Host Hotels & Resorts Inc (HST) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to this Host Marriott Corporation first quarter 2003 results conference call. Just as a reminder today's call is being recorded. And now 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, Mr. Larson.

Thank you and good morning. Welcome to our first quarter earnings call. Before we start I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As 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. In this call, we will discuss non-GAAP financial information such as comparative FFO and EBITDA, which we believe is useful to investors. You can find this information and reconciliations of this information to GAAP in today's earnings press release which has been posted on our website.

This morning Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our first quarter results and the current operating environment and then will provide an update on the company's outlook for 2003. Ed Walter, our Chief Financial Officer, will follow Chris and provide greater detail on our first quarter results including regional performance. Following their remarks, we will respond to your questions. And now here's Chris.

Thanks, Gregg, good morning, everybody. Well, not surprisingly with war in Iraq, increased terror levels, a February blizzard in the Northeast, general economic weakness, and SARS the first quarter proved to be a challenging quarter operationally. These factors combined to reduce business, leisure and convention demand at our properties. Fortunately, the war in Iraq appears to have gone well and while nearly all segments of travel have dropped off leading up to and during the war, current trends suggest we are returning to pre-war levels of demand. While this is certainly a positive trend, we would caution you that we expect a sustained recovery in the industry to occur only when consumer and business confidence improve and the resulting increase in capital spending and corporate profitability follows. Since recovery in our business generally lags an economic recovery by a quarter or two that means we do not expect to see a meaningful pickup in business before late this year or more likely 2004. At this point, it's impossible to pinpoint the inflection point for recovery. However, we continue to believe that once operations turn we'll enjoy a number of years of very healthy growth. Now let's talk about the specifics for the quarter. Diluted FFO per share was 16 cents, exceeding the consensus estimate of Chris Nassetta15 cents a share. Our comparable RevPAR Chris Nassettadecreased 5.5% for the first quarter compared to 2002 levels while hotel EBITDA Chris Nassettadecreased 3.9 percentage points. These results were driven by a decrease in occupancy of 2.3 percentage points, combined with a Chris Nassettadecrease in average room rates Chris Nassettaof 2.4%. EBITDA for the first quarter was $175m a decrees of 14% from 2002. The majority of this decline was due to transient and group travel that was postponed due to apprehension over the war which showed up in both higher attrition rates at many events as well as a general slowdown in booking of events which would have taken place in February and March. Outright cancellations were modest at less than 1% of quarterly revenues.

As a result of the impact of the war, we experienced a bit of a reversal in a trend that has affected our results for the past two years which has been the growth in the group and contract segments of our business and a decline in the higher rated transient business. This quarter primarily because of a reduction in corporate group events at our larger hotels, we experienced a equivalent decline in both group and transient business. In addition to the impact on room sales, the decline in group business also affected food and beverage sales which decreased 3.7% in the first quarter. Our preliminary results for period four indicate that RevPAR for our portfolio Chris Nassettadeclined approximately 9 to 10% as a result of the remaining impact of the war in Iraq. This is generally consistent with our period three results, including the change in business mix which reflects the trends I previously discussed. More recent trends suggest that we are returning to pre-war demand levels as evidenced by our net reservations which were down over 15%, leading up to and during the war but now have rebounded and are approximately flat with the same period last year.

As a result of weakness in operations, we have implemented contingency plans at all of our properties and have strongly encouraged all of our operators to focus on the appropriate level of staffing based on their specific market conditions and levels of operations. In addition to these contingency plans, we have delayed certain discretionary capital expenditures until we are more comfortable with where the economy is going. We continue to maintain our financial flexibility to insure that we can address any sharp downward spikes in operations brought on by international or domestic events. As of quarter end, we had more than Chris Nassetta$310m in cash on our balance sheet, which is more than adequate to deal with our minimal near term debt maturities as well as any incremental decline in business. In the first quarter we sold the Ontario airport Marriott and utilized the proceeds to pay down debt. We will continue to pursue other opportunities to dispose of non-core assets provided we can obtain satisfactory pricing. It's worth noting that we were able to sell -- that we are able to sell a significant number of our hotels unencumbered by existing management contracts or brands. This flexibility expands the universe of potential buyers and helps us maximize sales proceeds. We continue to have discussions with a number of buyers and expect that we will sell hotels that should result in total proceeds of approximately $100 to $250m in 2003. We intend to use the proceeds from these sales to repay debt or recycle the capital into other assets that match our target profile.

We also continue to aggressively manage our portfolio in order to maximize the value of our hotels. In that regard we recently announced that our 500 room Swiss Hotel in Boston will be reflagged to a Hyatt Regency, building on our relationship with this world class operator. We believe the broader name brand recognition and resources of the Hyatt will improve operations and drive profitability at the hotel. From an acquisition perspective we remain interested but cautious in adding to our portfolio. We expect that there will be increasing opportunities in the next couple of years to acquire single assets or portfolios that are consistent with our target profile. We will remain disciplined in our approach to buying the best assets in the best markets with the best brands managed by the best operators and with yields that significantly exceed our cost of capital. Now let me spend a minute on our outlook for the remainder of 2003.

Given the short-term view that appears to be driving demand, providing guidance for 2003 remains exceptionally difficult. Our ability to predict future business is clouded by a weak economy, post- war Iraq, potential terrorist acts and increasingly short booking cycles. Future group bookings for 2003 continue to lag behind last year. Furthermore, we believe that average room rates will be down modestly again for the full year 2003 as travel remains well below historical levels and we continue to have a higher mix of lower rated business. With all of these caveats, our best estimate is that RevPAR will be down 2 to 3% for the full year with margins down approximately 2 to 2 1/2 percentage points. The lower end of this range assumes that demand rebounds to pre-war levels and then remains generally static. Based on these ranges, we believe that 2003 FFO per share should be in the range of 73- 81 cents per share, and that EBITDA will be 750 – 775m for the full year. While our forecast for 2003 has highlighted a number of short-term difficulties and while you may be tired of hearing it, we still believe that the intermediate and long-term outlook for the industry remains positive. We strongly believe that lodging fundamentals will gain strength over the next several years. The supply growth rate will remain at historically low levels for a number of years and this, matched with a strengthening economy and increasing demand, should result in meaningful growth in RevPAR and earnings for a number of years. Given our significant liquidity and minimal short term debt maturities we're confident that we can deal with any challenges in the quarters ahead. And more importantly with our unmatched portfolio and our disciplined approach to running our business we're well positioned to outperform the industry and to maximize shareholder value as the economy recovers. Thank you and now I'm going to turn it over to Ed Walter to discuss the quart in a little bit more detail.

Thank you, Chris. Let me start by giving you some detail on our RevPAR results for the quarter. As Chris indicated our group business, especially our corporate groups, was weaker during the first quarter which affected the relative performance of our various product types. Our airport hotels had the best results for the quarter with RevPAR declining just 2 1/2%. Our resort hotels also performed better than the overall portfolio, experiencing a decline of 3 1/2%. RevPAR at our suburban hotels fell 5.6% and our downtown hotels, which were most affected by the decline in corporate group business, fell 6.9%. From a regional perspective, our top performing region was the Washington, D.C. area which enjoyed a 5.4 RevPAR increase driven by a strong performance in our northern Virginia and District of Columbia properties. Our Florida market also performed better, experiencing a RevPAR decline of only 2.3% as RevPAR was essentially flat in Tampa, Naples and Miami Fort Lauderdale. We expect both the Florida and Washington regions will be solid performers in 2003. RevPAR in our Atlanta market declined by 3.4% which was generally led by declines in both the downtown and Buck head markets. Our Pacific region slightly underperformed the portfolio with the RevPAR decline of 6.3%.

Operations in San Francisco continue to be weak with RevPAR falling 17%, although these results were significantly affected by the commencement of a major room renovation of the Masconi Marriott. We expect this market to stabilize later in the year as convention business picks up. Our San Diego market which benefits from a solid convention calendar as well as the Super Bowl enjoyed RevPAR growth of more than 16% for the quarter. We expect that San Diego will continue to perform well throughout the year. Our mid-Atlantic region had a tough quarter with RevPAR declining 13 1/2% as both key markets, New York and Philadelphia, declined. The New York market, which suffered from a series of special challenges, including February's snowstorms, a rooms redo at the Marquise and a strong reaction to the March elevated terrorist warning level, fell 17%. Our Philadelphia market, which had outperformed virtually all of last year, suffered from tough comparisons and slow convention schedule leading to a RevPAR decline of 10%. Although both we and our operators continue to be intensely focused on limiting costs and maintaining margins, it's becoming more difficult to offset revenue declines with decreases in expenses. A combination of several factors -- a 160% increase in insurance premiums, a 6% increase in utility costs, plus higher than inflationary increases in wage and benefit costs resulted in margin declines of 3.9 percentage points for the quarter. Although moderating oil prices suggest more favorable utility costs during the latter part of 2003 and our initial insurance renewals suggest more stable pricing, we continue to expect that margins will remain under pressure for the remainder of the year.

As Chris highlighted, forecasting operating results in the current environment is difficult. RevPAR results for the industry in our portfolio in April are difficult to interpret as the combination of the Iraq war and the timing of the Easter holiday skewed comparisons. Given these qualifications, we anticipate that RevPAR for our portfolio will decline between 6-8% for the second quarter. This forecast assumes that business returns to prewar levels during the latter part of the quarter, as group business picks up and we benefit from more favorably favorable comparisons. Our asset forecast for the quarter is 20-23 cents per share. From a capital expenditure perspective we continue to balance the desire to complete capital improvements during slow business periods to minimize the business interruption impact with the need to conserve cash when the operating outlook remains so volatile and uncertain. During the first quarter, we invested approximately 40, in our assets, which was consistent with our initial budget. Assuming the operating environment stabilizes and then begins to improve consistent with our forecast, we expect to spend between 200- 220m for the full year, which reflects the reduction from our initial budget estimate of 240m.

We have two significant 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. RevPAR in the Courtyard portfolio declined just 2.2% for the quarter as occupancy declined.2 percentage points and rate to kind 1.9%. Most of the decline is attributable to March operations and weakness in our Southwest and Western regions. Our J.W. Marriott in D.C. enjoyed a fairly strong first quarter as RevPAR increased 5.3% due entirely to a 9% increase in rate, which offset a 3 point decline in occupancy. As previously indicated, we intend to exercise our option to purchase the outstanding ownership interest in this venture for a nominal amount during the second quarter. Consistent with our philosophy of maintaining higher than normal levels of liquidity to ensure that we are able to meet any challenges presented by a volatile operating environment, we finished the quarter with $313m in cash. Excluding monthly debt amortization,Chris Nassetta our remaining debt maturities for 2003 are limited to the $65mChris Nassetta loan outstanding on the World Trade Center property and the $95mChris Nassetta loan with J.W.D.C. both of which mature in December. We expect the loan on J.W. Marriott D. C. property will be refinanced and the World Trade Center loan will be addressed in connection with the resolution of the larger issues pertaining to that property.

In 2004, our debt maturities are limited to the $27mChris Nassetta mortgage loan on the Hanover Marriott. We remain comfortable that we can address these maturities, which represent less than 3 1/2% of our total debt, as well as any potential decline in operations that may result from world events. We will continue to hold these higher levels of cash until the economy and our operations begin to recover. 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. As we have previously indicated, because we are currently subject to indenture restrictionsChris Nassetta which limit Chris Nassettapayment to that required to maintain our REIT status, our ability to pay our dividends on our perpetual preferred will be tied to these distribution requirements. We remain comfortable that we will make the dividend payment on the perpetual securities for the first three-quarters of 2003 because of distribution requirements related to our 2002 operations. Payment of the final distribution for 2003, which is actually paid in January 2004 will depend upon our actual taxable income for the year and whether we remain subject to the indenture restrictions. While it is premature to Ritch any definitive conclusions with respect to the likelihood of payment our lower guidance for the year suggests we will be less likely to pay the preferred dividend.

In summary, it was a tough quarter, but consistent with our expectations. Although results will likely be uneven in the coming months, our company is positioned to deal with the near term uncertainty and to outperform during the recovery. We will continue to make prudent short-term decisions to navigate through this environment, guided by the recognition that we create shareholder value over the long-term by focusing on the performance of our assets and the prudent allocation of capital. Thank you and we will now be happy to respond to any questions you may have.

Yes. Today's question and answer session will be conducted electronically. If anyone in the audience has a question or comment at this time you may press star one on your touch tone telephone. Once again, to anyone in our audience, if you do have a question or comment at this time, please press star one. And we'll pause for just a moment. And our first question today comes from Joyce Minor with Lehman Brothers.

Hey, guys. Can you talk just quickly on a couple of topics? Number one, can you speak to what a calendarized RevPAR for first quarter might be for your portfolio if that's possible to calculate. And then, secondly could you talk about what you're seeing in your Toronto properties and the level of exposure there and kind of what's factored in your second quarter expectations?

Sure the calendarized number, let me say we report in the first quarter the way we've always reported which is driven by a couple of things. One, the Marriott period system which most of you are familiar with as well as the fact that non Marriott hotels that we have report on a monthly basis, so that means that for the first quarter for a non Marriott hotel, we're only reporting January and February. March actually would then get reported in the second quarter. So there are a number of anomalies that exist in the way we report that as we say are consistent with the way we've always reported including in the fourth quarter. If you look at the -- to be specific, Joyce, if you look the at the first quarter it would be about a point and a half worse. So you go from 5.5 to roughly 7% down in RevPAR. Now, having said that, had we looked at the fourth quarter on a calendarized basis it would have inverse impact, meaning the fourth quarter would have been about an equivalent amount better. We reported it the way we've always reported it because otherwise it becomes confusing and very difficult from the standpoint of having any kind of comparable look at our properties.

From the standpoint of Toronto, obviously it's evolving a bit and Toronto was taken off the list, I guess, yesterday with the World Health Organization so that's a positive trend. We have been running occupancies in the 40-50% range in the last couple of weeks. So obviously it's had a significant impact on our properties in Toronto. We have three properties in Toronto that represent on last year's number about 1 1/2% of our EBITDA. So not a significant amount of our EBITDA. And to answer the question, yeah, I think your last question question, we have built into our second quarter guidance our expectations from impact in Toronto related to SARS.

Thanks a lot, Chris.

Uh-huh.

And our next question today comes from Harry Curtis with JP Morgan.

Morning, guys. Just following up on that question, your second quarter guidance of down 6 to 8 is somewhat worse than some of the other outlooks that we've heard on other conference calls. Notwithstanding SARS, are there any other markets that you're seeing relative weakness in?

You know, part of it, obviously, Harry, I don't think there's any major anomalies in terms of what we're seeing, market related, one quarter versus the other. Obviously one anomaly I already touched on a little bit that has some impact which is that on our non Marriott properties, March actually will be in our second quarter numbers. Obviously, March you were still feeling quite a significant impact or the brunt of the impact of the war in Iraq and some impact of SARS. So that has obviously some impact on what you're our guidance would be for Q2 because that will show up in the non Marriott branded hotels in Q2. From the standpoint of what others have said, we haven't studied everybody's guidance we have a sense of what other people have said. Obviously, we have not tremendous visibility, nor does anybody in the industry, but we have tried to look at our markets, our portfolio, and give you the best sense we can based on what we see of what we think will happen in Q2. We can't, I can't really comment on what other people are thinking.

Thank you.

Yep.

Moving on, we'll hear from Bill Crow with Raymond James.

Good morning, guys. Just a couple of questions. Chris, you're assuming that RevPAR gets, or actually demand gets back to pre-war levels and you've indicated that you've seen some of that recovery already. You just anticipated at some point it just stops and that we flat line for the rest of the year, is that correct?

Bill, there's some -- something disturbed that -- part of your question, I heard the first part, could you repeat it?

Yeah, I'm just curious because you've indicated your guidance assumes that launch and demand comes back to pre-war levels but you've indicated you've seen some of that recovery already. It sounds like you're then suggesting that demand flat lines at that point, we don't see any recovery in the second half of the year, is that correct?

That is the right way of looking at what our -- what we suggested in our guidance. And obviously the comps get a little bit easier so from a RevPAR point of view as the year goes on you, in theory, would see some improvement related to the comps. But as we've looked at it we've tried to pick, you know, a lot of people are looking at different numbers. We've tried to pick kind of a baseline year of demand, we've looked at 1999 and looked at the trends we've been following over the last couple of quarters trying to extract out the shorter term impact of the war to look at kind of what a stabilized demand level would have been pre-war. And when we do that and look at what that means for the full year, it results in the guidance we've given you for the full year which is 2 to 3 down which obviously, then you know, when you get 2 or 3 down based on where we were in the first and forecasted for the second it builds into the easier comps as you get into the third and fourth quarter.

Okay. And then on the disposition volume, it just seems like 100 to 150 million is not terribly challenging for the rest of the year. Is there you know, a possibility that you do two or three times that amount? Is the pricing such that it's compelling to do that at this point?

Jim Rizollio (ph)Chris Nassetta thinks it's challenging, who heads up this effort for us and is sitting here. We actually said Chris Nassetta100 to 250.

I'm sorry, -- 100 to 250. Okay.

The reason we have a broad range is, obviously with what's been going on in the world it's difficult to get deals done, I mean, that's the short story. I mean, I think the range we gave you is what we, as best we can tell you today, think the range of results would be. And it depends heavily on where buyers' expectations go relative to kind of coming through the post-war period. We've been working on a bunch of transactions, making more progress on some than others and I would say during the period of time that we're at war with Iraq, nothing was happening and people were really frozen on all sides of transactions. And so, you know, it put us back for a bit of time. So we'll give you more guidance as we get deeper into the year. I think right now the guidance we've given you is the best we know.

One final question, Chris. Is it possible to look out and determine when that preferred dividend may come back? I mean, is it -- should we assume there won't -- if there's not in the fourth you won't pay one in the first, as well?

Bill, obviously we look at a lot of different scenarios. I think it's premature to get into it. I'm not trying to avoid the question, but there are just so many Chris Nassettavariables now it’s hard for us to even judge Q4, let getting into '04 and beyond. As the year goes on we'll get a better sense on that we'll give you updated guidance and hopefully be able to, you know, limit the number of variables a little bit more as we get deeper into the year so we'll try and give you better guidance. Obviously, yes, we look at it and we have different scenarios that suggest different outcomes but there's just too many variables now to be precise on it.

Okay, thank you.

Yep.

Up next from UBS Warburg we'll hear from Keith Mills.

Good morning, how are you?

Good, Keith, how are you?

Doing well. A few questions for you. Chris, first, from a broader perspective, obviously Host Marriott owns a number of independent type hotels in the larger markets, and there’s been a significant amount of new space built across the nation in recent years and still expected over the next few years. How is Host Marriott, the asset management team, I guess as well as working with Marriott International to try to minimize, you know, reductions in convention markets where you have a presence there in terms of convention property?

Well, I don't think anything that is changed in that regard from that approach we would typically have. Obviously, you're right, there's a bunch of new supply coming into the markets around the country which is impacting and will continue to impact conventions to some extent. The primary way we deal with that is the focus that we've had in our portfolio really being in the strong urban convention markets around the country. So Las Vegas, for example, has certainly been picking up some market share. But our sense of it is over a period of time that it's been picking up market share from weaker markets not as much from some of the stronger markets. I think the primary thing we do, Keith, is really as much as anything a portfolio management exercise, which is to say, you know, be in the best market in the best locations with the best assets. And so that, I think, is the primary driver.

I think beyond that it is obviously working with Marriott and our asset management team to make sure we position from a physical point of view our assets as well as we can so that that, for example, San Francisco, Mosconi Marriott large convention hotel of ours is in the process of being renovated right now, so is the New York Marriott Marquise, so to make sure as the economy turns around and business demand does start to pickup that we're as well positioned as we can be. And then of course we're always -- we could talk for a long time and I won't ramble on the point but we always are working with our operators, Marriott and others, on making sure that we are positioning the assets as well as we can, we're marketing the assets as well as we can, that we're looking at the segments of demand within the group business to recognize that these things shift over time. In the last three years we've seen material shifts in the types of demand. You've lost a lot of the higher rated kind of corporate group business and you've picked up a lot of association business. And you've moved to having instead of a total dependence on the convention centers, around the country, you've moved to a lot of in-house business. Meaning that, you know, just business that they're not dependant on the convention facility but that's using our convention facilities, if you will, for in-house and not dependant on city-wide conventions. So there is a shift in the mix of demand within the group business that has occurred. And we're always working to make sure, with our operators and for our own account for that matter that we really understand what's happening and really understand where the demand is coming from so that we can figure out how to address how we maximize capturing our share or more than our fair share of that demand. That's an ongoing exercise that will continue.

The shift in business that we've seen over the last three years I think, in my opinion, will continue for a period of time. Probably at least for the next year. But then it will start to reverse itself over the next year or so. Much like in the transient segment where you will start to see greater demand being generated out of the corporate group side of the business and you will see convention activity as the economy recovers start to pick up around the country. So story sorry for the long winded nature of that. There's a lot to say about that. But I think that hopefully captures the essence of what you're asking.

I appreciate your feedback, Chris. Ed, you had indicated that Chris NassettaCapEx spending would now be in the Chris Nassetta$200 to Chris Nassetta$220m range this year versus the 240. Could you tell us the types of projects that are now basically off the table and what that means for those hotels going forward in terms of being in your portfolio?

I think what the answer to that question is generally not that the projects are necessarily off the table, but more that some of the -- we had mentioned in our first -- in the quarter -- year ending call that a lot of our capital happened in the second half of the year. And the decision that we've made at this point is that some of the rooms reduceChris Nassetta and some of the larger projects that we had initially planned to do in the fourth quarter are probably going to slip to the first or second quarter of '04. So I don't think it's as much of an elimination of projects as much as it's simply change in the timing which we think is appropriate in under kind of the economic circumstances that we're operating.

Okay. And then just one final question. I guess either for Chris or Ed. Based on your conversations with either your asset management team or with Marriott International do you have any sense and this is a question we struggle with at this point at least for the near term. Do you have any sense that there's pent up demand out there that could benefit, you know, the second half of April and probably the May and June numbers in terms of pent up business travel demand.

I think Keith the answer is yes, anecdotally we think there's pent up demand we're starting to see early signs of that activity in our, you know, booking phase and in the stat that I described in terms of net reservations would certainly suggest that, you know, some of that is occurring that could help the second or the latter part of the second quarter and maybe part of the third quarter. So the answer is yes, that is our sense. You know, other than our net reservation activity and some additional booking activity that's shorter term group bookings I can't -- you know, I can't give you hard evidence beyond that.

Okay. Just wanted to finally thank you for your increased disclosure in the earnings release in terms of your expectations going forward, that's much appreciated.

You're welcome.

Moving on, we'll hear from David Loeb with Friedman Billings Ramsey.

Can I take another run at the preferred dividend question? Ed or Chris Nassetta, can you give us any idea about what degree of recovery would either, A, put you over the 2.0 coverage or, B, make a big difference in generating taxable income? Or maybe Chris, the way you answered the question, give us an idea of what some of those variables are.

David, that's almost the impossible question. There are a lot of variables. Obviously, the more that we see a decline in operations and obviously we brought our guidance down for the full year, the further away we get from being over 20 and for the same reason the further away we get from generating adequate taxable income. There are a number of factors, literally thousands, that go into the calculation of taxable income that are variables that will play out as the year progresses. So I don't think we're in a position sitting here today to tell you exactly which of those are the key variables. There are too many of them and all of them are very important. But I think the thrust of what Ed says in his comments is really what we're trying to make sure that we're highlighting which is obviously we are in good shape for the first three quarters because of the carryover from '02. We were concerned about the fourth quarter prior to the reduction of our guidance and we're more concerns concerned about it is that much less likely more -- I guess it's that much more less likely that we would be able to pay it as a result of the continuing deterioration in operations largely as a result of the war. I don't -- again, David, I don't think we're in a position sitting here today, although we obviously look at all these things, to try and highlight on a conference call all of the various variables. I think that the message we're trying to articulate is that if it was, you know, an issue before, it's a bit more of an issue and it's something that obviously, as we get closer to the event, we're going to be working as hard as we can to find ways to deal with the issue but given where we are it's going to be more difficult to deal with the issue.

Okay. That makes sense. Just mechanically, the 2.0 coverage is a trailing four-quarter calculation, correct?

Yes, it is.

That's correct.

On the taxable income, if you generate -- let's say we're in the second quarter next year and you generate taxable income, will you be able to make a distribution then or do you have to wait until you have -- ?

Our interpretation is, yes, if we -- using a hypothetical, if we anticipated in the first quarter of '04 that for the full year '04 we would have adequate taxable income to be able to have to pay out an amount that would be equivalent to the preferred for the full year, we would be able to pay it in the first quarter. Even though in that quarter we may not have adequate taxable income.

Okay.

But if our forecast is for the full year that we would, we believe that we can.

Great. Thank you very much.

Yep.

Up next we have Steve Kent with Goldman Sachs.

Hi, good morning. Chris and Ed, I guess I'm trying to balance what the two of us you said because I caught Chris, I thought you said you might be using some of the cash to go out and make some acquisitions. And you're still in the market looking for opportunities. And I guess I'm trying to balance that with so much as so much of the rest of your release and the discussion of how tough things are, and over seven times in debt to EBITDA by the end of this year. I'm surprised you're even suggesting you might use cash from asset sales to go out and buy others and I guess the other thing that I'm questioning is let's start with selling assets Ameristar selling assets and private fund selling assets, what's your outlook for your ability to sell assets at compelling returns and couldn't we see a fire sale given some of the things that are going on from a balance sheet perspective?

The answer to that one is absolutely not. I'll start with that. I mean, it is challenging to sell assets right now which is why we've only done one asset sale this year. I think we got very, very good pricing on it and we're looking on some others that I think we're going to either get good pricing or we're not going to trade the assets. We go through a very diligent or disciplined process of looking at any asset sale and comparing the price we think we can get against the whole value, the whole value being really the net present value of what we think the cash flows and the asset will be over time. And if we can't get a price in excess of our old whole value, we're not a seller okay? I mean, we only sell when we think we can effectively enhance the NAB share of the company. We're not in the business of selling assets at fire sale prices. We don't have to from a balance sheet point of view. While we have obviously more debt than we would like and we would like to reduce debt over time, we have great stability in our balance sheet because we have longer term maturities and we have a significant amount of liquidity.

So we're not in the business of selling assets at fire sale prices. You will not see that. The inconsistency, if you will, in the comments, I don't think that you're picking up, Steve -- I don't think there is one. Let me articulate it in a different way and hopefully it will clear it up and that is asset sales for us, if we can sell assets at good prices and enhance the value of the company on a per share basis so we execute on a deal the likely use of those proceeds right now would be to go to pay down debt. If that's example being when we sold the Ontario airport Marriott we used the proceeds to pay down debt with the equivalent amount of proceeds that we got. We do, on occasion, when we sell the assets, have tax issues. And we have assets that where we have significant gains that if we were to use those proceeds other than to invest in another asset, it would it would burn up a lot of the proceeds in payments to the IRS. So that on occasion, you would see us look on an asset sale at doing tax free exchanges because that would be the most efficient execution. Sell an asset for a value greater than the whole value and then redeploy that into an asset that we think -- that's a higher and better use that has -- would have a better growth rate as an asset and thus improve the rate growth rate for the company. That is not what our preference is, that is merely what would be the efficient execution in the event that we were to sell assets that were disadvantaged from a tax perspective. So I think, to be very clear, our first desire is really to be able to use those proceeds to the extent we can tax efficiently to extend the debt.

Chris, of the assets for sale how many would you characterize as having a low tax basis or a tax issue where you would be looking to do a swap into another asset?

It's a mixture. I mean, and obviously we're trying to be intelligent about how we match portfolios. When we're looking at portfolios, we're trying to take assets that, you know, that have, you know, some gains, some losses. What, you know, to try and match them up, try to minimize tax impact so we can more efficiently use that capital to accomplish some goals that we have on the balance sheet. We're not always going to be able to do that. We also have tax efficient structures that we've looked at that I won't get into detail on that would allow us to accomplish that goal as well. So it's really -- Steve, it's hard to characterize. It's a mixed bag but I think you can feel comfortable that our efforts certainly in the short-term are much more focused on trying to find ways when we sell assets to do it tax efficiently and to be able to use those proceeds to reduce debt.

Okay, thanks.

Yep.

Up next from Merrill Lynch we'll hear from David Anders.

Great. Chris, I want you to give me more clarification. If I understood you correct you said group business which had it had been holding up kind of came off a bit this quarter. Looking forward, do you see kind of it rebounding a bit more than business transient or too early to tell?

The answer is a little bit early to tell. I think that second quarter at least the first part of the second quarter we're going to see similar trends particularly because of residual impact from war, SARS, et cetera has had a more dramatic impact on the group business. It would be our expectation as we get, you know, further into the year, you know, third and fourth quarter, that you'll see that stabilize. We think it is, as best we can see today, David, and it's hard to see much, but as best we can see it today we think it's a bit of an anomaly.

Conceptually food and beverage then will be weaker in the second quarter as well than what we normally would expect?

Yes.

Okay, thanks.

Anything further, Mr. Anders?

I'm all set, thank you.

Thank you. Up next we have William Truelove with UBS Warburg.

My question's already been answered, thank you.

Thanks.

Thank you, sir. Next with Wachovia Securities, Jeff Donnelly.

Good morning, guys, most of my questions have been asked and answered I do have a follow-up. I wonder was wondering if you could remind us of a break down of CapEx expenditures of 2003 out of that $200 to $220m and specifically what plans do you have around the Swiss hotel conversion?

I would say on the break out of the 200 to 220 it's predominantly maintenance CapEx. You know, and half of that is probably rooms redos. And then on the Swiss hotel, obviously we just announced as of June 26th Boston Swiss is going to become the Hyatt Regency. We are working diligently on the Buck head hotel, Swiss hotel in Atlanta to convert that to another brand. Hopefully in the not too distant future will make an announcement on that but we're not in a position to do that today.

Okay and just one last question was -- concerning northern California, just given the magnitude of the decline in performance that you and others have seen in that market and frankly how long people think it could take to actually recover, do you guys still see that market as strategic as it perhaps once was for Host Marriott?

Short answer is yes. I think fundamentally, northern California market is a very strong market. It's not to say that it doesn't have volatility. It's got volatility. And it historically has had a little bit higher volatility. But we view northern California, particularly San Francisco, as an important strategic place for us to be over time. Certainly looking at it from where we are today, we think that you will see, once the economy turns, an incredible growth rate in that market, in part because obviously the pain that has been endured to this point. Now, does it Ritch the height anytime soon of the -- that was caused to some degree by the tech bubble? No. But technology will rebound, obviously, to some extent and that will drive that economy and there will be other sectors of that economy that will pick up some of that slack. So we're not forecasting anytime soon that we're going to be back to bubble levels of 2000. But we do think fundamentally it's a very strong market and a place that we want to be.

Do you have a different perspective on the assets or the markets, I should say, that are in the peninsula as opposed to downtown?

Not particularly, no. I think that, you know, we're not particularly. I think that the region will generally be driven by the same demand generators and certainly, you know, downtown could have some greater growth. But if you look at that market, you really start to slice and dice that market, it generally moves in unison and while there are great demand generators downtown if you go out to Santa Clara there's terrific demand generators out there that when it things start to pick up in the technology world and in the economy in general they ought to have some serious, significant benefit, we ought to have some serious growth there. So not -- I'd say no, I'm kind of thinking as I'm saying this but our primary other asset really would be in the Santa Clara region and I think we're expecting, again, in part because we've had significant drop off there, that when things stabilize it's fundamentally a very sound market with some very sound demand generators surrounding it and it will have quite a nice growth rate.

Okay, thanks.

Yep.

Up next we'll hear from Celeste Brown with Morgan Stanley.

Good morning. I was hoping you could walk us through the increases in property level expenses and your expectations for increases throughout the year.

Well, I could take a lot of time and walk you through it. I think that the way to look at it is that there are certain categories of expenses that are growing at greater than inflation, some that are growing kind of at inflation and some that are growing lower than inflation. The primary ones that are growing lower than inflation relate to fees. You know, incentive fees, base management fees. And I'll skip what's growing at inflation because it will be everything that's not in these other two categories.

Those that are growing really at above inflation are wages and benefits for all the reasons that we've discussed, insurance, and utilities. Now, utilities in the first quarter you saw a very significant increase in excess of inflation of roughly 6%. We expect over the full year that to decline more to somewhere in the range of 3%. Benefits and wages, which are our largest single expense are going to be growing anywhere from 3 1/2 to 4%. So significantly in excess of inflation. And really that, if I were to highlight one thing that's kind of driving margin loss it is that issue. We're obviously fighting it every way we can. We're getting more efficient in hotels, using labor management model tools all of which are helping but fundamentally we're swimming upstream a little bit on that issue. Insurance, we saw on the first quarter was up 160%. It's a little bit misleading. We wouldn't expect, actually, for that to occur for the full year. We would expect it to be up about 30% for the full year. We've just finished we've just actually finished our renewals on almost all of our insurance and I'm actually quite pleased to be able to say that our rates, our total premiums on the property level insurance are basically flat on a premium basis. If you look at it on a calendar basis, because they renew at, you know, in April and June of the year, that's what causes the 30% increase. If you look at it just kind of premium-to-premium it's actually roughly flat and when it's all said and done it may be modestly down.

So the first quarter would be more dramatic in a couple of these areas in terms of margin impact, particularly utilities, at least of what we're estimating, and insurance. But still, all of these categories, meaning labor, kind of wages and benefits, insurance, and utilities are, we think, going to grow at greater than inflation. So we just don't have enough of the other expenses to -- that are under inflation, meaning primarily fees to offset those that are over and that's where you have margin decline. The other point worth noting in the first quarter the margin decline is also impacted by the fact that effectively there are tougher comps because in the first quarter of '02, we were still benefiting from very serious and significant cost-cutting efforts as a result of 9/11. They were much more dramatic. And so when you compare first quarter '30 2 and '03, '03 has tougher comps because of the flow over of the 9/11 cuts.

Great, thank you.

Yeah.

Moving on, we'll hear from Rob Pichtard with Legg Mason.

Morning, Chris.

Hi.

Chris, you have many targets to for where you'd like to get your debt level down to or even a debt EBITDA that ratio?

Yeah, we do and we've been pretty consistent with this we've we'd like to get our EBITDA coverage to over three times. And debt to EBITDA about four times. That shouldn't be any surprise to anybody because frankly that has been our goal for the last five years. We got very close to getting there in 2000, 2001, 2002, and 2003 has done some damage. You know, it's tough to -- when you have the declines that we've seen in the industry in operations and resulting impact on EBITDA to keep up with that decline. So we haven't, we've seen obviously deterioration in the ratios and the EBITDA coverage to where we're obviously below 2.0. As I say we feel very good about our balance sheet, it's stable, we don't feel like any stress events are going to come our way. But we really remain focused over the next three to five years in trying to accomplish our objective of improving our balance sheet and getting to over three times EBITDA coverage.

Given current debt levels your share price and the fact that you anticipate going in arrears on your preferred, is that a priority over opportunistic acquisitions?

I'm sorry, Rod, I couldn't hear half of the question, somehow you had a bad connection, could you say it again?

Given your debt level and your share price and the fact that you anticipate going into arrears on your preferred, is getting down to these levels a priority over acquisitions?

I would say it a little differently. In some ways, yes, but acquisitions at some point may play a part in affecting our leverage. In the sense that one of the ways, obviously, that we can accomplish acquisitions is through the use of OP units, probably the most likely way that we would accomplish those, not that there's anything in the offing at this moment. And that could be done in a way that would be advantageous to leverage. We wouldn't do that and I want to be real clear on this we would not be doing acquisitions just for the benefit of deleverageing the company. We will first and foremost only do an acquisition if we're going to be able to add value to the company on a per -share basis. What I'm saying, though, is we may be there is a way -- there may be ways, depending on the transactions, where you could accomplish both. Where you are adding value to the company on a per share base basis and also leveraging the transaction away that you're improving your credit stats.

In terms of using use of cash rate now to go out and do acquisitions, clearly that is not a priority. The priority as it relates to kind of the uses of our cash is more focused on deleverageing by a long shot than it is on any kind of acquisition activity.

Given the value of your stock right now, trading at a discount where I believe you think the value is it would require you to buy the asset at a discounted price and use your salesmanship to get people to buy -- take your currency?

Yeah, it would and as I say there's nothing in the offing right now.Given in the the war, post- war Iraq, there's really not a lot of dialog there. I think you're right. The lower our stock is obviously it's the harder it is to do that because, you know, our stock is a precious commodity. We're not going -- you're not going to use it lightly. We're only going to use it when we're really creating value and the lower the stock price really the harder it is to be able to effectuate a transaction where you can create value. So yeah, I think your basic premise is right.

Okay, thanks, Chris.

Thanks, Rod.

Our next question today comes from J. Cogan with Bank of America.

Good morning, everybody. Couple quick ones for you and Chris by the way I appreciate your comments about the Bay area. In terms of the cost side of the equation which has been asked about recently, can you remind us what you guys think now that you know a little bit better about the insurance side of the business and where energy prices may be going and what you know about the wage side, what kind of a RevPAR increase in '04 do you think you need to offset, you know, some of those continuing cost creeps, that's the first question? Second question follows up on an earlier question about CapEex. I was wondering, I don't think you specifically named which projects you were deferring in terms of, you know, fourth quarter into next year. I'm just wondering what that means about trends in those markets in 2004, at least initial expectations given that, you know, obviously a number of rooms will be taken out of service for a period of time. And then third, on the group side, just wondering, I knows there’s a very, very short booking a lot of stuff happening in the month for the month but I wonder for business that is being booked on an extended period of time, six, 12, 18 months, can you give us some sense as to what kind of pricing or profit issues are out there, you know, how price sensitive are groups these days and what are you having to do to make sure they stay with you ?

That's a mouthful. Sure. We'll give you all that. You got 20 minutes?

Sure do.

Just kidding. Let me take them as you gave them, I think. Probably the answer to what RevPAR increase we'd need to cover kind of increases and expenses and forward would be 2 to 3%. I mean, it's a little early, again, I hate to keep saying this but it's a little early to tell. But my best sense of it would be 2 to 3% RevPAR. From a CapEx point of view, you're right, we have not articulated or delineated the properties that we are deferring. And we're not going to get into that level of detail today, obviously that would take a lot of time to do that, we've got a lot of property. I don't -- obviously when we're looking at any kind of deferral, we're looking at the impact that those might have on the properties and I think it's fair to say we don't really feel like any of these decisions are going to have any meaningful impact on our overall results.

In terms of the group business, the longer term group business, you know, the big groups, what we're seeing, I'll say a couple things, one, the booking -- you didn't ask the question but I'll answer it for you because I think it will be helpful. The booking pace is slightly off of where we've seen it recently in general, even longer term groups, not much but a little bit off of recent data in the last couple quarters and the rate is probably for the longer terms groups meaning going out in '04 and '05 it's a couple -- you know, a little bit down, a couple of percent down.

Gotcha. And then are you having to do anything like less restrictive in terms of attrition and cancellation fees or giving more free breakfasts or any other goodies to kind of help you out which not only the rate affects you but also the profitability, you know, of that over all group given those issues?

Yeah, the answer is yes without being specific. I mean, it's more a buyers market, obviously so it's case-by-case. If it's a piece of business that we want we look at all components of the piece of business and figure out what the profitability is. And it's -- you know, there's an equation that is a mixture of things including rate, number of rooms, what kind of catering, you know, sales we expect to get out of it and what give ups we give, I mean, but your fundamental point is in a tough market do you have to be a little bit more creative. The answer is yes.

Okay, thanks a lot.

Up next, we have Zach Cherry with Neuberger Berman.

Hey, good morning, guys. Since Steve Kent stole my question first in the queue I guess I'm going to have to ask a follow-up on his. Could you sort of talk sort of specifically about the profile of the assets that are sort of being marketed and how they might differ from some of the other portfolios that are up for sale? And whether or not I mean, you know, clearly the evaluation that you got on the Ontario property was an attractive one and whether or not you think that's sort of reflective of the other assets as an appropriate valuation that are up for sale or if not, sort of what you think, you know, would be, you know, what you think reasonable valuations would be.

Yeah, I would say, you know, the profile of what we're trying to sell is obviously our assets generally that are non-core meaning, you know, they're in markets that we think longer term don't have great prospects. They've hit a point of diminishing returns in other ways, maybe from the standpoint of capital investment needed to keep up at the particular hotel. It's largely focused on suburban assets and we've been very consistent saying we want to lighten our load there. I would say, you know, while it's at the lower end of our portfolio, I think it's fair to say that, you know, as it compares to other assets that are in the market right now, because they're there are not that many high end assets in the market, that our assets fare pretty well. I'd say they're at the higher end of what's available in the market.

The other advantage and the focus that we have that you'll continue to see like Ontario is looking at assets that we can sell that either free up -- where we can free up the flag or in more cases than freeing up the flag, free up management so that a franchisee can or owner/operator can buy the assets. So that opens up a whole new pool of investors that are the owner/operators that are trying to expand their operating base. And we have been quite successful, as we were in Ontario, in doing those kinds of transactions. Now, there are harder deals to get done, they take more time, there aren't as many buyers in any of these categories, if you like, but there are more buyers in that category, there's more volume of dollars to spend there and so we're really focused there and have been successful there. In terms of pricing parameters versus obtain on tear yore, Ontario's a great price, you know, I'm not -- I wouldn't suggest to you we could match that necessarily but I would hope we could get somewhere close and certainly, again, think we could continue to get competitive prices, particularly focusing on dealing with some of the owner/operators and assets that we can free up management in the process of doing it.

Okay. Great.I think given your comments about sort of taking a hard-line on not selling assets for the sole purpose of paying down debt, given that you guys are in the market and, you know, are closer to it than we are, you get the sense that there are portfolios that are sort of trading at what you would consider below market valuations valuations?

I don't know. It's hard to say. I haven't seen a lot of trading below market valuations.I haven't seen a lot of fire sale transactions, if any, that I can think of offhand.

Okay.

Obviously we wouldn't tell you that we think we could do 100 to 250 if we didn't think we could get reasonable pricing. Cap rate at Ontario was pretty aggressive, I don't think we'll necessarily match that but I do think we'll get some transactions done that are going to be meaningfully in excess of what we view as our hold value or what I would say to you again as an enhancement to the NAV per share of the company or otherwise we won't trade, as I described before. I can't emphasize that enough. It's not a fire sale. It's not -- we're trading because it's the right thing to do, we're in the business of recycling capital all the time.

Right.

We're a real estate company. I mean, this is what we do. So every year we're doing this. This isn't about, necessarily, just going about de leveraging. Now, there is a benefit in this time frame that, by the way, while we're selling and enhancing NAV that the use of those proceeds can benefit us because we want to improve our balance sheet and we're certainly going to be focused on that as I said it's a very high priority. But first step is always making sure that it's an intellect business decision because we are not from a balance sheet point of view, in a position where we need to do anything like that.

Right, thanks a lot.

Yep.

As a final remind reminder to our audience today, please press star one if you have a question or a comment. Up next we have Asad Kazim with Ritch Securities.

I have a couple questions, first one, could you quickly walk me through of economics of switching flags from the Swiss hotel to the Hyatt and I guess do you folks do an MPV based on better -- I guess better distribution, et cetera? And then secondly, has a marketing strategy at the property level shifted at all now, that some of the group is slowing down in summer months -- you know, obviously, typically your hotels have been more group and convention, but are you doing anything to attract more leisure business? And lastly in terms of the Northeast assets in the first quarter, obviously there are certain anomalies in terms of weather -- can you qualify how much in additional expenses you had because of inclement weather and which was above and beyond what you guys had budgeted?

Sure. Well, let me tackle some of those, I don't know that I can answer the last one. The Hyatt conversion from Swiss hotel, we went through an exhaustive process of looking at a number of different brands that we could -- that we could convert the Swiss hotel to. We obviously negotiated for the opportunity to convert that hotel as part of a settlement of some litigation with Swiss hotel last year. And I think the short answer is that in our analysis of that, which is based on kind of bottom line cash flows, and you're right, looking at net present values, we thought that the Hyatt conversion was the highest and best use or the great potential in terms of conversion in brands that were available to us. Now, there are a lot of factors that obviously go into that. Some of the brands don't have availability in that market relative to other restrictions. Some of the brands have heavier representation in that market and so we're kind of sharing the power of the brand. In the end analysis we looked at the numbers with Hyatt, we were very comfortable with over time we will enhance the profitability here in a meaningful way and that Hyatt, given the strength of that brand, can do a lot more for us. Hyatt, one of the candidate drivers in that particular market in addition to Hyatt is doing a terrific job as a brand generally is that they have no representation in downtown Boston. So we really thought that that was a powerful change to be able to bring that brand in there where there's a lot of demand in that market for that brand and it's not being met. And we're going to be able to meet that demand.

In terms of the shifting of our marketing, I think all of the comments we've made about the shift in the mix of our business was maybe the exception of this quarter where we had a little bit of an anomaly on the group side and may in the next quarter as well would suggest kind of where the marketing, you know, time is being spent. Obviously you have seen a shift away from higher rated business on both -- recently on both the group and the transient side. And so there -- there clearly is, from a marketing point of view, from all of our operators, an enhanced focus in some of these areas because some of the higher rated business demand's just not there so they're focusing obviously more resources on demand bases that are flowing right now where we can fill the hotels. That’s going to shift around. You know, obviously as the economy starts to stabilize, I think that's going to shift around. You can already see that to some extent now that they're starting to shift their focus.

The one particular area that we've seen some pickup is in the special corporate side where we've actually in the last quarter or so seen a meaningful pickup in the special corporate business which had obviously declined a lot over the last couple of years and had been replaced with contract business, AAA, you know, kind of government type of business and Internet business. So that's -- you know, there's some data points there that suggest there may be more demand there and so obviously resources will shift and obviously resources will start to shift within the brands and our operators in anticipation of some of these things.

In terms of, hopefully that answers the question, you could talk a lot about that. In the Northeast, I think it's really hard. I can't isolate exactly what -- I think you said the expenses would have been, Assad, related to the weather in the Northeast. That's just not a data point that I have available to me right now.

The one comment we could make about the Northeast is that fortunately there and almost counter to what you may have expected, our utility cost didn't go up that much in the northeast because we were successful in arranging a long-term energy contract for our properties there. Compared to what you would have expected we had less utility increases there but other than that I don't think there was a major variation.

Great. I realize the call's pretty long. Just a final question.

Yeah.

In terms of, you know, you guys hunkered down earlier in the quarter and went to, you know, prepared for war and cut back on expenses. I guess how long do you think that continues at the property level or has some of that kind of gone away now that you are returning to pre-war demand levels?

I think that those contingency plans will remain in effect as long as demand is weak. I mean what the way to think about the contingency plans is that they are sized -- you know, they're right-sized depending on the market and the assets. So that they're, you know, for markets that have had more significant drop off in demand, the plan is more appropriately sized and for those markets that have performed well, haven't had that much of a drop off in demand, their contingency plans respond to that set of facts. So what I would say to you is because by the very nature of how we kind of set up these contingency plans, with all of our operators, they will continue in place indefinitely in the sense that until we see demand levels start to really pick up in a meaningful way.

Great, thank you.

Thanks.

And it appears we have no further questions at this time. I would like to turn the call over to Mr. Chris Nassetta for any closing remarks.

We've taken a lot of your time today so I won't take much more. We appreciate you joining us with the call. I hope it was helpful. We try to give you some of disclosure as we can and appreciate the feedback on that today and if you have any other feedback on other things that you'd like to see, let us know. Certainly, in a difficult time in the industry, we're, I think, dealing with it as well as we can and trying to give you as much information as we can as we see it. So we'll continue to do that as we move into the second, third, and fourth quarter. Again, I appreciate your time today, and we'll look forward to catching up with you after the second quarter. Thanks.

And that concludes today's teleconference. Thank you all for joining us today.