Host Hotels & Resorts Inc (HST) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to this Host Marriott Corporation third-quarter 2004 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.

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 Web site.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our third-quarter results and then we'll describe the current operating environment and the Company's outlook for the remainder of 2004. Ed Walter, our Chief Financial Officer, will follow Chris and will 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, everyone. As I will detail in just a minute, we had a strong third quarter despite facing an unprecedented number of storms that hit the Southeast. RevPAR growth was at the high-end of our forecast and for the first time in quite a long time, RevPAR growth was driven more by rate than occupancy. This trend, combined with more typical expense comparisons than we experienced earlier in the year, led to significantly better margin results.

While we experienced a broad-based recovery in demand in most segments of our business in the quarter, we continue to believe that we are only in the early stages of a strong sustained recovery in the lodging industry that will continue for a number of years.

Let me spend a few minutes on the specifics for the quarter. Diluted FFO per share was 6 cents in the third quarter. Excluding adjustments related to costs associated with the repayment of debt and preferred stock, which totaled 5 cents per share, we're at the midpoint of our guidance and in line with the consensus estimate. Our FFO per share for the third quarter of last year was 3 cents and that included 2 cents related to a one-time receipt of a directors and officers insurance settlement of approximately $10 million. Including these items, our FFO per share increased 10 cents. Our comparable RevPAR increased 7.9 percent for the third quarter, compared to last year, and comparable hotel adjusted operating profit margins increased 130 basis points.

Our top line results were driven by an increase in average room rates of 4.1 percent, combined with an increase in occupancy of 2.6 percentage points.

Adjusted EBITDA for the quarter was 133 million, which represents an increase of 9 percent from 2003 levels. Excluding the D&O insurance payment in 2003, our adjusted EBITDA increased approximately 19 percent for the third quarter compared to last year. Year-to-date adjusted EBITDA was 523 million. Year-to-date comparable RevPAR increased 6.6 percent, compared to 2003 levels, as a result of a 3.3 percentage point increase in occupancy and an increase in room rates of 1.8 percent. Year-to-date comparable hotel adjusted operating profit margins increased 50 basis points.

In the quarter, we continue to see positive demand trends, which generated a favorable shift in the mix of transient business and a substantial room night increase in all categories of our group business. During the quarter, premiums in corporate transient business was up approximately 15 percent, while the special corporate and lower rated discount segments decreased 5 percent. The net result of this positive makeshift was that total transient demand increased only slightly as the increase in the higher rated business segments was offset by the decrease in room nights in the lower rated segments. However, the average room rate in the higher rated segments is approximately $90 higher than the lower rated segment. This significant shift in business is one reason we realized higher room rates during the quarter.

In addition, for the first time this year, we have seen a significant -- seen significant rate increases in the premium and corporate segments, with both recording a rate of increase of approximately 8 percent. This is an extremely positive development, which suggests that hotels are having greater success in closing out discounted business and increasing rates in the higher rated segments as a result of improving transient demand.

Turning to our group business, total group demand increased approximately 6 percent with the Association segment up nearly 16 percent. This increase in our highest rated segment helped drive group room rates up approximately 3 percent during the quarter. Our group booking base at our largest hotels continues to improve but definite group room nights up over 7 percent for the full year. In the third quarter, we're now ahead of last year's pace by approximately 190,000 room nights. For the first time this year, fourth-quarter bookings are now slightly ahead of last year's pace with an average rate increase of approximately 2 percent.

Looking out towards 2005, trends continue to be positive. Net reservation activity continues to exceed last year by a comfortable margin. Initial feedback from our special corporate rate negotiations suggest that many hotels will achieve rate increases in the 4 to 5 percent range. Group booking pace continues to track 2004 levels with a higher average rate and a strong tentative number. The strengthening transient demand is leading many hotels to lower group ceilings with a goal of directing business towards (indiscernible) periods.

A couple of other topics that have received a lot of attention and are worth commenting on, hurricanes and strikes. As of today, we have been relatively fortunate on both fronts. Out of our 13 hotels in Florida and Louisiana, none experienced significant damage. However, some of these hotels did suffer landscaping damage and other minor damage that for the most part will not exceed our deductible. Only one property, the Singer Island Hilton, was forced to close twice for a total of 17 days to deal with repair issues which occurred after both Frances and Jeanne hit the East Coast of Florida. In total, we believe that, after insurance proceeds, the physical damage will cost us approximately 2 to $3 million. Several hotels were forced to shut down for a few days as various storms made landfall or as evacuations were ordered. Additional business interruption losses occurred as guests decided to cancel meetings which were scheduled around or during the storms. Some of the lost business will be either covered by insurance or partially made up in the activity that occurred after these storms.

We believe that the total loss of business will cost us approximately 1 to 2 cents of FFO per share with the majority of the impact in the fourth quarter. Remember, our third quarter ended on September 10, so we experienced two major storms in the third quarter and two major storms in the fourth quarter. We believe the storms could have a modest impact on business next year, as some meeting planners may elect to book business in other markets during the hurricane season. However, the state is already trying to reduce any negative effects next year as they propose to spend $30 million to promote tourism. We believe that any negative effects will be relatively short-lived and that Florida will continue to be a great long-term market.

On the strike front, we only have seven hotels with union contracts. None of our hotels have contracts that are coming due this year, so the strikes or potential strikes this year should not have a negative impact on our results for the remainder of the year. We continue to work with our managers and other owners to help reduce or prevent any long-term negative impact from these issues.

During the quarter, we completed the acquisition of the Fairmont Kea Lani resort for $355 million. On September 22, we acquired the 270 Suite Scottsdale Marriott at McDowell Mountains, located in the Scottsdale Perimeter Center, which is one of the fastest-growing office parks in the greater Phoenix/Scottsdale area, markets that continue to see significant demand growth. The hotel is located adjacent to the CPC at Scottsdale, which helps attract weekend business to supplement the strong corporate weekday demand this location generates. The purchase price was 57.5 million, including the assumption of 33.5 million of mortgage debt with an interest rate of just over 6 percent. We have now acquired over 500 million in assets this year and over 800 million since November of last year. As we have stated before, we believe the best time to buy assets is at the beginning of a cycle and we think we are in the first stage of another -- (technical difficulty) -- cycle.

We have also indicated that our initial acquisitions will be funded with a disproportionate amount of equity. Given that we have raised a substantial amount of equity, we have a newly expanded and more flexible credit facility and the recovery is picking up momentum. We now have flexibility to take on additional debt and we expect to be more balanced in funding future acquisitions, as evidenced by our purchase of the McDowell Mountains Marriott. We're working on a number of additional deals. However, the timing of potential acquisitions is difficult to forecast.

At this point, our forecast for the remainder of this year is 0 to 100 million of acquisitions, with any acquisitions for the remainder of this year occurring near the end of the year.

From a sales perspective, we continue to see strong market interest in our noncore assets. So far this year, we have completed the sale of seven noncore assets for approximately $155 million. For the year, we expect to sell between 100 and 200 million of additional assets, although some of these sales may ultimately close in the first part of next year. We generally expect that the proceeds from these sales will be utilized to repay debt or will be recycled into superior assets with higher growth prospects.

Now let me spend a few minutes on our outlook for the remainder of 2004 and 2005. We are expecting comparable RevPAR to increase 6 to 7 percent for the year with comparable hotel adjusted margins generally up 40 to 80 basis points. This operating forecast, combined with the acquisition and disposition targets mentioned earlier, will result in approximately 67 to 72 cents of diluted FFO per share for the year, which includes a 19 cent per diluted share reduction due to certain adjustments consisting primarily of call premiums and accelerated deferred financing costs associated with debt repayments. After, adjusted EBITDA for the full year should be approximately 765 million to 785 million. The midpoint of this forecast is approximately 70 million higher than the midpoint of our original adjusted EBITDA forecast for this year.

As it relates to guidance for 2005, at this point, we're just beginning our formal budget process with all of our operators that will allow us to develop our guidance based on a property-by-property analysis. As a result, we're not in a position today to give specific earnings guidance. Having said that, based upon our discussion today, our sense is that it's a result of a number of positive trends, including strong GDP growth, low supply growth, a continued increase in corporate demand, which is driving business mix shift, and a solid group booking pace, RevPAR will increase approximately 5 to 7 percent.

As for margin expectations, we expect to continue to experience above inflationary cost increases in wages, benefits and utilities and 2005. In addition, unlike this year, we do not expect to experience insurance savings in 2005. We do expect a larger portion of 2005's RevPAR increase will come from rate, as business transient continues to improve. However, we will continue to incur additional costs as a result of further increases in occupancy. As a result, our expectation, while very preliminary, is that our margin improvement in 2005 will be modestly better than we anticipate in 2004. We look forward to providing specific guidance when we complete our budget process.

I'm pleased to be able to say that the lodging recovery is continuing to play out as forecasted. Demand in our upper upscale segment continues to accelerate. The business traveler is returning in force and in many markets, we're raising rates. Clearly, we believe the stage has been set for a powerful and sustained recovery in the lodging industry. Thank you.

Now, let me turn the call over to Ed Walter to talk about more of the specifics of the quarter.

Thank you, Chris.

Let me start by giving you some detail on our comparable hotel RevPAR results. Looking at the portfolio based on property types, our airport hotels performed the best with third-quarter RevPAR growth of 11 percent, as occupancy improved by 6.9 points and average rate improved by approximately 1 percent. Our resort convention and urban hotels experienced RevPAR increases of 10.8 and 7.9 percent respectively with the average rate for urban hotels increasing by 5.8 percent. RevPAR at suburban hotels increased by 4.9 percent for the quarter.

Year-to-date, RevPAR at our airport hotels increased 11.6 percent and our urban hotels improved by 6.2 percent. Urban hotels increased by 5.9 percent while our resorts are up by 5.8 percent. As evidenced by these stats, we're enjoying solid improvement across all property types in the portfolio.

Turning to our regional results for the quarter, consistent with our predictions last quarter, our top performing region was the New England region, which enjoyed a 19.6 percent RevPAR increase. Our two highest hotels in this market, the Cambridge and Boston Hyatt, lead the region with increases of over 30 percent. Overall, the Boston market benefit from a pickup in both group and transient demand as well as from the Democratic convention, although the convention proved to be somewhat disappointing in terms of F&B business, as few events were actually held in the hotels. We expect this region should continue to perform well during the fourth quarter.

Our mid-Atlantic region also had a strong quarter with RevPAR improving 15.7 percent, as occupancy improved by 6.3 points and rate increased by 6.8 percent. Our New York hotels all had a great quarter with RevPAR increases averaging approximately 20 percent, as the Republican convention drove strong performance at both the Financial Center Marriott and the Drake. The Marquis had a solid quarter but it fell slightly short of expectations as transient business before and after the convention was muted, apparently due to security concerns, and the F&B pickup during and around the convention was negligible.

Overall, the conventions generally had a positive effect on both markets but the total contribution to hotel profits, especially at the large hotels, fell short of expectations. Although the pace is expected to moderate in the fourth quarter, we still expect the mid-Atlantic region to continue to perform well.

RevPAR in our Florida region improved by 10.7 percent for the quarter, as the Orland World Center hotel improved by 24 percent and the Ritz-Carlton at Naples improved by 13 percent despite losing 10 percent in RevPAR in August due to business interruption caused by the hurricanes. Our Orlando hotel appears to have benefited from both Hurricane Charley and Frances, which drove additional transient room nights. Although Florida was initially expected to outperform in the fourth quarter, we have suffered additional business interruption losses associated with both Ivan and Jeanne, which will likely cause softer performance in the region.

The Pacific region continued its rebound as RevPAR increased 7.8 percent. For the first time this year, the San Francisco suburbs outperformed the city as the convention calendar was softer during the third quarter and our suburban properties experienced double-digit occupancy increases. We expect the region's growth will moderate during the fourth quarter as citywide conventions decline through year-end in both San Francisco and San Diego.

Our Washington D.C. market underperformed during the quarter as RevPAR improved by only 2.2 percent. This occurred primarily because we had four hotels in the region undergoing room renovations and we expect to return to strong performance in the fourth quarter. Continuing a year-long trend, the center of the nation continued to underperform. The mountain region experienced a RevPAR increase of just 1.3 percent, as weakness in Denver markets offset strength in Phoenix. The North and South Central regions declined by 1.6 and 4 percent respectively, as convention business was weak in all of our major markets. These regions should improve in the fourth quarter.

Year-to-date, the three best performing markets have been the New England region with RevPAR growth of 10.4, the mid-Atlantic region with growth of 9.8 percent, and the Pacific region where RevPAR improved 8.4 percent. The South-Central region, which experienced a decline of 1.2 percent, and the North-Central region, where RevPAR has been flat year-to-date, were the weakest.

Looking at our Courtyard joint venture with Marriott International, RevPAR improved by 5.8 percent for the quarter, as occupancy increased by 1.7 percentage points and rate increased by 3.3 percent. Year-to-date RevPAR for the portfolio was up for 4.6 percent. The JV has continued to renovate its properties and at this point, more than 30 percent of the portfolio has been renovated and we expect that we should be more than 40 percent complete by year-end.

As Chris highlighted, we were pleased that our comparable hotel adjusted margins improved in the third quarter. Our margin growth of 1.3 points was facilitated by RevPAR increases which were half driven by rate improvement. Offsetting some of this benefit was the slow growth of our Food and Beverage revenues, which was limited to 2.4 percent for the quarter, compared to a year-to-date growth of 5.6 percent. This level of growth fell short of our expectations and is generally attributable to a 2 percent decrease in the more profitable catering business, including the business that failed to materialize in Boston and New York during the convention. As the economy continues to expand, we should begin to see improvement in this arena next year, as companies and associations feel more comfortable in increasing the scope and quality of food and beverage expenditures, which will also increase profit margin.

Most other costs generally remained in line. However, utility costs increased by 6 percent and the sales and marketing expense was up 7 percent. Fortunately, real estate taxes were down modestly and insurance declined by more than 30 percent.

Continuing a scene that began last year, we were active in the capital markets again in the third quarter. We modified and increased the size of our credit facility from 300 million to 575 million while extending the term until September 2008 and reducing our interest rate. In addition, we issued 350 million in Series L senior notes that bear interest at 7 percent with the term of eight years. This financing, which represents the lowest cost senior notes financing in our history as Host Marriott, was used to repay 336 million of our series B senior notes. During the quarter, we also repaid our 10 percent Class A perpetual preferred. As a result of these and early activities, over the last 14 months, we have reduced or overall fixed charges by more than 76 million.

We finished the quarter with 317 million of cash, although we have since spent 24 million of this cash balance in connection with the purchase of the McDowell Mountain Marriott. The remaining balance of approximately 290 million may be used for acquisitions, investments in our portfolio, other corporate purposes and to maintain working capital. We face no debt maturities for the remainder of the year and have full capacity in our new facility.

I would like to cover a few additional items. First, you will note that we have expanded our quarterly earnings information package to include a debt schedule designed to provide additional information regarding the announced and (ph) compositions of our debt, given all the strides we have made in changing our balance sheet over the last 14 months.

Secondly, as many of you are aware, the EITF has been reviewing the accounting treatment of contingently convertible debt and has tentatively concluded that such instruments should be accounted for on an if-converted basis, even if the conditions required to convert from debt to stock have not been satisfied. This conclusion is now being reviewed by the FASB. If this treatment is ratified by the FASB, we would be required to adjust our treatment of the senior exchangeable debenture transaction we completed in March of this year. The effect of treating this debt issue on an if-converted basis would result in less than a 2 cent decrease in diluted FFO per share for 2004. The guidance that Chris provided earlier does not include this reduction because the issue has not been resolved and no final interpretation has been adopted. The change in accounting treatment would not have an effect upon adjusted EBITDA and the transaction itself, even with the change in accounting approach, remains very creative.

As we have detailed today, the operating trends are increasingly favorable. As the economy continues to improve, lodging demand and business travel should continue to accelerate, leading to further improvement in operating results. The improvements in our balance sheet and enhanced financial flexibility should allow us to take further advantage of opportunities to enhance the value of our company and drive earnings growth in the future.

This completes our prepared remarks. We're now interested in answering any questions you may have.

(OPERATOR INSTRUCTIONS). Truelove with UBS.

My question is about group bookings for '05. Can you talk about the environment in terms of booking groups and how willing they are to getting rate increases on your group bookings and how much of your business is related to group?

Right now, if you look at our business mix, we are about in the low 40s in terms of group business. I think what you'll see is and what I mentioned in my comments is that the group booking pace is right now for '05 pretty consistent with where we were last year and that the rate is up a bit. It is not going to be up overall for the group segment in a huge way next year because we still are burning off some of the groups that would have been booked in a weaker time, so that will pick up momentum throughout next year and into '06 and beyond as time goes on. But I think what you'll see is -- and the discussions we're having with our operators -- is that given the strength that we're seeing in transient demand the strength that we think we're going to continue to see in the transient segment and the corporate segment, the premium segments, next year, that we're not really interested in increasing the level of group business in any meaningful way next year. In fact, what we're really pushing our operators to do is focus on keeping the group. We still need a large group base for the year so we can yield management (ph) and transient but to really try and push the group that we have into more need periods so that we -- where we have strength -- the periods of time where we have strength we can really yield manage and bring in heavier transient business, particularly the higher rated transient business so that obviously we can build the volume of transient but also have an impact, a positive impact on rate.

Fred Taylor with Lord Abbett.

You may have said this but could you mention what the dollar amount of the common dividend is likely to be in 2005?

We have said, for 2005, that we would have a 4 to 6 cent or a 16 to 24 cent per share dividend.

When you mentioned 76 million in reduced fixed charges, is that net of the common, or is that before the common? I know the definition of fixed charges is -- (multiple speakers) -- common.

That fixed charges is encompassing the interest payments that we make on our -- (multiple speakers) -- forms of -- (Multiple Speakers) -- perpetual preferred. (multiple speakers).

Not common dividends.

Right. Then finally, just the very large amount of 08 that you bought in -- might we see something similar in the '06 and '07 maturities throughout the year?

The '06 and '07s are bullets, so less likely that you would see it in those.

Just mature. Okay. Thank you very much.

Bill -- (technical difficulty) -- Raymond James.

Chris, a couple of questions. On your margin, you paint a pretty optimistic picture for fourth quarter RevPAR growth but it was interesting that your 2004 hotel level margin assumption is from 40 to 80 BIPs (ph) improvement. You're running 50 BIPs year-to-date. At the low-end of that, at 40, that implies pretty negative results in the fourth quarter. Is that really feasible or is that just a conservative range from you?

I don't think it's conservative. We have given you the best forecast that we can give you based on what we now. I would say that we do expect the fourth quarter margin to be less than the third quarter. There are two or three or four reasons that I will cover. One, we expect the RevPAR in the fourth quarter to be modestly lower, comparable to what we have for our full-year guidance. The reason is partly hurricane driven, partly the comps are a little bit more difficult for us, the fourth quarter of '04, just as you compare to fourth quarter, of '03. So, having a little bit lower RevPAR obviously affects the margins.

Ed mentioned that our food and beverage in the third quarter revenues and margins were not where we wanted to see them. I think that is a function of a bunch of different factors, including still the groups are holding back on spending on the catering, as well as the fact that we have a lot -- still have a lot of lower rated groups that just aren't spending money. In the third quarter, we had the conventions as well. But in the fourth quarter, we -- at least in terms of our forecasting -- and we do think this will turn itself around as we get into next year and beyond -- we still do expect not such a great result in the food and beverage side from both a revenue and (indiscernible) margin point of view.

So given that that is still a pretty big chunk of our overall revenues and thus margins -- our revenues -- it can have an effect on our margins. So that is impacting it. The hurricanes that -- we had two or hurricanes and we have a bunch of properties in Florida, Louisiana, a lot of cleanup cost, etc., certain costs that will run through our financial statements that will affect margin.

Probably, last but not least, we will have, in the fourth quarter, a little bit less benefit from both the insurance side as well as real estate taxes, as compared to our third-quarter numbers, just because we had started to see some of that benefit in both of those areas last year in the fourth quarter. So that may be more detail than you wanted, but just trying to give you a sense of what has gone into the forecast.

We're certainly not sitting here believing that we're being overly conservative. We do think margins in the fourth quarter are going to be a little bit tougher for all those reasons.

I appreciate the detail. Turning to the acquisition disposition activity, can you quantify the pipeline that you are looking at so we can maybe get a feel for what to expect in '05 at this point?

That's -- (technical difficulty) -- to do. In part, one of the reasons we can't give you -- there are a lot of reasons we can't give you guidance. Obviously, we would love to. I would love to be sitting here with a budget in front of me that I could describe to you but we don't -- we haven't even done our property level budgets yet, as I mentioned. It is just premature, given where we are in the process, to really start to pin down what our acquisition and disposition targets are because we're just right now in the process of working on our business plan and the markets are fluid obviously.

I can't -- Bill, I would love to give you a number that says we've got X millions or hundreds of millions of dollars in the pipeline. What I would say to you right now is we have a bunch of deals that we're working on, some are multiple asset, you know, smaller portfolio types of deals. We have a little bit going on in single asset. Frankly right now, the single asset side of the acquisitions, from the types of assets that we want, is little bit lower. I do expect that that will pick up some steam as we look in the next several quarters but it is relatively slow right now. But we have a reasonably conservative aggregate dollars, we have a reasonably large pipeline but as I sit here today being brutally honest, nothing is imminent, which is why we really said 0 to 100 and the likelihood is it would be towards the end of the year. Of the deals that we're looking at, while a lot of them I think could work -- some of those could work out and they would be wonderful deals, since we're not too deep into them in terms of where we are in the process, trying to assess an exact probability is very difficult.

I think it's a dynamic situation. The pipeline is reasonably good but probability assessment is hard. My expectation is while I can give you a number, we ultimately obviously will give you a number for next year when we come out and give guidance and have a more specific business plan and budget to base it on. I do think things will pick up from the levels of activity that we're seeing at this moment, which are I would say slower than we had seen. In the last two to four months, it slowed down from what we had seen in prior few quarters before that.

That's helpful. Thank you.

David Anders with Merrill Lynch.

Two questions -- first, on the rate gains in the current quarter, would you say that that is all mix shift? I'm curious to know what percentage of the rate gains came from mix. Then just the other one is, guidance for corporate expense in the fourth quarter, what should we be thinking about there?

I will take the first and maybe Ed will take the second. Rate gain in the third quarter was surprisingly split about equally between mix and rate increase, so very positive in fact.

In terms of our corporate level expenses for the fourth quarter, I don't think there's anything materially different that you would see fourth quarter '03 versus -- (multiple speakers). They would be slightly up, but nothing material. What we saw in the third quarter -- we saw a difference related to certain -- we had to revalue our stock plans based on where the stock price is largely. That was the meaningful impact there, just the stock price is higher so the value of any of our stock plan expense goes up.

Right, so just as a follow-up, so I shouldn't be taking that number times the 1.3 for the upgraded -- the change in weeks in the quarter? Should I be using the 12 million as the run rate and then grossing that up for the additional weeks?

David, I don't think I would follow that.

It's just that the fourth quarter is a longer -- you have more time right?

Yes, I would not take the third quarter as the grossing up; I would take -- I would assume, you look at '03 numbers, assume a modest over '03.

Okay, thanks.

Versus taking a third quarter as a run rate because you have kind of the extraordinary change or the one change related to the stock plans, which you wouldn't see follow into the fourth quarter, unless of course stock builds up a lot more, in which case you would see an adjustment.

Jim Sullivan with Prudential Equity.

I have two questions. First of all, Chris, I wonder if you could address what has been happening with cap rates in the acquisition market. Cap rates or EBITDA multiples, however you wish to frame it. We understand that spreads in the CNBS (ph) market continue to be very favorable as applied to hotel assets. We're curious to what extent that is driving down cap rates still.

Then secondly, thinking about RevPAR gains for next year, you talked about how the geography has worked out this year with real weakness in the central regions. I just wonder if you are expecting much better performance in the central regions in '05?

On the first comment or question, my sense of it is -- and people are debating this out in the market -- but I will tell you what I am seeing, as much feeling as seeing, is that -- before I say that, you also heard me say there's not a lot of activity out there right now in the segment in the higher end of the business. But I would say that I think cap rates, if anything, are stable to moving slightly up but not seeing any real kind of meaningful shift. The only reason I would say, in the acquisition market that they are -- I don't think that they're moving now and notwithstanding the CNBS spreads being tight is that there are fewer equity dollars than you might have seen in prior quarters that are being raised that are trying to find a home and short-term rates have gone up. Still, a lot of the money that is chasing hotel assets has been doing it using LIBOR-based borrowing, not longer-term CNBS (ph) based borrowing. The reason is it is driven -- there's a large part of the market that has been driven by the opportunity fund players. Typically, given their shorter holds periods, they're not looking to lock in the longer term CNBS (ph). In a lot of cases -- in a lot of cases, they are using CNBS, so some of it is floating-rate CNBS, which is obviously moving a little -- you know, obviously affected by the move in short-term rates.

So I guess both from the standpoint of fewer -- while the markets perform well, my sense is there have been just fewer equity dollars raised and thus, -- and fewer new REITs out there trying to find product and -- that the opportunity fund side of the business is short-term rates going up. Their debt capacity is a little bit less. So, on the margin, I don't think it is getting -- it is going down. Flat, my sense is, over a period of the next year, that you'll see them move up modestly, although many would debate that. But that is what kind of I see and feel.

Geographically, in terms of the portfolio, we still think that the coasts are going to be the star performers for next year. You have to go through every market in the midsection of the country. Some are going to, I think, pick up. Some are going to be relatively stable to where they are, but I would say the coasts will be the -- like I said, the star performers. Chicago we suspect expect, as an example, is one Midwest market, to have a more solid year than they did this year just because the group booking pace at McCormick is a lot better in '05, even better in '06 but better in '05 than '04. But we still think the midsection of the country is going to lag.

By the way, the midsection of the country has typically lagged in these recoveries. As we have looked back at the last couple of cycles, it is usually the coasts that it started and it spreads to the midsection. So I think it is going to take a little longer to spread in a fulsome way to the midsection of the country.

Tell me, Chris, is there any market where you refer to the group booking pace in Chicago -- is there any market where the group booking pace right now for '05 is running behind last year?

Atlanta may be running a little bit behind. I would also say some of the Florida markets are running a little bit behind even before, frankly, all the hurricane activity. The Miami/Fort Lauderdale market is running a little bit behind.

Harry Curtis with J.P. Morgan.

Most of my questions have been answered. If you could, Chris, go back to your comment about the impact of the storms in the third and the fourth quarter, you mentioned the 1 to 2 cents of FFO. I was unclear as to whether that was in each or spread between the two quarters?

It is spread but the vast majority of it I think will end up being in the fourth quarter. We had a minor impact in the third quarter but most of the 1 to 2 will end up in the fourth.

(OPERATOR INSTRUCTIONS). Jay Cogan with Banc of America Securities.

I've got a couple of quickies on the margin and the RevPAR outlook for '05 for what you can say. Chris, I am just trying to clarify. Is there anything that you're seeing on the cost side of the equation now versus let's say the last call or before that that makes you think that maybe the inflation on the cost side of the equation, whether it be wage and benefits or insurance, etc., will be any worse next year than what you thought let's say in the last quarter?

I would say no. No. I don't think so. We're trying to give a little bit of directional guidance on where we think margins are going to be for next year. Frankly, it is premature in the sense that we haven't gone through the process. It is not because anything has really changed so much, frankly, in our minds. It is just honestly that, as we have had conversations with people on the buy and the sell side, our impression has been that their expectations have been that margins were going to be a bit more robust than what we think that they are going to be, based on what we see. So it's not so much we're trying to just give a general sense of where we think things are but to give as much information as we can even though it is premature. But it is not so much based on the fact that we think anything has changed from the standpoint of our thinking.

Okay. Then, on the RevPAR front, last year at about this time, you guys thought that '04 would be up like 3 to 4 percent in your early guess. You're obviously looking like you're going to do almost two times that amount at the end of the day. Can you talk a little bit about what you're seeing that would give you some sense of maybe you beating the current expectation or missing the expectation? What are some of the main factors on the top line that you're looking at right now that could swing it either way?

Well, what we're trying to look at in judging it -- and again, this is very preliminary. It is top-down; it is not bottom-up, which is a dangerous way to do it because the real way to do this is the way we are embarking -- the process we embark upon starting right around now. We're just doing it by property. Our sense of it is we look at where GDP growth expectations are, we look at forecast for corporate profitability, for investment spending, capital spending; we look at what is going on within the airline business and the transient business. We look at our group booking pace, the strength there both in terms of volume but also to some extent in terms of rate. We look at our net revs activity, which is giving a pretty good indication of where the transient business is. We look at all of those things to kind of come up with a sense of where we think things are going to be vis-a-vis this year.

Honestly, the more scientific way for us to do it we are in the process of starting right now at, which is doing it by the property. Every market is different and obviously, we aggregate every one of these assets up to come up with a number. But our sense is obviously we feel a lot better today and thus the 5 to 7 percent than we did last looking at that time into '04 (sic). There's just a stronger economy, the transient business is much, much stronger and we've got a pretty terrific group base and we're having some success in pushing our group base in the need periods, which is going to help us on the transient side.

Okay, that's fair. Thanks.

Hopefully that gives you a sense.

The other thing I would say is if you look at '05 of 5 to 7 and you look at our guidance for the full year of 6 to 7 this year, you've got to remember some would say, well, that is not really much different. The truth of the matter is the second quarter of this year had a significant impact from the war comps. So, call it a pointer -- a point that says you're really looking more at this year without the second quarter war comps 4,5 --5,6 (ph). So, I think, in our minds, what we're really saying is next year is better than this year but for the fact that you don't have the comp situation from a war in Iraq in any of the quarters of 2005.

Understood. Thank you.

Ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Nassetta, I will turn the conference back over to you for any closing remarks.

Thank you very much and thank you, everybody, for joining us and spending the time with us today. Obviously, things continue to move apace. We had a third quarter that was pretty much on target with what we thought. The business continues to improve. We think this is going to last for quite some time. We've got great upward trajectory over the next several years and we look forward to talking with you after our fourth quarter is complete. Thank you and have a nice day.

Ladies and gentlemen, this does conclude today's Host Marriott Corporation third-quarter 2004 results conference call. We do appreciate your participation and you may disconnect at this time.