Host Hotels & Resorts Inc (HST) 2003 Q3 法說會逐字稿

Welcome to this Host Marriott Corporation third quarter 2003 results conference call. (OPERATOR INSTRUCTIONS). 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.

Thank you and good morning. Welcome to our third quarter earnings call. Before we start I would 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 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 website.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our third-quarter results and then 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 third quarter results, including regional performance. Following their remarks, we will be available to respond to your questions. Now, here's Chris.

Good morning everybody. This week Host Marriott celebrates the 10 year anniversary of our split with Marriott International. Ten years ago we owned 22 full-service hotels and 102 limited service properties, a portfolio that totaled approximately 25,000 rooms. Our enterprise value was approximately $3 billion. Today we are the largest owner of upper upscale and luxury hotels in the nation; our portfolio includes 120 hotels with approximately 60,000 rooms, and we have a total enterprise value of approximately $9.5 billion. Over this 10 year period, while we've grown considerably in size, we also have delivered strong returns. An investment in Host Marriott has earned an annual compounded return in excess of 15 percent, taking into account share price appreciation, dividends and two spinoffs. Our annual return has exceeded the S&P 500 annual return by 45 percent and the NASDAQ annual return by approximately 65 percent.

The past 10 year period represents a full lodging cycle, as it stands from the previous trough in operations after the Gulf War, through to the challenging operating environment the industry has faced in 2003. Today we believe that we are at the beginning of a new cycle; we're starting to see a number of positive signs both in the economy and in our business. We believe that the same disciplined approach that has provided our shareholders with exceptional returns over the past 10 years will provide opportunities to increase shareholder value now and in the future.

Now let's review the results for the quarter and the year. Diluted FFO per share was three cents for the third quarter, which exceeded our guidance and the consensus estimate of 2 cents per share. Our comparable RevPAR decreased 2.5 percent for the third quarter compared to 2002 levels, while comparable hotel operating profit margins decreased 2.5 percentage points. Our topline results were driven by a decrease in average room rates of 1.5 percent, combined with a slight decrease in occupancy of .7 percentage points. Adjusted EBITDA for the quarter was 122 million, which represents a decrease of 20 percent from 2002 levels. Year-to-date, our comparable RevPAR was down 5.6 percent as a result of a decrease in room rates of 2.6 percent and a decrease in occupancy of 2.2 percentage points. Year-to-date, adjusted EBITDA was 487 million, down 16 percent from 2002. The year-over-year decrease in RevPAR of 2.5 percent was at the better end of our guidance for the quarter of down 2.5 to 4 percent, and a substantial improvement over second quarter results; however, margins were under slightly more pressure than anticipated, and therefore, kept our results generally in line with the expectations.

Although demand levels generally improved during the second half of the quarter, overall demand continued to reflect similar trends to those experienced over the last two years. During the quarter, our transient business continued to underperform, as premium and general corporate segments experienced a 9 percent decline in room nights year-over-year, which was partially offset by a 13 percent increase for the special corporate segment. Group demand increased compared to last year, as some of our large group hotels, like the Ritz-Carlton in Naples and the Tampa Waterside Marriott, performed well. In general, our top 20 hotels outperformed the remainder of our portfolio, as RevPAR declined by less than 1 percent. The tide is starting to turn as 47 of our top hotels reported an increase in RevPAR of approximately 6.5 percent, while 68 of our hotels still reported a decline.

Continuing the pattern from the first half of the year, our food and beverage sales held up better than RevPAR, declining less than 1 percent. Other revenues declined by 8 percent, driven by a 25 percent decline in telephone sales, which was partially offset by a 2 percent increase in parking revenues. In August, the Company issued 27.5 million shares of common stock for net proceeds of 251 million. This equity was raised to fund acquisition opportunities. In fact, yesterday we announced that we signed a contract to acquire the 806 room Hyatt Regency Maui resort and Spa, a premiere luxury beach resort hotel in Hawaii, for 321 million. This hotel is a perfect example of the type of acquisition we intend to complete during the next few years. In addition to further diversifying our portfolio, the hotel benefits from extremely high barriers to entry for new supplies. Today supply is shrinking, as a 720 room hotel in the Maui market is currently converting their entire hotel to timeshare. We acquired this property in an attractive multiple of 9.7 times 2003 forecasted EBITDA, for a purchase price that represents a 20 percent discount to the estimated replacement cost of the asset. We expect this acquisition will be accretive to both our earnings and credit ratios in 2004.

Today, we have several hotels in our acquisition pipeline that are consistent with our target profile of upper upscale and luxury properties that we believe we can acquire at a significant discount to replacement cost. Given the overall decline in industry operating levels over the last three years, we expect that there will be increasing opportunities to acquire properties that meet our target profile. We would expect that any transaction would be accretive to both earnings and leverage, and have yields that significantly exceed our cost to capital. In the past, we grew our company by expanding our portfolio through selective acquisitions during the early phases of the lodging cycle; we believe that we are now entering that stage of the cycle. These selective opportunities should add incremental external growth to the significant internal growth of our existing portfolio as the industry recovers.

In July, we announced the sale of three non-core assets for total proceeds of 71 million, which we used to re-pay a portion of our existing debt, bringing year-to-date total dispositions to approximately 100 million. We're in the process of finalizing contracts for two additional sales that are targeted to close this quarter, with total proceeds of approximately 50 million. Additionally, we are currently in discussions with buyers for two portfolios of hotels, and we anticipate completing one or both of these sales later this year or in early 2004. Total sales over the next six to nine months could range from 100 to 250 million. Assuming we can continue to obtain satisfactory pricing, we will pursue other opportunities to dispose of non-core assets. We intend to use the proceeds from these sales to re-pay debt or purchase other assets that match our target profile. One final note on dispositions is that our Maui acquisition can be treated as a lifetime exchange, and as result, certain of our future asset sales can be sold in a tax efficient manner.

Now, let me turn to our forecast for the rest of this year and 2004. Some of you have commented that we have been conservative in our forecast over the last several quarters; in fact, we are extremely positive about the next three to five years as a result of strong and improving fundamentals. However, our more moderate short-term view is based on the fact that current results are still weak. We have forecasted a fourth quarter RevPAR decline, primarily as a result of weak group bookings, and we expect continued short-term margin pressure. For the fourth quarter, we are expecting RevPAR to be flat to down 2.5 percent. This will result in full year RevPAR declines of 4 to 5 percent, with a full year margin decline of 2.5 to 3 percentage points. These RevPAR declines, combined with continued margin pressure and the recent stock issuance, will result in 62 to 66 cents of FFO and adjusted EBITDA of approximately 715 to 730 million for 2003.

Looking out to 2004, given that we have not yet finalized our individual property budgets and visibility continues to be limited, it's difficult to give precise guidance at this point in time; however, we do see a number of positive trends, such as recent upward revisions to GDP growth forecasts, low supply growth and increased -- expected increases in corporate demand and a significantly improved 2004 group booking pace -- all that allows us to be optimistic about next year. As a result, we believe RevPAR will grow by approximately 3 to 4 percent. Despite the fact that we expect to incur above-inflationary wage and benefit cost increases again in 2004, we would expect to be able to maintain flat to slightly higher margins. 2004 will be the first year of our recovery, and as is the case with most recoveries, growth will start slowly and build strength over time. We believe these positive fundamentals will provide significant growth in RevPAR and earnings over the next 3 to 5 years. Thank you. And now let me turn it over to Ed Walter for the next part of the call.

Thank you Chris. Let me start by giving you some detail on our RevPAR results. For the second quarter in a row, our resort hotels led the portfolio with RevPAR increasing by 1.2 percent, as rate increases averaging 2.7 percent offset a 1 point reduction in occupancy. Our airport hotels and urban hotels experienced RevPAR declines of 1.8 percent and 2.7 percent respectively, while our suburban hotels fell by 3.6 percent.

Turning to our regional results, our top performing region was Florida, which enjoyed a 4.3 percent RevPAR increase, driven by the strong performance of our Tampa market, which increased by 7.6 percent and double-digit increases at our Emilia Island and Naples Ritz-Carlton resort. Our Washington D.C. metro region experienced a RevPAR increase of 3.6 percent, driven primarily by our Northern Virginia properties, which enjoyed positive RevPAR results due to increased transient demand. In this market, our best performing properties -- our Ritz-Carlton and Tysons Corner -- enjoyed a RevPAR increase of 16 percent. Finally, our Atlanta region, which represents roughly 12 percent of our EBITDA, had flat RevPAR -- its best performance of the year -- due to a slight increase in convention business versus last year. Preliminary group bookings suggest a better year for Atlanta in 2004.

Our Canadian properties continued to struggle, as summer leisure and group travel was still impacted by the residual effects of the SARS epidemic, leading to a RevPAR decline in Toronto of approximately 22 percent for the quarter. It is worth noting that our results improved meaningfully during the quarter, as the RevPAR decline was less than 4 percent during the last 4 weeks of the quarter. Although group bookings are still weak for the fall, the situation in Toronto continues to slowly improve. Our Pacific region slightly underperformed the portfolio, with RevPAR declining by 3.7 percent. Operations in San Francisco continued to be weak, with RevPAR falling 6 percent. Our two major downtown properties, the San Francisco Ritz-Carlton and Moscone Marriott, both enjoyed positive RevPAR growth as the convention calendar strengthened. But these results were offset by continued weakness in the suburban and airport markets. Our San Diego and L.A. markets experienced RevPAR growth of 1.1 percent and .4 percent, respectively. We expect San Diego to have a strong fourth quarter in 2003 before softening slightly in 2004, due to the absence of the Super Bowl.

Our mid-Atlantic region lagged the portfolio as RevPAR declined by 7 percent. Our New York hotels declined by 12.5 percent, led by our Marquee hotel which fell 14 percent, in part due to the completion of the next stage of our rooms re-do. Our booking pace for the Marquee suggests stronger transient business in the fourth quarter of this year and improved group bookings in 2004. Our New England region also underperformed, as RevPAR declined by 20.8 percent. It is worth noting that these results do not include the Boston Copley Marriott which we purchased in 2002, where RevPAR has increased 5.5 percent year-to-date and EBITDA has increased by 15 percent.

Looking at our Courtyard joint venture with Marriott International, RevPAR declined by 4.6 percent for the quarter as occupancy fell by 3.0 percentage points and rate declined by .6 percent. Year-to-date, RevPAR for this portfolio has declined by 4.8 percent. During the third quarter, it proved difficult to maintain margins in light of revenue declines driven primarily by lower average rates, above inflationary utility costs and lower profit levels in food and beverage. Unfortunately, our operators' efforts to improve labor productivity in the food and beverage area were offset by higher food costs, resulting from a shift in business mix towards outlet sales and the fact that groups continued to select less profitable menu items for banquets. These same factors are likely to affect fourth quarter operating results. We note that our third quarter results include the net after-tax benefit of an insurance recovery amounting to 7 million, which is reflected in our other income line item. This onetime benefit was partially offset by increased interest payments totaling 2.3 million, associated with the prepayment of $71 million of our senior notes. Similar costs are likely to be incurred to the extent we further repay debt.

As we detailed last quarter, consistent with our practice from 2002, we will only include business interruption payments related to the World Trade Center Marriott and Financial Center Marriott to the extent these payments have 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 assets, which we have assumed will be received in the fourth quarter. We are in the process of obtaining the necessary approval from our insurer, with a year end target date for receipt. In the event that we do not receive these payments and the appropriate release from insurer by the end of the fourth quarter, our FFO and adjusted EBITDA for 2003 will be reduced, as these sums would be recovered subsequently. Capital expenditures for the quarter totaled 34 million. Based on improving operating environment, we have fully reinstituted our capital program and expect to spend between 200 and 220 million in 2003.

During the last quarter, we have made meaningful progress toward improving our balance sheet. In addition to our issuance of 250 million in equity, we repaid 71 million of our Series A senior notes. We also closed a floating-rate $88 million CMBS loan to refinance the debt on our Washington D.C. JW Marriott hotel, which was to mature in December of this year. Finally, we swapped the fixed interest rate on our Series G senior notes, which had an outstanding balance of 242 million, to floating-rate. As a result of these transactions, we have reduced the percentage of our debt that is fixed-rate to 84 percent and reduced our overall leverage. We finished the quarter with 547 million of unrestricted cash and have 250 million of capacity available on our credit facility. If our remaining maturities over the next 18 months total less than $100 million, we feel very comfortable with our balance sheet.

You will note in our disclosure several references to FAS 150, which details the treatment of minority interests. Consistent with our initial understanding of a decision the FASB reached last week, we have reclassified the minority interest held by our partners in consolidated joint ventures to a liability, and have reflected the changes (technical difficulty) their equity interest in the partnership as the cumulative effect of a change in accounting principle in a total amount of $24 million. Based on the current interpretation of the FASB ruling, we will reflect future changes in the value of these partnership positions in the interest expense line item income statement, which means that our FFO would be affected by changes in the value of these equity positions. There is no effect on adjusted EBITDA. This adjustment had a negligible favorable impact of less than $200,000 on our third quarter results.

Although we have more than sufficient liquidity to cover our fourth quarter perpetual preferred dividend, which is to be paid in January 2004, based on our forecast we believe it is unlikely that we will be permitted to make that payment due to the indenture restrictions we have previously discussed. In the event we do not make the payment, it will accrue and must be paid prior to any distribution on our common stock or current payments on our preferred securities. Reinstatement of the dividend will depend upon a variety of factors, including the degree in improvement of our operations and the (indiscernible) of our taxable income. Although the near-term operating environment remains challenging, our outlook for next year is improving as we see signs of a strengthening economy and improving lodging demand. 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 now interested in answering any questions you may have.

(OPERATOR INSTRUCTIONS). Joyce Minor, Lehman Brothers.

A couple of questions for you. First, as you think about next year and you're talking with your managers about kind of the environment for next year, are you expecting that there's going to be much of a mix shift next year? You're talking about seeing strengthened group bookings, but on the other hand (indiscernible) pretty significantly over the last couple of years. So would there be a greater shift toward group or would you start to shift away from group as you see strength?

I think it's fair to say that group is going to be about the same, based on what we're talking to our operators about today. And you'll see some modest mix shift -- further shift out of the discount business hopefully, and certainly what we would expect, and into some of the other higher rated segments. But nothing too material. You'll definitely see some mix shift. And I would think that the growth you're going to see in RevPar that we're suggesting at this point of three to four percent is going to largely be occupancy, which would be typical for where we are at this stage in the cycle. That you need to really get your occupancies back up, your mix is going to shift a little bit from getting rid of the lower rated business to higher rated business. Your average rate is going to move up initially a little bit as a result of that mix shift, but real pricing power is going to take a bit longer to get back. So having said all that, again, I think next year we have used more of an occupancy gain here than anything, which obviously then puts -- you know, is why margins are a little tougher. It's why we are saying that margins will be kind of flat; maybe a little bit of margin improvement at the high end of that range (indiscernible) occupancy gains. Obviously, you've got all your variable costs that are going to go up along with that.

If you could just talk maybe about 2 specific markets and your outlook? Maybe just New England and Boston specifically. It's been sort of week, aside from the performance you've seen at the Boston Copley. But could you talk maybe a little bit more about your outlook for that market? And then maybe could you talk a little bit about Hawaii and the mix of business that you see at the property that you just acquired, business versus leisure, group versus transient, U.S. versus abroad? That would be helpful.

New England I'd say as a general matter we expect to start showing some reasonable improvement next year. I think as is historically the case, when New England recovers it starts a little slow and then picks up momentum. So we don't think it's going to be a barn burner year in New England, but we'll have some reasonable growth. In Hawaii -- Hawaii has obviously done pretty well. Leisure business has generally been stronger, obviously -- (indiscernible) and this market depends more on leisure business than the business travel. So Hawaii has had a pretty good couple of years, particularly in '03. We expect '04 to be another strong year in this market. And really what's happening -- and some of the upside we see in our opportunity in the Hyatt at Kaanapali Beach is rate opportunities, as you have additional airlift coming into Maui, as well as a shift in the mix of business that the wholesale business, which makes up a large part of the Hawaiian market and the Maui market. What we will be continuing to do and the prior owners have been doing is shifting from some of the lower rated wholesale business to the higher rated wholesale business. So both a mix shift, and honestly, I think, some rate potential in that market, because demand is very strong and supply is actually diminishing in that market. In addition to that, in our particular case we are just this year in the first full year of a total renovation of the rooms of that hotel. It's in fantastic shape, and so we think we're going to continue to get some meaningful benefit as the market understands the quality of that product. But overall, why -- we think it's going to have a great bunch of years, and we think next year is going to be very good. The numbers suggest that airlift into Maui alone is going to go up over 10 percent next year. And given the opportunities and the shift in the mix of business over the next few years and rate potential, and frankly, some occupancy as we shift the mix of business, we think there is tremendous upside.

Thank you.

Steve Kent, Goldman Sachs.

A couple of things. First, could you just actually, Chris, tell us how much your conference and convention bookings really are up for next year? Because you said that the mix wasn't really changing but you were feeling better about it. So how much is it really up at this point versus last year at the same point? And then, Chris, you said that the Hawaiian market was pretty good in '03 and your outlook for '04 is good, but this has been a very volatile market. Could you just give us the range of EBITDA that that particular property has been at, just to give us some sense as to the risk associated with it?

Sure. First question first. I shouldn't say sure because I'm not going to give you a specific range in EBITDA. On the group business -- our definite group booking pace is about two to three percent, ahead of where we were at this time last year, which is really the first time we've really started to see group bookings that are ahead in any particular period; and tentative for next year are up more than that. So it's indicative, obviously, of stronger overall bookings and business, but it's also indicative of the fact that the consumer -- that the big groups that are booking are starting to think about booking a little bit further out in time, which is obviously a good trend to start to see. So that answers that, Steve. Giving you the range in EBITDA -- we're not going to get into giving ranges on specific assets. We typically would not do that and get into (indiscernible) rate and occupancy or other stats on a specific asset, for competitive reasons and other reasons. But what I would say is that the Maui -- while Hawaii has had a lot of volatility, Maui has had a lot less volatility. And hat while this hotel has had a good year in 2003, as I described -- because obviously, leisure business has been strong; we had a new rooms product supply going out. As I mentioned in the answer to the earlier question that Joyce asked, we feel really good about the future potential for this asset and the upside. And we've obviously done a whole lot of analysis looking at the Maui market over the last 20 or 25 years. And while, obviously, all markets have some volatility, we are not concerned that particularly the Maui market has an undue amount of volatility.

Thanks.

Will Truelove, UBS.

Can you talk about your targets for your capital structure, especially as it relates to some of your covenants, regarding that two times? How do you think that will change over the coming year and what is sort of your target for a fixed charge coverage ratio when things are performing really well in the hotel industry?

(technical difficulty), Will, has not really changed in the last eight years. We have always wanted to get (indiscernible) coverage that is kind of three or a little over three times. And that was our target before, obviously. The last three years have been pretty hard on us because operations have declined significantly, and debt -- we haven't been able to reduce debt to keep up with it. But the target has never really changed, it's just we had to extend the time frame to accomplish that target. So we still want to be at three times, and while that is the objective, because of the liquidity we have, extended maturities that we have and the overall (indiscernible) we have with our balance sheet -- today's environment, we're not in a rush, or a panic I should say, to have to get there. It really is a three to five year goal for the Company. And as we've said many times, we're going to accomplish that goal through a number of different means. Most importantly, it's going to be through operations recovering. The growth in our EBITDA of our existing portfolio is going to ultimately have the most positive impact on our credit. But in addition to that, we're going to help it along its way, as we've been doing, and some of the things that we have been announcing over the last couple of quarters by selling some non-core assets and using those proceeds to repay debt. To the extent that we think we can raise equity and invest that in new opportunities, we're adding value to the Company on a per-share basis. And at the same time, improving our credit -- we'll do that as well. So it's really 3.0 or above and a multiyear objective (indiscernible) will be attacked on all three fronts that I just described.

And one final question. Are you hearing different booking patterns by your different operators of your hotels?

Not really. Nothing materially different. I think generically, we're seeing -- kind of the trend is that the fourth quarter group pace is really weak, and we don't -- there are certainly some markets that are stronger than others -- but there are certainly some markets that are better than others -- but uniformly, we're seeing next year's group booking pace kind of across all of our operators improving (technical difficulty) both on a definite basis and on a tentative basis. And we are, uniformly across all of our operators -- again, some markets are better than others -- starting to see the early signs of a pickup in the corporate business. You're starting to see net (indiscernible) activity on a daily basis that's positive. You are starting to see weekday occupancies that are a little bit stronger. So while it hasn't -- I have to be honest -- it hasn't really showed up yet. It certainly didn't show up in our third quarter numbers, there is some movement that we see going into the fourth quarter, and clearly, are hopeful that that continues. So that as we get into the first part of next year, not only are you dealing with an improved group booking situation, but you've got your corporate business that's really starting to pickup as a result of the traction in the economy overall.

Finally, one question -- Ed, maybe you can address this. In terms of the FAS 150 and providing fair values for the minority interests at some of your hotels -- I believe you have five hotels where there are minority interests -- how are you -- how is Host Marriott going to determine the fair values of these hotels and disclose those to the satisfaction of your auditors? Are you planning on having maybe a third party come in and do that? Are you going to do that with guidance from your auditors? How do you plan on attacking this?

I can assure you that on something that's as new as this, we are going to clearly listen to the opinions of our auditors in trying to come up with an effective solution to this new challenge. The way we've looked at it to date, and the way that our auditors are comfortable -- and so I expect until we give further guidance, the way we will look at this is to generally do a discounted cash flow valuation of the assets, similar to how we would look in terms of evaluating a property for acquisition or determining a whole value for sale. I think that's probably the best way to do that, and that seems to be the way that they're comfortable with today.

Fred Taylor, Fleet Securities.

Good morning. I had a question. I accept your comment you had the liquidity to pay the preferred, and certainly agree with that statement. The fact that you probably or will not pay it in the fourth quarter, even though you have the liquidity and you raised equity -- is that a ratings event at the rating agencies on the preferred, and thus, a notching event on the public bond issues?

You would have to ask them, but clearly I think the rating agencies have said that they are going to be watching what we're doing with the preferreds, in terms of whether we are paying those or not. And to the extent that we do not pay those, that they may downgrade those. And I think it's a fair assumption that it could have an impact on other ratings. But they have not in any way definitively made a judgment on that, as far as we know.

And then future asset sales -- are those geography-specific, or are they more individual hotel specific or where others in the industry have mentioned to you they are interested in buying a property?

It's individual hotel-specific, absolutely. And product type-specific, meaning it's largely oriented towards our older suburban assets.

Thank you very much.

Jeff Donnelly, Wachovia Securities.

Chris, given your, call it cautious optimism for 2004, are you more willing to reduce your cash balances to perhaps pursue acquisitions or redeem preferred?

I think with the latest acquisition we just made, we signaled that we were, in the sense that we raised 251 million in equity and we just agreed to acquire an asset for 321 million. So it certainly suggests that we are willing to reduce our cash balances a bit. Honestly, I would say until we get into the midst of this, where we really know we have recovery -- and we haven't done that (indiscernible) we said about the fourth quarter -- we'll keep a little higher cash balances than normal. Obviously, with our decision on Maui, we made a judgment to lighten the load a little bit in terms of the liquidity we are carrying.

I guess I was thinking as compared to, perhaps, prior to your equity raise. What you have been carrying has been above normal.

It has been. Normal -- we typically have had in normal times 100 to $150 million. We got that to being closer to 300 million before the equity raise. If you look at it now, we are probably taking into account the $70 million spread I just described, we are probably closer to 200 (indiscernible) 2 and a quarter. So we are still somewhat above what our normalized level would be, and we will probably want to keep it there for a little bit longer until -- as I say -- we see the recovery. But obviously, we've come down off of the high watermark in terms of liquidity requirements.

Just as a follow-up to that -- considering the cash that is trapped, effectively, in the CMBS pools, how close are you guys to being able to meet the tests that would be required to free up that money? Are you able to quantify that for us, maybe as a RevPar growth requirement to fall back into compliance? Barring a recovery, do you expect a conversion away from the Swissotel brands that largely dominate that pool to be sufficient for you guys to come back within compliance?

We've got, I think right now, 23, $25 million in cash traps between two deals. The one is the big CMBS deal I think you are talking about; the other is part of our Canadian asset pool, and given what's happened up in Canada with SARS, it's still -- as Ed described -- recovering at a pretty slow pace. But it will eventually get there. So we think it's going to be a little bit longer. We don't believe it's imminent that those cash traps are going to be reversed and we are going to get the release of that cash. It's going to take some time. We're going to have to get deeper into the recovery that we've described. And clearly, from a portfolio point of view in the larger CMBS deal, we are going to do -- as we always would do -- everything we can to try and maximize the value of those. Which means driving more cash flow out of those assets, including removing Swissotel, which makes up 4 of those assets in that pool. We've already done one transfer from Swissotel to Hyatt in Boston. We're very close on converting our Buckhead Swissotel to another brand. We're not quite done with that, so we can't mention today, until we get that done, where we are. But we are very close there. And over the next few years, I think it's fair to say, based on our contractual arrangements with Swiss, we'll continue to convert those away from Swissotel and into some of the other brands that we work with. And we, obviously, think in each of those cases that there is a material upside in terms of cash flow. That, along with overall recovery, will help a lot in terms of getting a reversal of those cash sweeps.

Just one last question. Can you walk us through on Maui what the redevelopment and/or expansion opportunities are and how they fit into the resort? Are you guys even considering timesharing or condo hotels, just given the strength of that product in that market?

Yes. There is an opportunity -- we've got 37 acres of fee ownership on the beach. There is some excess land. The zoning is very complex, which is why we didn't describe it in detail, because there is a lot of work that would have to be done to get the entitlements. But we think that the most obvious opportunity is to use some of the excess land that we have to pursue time-share opportunities. It's a very strong time-share market. A number of others have had very successful time-share projects there. We've actually had discussions with Hyatt and have looked preliminarily at what the economics would look like. And we think it could be very rewarding, but it will take some time to kind of work through the entitlement issues. We certainly view that as kind of upside potential in the acquisition. We didn't really value it, in the sense that we think that based on the cash flows the hotel is producing, we are going to get a very healthy yield for the $321 million investment. This should be -- if we can accomplish something here it should be gravy. And clearly we are going to be very aggressively trying to accomplish it. Timeshare I think is number one on our list, and I think a real good opportunity.

Is that just, like, a next 12 or 24 months thing, or even longer?

I think it's going to take a couple of years. A couple of years with entitlements to really get that going, which is why I say we didn't -- it's a real opportunity. I'm not trying to diminish the opportunity, but in terms of our underwriting of it, we -- because it was -- there's always risk in entitlements and it's going to take some time, we didn't really underwrite it in terms of the price that we paid for it.

Celeste Brown, Morgan Stanley.

Good morning. Coming back to the Maui acquisition, could you give us the occupancy and the rate of the hotel in 2002 and 2003, to date? Also, are your expectations for RevPar growth -- given that it's a leisure hotel, but also given the switch out of some of the discounted business -- are you expecting it to -- the RevPar growth to outperform your current portfolio, grow in line or grow below your current portfolio?

In terms of your first question, I'd love to help you out but we are not going to start giving out rate and occupancy information on individual hotels. Obviously, we are competing with a lot of hotels, and that's not information that we really want out there. In terms of how it would perform versus our core portfolio, I think that the right way of looking at that would be, because it has been more leisure in orientation than as a resort property, that it probably hasn't had the same -- endured the same pain as maybe some of the urban properties in our portfolio. So that in the short term -- meaning the next couple of years, because it hasn't been as much impacted on the downside -- it probably does not have quite the growth potential of our urban portfolio. Because our urban portfolio has been ravaged over the last couple of years. We bought this because we thought the long-term returns are great. We obviously want to do more on the resort side because we think over the next longer period of time, demographics are going to be very strong in the resort side of the business. So over a more extended period of time, we think it's going to have a terrific growth profile that will be as good as our portfolio. But I would say honestly in the short term, given that it's been more leisure in orientation, it may not have quite the growth profile of some of our urban assets.

David Anders, Merrill Lynch. Mr. Anders, your line is open.

We must have answered all of his questions.

Asad Kasim (ph) of Reese (ph) Securities.

When you guys acquired an asset this quarter, I'm just trying to get a sense of what kind of NOI or EBITDA growth are you underwriting over a 3, 4, 5 year period to get to whatever IRR level that you are underwriting? If you could give us a sense of that? And I ask that question in context of a lot of folks talking about securities trading at pretty high multiples of EBITDA, which I guess is not valid when you are underwriting pretty high growth for the next three to five years. So if you could give us a sense of that?

Again, it's hard to be specific. Asad, I think you are asking a question generally versus asking specifically about Maui. On the general -- it's hard to generalize. It depends on the asset. Some assets are going to have a much higher growth profile than others. And so I hate to not give you a specific answer to a specific question, but I think it's fair to say that most assets that we're looking at have a pretty high growth profile over the next three to five years. In terms of our underwriting, honestly we generally tend to be conservative, which you would want us to be. But having said that, the next three to five years our belief -- similar to our core portfolio -- is that you are going to start next year with a reasonable growth in RevPar and it's going to accelerate. Some markets, depending on the dynamic of certain demand generators and the supply situation, are going to have higher growth rates than others. But I think it's fair to say that in the next three to five years, really probably more five years, we think that you're going to have significantly in almost every major market -- not every, but almost every major market -- you're going to have growth significantly in excess of inflationary growth. From an IRR point of view, obviously that enhances your IRR. We tend to look at an IRR on a 10-year basis so that you can kind of normalize it, meaning that you are going to have a shorter -- in the short term you're going to have a reasonably high level of growth and then it's going to stabilize. In some cases you may, depending on new supply expectations, etc. -- you may show little growth at some point over that 10 years. But when we look at -- when we look at it, as we always have, we have a very disciplined approach of saying let's obviously assume that we're going to have a recovery and we are going to have above inflationary growth. Market by market we make those judgments. Let's try and be a little bit more conservative than what we think might really happen, just because we want to have a margin for error. And when we want to compare to an IRR against our weighted average cost to capital, we want to get 2 to 300 basis points spread. Clearly, if you look at the first deal we've done here this year in Maui, we're doing that. I would suggest to you I think, to where our cost of capital is today, we are probably getting a 300 basis point spread, or at the high end of the spread that we are looking for. And that's based on what I would suggest to you are reasonable growth assumptions. But again, we have tried to add a level of conservatism to it. I ultimately think we will do better than our projections. We always hoped to do better. Does that answer the question?

Yes, pretty much. And lastly, what would have the RevPar been in this quarter, ex Canada?

Ex-Canada probably had a 1 point impact or less. But there are a number of things happening with our RevPar in the quarter, too, because our quarter end is obviously -- you've got a number of things that affect our RevPar. We have geographic issues; some of our biggest markets have been in this quarter some of the weakest markets. We obviously have a much greater dependence on business travel, and the third quarter is a big leisure quarter. So that's going to hurt us. Canada, obviously, has a meaningful impact; it's down 20 percent in RevPar in that one market. And then our reporting period, we missed some weeks that were very good that others will pick up. Because our third quarter actually ended on September 12 for all of our -- for our quarters. So all of our Marriott properties -- and all of our non-Marriott properties, actually, were only picking up June, July and August. So it doesn't pick up any of September. There are combinations of things that drive the RevPar result that you are seeing.

And lastly, when you guys think about portfolio management in terms of geographic allocation -- you talk about 47 percent of your portfolio outperforming while a certain part of your portfolio underperformed -- do you think about geographic concentration then, in terms of maybe having kind of like a cyclical component to where (indiscernible) you expecting certain markets to go into a downturn, others are outperforming? So is that mix where it is -- how far is that mix from where you would want it to be?

We obviously think about geographic orientation and representation. It's something that, as you would guess, is quite dynamic depending on things that are going on in a market, from either a demand generator point of view or supply -- new supply and decisions that get made periodically that affect those things. There are some markets that we have been light in; Hawaii was one of them, frankly. And we wanted to have greater geographic diversification there. We also, by the way, want to have heavier resort orientation, given demographic trends in the next ten -- or frankly, 10 or 20 years. There are some markets -- I'm not going to get specific -- that we have a little bit heavier weighting than we'd like. What we really do though, Asad, is we go through -- for every asset we own, we go through -- we have a strategic plan. And that strategic plan really is an effort to make sure we position the asset properly. And that we -- from an operating point of view, that we understand what the capital needs of that property are going to be. And we look at the market dynamic in association with those other things to make adjustments on what is the appropriate holding period for that asset in terms of the market dynamic, and when we think it might make sense to trade out. So it's clearly overall geography, but in the end analysis it's also market by market, asset by asset, really trying to look at portfolio management from the standpoint of the ultimate goal being to maximize our performance and maximize our growth rate over a long period of time. And if we think a market that we have a representation in -- I won't pick on one -- is going to go into a period of decline, we may not decide to sell everything we have but we may decide that if we've got 10 percent of our EBITDA in that market, we want to lower our weighting to five or six percent over the next three to five years. And again, I can't get specific on a lot of markets around the country, but we clearly have a process that starts with a strategic plan for every asset in the Company that effectively gets rolled up into a strategic plan for the overall company, that dictates our geographic distribution desires.

(OPERATOR INSTRUCTIONS). Jake Hogan, Bank of America Securities.

Good morning everybody. I've got a few questions for you, a couple of quick ones. In regards to the fourth quarter -- given, Chris, the timing and all that that you talked about in regards to the third quarter -- what do you think the fourth quarter on a RevPar basis looks like on a calendar basis? That's the first question. The second question would be, you talked about the pace of inquiries and bookings on the group side. I think before last quarter you said you were expecting pricing to be down modestly. I was wondering if that's still the case, as well (indiscernible) corporate rates? I was wondering if you could talk a little bit about that? And I have a couple of quick follow-ups.

Yes. Fourth quarter RevPar on a calendar basis, I don't think it's a lot different; plus or minus a half a point. Pricing on group, same answer I gave last time -- modestly down. Pricing on special corporates is relatively flat.

If you could talk a little bit about (indiscernible) -- maybe 30,000 or 40,000 feet level -- about the lodging business today. Can you talk a little bit about whether you view a lot of what we've seen over the last couple of years to be cyclical, or how much of it is permanent? And how might that affect your outlook over the next couple of years, in terms of RevPar and EBITDA growth? I was wondering, do you feel -- Host Marriott has obviously got a lot of smart people on the asset management side, looking at how you can maximize the opportunities within your hotels -- I was wondering, though, do you feel that you control your destiny today as well as you did maybe at this point in the cycle last time around?

You know I can talk if you give me the chance, so I will try and be careful not to talk too much here. At 30,000 feet, the secular cyclical issue, we have spent an inordinate amount of time talking, thinking about that ourselves with our Board, with everybody else in the industry. Yes, I have to say we could go on for an hour on that topic alone. By view of it is, having looked at all of the issues -- including Internet distribution; disintermediation; threats in the business as a result of that; travel alternatives; teleconferencing -- all of the different things that we are all thinking about and worrying about -- my analysis of it, our analysis of it is that while there is some marginal impact from all of those things -- greater efficiency through the Internet, and transparency maybe affects on the margin pricing power. Maybe on the margin there is greater technological opportunities for people to substitute travel. On the margin, that can have a little bit of impact. In the main, though, the vast majority of what we think is going on today is simply cyclical. It is simply we are enduring the ever-present loss of supply and demand. And that is to say that these things that we've all been worried about in terms of the Internet and teleconferencing and all these other things, are really exacerbated in what has been an anemic demand environment. And so you can prey on the industry a lot more in that kind of an environment, because people are desperate to sell products in any way possible. And companies are desperate to cut costs in any way possible because they are really, for the last three years, having almost an -- their entire orientation is on not revenue growth, but on expense savings. Well, the fact of the matter is, that's not atypical for this time in the cycle. And as people start to move out of that mode and start to think about competing against their primary competitors and topline revenue growth, their travel budgets are going to go up, because people are going to hit the streets to try and make those things happen. You're already starting to see that. Corporate profitability is moving up. It's starting to move up more as a result of topline growth and just expense savings. Capital spending is going up. All of the things that are kind of the seeds that need to be sowed that ultimately trickle through and create demand in our business are starting to happen. So our belief is that as you -- as the economy gets more traction, as those metrics that I just described continue to improve, that demand in our business is going to improve. And that a lot of the things that people worry about that have the threat of being kind of permanent -- permanently impactful on our business demand -- are going to be a lot lesser issues. Will they have some impact? Sure. Things change in the world, and I think it's naive to think that they'll have no impact. Is it -- in our opinion, is it a material impact? No, we think this is cyclical. We think as the economy recovers and all of the things happen that I described, our business is going to recover in a meaningful way. And that the next three to five years are going to be some of the best our business has ever seen.

Your second question on asset management and control, I'm not sure I understand, let me take a shot at it. But I'm not sure I understand exactly where you're coming from. I would clearly say that as I look at coming out of this cycle as compared to the prior cycle, from a Host Marriott perspective, we feel better than we've ever felt. In the sense that we have, suffice to say, coming out of the last cycle, a lot of baggage to deal with. We had a lot of tax liabilities, contingent liabilities related to all these public partnerships, litigation. We had contractual terms in the vast majority of our assets that weren't as attractive as you would like. And we didn't have a lot of control over operations -- you know, budgets, personnel in the hotels, CAPEX -- all the things that you really want to have to really help influence the outcome. As I look at the world today, obviously I have to feel a heck of a lot better, because there's a tax liability (indiscernible) those issues have been worked out years ago. All the contingent liabilities related to the public partnerships and class-action lawsuits are behind us. We've negotiated 90 percent of our contracts. We have, through that, gained much better economics, much more flexibility in our ability to sell assets. And frankly, far greater control than we ever had, and I think state of the art controls in the industry. So in terms of -- as I look at the world, and from my vantage point of running this company, while we've endured 3 very painful years as an industry and as a company, I frankly have never felt better. We've got -- some of the anchors that we had on our neck after the split of the companies we've shed, and we are in a really good position, I think, to control our destiny and take advantage of the upside opportunity over the next three to five years.

You answered my questions. Thank you.

Gentlemen, it appears we have no further questions at this time. I would like to turn the call back over to Mr. Nassetta for any additional or closing remarks.

Thanks everybody. I have probably talked enough for one day. We appreciate you joining us, and we look forward to catching up with you after the fourth quarter.

Once again, that does conclude today's conference. You may disconnect at this time.