Host Hotels & Resorts Inc (HST) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to the Host Marriott Corporation fourth 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. Mr. Larson, please go ahead, sir.

Thank you and good morning. Welcome to our year-end 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. At described in our filings by the S.E.C., these statements 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 web site.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our fourth quarter results and then will describe the current operating environment and the Company's outlook for 2004. Ed Walter, our Chief Financial Officer, will follow Chris and will provide greater detail on our fourth quarter results, including regional performance. Following their remarks, we will be available to respond to your questions. And now, here's Chris.

Thanks, Greg. Excuse me. Good morning, everybody.

2003 was another challenging year for the lodging industry, despite the difficult operating environment, we were able to achieve a number of very important goals during the year, which strengthened our company and positioned us well for the future. We purchased the 806 room Maui Hyatt located on 37 acres of ocean front property on Kaanapali Beach. Our acquisition price of $321 million represents a 20% discount to estimated replacement costs. The hotel is located in the strong market with high barriers to entry and we're confident in the long-term prospects of this property.

We successfully resolved all outstanding issues on the New York World Trade Center and Financial Center hotels, for net proceeds of approximately $370 million. This settlement produced taxable income which was sufficient to allow the Company to make its fourth quarter preferred dividend payment. The proceeds were used to repay outstanding debt.

We sold eight of our noncore assets for total proceeds of approximately $190 million, these asset sales are consistent with the Company's strategy of selling noncore assets, thus enhancing our remaining portfolio. We issued 500 million of equity, which was partially used to fund the acquisition of the Maui Hyatt. We refinanced over $800 million of debt, lowering our average interest rate and extending our debt maturities.

We repaid approximately $500 million of debt with proceeds from the insurance resolution and the sale of our noncore assets and we converted the Boston Swiss Hotel to a Hyatt, making us the large third party owner of Hyatt properties and the Atlanta Swiss Hotel to a Westin, which marks the first Westin Hotel in our portfolio. Even though from an operations point of view it was a tough year, we were obviously very pleased to have accomplished these very important objectives.

Now let's review the results for the quarter and the year. Diluted FFO per share was 53 cents for the fourth quarter and 99 cents for the year. Excluding one-time adjustments from the fourth quarter, diluted FFO per share was 24 cents for the fourth quarter and 65 cents for the full year which was in line with our guidance and consensus estimates.

For the fourth quarter, our comparable RevPAR decreased 1% compared to 2002 levels while comparable hotel operating profit margins decreased 2 percentage points. Our top line results were driven by a slight decrease in average room rates of .4% combined with a slight decrease in occupancy of .3 percentage points. RevPAR comparisons have been steadily improving since the second quarter of 2003. Our second quarter comparable RevPAR declined by 8.4%, third quarter declined by 2.5% and this quarter, comparable RevPAR declined by only 1%.

With the strengthening economy and strong group booking pace in the first quarter of 2004, we are expecting continued improvement in year-over-year RevPAR results. Adjusted EBITDA for the quarter was $222 million. For the full year, our comparable RevPAR declined 4.2% and margins declined 3 percentage points. The RevPAR decline was the result of a decrease in average room rates of 1.9% and a decrease in occupancy of 1.6 percentage points. The full year adjusted EBITDA was $709 million, down 17% from 2002.

For the full year, 34 of our hotels achieved positive RevPAR growth with an aggregate increase of 4.6% compared to 2002. For the year, our decline of RevPAR was split fairly evenly between decreases in group and transient business. Within the transient sector, our corporate business experienced a significant decline in revenues that was partially offset by increases in the leisure and special corporate segments.

On the group side, the corporate group sector recorded a significant decline in business that was partially offset by increases in associations business. Our food and beverage sales declined 1.9% in the fourth quarter of 2003. Other revenues declined 10.1%, driven by a 23% decline in telephone sales, which was partially offset by an increase in parking revenues. For the year, our food and beverage sales declined 2.8%. Other revenues declined 10% due to a 26% decline in telephone revenues.

As we recently indicated, we've seen strong market interest in our noncore assets, which represent hotels that we expect will generate lower returns than the remainder of our portfolio. We intend to take advantage of these market conditions during 2004 and anticipate selling approximately 3 to $400 million in assets during the year in addition to the $100 million we have already either closed or announced. Consistent with our guidance from 2003, we generally expect that the proceeds from these sales will be deployed to reduce debt as we continue to target reducing our leverage.

On the investment front, we are clearly seeing more opportunities to purchase assets that satisfy our investment criteria. Although we intend to remain disciplined in investing our capital, our guidance for the year anticipate that we will complete roughly 3 to $500 million in acquisitions, weighted more heavily in the second half of the year and we're optimistic that we could exceed this target given current market conditions.

In addition to acquisitions, it is worth noting that we also expect to accelerate the pace of ROI investments in our existing portfolio, including the construction of additional meeting space or the expansion of spa facilities. In the past, we have generated superior returns from these investments and we are optimistic that we will enjoy similar results in the future.

After the completion this year and last of a combined 6 to $700 million in asset sales and a similar amount of acquisitions, our projected remaining asset base will have fewer cap ex demands, higher replacement costs on a per-room basis and a higher growth rate.

Now, let me spend a few minutes on our outlook for 2004. As we mentioned during our last call and in our recent press release, we are expecting RevPAR to increase 3 to 4% for the year with margins remaining generally flat. Obviously, this is lower growth than some have been forecasting. While we believe the economic recovery is under way, given the lag effect to our business we believe that growth will be more moderate in the first year of recovery and accelerate into 2005 and beyond.

This operating forecast, combined with the dispositions, acquisitions and debt repayments mentioned earlier, will result in approximately 59 cents to 64 cents of diluted FFO per share which includes a 9-cent per diluted share reduction due to certain one time adjustments existing of call premiums and accelerated deferred financing costs associated with debt repayments. Adjusted EBITDA for 2004 should be approximately 700 to $715 million, taking into account our increased asset sale program.

Clearly, we believe the stage has been set for a sustained recovery in the lodging industry. The economy has decidedly turned the corner after three difficult years. We believe the combination of demand growth stimulated by a strong economy and historically low projected supply have positioned the industry for a period of sustained growth. The past three years have required us to implement significant cost control measures that will further enhance earnings as demand levels improve.

This recovery should last for an extended period of time and lodging stock should outperform the market during this part of the cycle. We feel that we've positioned the Company to maximize this opportunity and we look forward to the next three to five years. While it's certainly been tough for the last three years, we've never felt better about the future of our business.

Thank you and now let me turn it over to Ed Walter who will cover the quarter and our '04 guidance in a little bit more detail.

Thank you, Chris. Let me start by giving you some detail on our comparable hotel RevPAR results for last year.

For first quarter since the beginning of 2002, our urban hotels led the portfolio with comparable RevPAR increasing by .1%, due a slight rate increase and flat occupancy. Our airport hotels and suburban hotels experienced RevPAR declines of 1.5 to 1.4% respectively while our resort hotels fell by 4.8%. For the year, however, our resort hotels performed the best with a RevPAR decline of just 3.5%.

Turning to our regional results for the quarter, our Washington, D.C. metro region experienced a RevPAR increase of 4% driven by both rate and occupancy growth at many of our Northern Virginia hotels. Our Atlanta region also experienced a modest RevPAR increase of .6%, despite a reduction in convention business versus the prior year, as the Atlanta Marquee Marriott enjoyed growth of 3.5%.

In a welcome development, our Pacific region essentially matched the portfolio's performance as RevPAR declined by just .9%. Our two Ritz-Carlton hotels, located in San Francisco and Marina Del Ray, both enjoyed positive RevPAR results as did two of our large convention hotels. The San Diego Marina hotel generated a RevPAR increase of 14% and our San Francisco Moscone Marriott saw RevPAR growth of 4%. These results were offset by continued weakness in the suburban and airport markets in the Pacific region as well as the soft quarter by the Desert Springs Marriott.

Consistent with our expectations on our third quarter call, our Mid-Atlantic properties performed better during the quarter as RevPAR increased by .3%. The New York Marriott Marquis benefited from stronger transient and group bookings for the quarter and had RevPAR growth of more than 2%. Our New England region continued to underperform as RevPAR declined by 14.4% and our South/Central region also underperformed with RevPAR declining by 5.7% as all of our Texas markets experienced RevPAR declines, including our convention hotels in San Antonio, which suffered from difficult comparisons to last year.

For the year, our best-performing market was the Washington, D.C. metro area, which saw a RevPAR increase of 2.5%, which was generated by double-digit increases at a number of our Northern Virginia properties. Our Florida region also experienced positive RevPAR growth of .2% as our Fort Lauderdale and Naples properties performed well.

Weaker markets for the year included New England, which declined by 15.1%, Mountain, which fell by 7.3% and the Mid-Atlantic region which declined by 6.8%. The latter suffered from declines in Philadelphia, which had enjoyed a strong year in 2002 and in New York, which was particularly impacted during the first three quarters by the Iraq War and several terrorist alerts.

Looking at our Courtyard joint venture with Marriott International, RevPAR declined by 1.5% for the quarter as occupancy fell by .6 percentage points and rate declined by .6%. For the full year, RevPAR for the portfolio declined by 3.7%.

Turning to margins, during the fourth quarter comparable hotel operating margins fell by 2 points, leading to a full-year decline of 3 points. Our margins have been under pressure all year as new cost containment measures have been difficult to identify given the cost reductions already implemented over the last three years. The modest reductions in ADR we experienced were difficult to offset as this portion of our RevPAR decline does not support cost reductions.

Double-digit increases in payroll benefits have also contributed to wage increases that exceeded inflation. In addition, banquet and catering customers are still favoring lower cost items reducing profits in this arena.

As Chris detailed in his presentation, we had an active fourth quarter and made significant progress on several major corporate objectives, including several asset sales and a major acquisition. After four fairly quiet years on the acquisition/disposition front, these activities, when combined with our business plan for 2004, complicate the understanding of year-over-year comparisons of adjusted EBITDA and FFO. From the perspective of adjusted EBITDA, the mid point of our 2004 guidance is roughly equal to our final 2003 figure.

This reflects the fact that we expect the EBITDA generated by the acquisition of the Maui Hyatt to be offset by the loss of the EBITDA related to the eight hotels we sold in 2003 and the business interruption insurance proceeds received from the World Trade Center, which related to 2003. In addition, although our current estimates assumes that we will sell roughly the same dollar value of assets in 2004 as we expect to purchase, the sales activity is anticipated to occur earlier in the year. As a result, the short-term reduction in EBITDA resulting from timing differences between sales and acquisitions offsets the improvement we expect in our comparable hotel operations.

Turning to FFO in 2003, our FFO per share of 99 cents included several unique fourth quarter events, such as the impact associated with the World Trade Center settlement, significant prepayment fees and accelerated deferred financing fees and the loss related to the Canadian hedge transaction. Netting for all these adjustments, which amounted to $98 million, our 2003 FFO per share would have been 65 cents.

As Chris detailed, we expect the comparable hotel RevPAR will range from 3 to 4% for 2004. This forecast anticipates that improvement will occur gradually in the beginning of the year with first quarter RevPAR likely to range from flat to up 2%. For the quarter, we expect that FFO should range from 10 to 12 cents per share, recognizing that we have already incurred 3 cents per share of debt prepayment costs in January. We would expect that RevPAR would improve more significantly beginning in the second quarter.

In 2003, we completed approximately $200 million in capital expenditures compared to our original estimate of $240 million. However, we have approximately $20 million of projects which are being completed at year-end, but were not fully funded in 2003. Excluding these items for 2004, our maintenance capital program anticipates expenditures of 235 to $245 million which is generally consistent with last year's original budget.

More than 45% of these funds will be expended on room renovations, which account for approximately 20% of our room inventory. Major projects include the renovation of the Hyatt in Boston, the Four Seasons in Philadelphia and the New Orleans Marriott as well as the completion of the renovation of the New York Marriott Marquis.

We made meaningful progress towards improving our balance sheet during the fourth quarter. In addition to our issuance of $250 million of equity, we issued $725 million in senior notes, which was deployed to repay the outstanding balance of the series "A" senior notes due in August of 2005 and a portion of our series "C" senior notes due in December '08. We are very pleased to complete this financing as it resulted in annual cash interest savings of more than $7 million and lengthened our maturities.

In addition, through the application of the proceeds resulting from asset sales and the resolution of the World Trade Center, as well as our regular amortization on our secured debt, we have effectively reduced our outstanding debt by approximately $500 million. We finished the year with $764 million of cash, although $273 million represented cash which we have since deployed to pay down the remaining portion of the series "C" senior notes and to reduce secured debt on two of our Ritz-Carlton hotels. We continue to have $250 million of capacity on our credit facilities and since our debt maturities over the next 12 months total less than $30 million, we remain comfortable with our balance sheet.

Although we have maintained more than adequate liquidity to pay the dividends owed on our perpetual preferred securities, our ability to pay these dividends has been subject to certain restrictions contained in our bond indenture. As we announced, the gain associated with the resolution of the World Trade Center insurance claim generated significant taxable income which permitted us to pay our fourth quarter perpetual preferred dividend. In addition, we expect that we will be able to be permitted to make the payments on the perpetual preferred securities for the first three quarters of 2004.

Consistent within our analysis from last year, payment of the fourth quarter dividend, which is paid in January of 2005, will depend upon a number of factors, including our taxable income for 2004 and whether our EBITDA to interest coverage ratio exceeds 2.0, thereby eliminating the effect of the indentured restrictions.

Despite the challenging operating environment, we have acted decisively to improve our balance sheet and to take advantage of an attractive acquisition environment. As the economy continues to improve, lodging demand and business travel should accelerate leading to improved operations. 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.

Thank you, gentlemen. Our question and answer session will be conducted electronically. If you would like to ask a question, please firmly press the star key followed by the digit 1 on your touch-tone telephone. We will come to you in the order that you signal and if you find that your question has been asked and answered before you could ask it and you would like to remove yourself from the question roster, please firmly press the pound key. Also, if you are on a speaker phone, please make sure that your mute button is disengaged so that your signal can reach our equipment. Again, if you like to ask a question, please firmly press the star key followed by the digit 1. And for our first question, we go to Harry Curtis with J.P. Morgan.

Good morning.

Good morning, Harry.

A couple of quick questions. First of all, with respect to your asset acquisitions, are you thinking that in '04 there will be a one or two-quarter positive EBITDA impact?

I'm not sure I understand the question. I think the --

I'm thinking about the timing of it.

The timing of it is that, as I mentioned in my comments, Harry, I think that dispositions will probably happen on par earlier in the year than the acquisitions. At least in terms of how we've factored it into our guidance.

Okay. Where was I going with this is should we begin thinking about building that EBITDA into third or fourth quarter estimates?

I think, yeah, more heavily weighted in the second half of the year than the first.

Okay. The second question is related to the group side. Can you give us a sense of the trend in your tentative group bookings versus the definites and are you seeing any meaningful acceleration in the conversion to definites?

Yeah, we've actually seen a pretty nice pickup, even really over the last 30 days. So, right now as we look at it, the first quarter is up on a year-over-year basis, now I'm speaking to definites. The second quarter is roughly flat, the third quarter is up again and the fourth quarter is a bit down. Now that, on par when you average it all out on definites, means that we're roughly, you know, kind of flat, maybe slightly up for the year. But when you think about the fact that you're either flat or up in the first three quarters and where you're really down is the fourth quarter to me, is a good place to be in the sense that the booking cycles are still very short and so there's a lot of time to fill in business in the fourth quarter, in fact, in the last two months we've billed in a lot of business in the second and third quarters. So, our expectation is if the economy continues to do what it's doing, which we think it will, that we'll fill in a lot of business on the fourth quarter -- in the fourth quarter.

On the tentatives, the tentatives are way up. You know, our tentatives are up on a year-over-year basis significantly over 20%. So, -- and they're significantly up in the fourth quarter. So we're very hopeful that you'll fill in, you'll generate more business, but also convert a number of those tentatives in the fourth quarter into definites. So, I think the overall picture from a group point of view is actually quite good.

You didn't ask it but while I'm on it, on the transient side, obviously the number of markets you're starting to so a pick up in a piece of business that we need to recover the most, which is in the corporate side. It's not, you know, been incredibly strong, but you are starting to see it in select markets and the net reservation activity now that we look at kind of year to date is pretty meaningfully positive, which is as good an indicator that we have as to what's going on in that piece of our transient business. So, while it hasn't, you know, while still this is developing and not surprisingly because we're on a lag to the general economic uptick, we're seeing some very good trends that we are hopeful will continue to develop so that we'll be reporting better operations throughout the year.

That's helpful. Thank you.

Yep.

For our next question, we go to Keith Mills with UBS.

Hi, actually it's Will Truelove here. Guys, just have a couple of questions about the balance sheet per se. You have quite a bit of, you know, hotels that don't -- you know, 3 to $400 million in asset sales you've identified are hopeful for this year. Are those assets specifically identified and if not, would there be potential for asset impairment charges if the assets become identified?

I would say they're not in every case are they identified, but the major of those are identified and we don't expect any material impairments associated with them.

Okay. And then the second is you've got quite a bit of cash already on the balance sheet and if you don't find acquisition, attractive acquisitions in the second half of 2004 and you were to more aggressively pay down debt instead, would there be additional charges for prepayment in, you know, financing fees in addition to that 9 cents that you've related for '04?

Yes, I think the answer is yes. Obviously we've got a, you know, we made the comments we made and built into our estimates or our guidance, acquisitions, because we think we've got a pretty good pipeline of things, of fields going right now and so, you know, we can't say for sure that we'll get any of those done, but feel reasonably confident that we will. In the event we did not and had a heavier debt repayment plan, yes, the charges associated with call premiums and deferred financing fees would increase.

Okay. And then finally, Chris, maybe you can help me walk through the, you know, looking at margins, obviously have been one of the major sticking points here the past, you know, few quarters. I was just wondering, is there a way -- a good measure or metric that we could look for to see when margins might be poised to improve relative to RevPAR? Is there a certain level of, for example, occupancy, you know that you need or a certain rate growth that you need before you start seeing margins materially improve?

Well, I think there are a lot of things we'd look at, but probably the simplest way to view that would be that we think, you know, expenses are going up in the three-- on average, when some are going down, some are going up, but on average, they're going up in the 3 to 4% range, which is why a 3 to 4% RevPAR we said would generally be flat because expenses are probably in the mid to higher part of that range in terms of increases. So, the simplistic way of looking at that is, in the current environment, is you need to give RevPAR really over 4% to see any kind of movement on the margin side.

Would that include the current mix between occupancy and rate to get to the 3 to 4% of growth? And what you if you were to get more, say--

Obviously it would be better to have it be rate than occupancy and I'm kind of assuming a blend when I give you that answer.

Okay, like a 50/50 blend?

I think initially though, as we said it's going to be more occupancy than rate. So, which is obviously impacting our guidance on why we think margins are going to be relatively flat in the range of 3 to 4% because we think even at the higher end of that range it's going to be more occupancy, which means it's harder for us to be able to move the dial on margins very much. As you get into the higher levels of RevPAR, which, by the way, we're not anticipating this year, but in out years, when you get this cycle a little bit more seasoned that will, by definition, coming from a mix of rate and occupancy which will make it easier as those levels of RevPAR to have margin growth, both because you have absolute revenues growing at a higher rate than expenses but also you have the revenues -- or the RevPAR growing as a result of a greater mix of rate against occupancy.

Great, thanks.

For our next question we go to Bill Crow with Raymond James.

Thank you. Chris, theoretically, you guys have always done a good job of maintaining our assets but to some extent, you are limited by whatever the perception of the flag is you fly on those properties. And I guess, you know, my fear is the Marriott brand, in particular, is losing, has lost a couple of steps to some of the, let's call it the Starwood brands and have focused more on the rooms and they've come up promotional activities and things like that. And, you know, I guess -- what are you seeing from a market share perspective, what do you anticipate Marriott's reaction to this might be and you know, wouldn't that potentially negatively impact your cap ex requirements over the next few years if Marriott decides to, you know, step up their image a little bit?

Yeah, well, obviously, Bill, that's a great question and one that we spend a lot of time thinking about. I guess the way I say it is speaking for our portfolio within the Marriott portfolio, if you will, we still have a significant premium in terms of market share to our competitive set. The truth of the matter is we've seen some reduction in that premium over the short-term, I think there are probably a few reasons for that, I wouldn't really say product quality is one of them, by the way and I will come back to that, though.

I think our market share decline that we've seen most recently is really the result of a greater reliance of our portfolio on the corporate business than some of our competitors. I mean, the fact of the matter is we have a very high degree of corporate business, both on the corporate transient and corporate group side, much higher than some of the other brands. And so obviously. with that being the weakest segment of business we're going to lose market share in that kind of environment. We're not as leisure oriented and so that obviously impacts it.

I think that the, you know, as we studied the second half of last year with all of our brands including Marriott, there was a tendency earlier in the year to view the latter half of the year as one that would get much stronger to a corporate side, which really never developed, as we all know in any meaningful way. So, a number of our brands, including Marriott, frankly, did not take a lot of lower rated group business that some of the other brands took. So, as a result took market share in the fourth quarter and then really in the second half of last year.

The other thing, the other factor involved, although I think it's a pretty modest one is Internet strategies, which obviously have evolved a lot, but if you look at last year, some of the market share decline, although a modest amount of it, had to do with particularly with Marriott's strategy and not accessing a lot of the particular distribution channels that are available on the Internet, in the Internet space. Now, that has since changed and I ultimately view that as short-term pain for long-term gain. That it was a good, I think a very good strategy to kind of hold out in that regard in order to get a better deal for the longer term but in the short-term, it clearly would cost a little market share.

So, you look at kind of the combinations of greater reliance on corporate overall, you know, not taking some of the lower rated business and Internet strategies, I think, are the reasons that we determined some of -- we had a modest decline in market share. Now, we would obviously, for the reasons I kind of articulated as I stepped through each one of those, would expect that to reverse itself and obviously are working very hard with them on all those issues to do that. So, we expect that to happen.

On the product side, you know, as far as we can analyze it, as least in our portfolio, we don't think that the product side of it is driving, I mean there are always exceptions to every rule, but as we look at the overall portfolio, it's not really being heavily influenced by the product side. Marriott, we could go back and forth and debate kind of the room products at the Westin versus the Marriott, was I say in our portfolio, particularly in our important assets, the supertanker assets we have, we have always looked at the product in a different way than Marriott and many others in the sense that we typically will look at a custom rooms product so that we're not using the standard Marriott products. If you go through the New York Marriott Marquis or the San Francisco Mascone, or San Diego or New Orleans, you go through all of our larger assets that have been redone over the last, you know, three to five years, they really have been done in a way that's not the standard room product and is very competitive in the market that they're in.

Marriott, you could say, as a brand, maybe in the standard room product that is outside of the scope of our larger hotels I was describing hasn't been quite as progressive or innovative and we would generally agree with that to some degree. I would say one of the things they're very actively working on and we're working with them on it daily and invested in the process with them is coming up with a new standard product and we have some very exciting things going on there that are going to be rolled out a little bit later this year that I think if there are any issues with their standard product, this will clearly resolve it.

The one thing I would say which is a significant advantage to Marriott is, nobody executes better than Marriott. So, when -- while maybe from an innovation point of view, the rooms product has not been as -- has seen as much innovation as maybe a Westin product on occasion, I will say that they are moving at a very fast pace and we are working with them on a new standard product in that Marriott as an organization, from our point of view, can execute better than anybody out there once a plan is in place.

So, I don't think, you know, kind of intermediate long-term that there are product issues that are really going to affect it and certainly, as I mentioned, in our analysis of kind of the market share issues for last year, this is particularly the second half of last year, wasn't -- it wasn't really so much related to product.

All right. That's helpful. Thanks for the discussion.

Yep.

For our next question, we go to Jim Sullivan with Prudential Equities.

Good morning. First question, just a follow-on what you were just talking about, Ed, you had talked about cap ex spending for 2004 and I wanted to make sure that I had it right, that the number that you're guiding us to is 235 to 245 and in addition, is about $20 million of work that was done kind of at the end of the year that should be tacked onto that. Is that right?

That's correct.

That's correct.

And as we look out to '05, Chris, as you talk about this new rooms product introduction, should we be assuming in '05 that, and I know it's a little early, but that, you know, that kind of level, you know, in the mid-200s, approximately 7% of revenues, is a good number to use?

Well, I would say in '05 we'll probably be a little bit higher than the norm. I wouldn't say that being at that percentage of revenues is the norm, meaning you should use that going out in time. But in '05, it is a little bit early to say but I would say we will probably spend a little bit more in '05 as we are in '04 for kind of two reasons. One, we've got a little bit of a -- some of the deferrals, which were not significant, but a little bit of the deferrals of the last three years that have been so difficult from an operating point of view. And two, we just have in the normal cycle of kind of rooms redos that are coming through a little bit heavier component of room redos coming through. I think for the next couple of years we would, I think be at those levels now.

Getting back to your comment on the rooms product, I don't think you should view this as that this is going to necessarily cost us a lot more money because that is not the objective here is to spend more money. The objective is just to have a rooms product that meets the customer needs a little bit better that maybe is a little bit more contemporary and frankly, that maybe has a little bit longer life and that as we cycle through in the normal cycle of doing rooms redos, we will be bringing that product, that new standard into our rooms product.

Now, we will continue on a number of our larger hotels, as we have in the past, to do a product that's more of a customized product because that's what -- that's what's necessary within those hotels. This new product, though, will allow us to -- if it's done well and I believe it will be because we're very actively involved day-to-day, will allow us to get some cost efficiencies because, in many cases, if the product is good enough and we think it will be, you won't need to have -- you won't have to use a custom product in each and every case. You will always, in certain hotels need to have somewhat of a customized product, but given the higher level of this product, the more contemporary design and the fact that we think it will meet customer needs in a better way, it actually, in theory, ought to be able to help us reduce capital spending through longer life and not having to use a custom product as much as we might have in the past.

So, if you think about maintenance capital spending as a percentage of revenues, as I take your comment here, you say once you handle the deferrals, that percentage should come down. Presumably, the percentage of revenues should also come down as your revenues recover but what kind of a cap ex number as a percentage of revenues do you think should be the norm?

I think as we have been saying for years, I think it's really more 5 to 6%. We would typically reserve 5, but when you add in all the roots, tillers, you know, et cetera, it's 5 to 6, is what we would typically expect to spend and we will spend a little bit more than that for a couple of years.

Okay and then in regards to what you used to refer to as ROI projects, are there none of those in the budget for '04?

There are some in the budget for '04. There's about $35 million worth of that in addition to what was described in the maintenance cap ex numbers and that, if things go well, Jim, frankly, that number will go up next year. Because those are, in our opinion, always the best opportunities for us to pursue because as we typically look at an acquisition in trying to get a premium to our cost of capital to the 2 to 400 kind of basis points and ROIs really are standard to 6 to 800 basis point premiums IRRs on an unleveraged basis. So, when you can find those you want us doing those and we want to be doing those.

The last few years, because the demand was so weak, there wasn't a lot of reason to do be doing that, expansion of meeting space, spas, et cetera. There were some we did that were ultimately pretty diminimus, but in an environment where the demand is starting to increase, particularly in a few hotels, we have the need for additional meeting space or spa facilities or conversion of additional restaurant space into meeting space and those yields are significantly in excess of anything we can get on acquisitions and so, we're hopeful that we will continue to find those opportunities that number will grow over time.

Okay and then a final question from me, in thinking about your acquisition and disposition activity, I wondered if you could address what we should be expecting in terms of EBITDA yields for both of those activities, number one? And number two, if you could also give a comment on the direction of yields over the last three months?

Yeah. If you look at what we did last year on dispos, it was about 8 cap on average and about 9.5 times EBITDA and that's before building in to it, you know, the significant cap ex associated with the number of these properties. So, I think you have to look at those as sub-8 cap and in excess of 9.5 times because the fact of the matter is, in many cases, these were Marriott, you know, older, suburban Marriott properties that were converted from management to franchise and they had a property improvement plan that was done as part of the deal to get the franchise approved and so somebody who bought it had to put a lot of money into it.

So, in fact what they were buying it on was certainly sub-8, in the 7s, probably low 7s and well in excess of 10 and that is strategically, again, what we will be focused on that this year, our suburban, older, noncore Marriotts with many of those same attributes. So, I'd say the pricing is going to be generally similar. We've done, I think, a good job of, you know, trying to find a needle in the haystack and have gotten really good pricing and frankly, better pricing in each case than where the market necessarily was.

Pricing clearly has moved up. I mean cap rates have gone down, pricing has moved up in the overall markets because, you know, public company multiples have moved up, there's more money in the market and so clearly multiples are a bit higher.

So, we're hopeful that we'll do a little bit better, but in terms of what we would guide you to, we'd say it would be similar to our last year's experience because of the types of assets we're selling and frankly, the fact that we've taken the time and attention to really find the right buyers and I think got very attractive pricing that was probably better than where the market was at the time.

And in terms of acquisitions?

With acquisitions I think, you know, the same holds true, it's more competitive out there than it's been, we have a good pipeline of opportunities right now. You know, we think that we can still buy assets that meet our criteria, meaning, you know, very high end of the business in the best markets that are kind of urban or resort convention hotels at reasonable multiples, probably the multiples, based on what I just said, have moved up a bit but we think there is still an opportunity to buy assets in a way that's accretive to the value of the company. If we didn't, obviously we wouldn't invest, we wouldn't deploy the capital, but we do think that we'll be able to acquire assets that will net add value on a per-share basis to the Company.

Okay. Very good. Thank you.

Thanks, Jim.

We go next to Rod Petrik with Legg Mason.

Good morning, Chris. Chris, following up on your acquisitions, when you sell an asset like the older stuff in, let's say Detroit and Atlanta, how bidders do you have and how does that compare when you go and buy a big asset like the one in Maui?

Well, I'll tell you, it depends on the asset on the sales side. It's anywhere from, you know, two or three to a dozen, literally. It just depends on where it is, what it is, how much cap ex is required, you know, et cetera. So -- and that's been increasing so, more and more we've got a healthy, healthy number of bidders when we're selling assets. In the end, I think real bidders that want to buy these type of assets, I think you've got a handful of players, I mean, you can get more bids than that but if I were to generalize it, it's hard to generalize it, I'd say you'd hand up with a handful of real players and typically like any deal, one or two of those are more serious than the others and willing to pay up for whatever reason. They have strategic rationale for wanting to be in a particular market and will pay a little more to be in that market.

On the acquisition side, you know, it, again, it's hard to generalize, it depends, like in an acquisition like Maui, the truth is I think we got a, you know, a very fair price on that. We didn't have a lot of competition because it was a huge deal, $321 million, it was encumbered long-term by a contract with Hyatt and so it took, you know, the whole brand play out of it and so, truth be known, I don't know ultimately because we negotiated the deal, it was never marketed. But I suspect that there are only a couple of people in the world for various reasons that would have been a bidder for that. In the end, we were really the only bidder because we negotiated the deal.

On deals that are being marketed, again, we are trying to focus on the larger assets, urban, resort, conventions, one, because we like the strategy long-term in terms of the growth rate. Two, we like the ability that we think we get a little bit better yield because those large assets that are encumbered by long-term management contracts and flags are less competitive. So, instead of, if you had a big asset that the flag was available on that was for sale, depending on the size of it, you know, you're going to get a fair number of bidders and you're going to cut those bidders in half if it's encumbered long-term by a management contract.

So, you know, if you found another Maui-type asset today, a $300 million-plus asset encumbered by a long term management contract, I still think in today's world we are going to have very little competition. It would be unfair to say we'd have no competition because there's a lot of people with a lot of money out there, but I think we would not have a lot of competition and thus the reason, I think that ultimately, we are saying to you that we think we can selectively still acquire assets while the multiples may be a little bit higher than where we were with Maui, we still think we can acquire assets in a way that is getting a return that is significantly in excess of our cost to capital and that's value accretive on a per share basis for the Company.

Are there opportunities to use your stock as currency?

Yes. Some of the transactions that are in the pipeline would contemplate the use of OP units, absolutely.

When you look at the public landscape and you look at strategic and C&O and Hyatt and others, you know, possibly going public, does that have any impact on you?

I don't think so, really. I mean we, of course, have, you know, looked at many of the assets that are out there within some of these portfolios and in the end, for a lot of different reasons I won't get into, have decided not to pursue those opportunities. I think having a strategic or, a you know, C&L or whomever being public, you know, it's one more person out there, but I think ultimately there's enough to do for all of us. So, I really, I think that these companies are looking at public markets that are pretty robust and looking at exit strategies and they find in this public -- robust public market that that's a good exit strategy and so more power to them. I don't think in the end analysis it has a tremendous amount of impact on us.

Thanks.

We go next to John Arabia with Green Street Advisors.

Good morning, guys. Most of my questions have actually already been answered, but a quick question, how many of your properties are actually negative or generating negative EBITDA at this time, or let's say in '03?

In '03, I don't think, maybe one asset that was, you know, one of the original assets in the portfolio in the Company's split that has a structural deficiency, but I think that's it.

Okay. Thanks.

We go next to Dave Anders with Merrill Lynch.

Great, thanks. Hey, Chris, could you give us an update on the Courtyard partnership, kind of how the performance is and where we stand on that right now?

I'm going to let Ed do that for you, Dave.

Okay.

You know, as I indicated in my comments, we had a RevPAR decline last year, we are in the midst today of renovating a number of hotels in that portfolio. We have about 18 hotels out of 120 that are being renovated as we speak and we are expecting to renovate a like number later in the year. So that will put us in a position where by the end of this year, we should have renovated between 35 to 40% of the portfolio. We've been seeing improving results at the hotels that we have renovated. We got off to a little bit a slow start in that process, but the improvement we have seen and the reaction to the product has been fairly positive, especially over the last six months as I think that we've done a collectively done a better job of marketing the renovated hotels.

This year is going to be, I think, somewhat challenging for us. We are expecting to see RevPAR growth, but at the same point in time, the high level of renovation that we're seeing is going to affect operations simply because there will be rooms out of service while we're completing the renovations.

Okay. And as a follow-up, is that renovation a function of just obviously the properties were under invested in during the downturn or is it also just an increase in competition from say Hilton Garden or something like that?

You know, it is probably a little bit of both. I'm not so certain that we under invested in these hotels as much as it's just been a function that we, there was some time spent trying to rethink how the next cycle of Courtyard renovations should be done and so we're now in the midst of moving through that process. I think it was our desire to make certain as we approached that that we were comfortable that where we might be spending more than we had spent in a typical rooms redo in the past that we were getting full value for the investment that we were making.

I don't think there's any doubt that in some markets you have seen new supply come in and that new supply does have an effect on the Courtyards, but as I mentioned before, we are starting to see improvements in share resulting from the renovated hotels and I'm hopeful that in the long-term, that will push back against some of this new supply.

Great, thank you.

We go next to Keith Mills with UBS.

Good morning, gentlemen, how are you?

Good morning.

I have a few questions for you. First, I will start with Chris. Chris, you mentioned earlier in your comments that the booking cycles were still pretty short. Can you provide us with some feedback on the booking cycles at this point in time for your supertankers versus your non supertankers and where that, I guess, is relative to what it was say six months ago, have you seen much of a change?

No, not much of a change. I guess in the non supertanker, you know, it's down to weeks and the supertanker, you know, it's down to months. It could be kind of a 30, 60, 90 day cycle except, of course in the supertankers for the super big groups. Those are still booked, you know, those can be booked years in advance because of the scale, the San Francisco Moscone, if you want 1,000 rooms, you still don't have many options and have to book pretty far out but I'm talking about the bulk of the business, which is more the moderate and smaller size groups.

So, not a big difference, you know, I would say if there's any kind of inkling of a trend it is starting to be that you'll see the cycle lengthen a little bit because people more and more, as demand comes back, will be trained to realize that they got to do it earlier or they're not going to get their meeting done because, you know, there's not space for them. But I would say having talked to all of our operators, there's not been any big movement in that regard recently.

Okay. Second question for you, Chris, is you mentioned there are some markets that are stronger than others from a transient perspective. Can you tell us which markets those are that are stronger and what you're seeing in the booking cycle in those markets?

Let me think, New York's been a little bit stronger, I'm thinking Atlanta has been a little bit stronger.

All in the transient area?

A little bit, yeah.

Yeah, the fourth quarter in Atlanta, Atlanta had softer, you know, we had positive RevPAR in Atlanta yet some of our group businesses actually declined so it was clearly a transient pickup in Atlanta.

We're seeing a bit of a pickup in some of the West Coast markets. The Florida markets have been reasonably strong in that regard, but, of course, driven by a little bit more leisure than necessarily corporate. So, I would say some of the major markets, the Northeast, other than New York, I mean when you go to Boston and beyond, hasn't seen so much of a pickup. I mean we have it, I would say at Copley a little bit, but if you look at it on the average it's been still pretty weak in Copley as obviously noncomp for us. So, you know, a little bit of, you know, kind of pockets around the country. New York, South and West a little bit.

Have you seen a change in the New York, the West Coast, the Florida markets in terms of the booking cycle?

Not much. No.

Okay.

Not discernible to us at this point.

Okay. Okay. The Boston property, the Swiss Hotel that you've converted to the Hyatt, can you share with us some of the financial performance of that property since you made the change from Swiss Hotel to Hyatt, what impact has that had on the property?

I don't have it sitting here in front of me, Keith. We wouldn't typically give out individual property data, obviously, for competitive reasons, but I would say it's going well, it's been honestly a little bit slower start than we would like, we don't think that that will impact the long-term. I think it's a great decision and we think Hyatt's going to do a tremendous job. What was really apparent after they got in there was that Swiss had, you know, left us holding the bag a little bit in the sense that some of the bookings that appeared to be there didn't really materialize. So, when Hyatt came in they were really starting with a tabula rasa, so, they had hoped to have had a little bit more on the books to take advantage of them was actually there. So, a little bit slower start, but they're doing a great job and given where they started, we're very pleased with our results there.

And with the other one, you didn't ask about, but I'll say we're just getting started with Westin really, with very little data. The data we have so far with Buckhead with Westin is quite positive.

What does it mean for the properties in Chicago and New York? With the two remaining Swiss hotels you have.

What was the question? I'm sorry, I did not hear you.

You have two other Swiss hotels, can you remind us about the status of those, with your intent to convert those, the one in Chicago and the one in New York?

In New York we've got about 2 1/2 years left. In Chicago we have, I think, five -- four and a half or five years left. So, we're we're not in a position at this moment to do anything with that. When with we get closer to the dates, we will give you an update. Clearly our intentions would be look to at all of our alternatives, outside of Swiss, in both cases.

Okay. A few more questions for you. The first is on your cap ex program, can you tell us your views of approaching that in maybe a more standardized way going forward, specifically on the rooms package, so you can reduce your costs further and maybe drive down the time that it takes to convert a room?

Yeah, I mean, I think we have pretty much said it, but the idea is kind of twofold, or multiple-fold. One is to get a, you know, a little bit more innovative product so that, you know, it's a little more cutting edge, it's a little higher quality from our perspective and thus it can be used more readily in our hotels so we're just buying it in bulk as opposed to a customs product, which our custom products, which we have to buy for a particular hotel. While we're buying it in bulk because our hotels are big, obviously it is better to buy it for 5 or 10 or 20,000 rooms or the whole Marriott system, 50,000 rooms than it is to buy it for 2,000 rooms at the Marquis or 1,500 rooms at Moscone. So, obviously trying to take advantage of higher quality product that is more innovative in that you're just getting bulk purchasing. So, I think clearly there's going to be an ability to end up with better product and a lower price.

The other thing that we're trying to do and we've spent a lot of time and frankly, we've been really pushing this with all of our operators is to get -- is the use of the materials, not just making sure that it's cutting edge and innovative and that the customer likes it, but there are lots of different, not to bore you with the details, but there are lots of different products you can use or materials that you can use that go into these rooms, whether that be the carpets or the drapes, the fabrics that are used, the artwork, you know, the type of process that's used to make the prints for the artwork, et cetera, that get -- that really doesn't necessarily cost you much, if anything, more up front but it just has a longer life.

And so the concept is not just end up with a more innovative room that you can buy in bulk and save money, but it's also to make it last longer and while you think that's, you know, should be a real simple concept and it is, I will say to you I don't think many of the brands, in our opinion, have spent the time really analyzing, you know, buying every little bit and piece of a room how you might extend the life in these rooms just by the use of materials. And that's something we've been really pushing all of our operators hard on and in our work with Marriott is a major component of the work, is to accomplish all of those goals.

Okay and then just a couple of more questions for you. Chris if you're optimistic about 2005 at this point, why wouldn't you, now, start to step up your return on investments and your ROI spending and increase that now so you can reap the rewards beginning in '05 rather than step it up in '05?

The answer is we are. That's why we have $35 million built in but these are projects that take time. So, I mean, the fact of the matter is the reason we'll be spending more in our opinion in '05 is for things we will do in '04, but if you want to build an exhibit hall at a property that may cost 30, 40, $50 million, there's only so fast you can get that done. Until now, you haven't really had the demand and couldn't anticipate the demand to do it. So I think the answer is, you will start to see ramping up in the activities it's just a question of the timeframes that it takes to accomplish the goals.

Okay, so more of this year is kind of ramping up on the planning, getting everything set so that you can then start to work on it?

That's right. And execution in some cases, but it may mean it spans both years. You won't get it all done this year, certainly and paid for, so, you're going to end up paying for a decent part of it next year.

Okay. And can you just remind us on the Courtyard portfolio, what Host exit strategy is on that portfolio?

Well, we don't have a formal exit strategy so it would be hard to remind you of it, but what we have said and I will say again is that this is not, you know, when we did this we did it to resolve out standing litigation. We're confident that it was the right thing to do and it is not in any way a change in our strategy to get into that business. So, not assets that we will hold long-term. They have obviously, just listening to Ed's description, had a number of performance issues over the years, we're in the middle of a reinvention program and so, as I sit here today, I think it's our sense that it would not be the ideal time to sell it. We ought to really deal with the capital issues and let things recover a bit and then, ultimately, we will come up with an exit strategy, whatever that is. But I think the net result of it is it will be long-term, we will not own these assets, but we will obviously pick a time to exit them to maximize the value to the Company.

Do you think Host owns these companies two years from today?

Can't say. It depends.

Okay.

I mean I just can't be specific with you in the sense that there are too many variables that go into deciding when we exit. So, we could, we might, we might not, I hate to be so coy on it, but that's just, that's the honest answer.

Thank as for taking the time, I appreciate it.

Yep.

We go next to Mike Rietbrock with Smith Barney.

Hey, guys, we're all set, thanks.

Thanks, Mike.

And for our next question, we go to Asad Kasim with reef.

Hey, guys, I will just follow-up offline, thank you.

Thanks.

And, ladies and gentlemen, that does conclude our question and answer session. Therefore, Mr. Nassetta, I will turn the conference back over to you for any closing remarks.

Well, thank you, everybody for joining us today I hope it was helpful. While there's a lot to cover and there was a lot of noise in the numbers for last year because the World Trade Center debt repayments, et cetera, obviously we're really pleased with all of what we got done last year. We're particularly pleased with the fact that, you know, we now see the trends that we had all been expecting for so long in terms of the recovery on the operating side and we're looking forward and hopeful to be able to report improving results as the year goes on.

So, we will look forward to chatting with you and not too distant future after we finish the first quarter and give you an update on our progress. Thanks for joining us.

And, ladies and gentlemen, that does conclude today's Host Marriott Corporation fourth quarter 2003 earnings conference call. We do appreciate your participation and you may disconnect at this time.