Host Hotels & Resorts Inc (HST) 2002 Q4 法說會逐字稿

Good day, everyone. Welcome to the Host Marriott Corporation fourth 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. Gregg Larson . Please go ahead, sir.

Thank you. Good morning. Welcome to our year-end earnings call.

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 described 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.

With me this morning are Chris Nassetta, CEO, Ed Walter, CFO, Robert Parson (ph), EVP, and Larry Harvey (ph), our controller.

This morning, Chris Nassetta, our president and chief executive officer, will provide a brief overview of the fourth quarter results and then we'll describe the current operating environment and the company's outlook for 2003. Ed Walter, our chief financial officer will follow Chris and provide a greater detail on our fourth quarter results including regional performance. Following their remarks, we will respond to your questions.

And now, here's Chris.

Thanks, Greg. Thank you for joining us today.

Without a doubt, the last 18 months have been some of the most challenging times in the history of the lodging industry. Despite the difficult operating environment, we have achieved a number of important goals during the year. We renegotiated the management agreements on 102 of our Marriott and Ritz Carlton branded hotels providing us with new rights and improved operating cash flows. We also renegotiated management agreements in our four Swiss hotels to allow us to terminate two immediately and the remaining two over the next five years. As a result we have restructured the management contracts on approximately 90% of our portfolio.

Through a combination of our renegotiation with MI which provided a cash inflow of $125 million and prudent financial management, we have accumulated more than $360 million in cash reserves at year end which we believe is more than sufficient to deal with the impact of international events on our business.

Between the modification of our Swiss hotel contract and our revised rights with MI, we now have flexibility over time to change the manager and/or the flag in connection with a sale related to 53 or 45% of the assets in our portfolio. In this environment, given the premium in value associated with this right, and the larger pool of purchasers for unencumbered assets, these modifications will substantially enhance our ability to recycle capital. Although acquisition opportunities fitting our target profile of large urban assets in markets with barriers to entry has been extremely limited, we are pleased to have purchased the Boston Compley (ph) Marriott, an 1139-room hotel located in the back bay area of Boston. Our acquisition price of 214 million dollars represented a discount to replacement cost of approximately 35% for this asset. And we're confident in the long-term prospects for this property.

Through the sale of our Residence Inn one in two partnerships and the sale of the Richmond Marriott, we have essentially terminated our involvement in the public limited partnership market, thereby simplifying our corporate structure and permitting us to reduce overhead attributable to those activities.

Our portfolio of premium properties continue to maintain their superior position in the market, generating an average occupancy of 70% or roughly 11 points better than the overall market, which helped the company achieve a rev par yield index of 116, proving that even in a down market our properties attained more than their fair share of lodging demands.

While achieving these goals does not make up for a disappointing year, we believe our focused and disciplined approach to running the business will provide opportunities to increase shareholder value now and in the future.

Now let's turn to the results for the quarter and the year. Our strong fourth quarter results ended a difficult year on a positive note. For the quarter diluted FFO per share was 34 cents, exceeding the consensus estimate of 30 cents per share. Our comp rev par increased 10.6% for the fourth quarter compared to 2001 levels while operating profit margins increased slightly. The increase in rev par was driven almost entirely by an increase in occupancy of over six percentage points as average room rates were only slightly higher.

Our EBITDA in the fourth quarter was 261 million, an increase of more than 20% over 2001. While part of our success this quarter was the result of easier comps, our improved operations also reflect the quality, diversity, flexibility and unmatched location of our hotels.

For the full year, our comp rev par declined 5.1% in margin and margins declined 1.8 percentage points. The rev par decline was the result of a 5.9% decline in average room rate that was partially offset by an occupancy increase of just under one percentage point. This resulted in EBITDA of 863 million.

The full year reflects results of a decline in business and leisure travel resulting from a weak economic growth, apprehension over terrorist activity and military action in the Middle East. Our efforts this year to control hotel operating costs have minimized the overall decline in margins despite the decline in revenues. As we have seen for the past two years, the trend in the mix of business continues to shift towards group and contract and away from higher-rated transient business.

Since 2000, we have seen a decline of approximately 40% in demand from our higher-rated corporate transient customers. In 2000, these transient segments represented 23% of total demand. By 2002, the share of total room nights derived from these higher rated segments had dropped to 15%. To maintain occupancy levels in the face of reduced corporate travel, our hotels have focused their efforts on discount and individual and group travelers resulting in a significant increase in this segment.

In addition, as hotels seek to fill rooms in lower demand periods we have also increased our contract business. The size and location of our urban resort and convention hotels has enabled our managers to be creative and flexible in managing these different sources of demand. The net effect of these changes is that our group and contract business has increased from 42% to 45%. Although occupancy levels increased as a result of this strategy, we did experience a decline in rate which led to our rev par reduction for the year.

In the fourth quarter, a beneficial side effect of our increase in group business was a 14% increase in food and beverage revenues. This increase combined with an improved focus on labor management and cost controls resulted in an increase in food and beverage profit of over 14% for the quarter. For the full year, food and beverage revenues increased slightly over last year with profits increasing approximately 2%.

Now let me spend a minute on our outlook for 2003. Providing guidance for 2003 is exceptionally difficult. Our ability to predict future business is clouded by a weak economy, threats of war and terrorism, and increasingly short booking cycles. Our future group bookings are approximately 5% behind last year. Furthermore, we expect to continue to feel rate pressure from our transient corporate customers as travel in these groups remains well below historical levels. We expect the average rate for this segment will be down modestly again in 2003.

We expect that heightened concern regarding the threat of terrorism and conflict in Iraq will depress travel for the near term. In fact, we have already seen deterioration in operations in the first part of the year related to these threats. Attrition and cancellation rates are slowly increasing and there's been a slowdown in reservations for March and April as meeting planners are delaying meetings to a later date for fear of low attendance during the potential war. Based on our belief that the economy will continue to grow slowly and unpredictably during 2003, our current guidance is that for the full year rev par will be flat to down modestly with margins down approximately 1 to 2%.

Our rev par forecast is based on the assumption that rev par is likely to decline in the first half of the year and improve in the latter part of the year. Obviously this assumes that the economy picks up in the second half of the year. These assumptions translate into the range of 80 to 90 cents of FFO per share and EBITDA of 770 to 800 million. This range assumes that the weak economy will continue to at least through the first half of the year as the potential war and global economic factors continue to make most businesses, groups and individuals cautious in their outlook. This range does not assume any material impact from military action in the Middle East.

Our margin assumption does reflect our expectation that certain costs such as wages, insurance and benefits will increase at a rate greater than inflation in 2003 resulting in further margin deterioration.

Our strategy in this uncertain environment will remain consistent with the prior two years. First, we'll emphasize financial flexibility to ensure that we can address any sharp downward spikes in operations brought on by international events. At year end we had more than $360 million in cash which we believe is more than adequate to deal with our minimal near term debt maturities as well as any significant falloff in business. Secondly, we'll look to sell properties that are not consistent with our long-term strategic plan provided we can obtain satisfactory pricing with a goal of either reducing our debt balances or recycling the capital into assets that match our target profile.

We believe that our enhanced flexibility in this area generated by the management contract modifications I previously discussed will facilitate our success in completing asset sales. In line with this objective, we recently completed the sale of the Ontario Marriott for approximately 26 million dollars and used the proceeds to pay off debt. We continue to have discussions with a number of buyers and expect that we'll sell additional properties in 2003 that should result in proceeds of approximately 100 to 250 million dollars.

From an acquisition perspective, we remain interested but cautious in adding to our portfolio. We expect that there will be increasing opportunities to acquire assets that are consistent with our target profile of luxury and our upper upscale properties and hard to duplicate urban resort and downtown locations, which have significant barriers to entry. We think there will be unique opportunities for both single asset and portfolio acquisitions over the next year or two that may be facilitated by the use of stock or operating partnership units. Obviously, we're only going to use stock when we're confident that we're able to create value on a per share basis.

Regardless of how we structure any transaction, we'll remain disciplined in our approach of buying the best assets and the best markets with the best brands operated by the best operators and always with yields that significantly exceed our cost to capital. Although these opportunities should incrementally add to a strong base of growth and provide upside potential for our shareholders over the next several years, we do not think we'll see any transaction activity in the near term.

Finally, we'll continue to work with our operators to maximize our individual asset operating results. Although there are more limited opportunities to reduce cost structures, we'll -- we will place further emphasis on labor management tools to contain costs. Ultimately, improved operating results will be driven by improved revenues which will occur when the political uncertainty has been reduced and economic outlooks generally are more optimistic.

In the short term, we have put in place contingency plans for all our hotels in the event we experience significant weakness in operations from war or terrorist acts. These plans enable our hotels to quickly reduce costs and mitigate the expected margin decline and operate at lower break-even levels.

While the forecast for 2003 is not as encouraging as we would have predicted last year and clearly there is a lot of uncertainty, we still believe that the intermediate and long-term outlook for the industry remain positive. Lodging fundamentals will continue to gain strength over the next several years. We continue to see a supply growth rate that should remain at historically low levels for a number of years.

As we look beyond the first half of 2003 and into 2004, this low supply growth matched with a strengthening economy and increasing demand should result in meaningful growth in rev par and earnings. We are also confident about the long-term future and strength of our company due to the unmatched location, quality and growth potential of our assets which has historically outperformed the industry. We believe they will continue to do so and that we should be able to provide superior returns to our investors. We'll continue to update you as the remainder of the year unfolds.

Before I turn it over to Ed Walter, our new CFO, let me comment on our recent management changes. Ed was named CFO as a result of our consolidation of our finance functions that had been split prior between Ed and Robert Parsons. Consolidating these functions will help us streamline our organization, be more efficient and ultimately enhance communications.

I'm also very pleased that Larry Harvey has rejoined us from Crestline (ph) as senior vice president and corporate controller. Larry has been a valuable part of our finance team prior to the spin-off of Crestline. Robert will be working on a number of special projects in the coming months and will ultimately be leaving to pursue other opportunities at the end of the second quarter. Robert has made a number of valuable contributions to the company over the years and we wish him well in all his future endeavors.

Thank you and now I'm going to turn it over to Ed Walter to cover the quarter and the full year in a little more detail.

Thank you, Chris. Good morning. I'd like to start by sharing with you some of the details of our performance for both the fourth quarter and full year 2002.

As Chris indicated, we enjoyed rev par increases of 10.6% for the quarter. These results were driven primarily by the strong performance of our urban resort hotels which increased 14.5 and 17% respectively, due to increases in both occupancy and in average daily rate. Our airport hotels which are hindered by continued softness in airline passenger levels generated only a 4% improvement in rev par for the quarter, as occupancy increases were offset by rate reductions. A similar result occurred at our suburban assets where rev par growth totaled 3.5%.

For the full year our resort hotels performed best, as rev par declined by only .9%, followed by our downtown hotels which experienced a decline of 2.1%. Our suburban properties experienced rev par declines of 9% driven almost entirely by rate reductions. Our airport properties which are directly affected by the significant year over year declines in airline passenger volumes saw rev par declines of 12.8%.

From a regional perspective for the fourth quarter our Florida region led the portfolio, generating a 16.7% rev par improvement. These results were driven by strong performance in all three of our major markets, Miami, Ft. Lauderdale, Tampa and Orlando. Our Harbor Beach Marriott, an asset that we repositioned over the last two years by renovating the rooms, reconcepting and redesigning the F&B outlets and lobby, as well as adding a 20,000 square foot spa, achieved 30% rev par growth for the quarter. Our (inaudible) Marriott Waterside Hotel also had a great quarter, enjoying 31% rev par growth due primarily to strong group business.

The New England market performed well with rev par growth of 13%, led by 42% rev par growth at our Hyatt Cambridge hotel. These results in Cambridge are a testimony to our evolving marketplace as that strong performance is generated in part by a contract with Boston University to convert about 30% of the hotel or 130 rooms to student housing for the fall semester.

Performance for the quarter was weakest in our Mountain region, which generates rev par growth of only 3.4% as our occupancy increase was limited to the less than 2 percentage points and our rate was essentially flat. Results in this region were dragged down by our Denver hotels, which suffered a 13% rev par decline resulting from occupancy and rate declines at two of our three hotels. Corporate special corporate and group business volumes all declined in Denver.

For the full year, our top performing region was the South Central, which had rev par growth - rev par decline of only 1.1%. These results were driven primarily by rev par growth of approximately 10% at our two large San Antonio hotels, which overcame weaker results in Houston and Dallas. San Antonio's recently expanded convention center which hosted 35 citywide events enjoyed one of the strongest lodging years in the city's history in 2002.

The Mid-Atlantic region also performed well with a rev par decline of 2.5% as our Philadelphia properties reflected rev par growth of 4% and our New York City assets were down only 1.7%. In particular, occupancy at the New York Marriott marquee continued to exceed 90% and the rev pa -- the property had a rev par decline of 2.3%. The marquee benefited from an increase in local catering business attracted by its redesigned eight floor which resulted in an increase in food and beverage revenues of 9.5% for the year.

For the year, the Pacific region continued to be challenging with a rev par decline of 8.3%. Weakness in San Francisco and Los Angeles, down 16% and 10% respectively offset almost 5% growth in San Diego. The San Francisco market continues to be affected by the reductions in air travel, both domestic and international, as well as continued softness in the high-tech and finance sector. As expected it was not possible to continue the level of flow through achieved earlier in the year, although we and our managers are successful in keeping the margin decline to a minimum by strictly controlling costs.

In the fourth quarter, margins improved albeit slightly as our productivity was up and our operating costs per occupied room declined by 2.5% at our comparable hotels. For the full year, our operating cost per occupied room declined 2.7%. However, this could not keep pace with the rev par decline and it was exacerbated by a 141% increase in property insurance which led to a margin decline of 1.8 percentage points for our comparable hotels.

As Chris indicated, we expect that rev par growth for 2003 will be flat to modestly down, assuming that our business is not materially affected by events related to the potential Middle East conflict or to acts of terrorism. We expect a rev par growth will be negative in the first half of the year, down approximately 4 to 6% in the first quarter and down 2 to 4% in the second quarter. These expectations of weak performance in the first half of the year consistent with our previous guidance and reflect the near-term impact on the travel industry of concerns related to the international environment.

Although our actual performance in comparable hotels in January was up slightly to last year, we are seeing declines in February and expect similar declines in March.

Our forecast assumes that we will see rev par improvement during the second half of the year with the third quarter up 1 to 3% and the fourth quarter up 3 to 5%. This estimate assumes that we have moved half the issues related to the Mid East and that the economy begins to recover.

In 2003, we expect to see stronger performance in our Northeast markets as our Boston area hotels begin to improve. We expect that our Washington, D.C. hotels will see better than average performance primarily due to improved business activity in the Dulles corridor. Weaker performances is expected in our Mountain region which represents less than 4% of our EBITDA because of continued softness in the Denver market. The Pacific region is expected to stabilize this year as San Diego is expected to have another strong year which started with the Super Bowl and will continue throughout the year. San Diego is expecting a 35% increase in convention room nights in 2003 versus 2002.

Based on these expectations, our FFO forecast for 2003 is 80 to 90 cents per share. For the first quarter, we are anticipating FFO per share of 15 to 17 cents. One of the reasons our hotels have outperformed our competitors is the high standard we have set for maintaining and upgrading our hotels. In 2002, we spent approximately $170 million which was less than our historical average of closer to $200 million to renovate and upgrade our hotels.

Our focus in 2003 will be to continue to maintain a disciplined approach to capital spending with a primary focus on enhancing the property's competitive position. Although the capital budget will be adjusted if our operating environment continues to decline meaningfully, we currently expect to spend approximately 240 million in 2003 with the majority of those expenditures occurring in the latter half of the year. These increase -- this increased level reflects our plan to complete several rooms renovations while business levels remain low, including hard and soft good renovations at two of our most important hotels, the New York Marriott Marquee and the San Francisco Marriott Mosconi (ph).

We have two significant hotel joint ventures that are not consolidated on our balance sheet. Our Courtyard joint venture with Marriott International and the venture that owns the J.W. Marriott in Washington, D.C. Operations in the Courtyard portfolio declined slightly during the fourth quarter as rev par decreased by less than 2%. For the year, rev par declined by approximately 10%. The outlook for 2003 for Courtyard is consistent with our overall estimate, which assumes rev par will be flat to modestly down.

Our J.W. Marriott in Washington, D.C. had a good year with rev par roughly improving 33% in the fourth quarter and about 2% for the full year. When we completed this acquisition in 2000 we had negotiated an option to purchase our partner's interest in the joint venture for a nominal amount. It is likely that we'll exercise this option during the second quarter and in connection with that transaction, either refinance or retire the outstanding mortgage debt of $95 million which matures in December.

With respect to our balance sheet, it is worth noting that two weeks ago S&P completed a review of several lodging credits including Host Marriott and concluded that our rating should be reduced to B plus with a stable outlook. This rating change was not unexpected and it's attributable to S&P's determination that operating levels are now expected to recover more slowly than originally anticipated. Our rating is currently under review by Moody's and we'd expect to learn the results in the next few weeks.

In its review, S&P commented on both the high quality of our portfolio and our liquidity position. As Chris has discussed, the economy will most likely remain difficult to gauge as the threat of war looms and the business climate remains cautious in 2003. Accordingly we have focused on maintaining our liquidity to ensure that we are prepared to meet any challenges and are available -- and able to take advantage of opportunities.

We finished 2002 with more than 360 million dollars in cash which is more than adequate to address our 2003 debt maturities and retain a significant cash reserve. We will likely continue to hold a high level of cash until the magnitude and timing of the economic recovery is more clear. Consistent with our statements in the past, it is our intention to reduce our leverage and further improve our balance sheet. In 2003, this will occur primarily through selective asset sales and through the potential application of the cash reserves in the latter part of the year.

Our dividend policy continues to be to distribute the minimum amount necessary to satisfy the redistribution requirements which is generally equal to our taxable income. We have indicated also that we intend to pay dividends on the perpetual preferred securities. Because we are currently subject to indenture restrictions which limit our payments to distributions required to maintain our weak status, our ability to make payments on our perpetual preferred will be tied to these distribution requirements.

During 2003 as a result of our levels of 2002 taxable income, we expect to make distributions on our perpetual preferred securities for the first three quarters of the year. Payment of our fourth quarter dividend which is actually paid in January of 2004 will depend on our taxable income for the year and whether we remain subject to the indenture restrictions. Based on our current estimates, we do not expect to pay more than a minimal, if any, common dividend in 2003.

In summary, we have worked through a difficult year in 2002. We believe that the weak economy will continue through the first half of the year, as the threat of war and global economic factors continue to make most businesses and individuals cautious in their outlook. The result is a challenging operating environment for the lodging industry, at least in the near term. We believe we have positioned the company to deal with the near term uncertainty and to outperform during the recovery.

Our business has always been affected by supply and demand in economic cycles. The current geopolitical situation is clearly exacerbating the effects of these cycles. As markets and the economy stabilize, and the international situation is resolved, we would expect to see a rebound in travel which will ultimately lead to outperformance by our portfolio. Until that point, we intend to be careful with our capital and keep a sharp eye on the operating performance of the assets.

Thank you and we will now be happy to respond to any questions you may have.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit one on your touch-tone phone. Please make sure your mute function is turned off. We will proceed in the order that you signal us and we'll take as many questions as time permits. Again, ladies and gentlemen, that's star one on your touch-tone telephone to ask a question.

We'll go first to Jake Cogan (ph) with Banc of America.

Good morning, everybody.

Good morning.

I have a couple questions for you. First, just in terms of the group outlook, Chris I believe it was said that the forward bookings are down about 5% or so. I was wondering if you have any data to talk about how much you're down in the first half so we can get a sense of the magnitude of the issues in March and April that you were referring to.

And then second, kind of looking farther out, I was wondering, Ed I think at the end said here some of the issues are clearly cyclical. I was wondering if you guys can talk a moment about what is cyclical and also what might be secular in your business, you know, as you look out and think about the future of, you know, host business and the lodging industry in general. I think that would be helpful to investors these days.

I'm not sure what you mean by the second, but we'll start with the first and then you can clarify. On the group outlook, we are about 5% down for the year at this point. As you might guess because of the way booking cycles are working right now which is that they're very short, that it's further off in the second half of the year than in the first half of the year. Actually, there's an interesting phenomenon, I'm not sure exactly yet what it means but we have more groups than we had on the books. But that the groups are smaller. So the actual number of groups is up over last year but the size of the groups has become smaller. Maybe you can clarify your secular/cyclical -

Sure. We all know that demand comes in cycles over time, but I guess what I'm wondering when you take a look at what's happened to booking windows or the effect of the Internet and other tools that have allowed buyers of travel to become better educated or terrorism these might have an impact longer term. I was wondering if you can talk about things that might be a trend that are more of a permanent change in the lodging industry for better or worse as you think about the ability of this industry to recover to maybe levels or maybe levels that we have not seen in the past?

Sure. I think I get it a little better right now. I know PWC (inaudible) came out with an article and that we've what had a recess in the growth of the lodging industry. Obviously they do great work. We agree with them. It's statement of the obvious. To think that the business, if you look at year 2000 is kind of a peak year was going to grow on a straight line base basis from that given what's gone on, it's going to rebound to that and pick up on the same trajectory and on the same exact line where it would have been, I think is kind of -- kind of crazy. I mean, the fact of the matter is we have had as a result of what's happened in the economy and terrorism a bit of a reset, where it's not to say that the industry is not going to grow. It's to say that we're going to have -- if you were to -- hard to do without doing it graphically, we're going to have a line that's growing, that's going to be parallel to the line that would have grown having straight line growth out of 2000 but it will be a parallel line below that.

I think ultimately -- so, yes, there has been a reset as a result. We have no expectation of that in the next year or two we're going to be bounce back and be exactly where we would have been had we had kind of straight line growth off of 2000. I just think that's not going to occur and PWC is right in that way. I still ultimately believe that that -- it's hard to dispute this that the trends in our business are going to be driven by the laws of supply and demand. And obviously what we're doing with right now is a significant recession in our business, a recession in the economy. Maybe not technically at this exact point, but a recession in our business that is driven by very weak demand, and there are a number of factors causing that including threats of terrorism, threats of war, weak economy, lack of capital spending, in corporate America. A whole host factors that we're dealing with, incredibly weak demand.

There are certain factors that are exacerbating the kind of normal things that we would see in this environment. Some of them you mentioned. I mean, we have threats of terrorism and war are new, the Internet situation obviously is new, but it's not new in the sense that we have had new forms of distribution come into our business over the decades and over the last hundred years. So this is another new form of distribution that creates a little bit more efficiency that can exacerbate the situation we're dealing with right now which is an incredibly weak demand environment. So my belief is ultimately the laws of supply and demand are alive and well, and as you start to see the economy pick up, and you start to see demand pick up, you will start to see rev par growth pick up and growth and cash flows pick up. Albeit, you know, certainly from a stand point of kind of drawing the growth line at a lower level than you would have been at if you had had straight line growth off of the high point of 2000.

As it relates to some of the threats that have gotten a lot of attention, you know, one being the Internet issues, I think -- I'll comment on that because I know we talked about it a lot in the market, clearly the Internet issues and the efficiencies that that creates in the -- and the impact on pricing power that that has are issues that are -- that should be talked about that we're spending a lot of time talking to people about and working on, obviously as I described in a very weak -- I would describe anemic demand environment, the issues like the Internet and a number of other issues that you mentioned in the lead in to your question can have a much more dramatic impact - that's part of what's happening.

I think that ultimately there is opportunity as well as threat in the -- in Internet distribution in our business. We're dealing with it a number of important ways. The most important probably being that we're obviously pushing our operators to really focus on their proprietary website because that's a way that we control the product, control the pricing and ultimately create an opportunity to take excess capacity that we have and distribute our product at -- on a very cost efficient basis. So that can be good for our business. You look at the stats on that today, right now we have six -- -- in the last year we had 6 to 7% of the business that was sold over the Internet and over 70% of it was done on proprietary websites. So I would argue to you that that's more of an opportunity that we have found, to sell excess capacity in a weak environment where we control the pricing and doing it very cost efficiently.

Obviously, the other things that affect the Internet strategy from our point of view are ways that we -- we're not a commodity product. We're at the very high end of the business and we don't lend ourselves as well to the -- to the Internet strategy as I think product at the lower end of the market. And the -- all of the brands have gotten together and formed Travel Web which I think is --we can talk for hours about that but is an important company that's been formed. I think ultimately will alter brands and the major owners that work with the brands to kind of regain some control over their distribution and their product and ultimately the pricing.

So I went a little afield of your original question but I know that's probably one that's in the lineup that we eliminated in the process. I think the short -- short story is I do believe the laws of supply and demand are alive and well. Demand is weak when it comes back, we'll start to see growth. It will clearly be on, you know, on a different -- we'll have it on a different line A new line has been drawn if you will going into the future compared to the line we were on in the year 2000.

I hope that answered that question and 25 others.

Yeah, I think it does. Thank you for your help. Thank you.

We'll go next to William Truelove (ph), UBS Warburg.

Hi, guys. Good morning. To follow up on your Internet comments, Chris, could you talk about what kind of changes you're looking to push the operators to make in terms of their web sites, to drive more business there? Are you -- is that different by brand or is that just sort of a common thing?

It is a little bit different by brand, but I would say the most important thing is single image inventory so that anywhere you go on our -- to book a room in one of our rooms you get the same price. So that the effort being that the consumer doesn't feel like they should go to -- I won't pick on -- one of the merchant models because they're going the to get a better price. That's probably the number one thing.

We're also working with them on the concept, some of them have it, some of them don't, on low-price guarantees as yet another way to make sure that the consumer feels like they're absolutely getting the best price. Because obviously from our point of view, I mean, when you net it all out what's happening -- I'm going to round numbers we typically the travel agent or we pay a 10% commission. When you look at the merchant model that Hotels.com, Expedia and others have, it's basically a 30% markup to the end consumer when you finish all the math, it's about the same price. Obviously in our point of view, we'd rather pay 10% than 30%.

So what we're trying to do is push the brands to make changes of the kind -- of the type that I just described so that the consumer is ultimately comfortable either on a proprietary web sites or on Travel Web which is the -- you know, the web site that all of the brands have pulled together on because we ultimately drive better cash flow to the bottom line. And in the end, from a consumer point of view it has very little impact. It's pretty much the same price.

All right. Two other kind of questions. One, you mentioned maintenance cap-ex of 240 million. That's roughly about 7% of my revenue number but I was just wondering you know you talked of two major projects, New York Marriott and the Marriott Masconi. I think you're spending $30 million at the Marriott Masconi center? Is that correct?

That's correct.

How much do you anticipate spending at the Marriott Marquee or any other large projects going on?

$20 million at the Marquee. We're noting all the rooms at the Marquee at one time. We're going to stage it out over a couple of years. So it's about 50 million dollars between the two. There are a number of other large projects, but none that approach that scale. Those are the two largest projects. As Ed mentioned in his prepared comments, the majority of our cap-ex spending which we did estimate at $240 million is oriented towards the second half of the year. So clearly we're trying to take advantage of this weak demand environment and get some of the renovation work done that we want to get done to position these hotels for the next five and ten years. But to the extent that we saw --or continue to see deterioration or a more material deterioration as a result of terrorism, et cetera, because of the way that the cap-ex is sequenced out and heavily weighted towards the latter part of the year, we would be able to reduce spending in that area.

Sure. So most of that maintenance cap-ex is not really return on investment kind of projects, right?

No. That's correct.

It's almost entirely maintenance cap-ex.

Okay. My final point, Ed, I was hoping you could review with us some of your debt covenants and the preferred covenant where you might not be able to pay a preferred dividend in the fourth quarter that you mentioned? Can you go through those covenants with us?

The covenant that's really at hand here is contained in our indenture and it's the EBITDA to interest coverage covenant which states that we can't incur debt but also limits other than for refinancing and debt that we have available under the credit facility. We can't either incur debt or make -- not make distributions unless they're required to maintain our read status. We are in a position because of the taxable income that we had in 2002 that we will be able as part of satisfying the distribution requirements, it's kind of carry over requirement from our 2002 taxable income to cover the -- the first three quarters where it's a payment on our perpetual preferred.

The fourth quarter payment will be tied to whether either we have reduced our leverage or improved our EBITDA such that we're in a position where we're back over the '02 level or because we have taxable income in 2003 to support -- that requires the distribution of that is for the fourth quarter dividend.

Let me provide one clarification as well. We can incur debt under our credit facility because it's an exception under the indenture.

Okay. Thank you.

We'll go next to Joyce Minor (ph) with Lehman Brothers.

Hi, guys. I'm wondering if you can try and help me reconcile maybe your outlook for first quarter versus what we heard couple weeks ago from Marriott. I think they were saying rev par down 3% but the change in the time of the quarter would make it flat. And then we heard flat rev par from Starwood and Hilton and you're saying down 4 to 6 which sounds somewhat less optimistic and you guys tend to be more conservative. Is it that? Is it that you don't get the Easter benefit? Is it a timing shift? Something we have seen in the last couple of week since the orange alerts? Can you provide more color?

How about if I said all of the above?

That would work.

I think it's all of the above. I can't speak for other companies but clearly in the last few weeks we have seen additional deterioration in results and it creates cancellation rates, greater attrition, booking paces, slow downs. So again, I can't speak for them. Three weeks later I think we have more information than we had three weeks ago. And I think it clearly has impacted our thinking. My guess is it's impacted other people's thinking as well. So it is not our belief that this is overly conservative. I think this is a reasonable view of the world based on what we are seeing today.

Okay. And then if you could clarify on fourth quarter why corporate expense looked as light as it did? Is it something that we're expecting to continue?

No. Let me explain. Part of it is just -- you know, a reduction in corporate expense but the largest piece of it is that as you probably know, most you know, we are on -- the senior management of the companies stock program is a restricted stock program, not an option program. Always has been restricted stock and it's a multiyear program that is typically a three-year program. It so happened that our prior three-year period ended at the end of 2002. As we move through the years, we accrue for that expense based on -- you know, certain forecasted outcomes. When we finished out the year last year, unfortunately for management, the targets -- a lot of the targets were not achieved. So those accruals then effectively got reversed in first quarter of '02. So it really is effectively --the largest piece of it is the one-time expense -- or benefit related to a reversal of an accrual on stock expense for compensation.

Okay. One more question for you, Chris. I guess based on the experience you have seen here over the last couple of years where now the Ritz's aren't performing as well as maybe your more standard full-service product, does it make you think differently at all when you think of acquiring hotels or no, do you still feel like you have a good interest in that product and are you surprised that we're not seeing more product out there available to acquire? We keep -- I feel like every quarter we hear that pretty soon the acquisition environment going to pick up. What's your sense on that?

On the Ritz, no, it doesn't really change our strategy. Our strategy hasn't been a focus on luxury, but upper large scale and larger inn. I think if you look at the stats while it's painful to endure what we're enduring right now in terms of rev par reduction, particularly at the upper end, I think if you still look at it an extended period of time that the higher end property, if you buy the right properties and the right location, they outperform all the other segments of the business. So we're just suffering through a couple of years. You know, where it reverses itself and it's not unexpected. If you look at prior cycles the two or three, four cycles I think you look at the upper end of the business and it typically gets hit harder on the down turns than the lower end and the middle part of the business. But if you look at it in the aggregate over long periods of time, their growth more than in the good times more than compensates for that and their overall growth rate is higher.

So the reason for our strategy being focused in the upper end of the business has really been the result of doing a lot of research and looking at the history of the business and also trying to extrapolate from the history what we think the future can be. We still think the upper end of the business can allow us to maximize the growth rate.

On the acquisition front, I commented that we think there will be opportunities in my prepared comments but I didn't expect any in the near term. That was reason for that. You're right, we have all been talking about the fact that there should be some opportunities that should arise. The reality is there have been very few, particularly in the segment of the business that we're interested in. My expectation as I said in any comments is that's going to change. I don't think it's going to change in the short term or kind of immediate term, if you will. But I do think over the next year or two, you will find some opportunities. I think what's happening right now is with the threat of war and terrorism, et cetera, it has really -- for the same reason corporate America has kind of frozen in its steps and nobody's really making a lot of decisions about anything, I think the same thing is affecting the acquisition market.

I think most people are stepping back and looking at the world and saying now is the time to really focus on blocking and tackling and drilling our -- and focus on our existing assets or existing business an not be focused on, you know, M&A activity. I think as a result of that, focus kind of inward, you will not see a lot of activity. I still think -- it won't be like the mid '90s in terms of volume of activity. The early mid '90s but I do believe as we kind of work our way through that geopolitical instability that we're dealing with, people are going to make decisions to want to trade out of assets, some of those will be at the high end and will provide opportunity for us.

I think there's a number of portfolio opportunities that those parts of public companies but also private companies for a lot of strategic reasons people are making judgments to exit all or part of the property, hotel property side of their business. I think Host is a real natural player given the scale of our company, the liquidity in our stock, the infrastructure that we have in place to be a candidate for that.

So as I said, we're not here trying to send a message to the market that we've got a bunch of deals working and expect some big things on the M&A front in the short term. To the contrary, I think you'll see little or nothing out of us in the short term but I do think as the next year or two unfolds for both strategic and other reasons you will see owners turn into sellers, to at least a modest degree.

That's helpful. Thank you.

Yep.

We'll go next to Brian Edgar (ph) with Gerard Klauer Mattison (ph).

Good morning. Can you walk us through the cost assumptions behind your guidance of a 1 to 2 margin decline? In terms of the expectation for wage benefit, utilities and insurance, just which cost category should grow the most quickly and kind of rough guidance as to maybe how quickly if you give that some thought.

Yeah, I can give it to you in broad terms. We would expect -- I mean it's anybody's guess where inflation will turn out, but call it 2% plus or minus. We would expect the combination of wages and benefits to be 3 to 4% in growth. So at the high end of that, double the rate of inflation and recognizing that's a significant component of our overall expense base that can have a meaningful impact on our margins. In the insurance area, we would expect it to grow after having grown obviously at a very high rate for the last couple of years, we expect insurance costs to grow at about 30% this year. Somewhere plus or minus 30%.

Okay. Great. That's helpful. Thanks.

We'll go next to Sag Aveem (ph) with Deutsche Reese (ph).

Hi, guys. What cap rate (inaudible) was the Ontario totaled at?

It was -- it was about a 7.75 cap rate. So a -- about 10 -- 10 when I translate it.

Great. So you guys have sold assets --you're selling assets on three quarter cap rates which distinguishes you from your comps, that is you're not taking write downs because of (inaudible) and going forward, the 100, 250 million dollars worth of assets that you're selling - should we expect similar cap rate ranges or (inaudible) multiples on those?

Yeah, the cap rates might be higher than that. That was a pretty low cap rate transaction. But somewhere -- 7.75 to 8.5. Somewhere in that range is where we hope to be. We're selling assets to the extent we sell them if we think that the price that we're getting is higher than our hold value. We go through a very detailed analysis of forecasting into the future what we think a particular asset and how a particular asset and market are going to perform, and we ultimately determine what we believe is a hold value which is the present value of the future expected cash flows. And only to the extent that we can exceed that in our -- in our price will we trade on an asset. Even if it's a non-core asset that ultimately we don't want to hold long term, if our hold value is better than what we get in the open market selling it we're going to hold it because that's the right decision from any of the per share point of view.

Perfect.

Chris, I guess taking that into account, the settlement from the World Trade Center asset as well as cash in the balance sheet, you guys have significant amount of liquidity in those terms. However, I guess what I'm trying to get to is the capital allocation decisions, your portfolio itself is trading at a significant discount too either asset value or replacement cost. So how do you guys go about the decision to, A, either, you know buy back stock or you know a lot of folks are talking of acquisition, you can buy back your own portfolio at a meaningful discount or even pay down debt is fairly accretive simply because you're not earning anything on the cash or that you're holding on the balance sheet. How do you guys look at this decision?

Well, as we talked about in our prepared comments, we're in the short term going to have higher cash reserves just because there's just too much going on in the world not to --I think it's prudent for us to have heavy cash reserves in this kind of environment. We don't expect to do that forever. Once we get past this situation in the Middle East, one way or another, we would not expect to hold 350 or 400 million in cash. We typically held more like 100 million dollar in cash.

When we get some stability in the business and in the world, we would go back to that. But the way I would look at it today, it's a very important insurance policy against a lot of uncertainty that is out there and we believe on behalf of our shareholders it's very prudent thing for us to be doing. In terms of looking at stock first and debt buy back, the reality is from a standpoint of managing our balance sheet we think reducing our overall leverage levels is priority number one. And buying back stock while obviously the lower the stock goes the more attractive it looks is not in our opinion the prudent -- a prudent thing to do because it flies really in the face of our goals from a leverage point of view and a credit point of view.

So given the uncertainty in the world, we'll hold the cash. When we do decide to reduce those cash balances, I think you should look for us more to be focused on the debt side of it, which can be accretive because it really is inconsistent with one of our primary goals from a balance sheet point of view which is to continue to try and deleverage the company over time which is nothing new. We were deleveraging the company before the terrorist attacks in 2001. We had a lot of damage done and our credit is not what it was, but at the same time, we had been -- we hadn't quite gotten it to where we wanted to go, so it will take us a bit longer to get there.

But our objectives remain the same. We want to ultimately improve our credit. We stated a goal in the market of trying to get our EBITDA coverage over three times and we maintain that goal, recognizing that it will take us time to get there. And so the priority that you'll see us focusing on as we make these capital allocation decisions will be to be intelligent how we do it, but certainly over time to move towards deleveraging and improving our credit profile.

Fantastic. Thank you.

We'll go next to David Anders (ph) with Merrill Lynch.

Hi, good afternoon. It's Rachel Larson in for David. I was wondering how much you guys are expecting to get in cash proceeds from the World Trade Center Marriott or if you've gotten that all already?

No. I mean -- you mean cash in is terms of a settlement, Rachel?

Yeah.

We never really stated to expect what we get out of that. We were saying before we got the hotel was destroyed about $20 million in EBITDA out of that asset. We are in the middle of what I would describe as -- and this is putting it lightly a very complex equation with a lot of different parties including the port authority, the city of New York, the federal government, a bunch of other land owners -- or leasees in the World Trade Center site. And it is our hope that we will be able to effectuate a plan to resolve all of this by year end, but there's certainly no guarantee given the complexity of the situation.

In the meantime, we are receiving -- continuing to receive as you can see in our fourth quarter, we received some additional proceeds of business interruption from our insurance company and we expect to continue to get some insurance -- business interruption again this year. I believe we worked in -- in our forecast there's about 15 million dollars of business interruption that you would see -- our expectation is it would come in the fourth quarter but we do expect to continue to receive business interruption until we can work our way out of this situation.

All right. Terrific. Thank you.

We'll go next to Michael Rietbrock (ph) with Salomon Smith Barney.

We're all set. Thanks.

Thanks, Mike.

We'll go next to Harry CurtisHarry CurtisHarry Curtis(ph) with J.P. Morgan.

Chris, could you comment on supply growth? More so from an industry perspective as opposed to the upscale and upper upscale segments. There still appears on the about 70,000 units coming on at time when we don't really need them, and that's primarily in the mid scale without food and beverage. How long does it really take to pull that capacity addition out? And do you think that that segment is really profitable at this point?

Well, a couple of comments. You're right, there is still --you know, some supply coming into the market. We focused of course most on the upper end of the business, so I eel comment on both. In the industry overall, if I think if you look at the stats it's still very, very positive supply stats and on the decline. At the mid -- at the mid level of the business as you described you know, there is some supply. My personal opinion is the same as yours, which we don't need any more hotel rooms. I agree with you. I guess I'm skeptical that many of these make terrific economic sense. But its not a business that we're really focused on looking at deals. So I can't give you anything other than my kind of, you know, general gut sense of what those economics would be.

But I tend to agree with you, we don't need the hotel rooms and the economics I would think would be tough. At the upper end of the business, there is some additional supply the way the cycles work, you know, as you're going in to the -- into the down cycles, when you start to get all deliveries at the upper end of business because it takes so long to get all these things entitled and built and operational. So we are -- we did have additional supply and we again in '03 will have more than we'd like. Obviously it's still low. Below 30-year averages now.

But really as you get out later in the year in '04 and '05 and I would even say into '06, you're going to see a real dearth of activity at the upper end of the business. Because clearly you can guess based on the economics of what you're seeing, kind of report for our existing hotels it is hard to make sense other than have unique circumstances of a new development at the upper end of the business. It just was where rev pars have gone. You just can't in our opinion make economic sense of it. So that's a problem that solves itself and you're dealing now with -- for the most part whatever supply happens to be kind of under construction and in the pipeline.

Does that answer your question, Harry?

Harry is not there.

Mr. Carter, does that answer your question?

It does. Thank you.

All right, it appears there are no further questions at this time. I'll turn it back over to you for additional or closing comments.

Thanks for joining us today. It's a difficult economic climate out there. I think we're doing all the right things to deal with it. And hopefully in the not too distant future we'll get through this uncertainty in the Middle East which obviously will help our economy and help our business. We'll keep you up to date as the quarters unfold. Thanks again and we'll speak with you soon.

Thank you. This does conclude today's conference. We thank you for your participation.