Host Hotels & Resorts Inc (HST) 2003 Q2 法說會逐字稿

Good day and welcome to the Host Marriott Corporation second quarter 2003 results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice-President of Investor Relations, Mr. Greg Larson. Please go ahead, sir.

Thank you and good morning. Welcome to our second quarter earnings call. Before we start, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under Federal Securities laws.

As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties which could cause future result 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 FFO and EBITDA, which we believe is useful to investors. You can find this information in today's earnings press release, which has been posted on our web site.

This morning, Chris Nassetta, our President and CEO, will provide brief overview of second quarter results and then provide an update on the company's outlook for 2003. Ed Walter, our CFO, will follow-up Chris and provide greater detail on our second quarter results, including regional performance. Following the remarks, we will respond to questions. Now, here is Chris.

Thanks, Greg. And good morning, everybody. Despite the combination of the war in Iraq, the prolonged SARS epidemic and continued economic weakness, has clearly created a challenging operating environment for the industry and our portfolio, our second quarter results were generally in line with our expectations. Diluted FFO per share was 22 cents in the second quarter, which fell within our guidance and exceeded the consensus estimate of 21 cents per share. Our comparable RevPAR decreased 8.2% for the second quarter compared to 2002 levels while hotel operating profit margins decreased 3.3 percentage points.

Our top line results were driven by a decrease in occupancy of 3.6 percentage points combined with the decrease in average room rate of 3.5%. Adjusted EBITDA for the quarter was $193 million, which represents a decrease of 17% from 2002 levels. Year-to-date our comparable RevPAR was down 7% as a result of the decrease in occupancy of 3 percentage points and decline in room rates of 3%. Year-to-date adjusted EBITDA was 365 million, down 15% from 2002. As we indicated in our press release, due to recent SEC guidance, we have made adjustments to our reported measures, which Ed Walter will discuss in greater detail in just a few minutes. Our RevPAR decline was driven by across-the-board reduction in demand and the group contract and transient segments of our business. In particular, the decline was driven by further deterioration in our corporate transient and corporate group business.

The decline in-group demand was most pronounced in our larger group hotels, which were affected in April or May by higher attrition levels and reduction in short-term bookings prompted by war-related concern. Despite this handicap, our large hotels slightly outperformed the portfolio declining to 7% as we attracted more discount business. Contract business levels continued to decline that started in the first quarter, falling by almost 15%. In part this reflects our property decision to pass on what has become exceptionally low-rated business in many markets, as well as completion of a major contract at New York Marriott Marquis. Group bookings did increase slightly over the course of the quarter, but not at the rate of transient business.

Our overall transient demand was significantly down in April, but improved steadily during the quarter and was down less than 1% during the last four weeks. In particular our special corporate transient business continued to grow as property seek to replace lower rated discount business. Interestingly, our transient demand at our Ritz-Carlton hotels has been very strong, especially our resort properties, which resulted in positive RevPAR growth in May and June for risk portfolio. We note that RevPAR for second quarter came in at the low end of our guidance and fell short of the national level for upper-scale segment as tracked by Smith Travel Research. Given the trends dominating our business this performance should not be surprising as our portfolio is dominated by larger groups situated in gateway cities. It is precisely these locations that have experienced the greatest decline in business over the last several months for the reasons I previously explained and the locations which are most leveraged to a recovery once it begins. In addition, because of the timing of our reporting cycle our results include the month of March through May where hotels report results on calendar month basis, which is obviously not favorable.

Lastly, the two phase SARS epidemic in Canada, negatively impacted our second quarter RevPAR. Continuing a pattern from the first quarter, our food and beverage sales held up better than RevPAR declining just 4.2%. Other revenue declined 12.3% driven by 28% decline in telephone sales which was partially offset by a 5% increase in parking revenues. Our relative margin performance improved slightly over the first quarter as wage and benefit increases were partially offset by productivity improvement. Utility costs increased by 9% and higher natural gas prices resulted in increased heating and electrical expense. Overall, we believe our properties have been effective in controlling expenses and expect margins will improve in the second half of the year in part because expense comparable will ease.

We are pleased to announce that we closed the sale of through non-core assets, Palm Beach Gardens Marriott, Norfolk Waterside Marriott and Oklahoma City Waterford Marriott for total proceeds of $71 million. The sales price represents 7.5% cap rate and 10 times EBITDA multiple based on trailing 12-month numbers. The sale proceeds will be employed to repay a portion of our existing debt. Assuming we can obtain satisfactory pricing, we will continue to pursue other opportunities to dispose of non-core assets. We are currently in discussions with a number of buyers and expect that we will sell hotels that should generate additional proceeds of 50 to 150 million in 2003. From an acquisition perspective, we remain interested in selectively adding to the portfolio.

Given the decline in operating levels over the last three years, we expect there will be increasing opportunity to acquire single assets or portfolios that are consistent our target profile at less than replacement cost. Since financing for new development is expected to remain scarce for the foreseeable future, we would expect that market fundamentals would be attractive for these assets. Although, the purchase price for any new acquisitions would likely be funded in part by issuance of equity, we would expect that transitions would be accretive to earnings and leverage and yields will significantly exceed our cost of capital. Now, let's talk about the remainder of 2003.

Today's debate is have we hit the inflection point? The fact we are having this is a positive change since we have been in a downward cycle over the last three years. RevPAR results over the last several weeks have been generally improving for the industry and have given us some evidence that we may have seen the (inaudible) . Occupancy rates have generally been improving and our net reservation volume has generally exceeded prior year levels. Continued low interest rates, stronger equity market and potential for increased spending resulting from recent tax cut all create economic climate which should be favorable to the economy and eventually our industry. On the other hand, our group booking pace for the third and fourth quarters remain weak. Increases in the number of groups booked are more than offset by reduction in the average size of an event. Booking cycle is very short and the economy continues to show alternating evident of strength and weakness.

Indicators critical such as business investment, airline travel, have yet to demonstrate any sustained momentum. In addition, because we expect the leisure segment has helped drive the results over the last several weeks, it is difficult to predict the strength of the business segment this fall, especially during September and October, during which we generate significant portion of our fourth quarter results. Looking into 2004, we find reasons to be more optimistic, as the booking pace at larger hotels is strengthened into slightly positive on a year-over-year basis. Tentative bookings have increased by over 20%. Given historic 1-2 quarter lag in the turn in the economy and increasing in lodging demand, improvement in economic fundamentals over the next couple quarters should generate increasing demand in 2004 and conversely it should not be surprising that we haven't seen any consistent improvements to date.

Given the conflicting nature of our data and the general lack of visibility, it is difficult to forecast our operations for the remainder of this year. Although short booking cycle offers opportunity to fill in weak periods, at this point we believe RevPAR results will improve as result of easier comps, but will continue to decline during the second half of the year. With full year RevPAR declining between 3 and 5%. The midpoint of guidance suggests RevPAR will remain constant with pre-war levels using 1999 RevPAR levels as a base model. At top line levels we expect margins will decline between 2 and 2.5 percentage points resulting in EBITDA levels between 725 and 750 million and FFO per diluted share defined by NAREIT between 62 and 70 cents.

While our forecast for 2003 is highlighted a number of short-term difficulties, we are becoming more confident about the intermediate and long term outlook for the industry. We strongly believe that lodging fundaments will gain strength, the supply growth rate will remain historically low levels 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 debt maturities, we are confident we can deal with any challenges in the quarter ahead and more importantly with unmatched portfolio and our disciplined approach to running our business, we are well positioned to outperform the industry and maximize shareholder value as the economy recovers.

Thank you. And now, let me turn the call over to Ed Walter for greater detail on the quarter.

Thank you, Chris. Let me start by giving you some details on RevPAR results. Our resort hotels had the best results for the quarter with RevPAR declining just 5.8%. Within this segment our Naples Ritz-Carlton enjoyed RevPAR increase of 2.7%. Our suburban and urban hotels, experienced RevPAR declines of 8% and 8.6% respectively. Our airport hotels which were most affected by decline in travel because of concerns surrounding the Iraq war fell by 10.1%. Turning to our regional results, our top performing region was Florida which enjoyed a 0.2% RevPAR increase, driven by strong performance in our Tampa market which increased by 20%.

Our North central region experienced RevPAR decline of 2.1% as downtown Chicago properties benefited from positive RevPAR growth and strong convention market. Our Washington, D.C. region also continued to outperform the portfolio, with RevPAR decline of just 2.5%. And several northern Virginia properties enjoyed a strong quarter. Our Canadian properties suffered tremendously during the quarter as result of the SARS epidemic. RevPAR in Toronto declined by 31% for the quarter and our operating profit from our three assets in this market declined by roughly $3 million for the quarter and forecast to decline $11 million for the full year from pre-SARS projection. RevPAR in our Atlanta region declined by 16.4%, which was led by double-digit declines in both the downtown and Buckhead markets. We note that we are seeing greater competition between Atlanta and markets such as Orlando or New Orleans, for large group functions has rake within these markets to achieve parity.

Our Pacific region under performed the portfolio with RevPAR declining by 9.9%, operations in San Francisco continue to be weak with RevPAR falling to 13%, although these results were generated by softer demand in the subsumes and airport markets as opposed to downtown hotels. We expect downtown hotels will benefit from stronger convention schedules. San Diego market continues to benefit from solid convention calendar experienced RevPAR decline of just 2% for the quarter. Our mid-Atlantic region improved over the first quarter with RevPAR declining by 10.2%. New York hotels declined by 11%. Soft performance in suburban markets is better performance of the Marquis, down 8%. Our Philadelphia market outperformed virtually all of last year, suffer Friday tough comparisons and slow convention level leading to RevPAR of 10%. Turning to the courtyard portfolio, RevPAR with Marriott international declined by 7.1% for the quarter, as occupancy fell by 3.1 percentage points and rate declined by 2.9%. Year-to-date RevPAR declined by 4.8%.

You will notice you review our press release and associated schedule we have modified FFO and EBITDA calculations in light of recent SEC guidance. With respect to FFO, for the first quarter we provided both calculation which was consistent NAREIT definition of FFO and a calculation of comparable FFO representing historical method for calculating FFO and serves as basis for previous forecast of FFO per share. In 2003, the primary difference between these two methodologies is add-back of deferred tax benefit relate tod purchase of leases in 2000, which amount to $12 million per annum or 4 cents of FFO for the full year and 1 cent per quarter. Since the SEC has indicated its acceptance of the use of FFO and filed documents is limited to FFO as defined by NAREIT we eliminated use of comparable FFO and adjusted guidance to eliminate the deferred tax benefit.

The SEC also sought to standardize the definition of EBITDA and provided comparison as appropriate. In light of this guidance we have provided calculation of EBITDA which is consistent with the SEC's definition. In addition, in an effort to provide more complete disclosure regarding the ongoing operations of the company, and to facilitate evaluation of the company's, we have calculated adjusted EBITDA. Adjusted EBITDA makes certain modification designed to present actual cash retained by the REIT with respect to certain properties held in consolidated and non-consolidated joint ventures and to eliminate gains or losses associated with the disposition of assets. You should note adjusted EBITDA excludes non-cash adjustments such as the add-back of restricted stock expense and effective changes in value of certain financial hedges of foreign currency which we previously made in calculating EBITDA and would have totaled approximately $15 million for the year. Our adjusted EBITDA guidance reflects all of these changes.

Full reconciliation of both FFO and EBITDA measures are included in our press release. As Chris highlights forecasting in the current environment is difficult. RevPAR results for the industry and our portfolio are difficult to interpret and combination of low demand for business travel and combine wide favorable year-over-year complicate the analysis. We anticipate RevPAR for our portfolio will decline between 2.5 % for the third quarter. Given low operating levels our portfolio experiences in the summer months, we expect FFO per share will amount to zero to 2 cents for the quarter. We would like to point out consistent our practice from 2002, we will only include business interruption payments related to world trade center Marriott, financial center Marriott to the extent payment vs been fully released by our insurer.

Similar to our treatment in 2002, our FFO and adjusted EBITDA estimate for 2003 includes $17 million in business interruption insurance from these two asset which is we have assumed will be received in the fourth quarter. In the event we do not receive these payments and the appropriate release from our insurer, our FFO and adjusted EBITDA will be reduced. We finished the quarter with 312 million in unrestricted cash and 250 million in capacity on our credit facility. We recently completed asset sales generating approximately $71 million in sales proceeds. During the quarter, we acquired our outside partners interest in J.W. Marriott Washington, D.C. and consolidated the asset on our financial statement.

We are in the process of refinancing the $95 million loan ensured by the property with new floating rate loan. Remaining maturities total less than hundred million, we remain comfortable with the balance sheet. . We have more than sufficient liquidity to cover our fourth quarter perpetual preferred dividend, we believe it is unlikely we will be permitted to make that payment due to indenture restrictions we previously discussed. In the event we do not make the payment it will accrue and must be paid prior to distribution on common stock. Although the operating environment remains challenging we are begin tog see signs conditions should improve. As a company we are well positioned organizationally and financially to take advantage of the opportunities we expect to see over the next few years.

This completes our prepared remarks.

We are interested in answering 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 * key followed by 1 on your touch-tone telephone. If you are using speakerphone, please release the mute function to allow your signal to reach our equipment. And again, that is * 1 if you have a question. We will go first to Joyce Minor at Lehman Brothers.

Hi, guys. Chris appreciate your comments around '04. Not many people are willing to go there yet. If you are willing to go there, I would love to tempt you to make additional comments you might on '04. If you could put in perspective for us what in your view tentative bookings up 20% means? When you say you are looking for solid '04, what should that mean to us, like consensus FFO numbers are up 17% in '04, is that within the realm of reason? If RevPAR is up solid '04 means meaningful EBITDA increase or anything would be helpful?

I know it would be helpful. Wish I could give you more detail. Obviously it was difficulties we are having in giving guidance in third and fourth quarter. Based on our lack of visibility, it is by definition that much harder to talk about what we think will happen in '04. I can't really, I'm not going to step out and try and be specific on what we think of '04 RevPAR at this point for next year or what that means for FFO and EBITDA. The only thing I would say and we said in our comments, it is obviously not as specific as you would like me to be. We expect next year to be a much better year.

You know, obviously we are still concerned about the third and fourth quarter, particularly as it relates to group bookings. We see alternating signs of weakness, which is better than where we have been. That certainly puts us in the category of being hopeful that as we walk through the third and fourth quarter the economy really is starting to get sustainable traction that is ultimately on a lag and will start to suggest improvement in our business, which we've said for the last two quarters we think is more likely next year than this year and we said it again today.

So, I guess the short response would be in relative sense, relative to where we have been in the last few years, we expect to see meaningful additional strength next year. We prefer to wait until we have better visibility to be more specific. Sorry I can't do more for you.

All right. Thought I would take a shot at it. One more question, if I could. If you could comment on what you are seeing in the way of buyer interest? You know you targeted asset sales, and it seems like that is going fairly well. Is there a different level of appetite for assets in your kind of quality spectrum versus the 2 and 3-star hotels that may be other portfolios for sale and lower quality caliber?

Well, I think that there is capital out there chasing hotels, not in massive volume, but certainly at increasing volume. I would say it might be -- I don't mean to comment on what other people are doing, but it might be easier in our category if nothing else because there is less of it available. I think there is more 2 and 3-star product available out in the market with a limited amount of money chasing it than there is 3 and 4-stars. By definition, there is less product and increasing amount of demand for it.

So, I think we have some opportunities to continue to get these transactions done. They're tough deals to get done. Weather 2, 3 or 4-star hotels, while the volume of money chasing the deal system increasing, they take a long time to get done. You know, they are complex deals, particularly, because of the types of buyers that you're working with, at least the types of assets we have been selling are the owner-operators are smaller players relative to some of the big public players and the way they are getting deals done is by layering different forms of capital on top of one another to pull together the proceeds in order to buy them.

By definition, they're tougher to get done, lower probability and a lot more work goes into them. As you can see from the deal we did earlier in Ontario, we are getting attractive pricing at 7.5 cap rate multiple. Clearly, meaningfully in excess of our values. As we are doing it, we enhance the AV of our company on a per share basis. We will keep doing it. We said 50 to 150 million, which is a significant amount. As percentage of total assets, it is not. That is a reflection on the fact first we have a great portfolio, not a huge number of assets we want to sell 1 and 2, the way we are going about doing it in order to achieve these types of prices is by definition, little bit of slower process.

All right. Thanks, guys.

Moving on, we will hear next from Jay Hogan with Banc of America Securities.

I can't resist. Let me ask a couple question specific group pricing for next year and negotiated corporate. You were talking about Atlanta seeing hefty competition this year in terms of group rates. I was wondering if you could talk about the overall portfolio and how things look from a price standpoint or general competition standpoint, give-aways and all to get groups in there and corporate rates would be helpful?

Pretty short answer to that, Jay. The market is tough, demand is still weak. It is more of a buyer's market than a seller's market. The result would be what you would expect, as you see advanced bookings for groups and as we start to enter the zone on negotiations on the special corporate, we would expect that they would be modestly down for next year. Now, as you get into special corporate, you may be able to do better because the heat of the debate is in September and October. So it's It is premature. Given where demand levels are today and the fact you will be negotiating in this environment, we generally expect that while the pace will be up, the pricing will be slightly down.

Can you talk little bit about September 11th period, just in general? You know, relative to last year what are you seeing right now on the book? Group bookings are weak, easy comps at that point. Can you talk about what you are seeing there?

Group bookings are not as bad as you would think. Frankly, group booking for the remainder of the year is about 6% down, but the majority of that in the fourth quarter,-- corporate group particularly which have been dramatically weak in the last quarter or two are performing because those are going to be real big part of the year for those segments of our business. Those are the segments of the business that we really need to have a little bit more visibility in to start to try to judge next year and be thoughtful about it. So, there is a little bit more of an answer there. I am just not in a position where I think it is responsible for us to try to give guidance with any kind of specificity.

Just as a follow-up, then. Two or three part question. Remind us one specific you look at for signal of lodging demand? At what point does your conviction shaken in the one to two quarter lag in the terms of demand? Do you have personal belief as to when you think the business recaptures pricing power?

Yeah, I think from the standpoint of the signals we are looking for, we're looking for continued increases in corporate profitability, particularly focused on top line growth than profitability segment rather than further increases in productivity or more of a component that is coming from top line growth and we think when you see that we will also start to see business investment, which is clearly a key indicator in looking at our business. Looking at airline traffic, which should result from those things is obviously another indicator.

We are looking at -- those are the indications we are looking at, all of which show some signs of life. Corporate profitability is going -- has been improving. More productivity than top line. You start to see a shift toward top line, that is good. Business investment has been sputtering. You had a couple at the beginning of the year, decent turnaround that looked like going. Then, you have seen weakness more recently. So, you need to see more sustained recovery in business investment. I think those things will lead to additional airline traffic and additional demand in our hotels. They will on a lag. My confidence level to the second part of your question, is high. I can't tell you one quarter or two quarter or one and-a-half or two and-a-half, we don't have that kind of precision.

Clearly, I have a high degree of confidence they are going to create demand in our business and ultimately lead to improvements in RevPAR cash flow greet and allow us to get pricing power. In terms of when we are going to get pricing power back meaning we can start to move rates up, I think it's going to be slow climb out and take real time for that to occur. The natural way it will occur, you will start to see occupancy gains. When you start to see occupancy gains, you will also start then furthering on that, start to see changes in the mix of business, which will increase your rate just as an average of higher rate of business and averaging out lower rate of business.

You really need to get occupancy levels up if -- you know, talk being numbers we ended last year at 70%. You need to get occupancy levels up between 75 to in our portfolio, 75 to 78% where you are getting maximum levels of efficient levels of occupancy where you can start to have meaningful pricing power and we're obviously not there yet. The signs you are going to see are occupancy going up, mix of business changing and then ultimately, as those things play through, you will see we will have pricing power and start to really move rates up. But, I think it will take some time to get there. That is not to say in the interim good things aren't happening. As you move occupancy up, obviously you are moving RevPAR.

As you change the mix of business, that will help end rates thus moving RevPAR, as well. Picking an exact time where you get strength in pricing power is difficult. My point of view, I certainly don't think it is next year. That doesn't mean we can't have RevPAR gains. We expect to have RevPAR gains. Pricing power gains of the type I am talking about, once you get passed that level and can move rate system likely in 05 and 06 rather than '04 experience.

Okay. Thanks and this is the last, very quick question. Any update on your plans for newly rebranded Boston Hotel? What are your price per room expectations for these remains sales in '03?

The new Hyatt Regency Boston?

Correct.

Things are great. We think Hyatt is a better brand. Hyatt's doesn't have a Boston location, which is one thing that made us interested in the brand. They have great brand, great sales force, great reservation of brand, loyalty. We have already, I think in the last two and-a-half or three weeks, we're back to reservation levels -- or at reservation levels that were exceeding where we were prior to the conversion, which is pretty amazing statistic in that short a period of time. So, we're confident that that brand change is a powerful one for that asset and that long-term profitability will be greatly enhanced as a result of it.

Thanks.

Bob Kazine (ph) with Research Securities has our next question.

I am having a hard time understanding the guidance for second half of the year. Seems to be getting better. You are more positive on trends going forward, yet fourth quarter numbers seem to be worse than third quarter. Is that just a function of you guys not having much color on group bookings and not making any increase in group bookings for the fourth quarter?

That is right. The reason RevPAR guidance went down is simply two things. One, of course, second quarter we were outside the low end of our range and that affected a bit. Also, we along with most others, I think, had expected to see some pick-up in the fourth quarter, which we haven't been materializing. As we looked at trying to give guidance today, we thought given the patterns in bookings which have been focused on next year and not this that we should assume because it is what we forecast will actually happen, you will be in kind of a steady state because of the lag of our demand to the economy, steady state meaning that you kind of don't see improvement in demand from pre-war levels like we used in '99 base year.

If you look at the mid-point of our guidance that is what that is. It is basically saying we don't have a real big pick-up and fill in big part of the gap in the fourth quarter. Now, obviously, that could happen if we thought it was going to happen, we would have given you different guidance. So, obviously we are giving the best sense we can looking at the business everyday. You know, given the lack of visibility, I think it is fair to say there could be a different result. But, I also would say and I think this is an important comment, that our view is not that as we have given you guidance for the second half of the year that in any way overly conservative. It is a reasonable assessment as best we can with the visibility we have of what we think is going to happen.

Very good. One more question, if you could. If you guys could walk us through sources and uses of cash and 71 million of assets in July, expecting to sell another hundred to 150 more going forward. Can you walk us through generically what the sources and uses of capital will be over the next year or so?

Speaking specifically to proceeds out of asset sales, the vast majority, if not all, will go to debt pay down. Pretty easy walk through. we would expect with 71 million dollars that we just the results of the sales we will buy back or pay down debt in some form to the tune of $71 million.

Okay. Very good. Thank you.

Moving on to David Loeb at Friedman, Billings & Ramsey.

Hi, Chris. Along the lines that Jay was asking, I guess. Let me put it in a different way and maybe you can give us some color. If you get a few points of occupancy next year and the mix improves a bit such that you get two points of rate. What happens to margins?

Well, I think you should expect that like this year certain expenses are -- you know, medical, benefit costs, wages are going to be growing at more than inflation. So, at this point, again, it is hard to say exactly where cost increases are going to be. Two to three percent broad range is probably reasonable. So, if you are having -- just taking your example and I am not suggesting I agree, David. Take a five to six percent RevPAR growth against a 2 to 3% expense growth, you would have margin enhancements. I think it's very difficult to say --

One question on that. If most of the revenue rise is from occupancy, is 2 to 3% expense growth enough to cover the variable cost of the additional occupancy?

I think the answer is yes. I think the answer is yes given the effectiveness in kind of getting efficiency out of these in the last couple of years. I think yes. The 64,000 dollar question is would you have 5 to 6% RevPAR growth. That I go back to my answer from the four other questions on the topic which was it is too early for us to judge that. We've got to see more of what is happening with the corporate business, corporate group and transient business will be a big driver. We will know more about that in the fall.

Is it fair to say that occupancy only no rate increase, occupancy only of 2 to 3% means margins are probably flat to down a bit? 

I think that is fair, yes.

Next thing, I thought I heard you say something differently than you said before. You were talk being potential for acquisition and you said you would likely use equity for them. Did I hear you correctly?

Yes.

Sounds like a shift from what you said last quarter.

It shouldn't be. I have said that consistently for more than a couple quarters. If we can find assets that we think are a great value where we could add value to the company on per share basis, we certainly would consider the use of stock in doing that. As I said today, we are looking at that in the context of being able to buy assets at significant premiums to our cost of capital in terms of yields and doing it in a way that is accretive to the value of the company and should also be accretive to our leverage. So, I don't believe that is new information. We've been consistently saying that probably for the last year.

You usually add you wouldn't do that at current stock price. I didn't hear you say that.

I don't remember ever using that caveat. I didn't say that today, no. It is relative value game t. depends on the pricing that we can buy something. If we can create a relative value in theory you could use stock at any price. Obviously there are natural governors on that when your stock get tos a certain price it becomes hard to be able to use it and be able to create value. It really is a relative value question on what is the value and what you are getting with pricing and buying versus the pricing in your stock. Those are the factors that go into the equation.

Do you think at this point in the cycle, given the supply of properties at interesting prices that we're getting close to or at least closer to the time when you are making acquisitions? Could we see some prior to the end of the year, for example?

It is hard to make any judgment on that in terms of the short term. But, as I said many times, over the next 12 to 24 months, you will clearly see us become more active on that front. I don't think there will be opportunities in the volume that you saw them in the mid-'90s because we don't have as many inadvertent owners of hotel real estate in today's world as you had then. Clearly as a result of three years of decline in the business we have seen and the pain it has caused and the more than that seasoned over the time, people will strategically, may be making decisions for assets or portfolios. You will see more M&A activity over the business. Over the next 12 to 18 months we will become more active.

We have not been active because we did not think the opportunities that we've seen made sense. Obviously we're more historically an acquisition company than a development company. We think the risk-reward relationship makes more sense in that regard. Development field by and large with some exceptions, we haven't been able to get yields that justify taking that additional risk. On acquisitions, you know, there are times to acquire and times not to. Since 1998 was very few exceptions, we haven't done much. We knew we were at peak and had to look at cash flow going down and from a cost to capital point of view, we couldn't get premiums. I think that's changing, where there's opportunity to buy assets that increasing opportunity to buy assets at significant discounts to replacement cost, not tons of them, but that will continue to change over the next 12 to 24 months.

Where you can invest capital and get a meaningful premium to long-term weighted average cost of capital, which is something I think is different than we have seen over the last three to five years. So, this is the time zone where we should be thinking about growing when you have this kind of dislocation in the industry. That doesn't mean the next quarter or two, but over the next couple of years. We have to be very disciplined in how we do it any time we allocate capital, we have to be disciplined to make sure we are adding value to the company on per share basis. Obviously we will do that. But it is a long way of saying I am not trying to say yes, the next quarter or two we have X or Y happening. We don't comment on specific deals unless they are done. Over the next year or two there will be more opportunity. I would be surprised if we don't participate in it.

Very helpful. Final question for Ed, hopefully a quick one. Given your crystal ball of taxable income and not giving guidance for next year, it will be hard to answer. Any idea how soon you might be allowed to reinstate the preferred dividend? Could it be a quarter, two quarters is it a decision you will make based on full year taxable income, how will you decide that?

David, you partially answered it the way you asked it. Professional dividends, you have to look at whether or not you are satisfying the 20 EBIT test, that is the governor determining whether we pay perpetual a liquidity perspective, there is not a problem. In terms of looking at the issue from taxable income perspective, you are right. It is difficult at this point since we don't have a clear outlook 2004 to really forecast taxable income will be. Ultimately, that is going to be the governor until we get above the 20 standard. We will see how this year and next year plays out with respect to taxable income. On one hand, it is reasonable to conclude if we don't pay the January dividend until you see improvement in operating levels it probably suggests that at least for a quarter or two, we won't be paying the filing dividend.

You need to either get to trailing 12 passed the 2.0 mark or have taxable income at that point or do you need --

We have to be confident we would have taxable income forecast for the year to justify paying it.

Perfect.

One thing I would point out is to remember that test is a pro forma test and so to the extent that we complete acquisitions or pay down debt or to have those types of transactions occur, we get to take that into account immediately in calculating the tax. So, there is sort of to Chris' original question those acquisition activity could impact that calculation if and when it occurs.

Got it. Thanks.

We will hear next from William Truelove with UBS Warburg.

Good morning. Following on that question. Do any of the covenants change once the preferred goes into arrears, first of all? Second of all, how long would you be willing to let that go into arrears? Unless your EBITDA jumps considerably over time you are probably not going to meet the 2.0 test for quite sometime. So, that would suggest that even if your preferred went to arrears, the common dividend may not be able to be paid for several years going forward at this point. Could you comment if I am thinking about that correctly?

Answering the first part of your question, there's no changes that happen in our indenture covenants to the extent we are not paying the perpetual. So, you shouldn't expect any changes in that part of our financial structure as a result of not paying a perpetual. In trying to speculate what is going to happen long-term with perpetual or long-term with the common, it is really difficult to do that in the context of the visibility that we have right now. As we've said in the past, taxable income is obviously most directly tied to EBITDA growth. Your initial perspective of thinking about it, you are starting with the right point. Remember other transactions that we may have will affect that, the ability to buy assets, the ability to sell assets and pay off debt, the amount of capital we institute over the course of a year, all have an effect upon our taxable income to satisfy the 2.0 test. It is not necessarily growth in EBITDA that will end up putting us back in a position where we are over the 20 test. Hopefully that gives you more insight into the issues. I will come back to the central point, trying to look too far out in this environment is difficult to do to forecast what that means for resumption of the perpetual and resumption of the common dividend.

Two questions on operations. First of all, you mentioned CP revenues held up better than RevPAR, what do you attribute that to?

I think what we are finding is the S&B revenue track occupancy. If you think about it, it is not surprising. What you are seeing is S&B decline is equivalent to the percentage decline in occupancy as part of what is driving the decline in RevPAR has been rate. Half the decline is due to rate, that accounts for the discrepancy between the two.

You mentioned wage and benefit were being offset by increased productivity, we have been hearing this for a little bit, especially after cost cutting after 9-11. What is next, will we see attendants on roller skate tos get to rooms quicker? What is going on?

Good idea, we might want to try that. In the sense, there are limitations to being able to get further productivity out of the hotels. I wouldn't say we are done. Their labor management models, we have been beginning to employ them more aggressively, better technology than we've had, even than we had in 2001 after we had the events of 9-11. What you are seeing is the benefit of the use of the technology in a more aggressive approach to it you were not seeing as impacting service levels dramatically. Our guests were not getting that feedback. We are getting positive feedback. There ask is more to do with productivity, obviously not as much as when we started out a couple of years ago.

Final question. You mentioned Atlanta being impacted in terms of large groups by Orlando and New Orleans market. Is there something your large Atlanta hotels, you have Marriott Marquis. Is there activities they are able to do to offset this kind of -- or any activities your asset managers are taking issues with to try to deal with this new competitive threat?

I think the biggest change that you've seen in the approach of the large Atlantas, especially Marquis, they are focusing more and more at booking business in-house and for our hotel and looking to depend less and less on what is happening at the Congress Center in Atlanta. Originally in concept that hotel looked to feed off the convention center. The convention center recently expanded, our approach in operating the hotel is to focus on filling with in-house group and get the benefit of the convention schedule when it happens. The schedule has been soft because markets we are basically competing in Atlanta with other markets. That is the change in philosophy. That is mitigating the decline, but the decline has been fairly strong, especially this year in Atlanta.

Thank you very much.

Moving on we will take the next question from Michael Reedy (ph) with Smith Barney.

How do you guys describe tentative bookings? Are those inquiries or reservations on the books and not confirmed? How did those feel at this time last year?

The tentative bookings are bookings where they've had dialogue, but they're not confirmed contracts. And it feels a lot better than it did last year right now for '04. The tentative for the rest of this year don't feel as good, which is in part the reason for the guidance we have given for second half of this year.

Got you. Second question, was there a material impact or difference in the fees that were paid to Marriott International during the quarter as a result of the renegotiation last year?

The impact on just the fee part of it, obviously there were a lot of pieces to the deal. Just the fee part of it this year is about $2.5 million on IMS. So, 6 or 700,000 per quarter.

Thanks.

Next we have Bill Crow with Raymond James.

Couple quick questions. Chris, do you think things have stabilized enough or are we close to the point where you will feel comfortable doing something with the cash on your balance sheet?

We are not quite there yet, no. What we've said consistently, Bill, and I would say again today, we need to get past this point in time when we are having alternating strengths and weaknesses we want an upward trajectory and traction that will be consistent. It doesn't have to be moving to the moon in terms of the incline, but we got our legs and are going the right direction felt as you can tell from our comments today, we are hopeful and there are decent signs of strength looking to next year. There is enough alternating evidence of what is going on in the economy for us to want to hold on to higher cash reserve for at least another quarter.

Do you have update on your negotiation with the insurance companion World Trade Center property?

Nothing new. We are making progress. We are in healthy dialogue with all parties involved, and there are a lot of them. We are hopeful we will resolve that in the not to distant future. There are a lot of parties involved with complex negotiation, I wouldn't want to give details of where we are exactly other than to say it is ongoing and there is progress being made.

Okay. Finally, Ed mentioned July trends were difficult to interpret, could you give us detail on what July looks like, maybe relative to June?

What we have seen is the level of RevPAR and I meant period seven for those familiar with the Marriott cycle of reporting. While RevPAR still declined in that period, it declined by less than the prior months. I think as I pointed out in my comments, the trade-off for that is we think most of that strength we are incurring transient side, a lot is leisure. The declines on the -- we have no evident the business travel has picked up in any way.

That's why when we are trying to look to fourth quarter where we indicated the bulk of our FFO and the bulk of EBITDA is going to be derived from the remaining part of the year, it is hard to tell whether improvement in leisure travel are going to necessarily bode anything with respect to what will happen with business travel in the fall. So, we're obviously pleased to see that the trend that began after the war was concluded and as occupancy decline got smaller to see the trend continue over the last four or five weeks. We have seen that with the Smith Travel data coming in. There is inconsistency week-to-week. But, knowing who the travelers are doesn't make us overly bullish about the fourth quarter which is why you are hearing the comments.

When does third quarter end?

First week, September 12th.

Thanks.

Brian Ager (ph) with Harris.

Your earlier comments suggest you seem to expect house margin trends to get better in second half of 2003 with easier expense comparisons. Are there particular categories of cost where comparisons clearly ease? Insurance has been mentioned by other companies as area where things are starting to lap easier going forward.

I would say probably two or three, insurance clearly is one, a big one. Overall, percentage of our expenses obviously not large, but the level of increase has been so large that can have impacted second half of the year because on a premium year basis, our insurance has all been redone and relatively flat in the last year. What we are dealing with is a comparable issue. As we get into third and fourth quarter that will help us. We are hopeful, although what's going on in the natural gas market is not helpful, but hopeful we will see better news on the electric utility side of the business. Then, we have a number that are probably particular to us, allocated charges for certain program expenses within our Marriott system that went into effect really in the third quarter of last year. They valid made our comparables more difficult the first or second quarter, but will make them easier in the third and fourth quarter.

Okay. Thanks.

We will take Rod Patrick (ph) next from Legg, Mason, Wood.

Chris, what was it around 80 thousand a room?

81, I think.

(inaudible).

What kind of premium do you think that got you?

I would say at least hundred basis points in cap rate. At least. I would say --

7 million?

What's that?

Close to that?

Yeah, between 100 to 150.

Is that part of the --

It is not scientific, just kind of my guess.

Is that part of the additional benefits from the MI deal?

Not in these particular assets, although it will be a part of the benefit long term in our renegotiation with Marriott. But, these assets were all managed by others. In other words, they were already franchised Marriott where we had the right to terminate the management but keep the franchise.

What were the disposition goals between now and year-end?

50 to 150. Additional, we have done about hundred roughly.

Thanks.

Our next question will come from Zach Cherry (ph) from Neuberger Berman.

Good morning, guys. Calling from the asset division at Lehman Brothers.

Congratulations.

Question on the acquisition environment. In particular the assets that you guys sold. If you were to look at those assets within the context of the core tiles of your portfolio, where would you say they were just on the quality property?

In the bottom 10%. I would say bottom of our portfolio.

So, is it safe tax the 7.5% rate across the portfolio is conservative valuation metric?

I wouldn't judge it that way. You will have to make your own judgment on that. Clearly there are a lot of factors that go into individual assets, I think, not trying to judge it either way, hard to extrapolate from the assets. There are reasons why any asset will trade at a particular cap rate. When dealing with three, you are not getting the law of averages.

Okay. What about directionally? Where buyers and sellers are, are you seeing cap rates decline?

I'd say on the margin, yes, a little bit. On the margin, yes. Obviously the more money that is coming into the market, the more you are going to see cap rates decline. As I mentioned in my earlier comments, haven't seen a flood of capital coming into the market. On the margin, there is more money today than last quarter. Ot margin as a result of that, cap rates are lower.

Okay. The only other thing was in the past you've talked about $1.05 in FFO as the bogie common for common dividend, is that still hold up?

I don't think we have commented on that, Zach. For all the reasons Ed described, there is so much complexity that goes into the judgment on our common dividend right now, of course, we have 20 restriction we have to be over in order to do it and our prior policy, we have always said we are going to distribute the minimum necessary to maintain our REIT standard. The REIT qualification means 90% or 90 to 100% of taxable income. There are a lot of variables that go into the calculation that make it, I would say, not as clean as just saying any level of FFO per share kind of directionally gets you there. So, that's not a given answer you want. It is not that simple. At this point it is very difficult with the lack of visibility we've talked about in all these areas, to be specific on exactly when that common dividend comes back.

Okay. Thanks. 7.5% cap was LTM?

Yes.

Thanks.

Our next question comes from Fred Taylor at Fleet Securities.

I saw guidance for capital expenditures for the full year in the press release. I had to jump off for a second. Do you have it for the quarter and six months?

No, we have just given the full year.

Could you estimate it for us?

We spent about 92 year-to-date. So, that would leave us little about 110 million or so to spend in the second half of the year. I think what I would say to you is I would probably push more in the fourth quarter than the third quarter, just by virtue of what I think we will end up paying for the Capex we have planned.

Right. And are you paying a dividend on the preferred in the second quarter and third quarter? I understand the fourth quarter.

We paid the second quarter dividend a week or so ago, which is 9 million. We will be paying -- in the third quarter in October.

Okay. Thank you very much.

That does conclude today's question-and-answer session. I will turn the call over to Chris Nassetta for closing remarks.

Thanks for joining us today. Obviously it is a difficult time in the industry. Difficult time for us to give you really precise guidance on what is going to be happening in the out years. We do feel like we're seeing decent signs of the economy starting to turn around, which will ultimately mean good things for us. In the short term, there is still uncertainty and difficulty and challenges to deal with. We appreciate your time today. We'll hopefully in the third quarter, have a lot better visibility into the corporate side of the business which will help us give you better visibility into next year. Enjoy the end of your summer and again, thank you for your time.

That does conclude today's conference. Thank you for your participation.