Host Hotels & Resorts Inc (HST) 2005 Q3 法說會逐字稿

Good day and welcome to this Host Marriott Corporation third-quarter 2005 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, Mr. Greg Larson. Please go ahead, sir.

Thank you and good morning. Welcome to our third-quarter earnings call. Before we start, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties which could cause future results to differ from those expressed. We are not obligated to publicly update or revise these forward-looking statements.

In this call, we will discuss non-GAAP financial information such as FFO, adjusted EBITDA and comparable hotel results, which we believe is useful to investors. You can find this information in today's earnings press release, which has been posted on our website and in our 8-K filed with the SEC.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview of our third-quarter results, and then we will describe the current operating environment and the Company's outlook for the remainder of 2005 and full-year 2006. 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 is Chris.

Good morning, everyone, and thanks for joining us today. We're pleased to report we had another very strong quarter of operating results. Our diluted FFO per share for the quarter was $0.19, which exceeded the top end of our guidance and consensus estimates by $0.02 and was 73% higher than our third-quarter 2004 FFO per share, exclusive of the impact of financing costs.

Comparable RevPar increased 8%, compared to 2004 levels, driven by a 6.3% increase in average room rate and a 1.2 percentage point increase in occupancy. Comparable adjusted profit margins for the quarter exceeded third-quarter 2004 margins by 180 basis points, which led to a 20.3% increase in adjusted EBITDA of Host Marriott, L.P., to 160 million for the quarter.

As you know, our fiscal quarter ended on September 9. As a result, operations for the third quarter for our non-Marriott hotels include June, July and August, and for our Marriott hotels includes a period of time of June 18 through September 9.

On a calendar quarter basis, our comparable RevPar growth was approximately 9.5%. Year-to-date adjusted EBITDA was 610 million, an increase of 16.6% over 2004. Year-to-date comparable RevPar increased 9.1% compared to 2004 levels as a result of a 7.5% increase in average room rates and a 1.1 percentage point increase in occupancy. Year-to-date comparable adjusted profit margin increased 170 basis points.

Food and beverage revenues increased 6.3% at our comparable hotels during the quarter on a year-over-year basis, substantially closing the gap that had existed between revenue growth and food and beverage growth in prior quarters. Year-to-date food and beverage revenues increased 4.5%.

Transient demands remained strong in the third quarter of 2005, with strong increases in both room nights and average rates in all transient segments. Our overall transient revenue increased over 12% for the quarter, driven by an approximate 8% growth in average rate.

Looking into 2006, we expect these favorable trends to continue. In particular, we continue to be optimistic about the ongoing special corporate rate negotiations for 2006. Our managers are reporting the special corporate rates currently being negotiated are pacing 7 to 9% ahead of this year's rates and that fewer of these contracts will allow for last-room availability.

Group revenues were up slightly in the quarter. These results are consistent with the strong increases in transient demand and our managers' desire to shift groups out of strong transient periods. Future group bookings are up modestly for the remainder of the year and next year, and rates for group bookings continue to increase. Rates for group bookings in the year for 2005 are up over 10%, and average rates for groups booking now for 2006 are up over 6%. Clearly, the outlook for the remainder of this year and next for both the group and transient segments is very promising.

Now I would like to give you an update on the impact on our markets that were affected by the recent hurricanes in the Gulf Coast region. Along with the rest of the nation, we were deeply saddened by the tragic loss of life, destruction of property and displacement experienced by the residents of the areas of Louisiana, Mississippi and Alabama that were ravaged by hurricane Katrina.

Those affected by this terrible tragedy included roughly 700 members of the extended Host Marriott family that were associates at our new Marriott. To help those associates in their efforts to get back to normal, we and our associates have made a substantial contribution to the relief efforts.

The New Orleans Marriott, which is a 1290-room hotel located on Canal Street, suffered water damage to guest rooms and public spaces from the storm, but was not significantly affected by the subsequent flooding that paralyzed most of the city. We're happy to report that the hotel partially reopened on October 3 and now has roughly 800 rooms available, which are housing associates, FEMA and other contractors who are working to help the city recover from Katrina.

We are currently in negotiations with FEMA on a long-term contract for 700 rooms at the hotel, including a food and beverage per diem. The remainder of the rooms at the hotel will require more extensive renovation work due to water damage, and a small percentage of the rooms will require complete renovation. However, we hope to have the entire hotel operational by the first quarter of next year. Ed Walter will give you more details on insurance matters related to the hotel in just a few minutes.

We will of course keep you updated on the progress of the market over time, and while it remains to be seen what the market landscape of New Orleans will look like over the longer term, we're cautiously optimistic about the prospects for the future of New Orleans.

We also have three hotels in Houston that were affected by Hurricane Rita. We are pleased to report that these hotels did not sustain any damage related to the storm and were only affected by a temporary loss of business due to the evacuation of Houston. These hotels collectively represent roughly 1% of our EBITDA, and we don't believe that there was any material impact to our earnings from this storm.

We are happy to report that we have completed the previously announced purchase of the Hyatt Regency Washington, D.C. on Capitol Hill for 274 million. This acquisition is a perfect example of our strategy of acquiring great assets in strong urban markets with high barriers to entry and was acquired at what we believe to be an attractive price.

We also continue to have a strong pipeline of potential acquisition candidates that we're working on. On the disposition front, we're continuing our efforts to take advantage of the current pricing environment to recycle capital out of a portion of our lower-growth noncore assets. To that end, on October 7, we completed the sale of the 297-room Charlotte Marriott Executive Park for approximately 21 million.

As we have covered many times over the years, disciplined capital allocation, aggressive asset management and the realization of value enhancement opportunities within our portfolio are all critical components of our strategy. Since November of 2003, we have acquired over 1 billion in assets. Excluding our most recent acquisition, which we closed within the last couple of weeks, our current cash flow on over 820 million of acquisitions is approximately 20% higher than our original underwriting and equates to an 8.8 times even multiple on our initial investment. The projected unlevered IRR on these combined acquisitions is now expected to exceed our weighted-average cost of capital by over 500 basis points.

Additionally, over the last several years, we have completed over 100 million in ROI repositioning CapEx projects that are currently yielding over 15% and are expected to yield an unlevered IRR well in excess of 20%. Fortunately, we feel we are early enough in the cycle where we will find many more high-yielding ROI repositioning projects. In fact, we estimate that in addition to the 110 to 130 million we're spending this year, we would expect to spend 200 to 400 million more of ROI repositioning projects over the next several years.

While not as visible as our acquisitions, these investments are our highest-yielding investments and will have a meaningful positive impact over time. As an example, for every 100 million of ROI CapEx, assuming stabilized yields that are 600 to 800 basis points in excess of our cost of capital, we would generate an additional $0.02 per share in FFO. Obviously, given the volume of opportunities, these numbers can add up quickly.

In addition to acquisitions and ROI and CapEx, I have described during our last several calls some of the value enhancement projects that our in-house development team have been working on, projects such as the hotel repositioning and land development at the Newport Beach Marriott. The Newport Beach Marriott will fully open in December of this year with a 50% higher average rate, and we will be able to give you more detail in the first quarter of next year on the favorable outcome of the excess land development for this project.

Also, we're currently working on the development of an exhibit hall at the Orlando Marriott World Center; the repositioning of the Atlanta Marquis Marriott, including the development of a grand ballroom; the redevelopment of the Marriott Mountain Shadows; and 120 time-share units at the Maui Hyatt. We have a number of projects in progress in addition to these that we will be able to talk about on future calls, including several sales of hotels for partial or complete condo conversion.

It is difficult to put a number on all these projects at this time, but when it is all said and done, it will be meaningful to our Company. Now let me update you on the outlook for the remainder of 2005 and our view for 2006.

With demand remaining strong, we expect comparable RevPar for our portfolio to increase 8 to 9% for the year and comparable adjusted profit margins to increase 130 to 150 basis points. Based on our current operating forecast, we expect diluted FFO per share for the year to be approximately $1.07 to $1.10, which includes $0.09 per share of expenses related to costs associated with refinancings, and we expect adjusted EBITDA for Host L.P. for the year to be between 900 and 915 million.

Now I know that what is probably most important to all of you at this point in the year is our guidance for next year, and as is the case every time at this time of year, we are very early in the process of beginning our budget process, and as a result, we do not have property level budgets at this time.

Having said that, we have had discussions with our managers and GMs about anticipated trends for next year and have to analyze advanced booking tapes (ph) and other metrics. While I caution that we are early in the process and results may vary, preliminary we believe that RevPar growth will be in the range of 7 to 9% and margin growth will be in the range of 125 to 175 basis points. These assumptions should produce diluted FFO per share in the range of roughly $1.35 to $1.45 and an adjusted EBITDA of approximately 1.005 billion to 1.045 billion.

In summary, we are obviously very pleased with our third-quarter results and feel good about our forecast for the remainder of the year. We continue to believe that the supply and demand environment in our industry will remain favorable for the foreseeable future and thus expect the current expansion cycle to continue through next year and beyond.

Thank you. Now let me turn the call over to Ed Walter, our Chief Financial Officer, who will discuss the quarter in more detail.

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 suburban hotels performed the best, with third-quarter RevPar growth of 10.2%, as occupancy improved by 1.9 points while our average rate improved by 7.2%.

Two of our Washington-area suburban hotels -- the Reston Hyatt and the Ritz-Carlton in Tysons Corner -- had strong quarters with a combined average RevPar increase of over 22%. Our airport and downtown hotels experienced RevPar increases of 9.8 and 7.4%, respectively. Our resort hotels increased by 6.3% for the quarter. This reflected weaker performance at the Naples Ritz-Carlton, which was under renovation during the quarter, and at the Orlando World Center Marriott, which had benefited last year from an influx of contractors responding to the series of hurricanes impacting Florida.

Year to date, our downtown hotels have performed the best, with RevPar increasing 9.7%, while our suburban hotels improved by 9.3%. Our airport hotels have increased by 8%, while our resort hotels were up by 7.4.

Turning to our regional results for the quarter, our top-performing region was the Washington, D.C. metro region, which enjoyed a 14.7% RevPar increase, driven by the continued strong performance of our downtown hotels such as the Metro Center Marriott, which benefited from solid group and business transient demand. We expect this region to continue to outperform during the fourth quarter.

The mountain region continued its rebound in 2005, as RevPar improved 14.4% in the quarter, led by a 28% increase in RevPar at our Denver Tech Center Marriott, which enjoyed strong group and transient increases as occupancy improved by more than 10 points. We expect this region's solid performance will also continue into the fourth quarter.

RevPar in our Pacific region improved by 11%, as average rate growth of more than 15% at Los Angeles-area hotels such as the Manhattan Beach, Marina del Rey and Costa Mesa Suites Marriotts resulted in RevPar increases averaging more than 22%. The San Francisco market also performed well, as our Hyatt and Marriott hotels at the airport enjoyed a RevPar increase of more than 16% and our Ritz-Carlton in downtown San Francisco experienced RevPar growth of more than 12%. The Maui Hyatt also had another strong quarter, with RevPar increasing by 20%.

The South Central market continued its rebound from 2004's under-performance with RevPar growth of 8.5%, led by our Houston hotels, which experienced average RevPar growth of more than 14%. The Houston area's results were driven in part by RevPar growth in excess of 30% during the last month of the quarter, which resulted from the evacuations of a portion of the Gulf Coast due to Hurricane Katrina.

Our New York City hotels continue to outperform, generating average RevPar growth of 14%, despite the difficult comparison relative to last year's Republican Convention in August. However, our mid-Atlantic region improved just 8% overall as weakness in Center City, Philadelphia dragged down the region. We expect Philadelphia to have a stronger fourth quarter, which will improve performance in this region.

RevPar in our New England region improved by just 1.6% as the Back Bay area of Boston had a tough quarter, driven by soft group and business transient demand, especially when compared to last year, which included the Democratic Convention. Although demand in the suburban markets was also muted during the third quarter, we expect it to pick up slightly in the fourth quarter, leading to improved results in this region.

Finally, RevPar growth in the Atlanta region declined 3.7% due to a combination of reduced convention and group bookings, which affected results in the downtown market, and construction projects at three of our Buckhead-area hotels, which reduced occupancies by more than 6 percentage points. As predicted last quarter, both the New England and Atlanta regions underperformed in part because of tough comps from 2004, as both markets had significant citywide events last year. Longer term, looking into 2006, we expect both markets to strengthen.

Year to date, the three best markets have been the Washington, D.C. metro region, with RevPar growth of 15.3%; the mountain region, with growth of 13.6%; and the mid-Atlantic, where RevPar improved at 11.6%. The Atlanta region, with RevPar growth of 2.5%, and the New England region, which grew RevPar by just 1.3% year to date, were the weakest.

As would be expected, strong RevPar growth, driven primarily by increases in average rates, resulted in excellent comparable hotel adjusted margin growth of 1.8 percentage points for the quarter. Room margins were up 0.7 percentage points, leading to rooms department flowthrough of approximately 83%. Food and beverage trends were also favorable, as the revenue increase of 6.3% resulted in a departmental profit increase of roughly 15%.

Consistent with our expectations expressed earlier this year, F&B pricing and spend have begun to improve as our average banquet check increased by almost 6% and F&B revenue per group room night improved by more than 9%. While overall banquet covers were flat year over year, reflecting the declined in group room nights we experienced this quarter, these increases are indicative of the hotels' ability to drive higher group spend in connection with group events. Although our results will vary quarter to quarter on this front, we generally expect this trend should continue into 2006.

Not surprisingly, our major cost increase for the quarter was in utilities, which increased by more than 14%. Overall, although utility costs have increased substantially over the last three years, we should note that this line item still represents just 3.5% of our revenues.

Our balance sheet continues to improve as operating performance accelerates and we benefit from debt refinancing and repayment activities. We finished the quarter with 402 million of cash, although roughly 270 million of this amount was deployed to purchase the Washington, D.C. Hyatt.

Chris discussed the status of our New Orleans Marriott, which was damaged by Hurricane Katrina. Because the hurricane struck near the end of our quarter, the effect on our third-quarter numbers was negligible. Looking at the hotel from an earnings perspective, we will recognize business interruption income related to the asset to the extent that we and our insurers reach agreement with respect to the amount of lost income and we actually receive the cash payments.

While it is premature to speculate on the level of business interruption insurance and actual operating income we will receive related to the asset, as we have only commenced processing our claim, our EBITDA and FFO guidance assumes that we will receive approximately 10 million related to the asset in the fourth quarter of 2005. In the event we do not reach agreement with our insurers by year end, some or all of that amount may be deferred and recognized in 2006.

As we have detailed today, we had a great quarter. Operating trends remain very favorable and the new supply outlook continues to be extremely favorable. Lodging demand and business travel should continue to accelerate, which will lead to continued improvement in our operating results. Our actions to enhance our balance sheet have improved our flexibility and positioned us to take advantage of the opportunities we expect to see over the next several years.

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

(Operator Instructions) William Greene, Morgan Stanley.

Good morning. Can I just ask you to clarify the last comment you made on the insurers' cash -- the 10 million -- that is your estimate that is in your guidance, and so if you do not receive it, it shifts into 2006. Is that what you said?

That is correct. That is what is built into the fourth quarter of '05. We do believe our business interruption insurance will cover us on that. The question that Ed described really relates to when we will have a definitive agreement with our insurance providers. That could happen in the fourth quarter. I think there is a possibility certainly we would go over to the first part of next year. So I think that the money will be there; the earnings will be there. It could be just a function of a timing delay.

So am I right to conclude, then, that 10 million is roughly what you think you have lost from the closure in New Orleans?

For the fourth quarter.

For the fourth quarter, right, okay. And then secondly, have you seen in Florida in this third quarter or even and as you look here in parts of your fourth quarter, can you see any meaningful shift in the group business away from that region? So do you think this is sort of a longer-term issue for some of those hotels there, where it's going to -- where the group business is going to migrate to other parts of the country?

I mean, certainly it would be fair to say it is going to be a short- and intermediate-term issue. Whether it is a long-term issue I think it is a little early to tell. It depends a lot on what happens in terms of the investment that is going into New Orleans over the next three to five years.

We are definitely seeing a shift, but again, I think it is more a short-and intermediate-term shift in group bookings. The markets that we have seen -- and of course we've got representation in almost every major market in the country -- the markets that we have seen that have had the most to lift as a result of it that we're in are really Atlanta, Houston, San Antonio, Dallas and to some degree Washington, D.C., believe it or not. We have had some good displacement out of New Orleans into Washington, D.C.

I'm sorry, let me just -- I was actually talking about Florida this year versus last year -- because of the hurricane effect last year, did Florida meaningfully suffer this year?

I'm sorry, I missed the point of the question. The answer is there was some impact year over year, particularly in Orlando, where we had a lot of displaced business that headed from the coast up into the Orlando market, and obviously on a year-over-year basis, that made it a more difficult comp.

Okay, thanks for your help.

Bill Crow, Raymond James.

A couple of questions here. Of course, your guidance and that of Marriott's last week wouldn't indicate that you expect a big impact from a weakening consumer. Could you talk about how much leisure business represents of your total book of business and what you anticipate for leisure travel as you look ahead?

I think that is right, Bill. Obviously, the guidance we're giving in terms of RevPar and margins for next year we think is strong, and it is the result of the fact that as we look at the trend in all segments of our business, we're pretty confident that we're going to continue to see strength in those trends.

From a transient point of view, the leisure segment is really of our overall business plus or minus 10%, 10 or 12% of our business, so it is not a huge driver of our business. We do have an expectation for the markets we're in, the leisure business is going to be relatively stable, probably not growing in a significant way. Where we really expect to get the growth is in the business segments, really the corporate segments, the corporate and premium segments, both volume growth both volume growth as well as rate growth.

And then in the group segments, again, we expect in the higher-rating segments, which are the corporate groups and the association groups, that both see volume increases as well as significant rate increases. So our sense is generally leisure we don't think is going to fall off the face of the earth, but it's not really the driver for our optimism regarding 2006 because really the business segments -- the corporate segments association and the group side special corporate, those are really all what are driving our expectations. (multiple speakers) volume and rates.

And of course, you talked about, I think in your words, a strong acquisition pipeline. Could you quantify that at all, give us a ballpark for what you're looking at?

No, I mean, it's hard to quantify. Truthfully, we look at pretty much everything that is out there in the market, and so the number in terms of the pipeline would be huge. In terms of the types of deals that we're working on that we're spending more time on, it's the types of deals that are right up our alley in terms of large single assets -- is really the guidance we've given you really anticipates that kind of acquisition activity, and we've got a number of those that are in various stages of development in terms of our work.

So these are more the one-off acquisitions like the Hyatt?

Yes.

Ed, can I ask you a quick question on the balance sheet. Can you just discuss where the balance sheet is today vis-a-vis your internal targets and what we should expect from a balance sheet perspective over the next year?

I think we have certainly made great headway. It's no secret that a couple of years ago, we were below 20 from a coverage perspective and we -- obviously that created some issues with respect to paying a dividend and was an issue that we were trying to confront. We have improved considerably from those levels and our coverage now is in the mid-two range, which is obviously much better than where it was before.

As we have said a number of times, we still long term want to continue to see our balance sheet improve, and I'd probably say -- we had a target out there of ultimately getting over three times in terms of coverage, and I think over the next couple of years that is still a legitimate target.

Thanks, Chris.

Joe Greff, Bear, Stearns.

Two quick questions. For full-year '05, can you give us the mix between individual business room nights and room nights to the group, and then how that mix changes in '06? I know, Chris, you have been talking about the shift to what's the transient travel, but just kind of putting some numbers to that?

Yes. Right now, I would say 2004, we ended the year with kind of a 43% group mix. I think Q3 -- 2005 through Q3 is approximately 38%. I would say to you, given through Q3 and Q3 being a relatively weak group quarter, you will see that rise up where it will be in the low 40s. So my guess is between '04 and '05, you will have a couple of point difference, meaning that you will have a couple of points move out of group and into transient. And I would say next year, it will be relatively similar to that in terms of our expectations built into our guidance.

Great. And then just with respect to the acquisition market, are you seeing a slowdown either in the amount of capital, the level of interest or the valuations for the amount of dollars that have been chasing hotel assets on a year-to-date basis?

I have not seen a big difference, honestly. When the equity market kind of weakened, call it a month ago or six weeks ago, I think that sends a little bit of a ripple through the M&A world in the sense that I don't think it really changed a lot, but it makes people step back and take a little bit of a different look at things. And so even though the equity markets have stabilized some, they are still generally down, obviously, from where they were.

And so my general sense of the M&A environment is that it is stable. I would say for the last several quarters, I probably would have said to you if you had asked, generally, I mean, dependent on the week you ask and what was going on, but generally I would have said that markets were getting more fluid, more robust, more money was coming in, cap rates were -- if they were moving, they were probably moving down, not up, in the universe for multiples -- EBITDA multiples, obviously.

I would say right now that they are stable, and depending on what happens in the macro environment in terms of the flow of capital, that obviously will have an impact on which direction it goes. But right now I would say things are relatively stable. There is still a lot of money chasing hotel deals. There's still a ton of money in the market. And pricing is still very competitive. But, again, it's just my gut instinct is that it is not moving in one direction or another; it is stable right now.

Great, thank you.

Jim Sullivan, Prudential Equity.

Chris, I wonder if you could go into a little more detail on the expense comparisons that underlie your forecast on the operating margin growth for next year. There was some discussion -- you guys did refer to the energy costs and some of the increases you've seen, and I just wondered what kind of -- in terms of the heading of costs that have a major impact on the assumptions for '06, what would you cite, and if you can give us some percentages, that might be helpful?

Yes, I can -- let me give you a general sense, Jim, and the reason I gave the disclaimers that I gave when we gave the guidance were I think self-evident, and that is we're just starting the budget process. Honestly, we don't have property-level budgets. And so to really get a specific sense or detailed sense of what line item by line item is going to look like, I need to have property budgets that are aggregated up into a roll-up, and we don't have that.

We've had lots of discussions. We were obviously -- have started the budget process and have had dialogue with our managers, dialogue with all of our GMs, including at the largest hotels. So we have a general sense of what is going on.

But I would say as a review -- and as a result of not having the property budgets done, I can't go all the way down in the income statement, but the big items that we have been talking a lot about and obviously could impact it in a material way would be wages and benefits, right, which make up 50% of the expense base, so that's a big piece of it, and I think our expectation is that they are going to moderate potentially a little bit from where we are this year, but the wages and benefits are still going to be growing at greater than inflation.

And so that is what we have built into our thinking in terms of our guidance for next year, is the year-to-date wages and benefits are up plus or minus 5% right now. Our expectations for next year is they might -- you might do a little bit better, but not a lot better than that, and that is what we've built into our guidance.

On utilities, obviously, utilities have gone crazy with everything going on in the world, and the hurricane season has not been friendly to utilities. We were up in the third quarter about 14%. We're up year to date about 12%. Our expectations for next year are probably right in that range, and that is what we've built into our thinking. We have -- given what is going on with oil prices, etc., we do expect that this will moderate at some point, but with the impact of these hurricanes, we think it is going to take longer to moderate, and so our expectations and our guidance for next year builds in pretty heavy increases in utilities. Beyond that, those are probably the biggest items to talk about that make up the majority of the expense side of the income statement, and it's probably as much as we can get into in terms of detail about having property level budgets done.

Just one other point, if you could comment on it, then. Correct me if I'm wrong, but I've been following Marriott. In their call last week, they were very bullish about the outlook for margin growth, and I think their commentary is a little more positive than yours in terms of the expansion range that they gave. Is that right?

Yes. I think if you look -- I think they -- we're saying 125 to 175. I think they said 150 to 200. We've looked at it and we've obviously done a lot of modeling. While we don't have the property-level budgets, as I've said a couple of times, we've certainly done a lot of modeling in terms of the aggregate portfolio to understand where we think we'll end up and understanding what expense growth will be, particularly in the major categories that I just discussed, and our best estimate is 125 to 175. Now I would say if they are right, that is good for us, because we will benefit from that. So I hope they are right.

So it sounds like you're being a little more conservative.

Yes. We are being a little more conservative than they are.

Question, then. I'm a little bit unclear on your commentary on the acquisitions. In the press release, you pointed out that acquisition disposition targets have not been set, as well I guess as specific capital spending numbers. But on the other hand, I think in answer to an earlier question, I think you did say that there was some acquisition disposition activity in your EBITDA guidance. Can you clarify what is in the guidance?

What I said or what I intended to say is we have a nice pipeline of things that we're working on. What we have actually built into our guidance, I will break it apart and looking at the fourth quarter and the rest of '05 and then '06. For '05, we have assumed that we will not get anything beyond the Hyatt D.C. deal done. Now, we might, or things that we're working on might flow over into the first part of next year, but we haven't built into our guidance any additional acquisitions in terms of a contribution to our earnings.

And for '06, given that we haven't even really -- we don't have the property-level budgets; we haven't set down and done our business plan and sat down with our Board and reviewed that. We thought the appropriate -- we wanted to be able to give a directional sense in terms of guidance. We thought that the appropriate thing to do without having the benefit of having worked through our entire business plan is to basically not make assumptions on acquisitions and dispositions.

Another way of looking at it is that one is they are natural, right? Not that they necessarily will be, but from a simplistic point of view, it's just a view that acquisitions and dispositions would neutralize one another. When we get through the year and we actually have property budgets and we have a business plan that we've reviewed with our Board, we will update that, and obviously we are comfortable that the range we have given you will work from the standpoint of the assumptions that we've articulated.

Okay, good. Thanks.

Jay Cogan, Banc of America.

I've got a few questions for you on the margin front, as well -- understanding the things that you've said already on that. First in regards to energy, Chris, can you talk a little bit about, given where oil prices and also natural gas prices, etc., are going, how could energy costs only be up in the 12 to 14% range, let's say, for next year? Is there something that you guys are doing from a hedging standpoint or from an efficiency standpoint that is helping on that front? That would be helpful.

I think the truth of the matter is we do not have a crystal ball to know exactly what is going to happen there. There are things that we do and have done in hedging. There is a portion of our portfolio that is hedged. There's a number of things we're doing in a lot of our major hotels in terms of ROI investing to increase our energy conservation, just more efficiency in the use of energy, and those certainly -- both of those things will have an impact.

And then honestly, it is just trying to do our best job with the information we have right now to kind of get a sense for what will happen next year, and we do have a bunch of consultants that we work with on all of our energy matters that are helping us figure this out. While we don't have a crystal ball, we certainly don't just rely on our own views of what is going to happen in the energy markets.

And I think that the general theme would be, as we get into next year -- late this year and next year that refinery capacity is going to be greater as a result of them getting more refineries back on line. The pipelines that were disrupted and largely been repaired -- not entirely, but I think our sense of it is next year that the lasting impact or the impact of the Katrina/Rita hurricanes will have not passed entirely, but the majority of the impact of that will have passed.

There is obviously more capacity that is being worked on in the Middle East and elsewhere, and so our advisors will tell us as you look at the full year of next year, there is an opportunity for the world oil markets and overall energy prices to stabilize to some degree. So when we think about next year, we are probably building in 12 to 15%, which is a pretty healthy increase. It does depend somewhat on some overall stabilization. If things continue to go the wrong way, then obviously that would not be enough.

Understood. And when we look at the fourth-quarter margin guidance or try to back into it from the full-year expectation, is something kind of south of 100 bips to just over 100 bips what you're looking for in regards to margin growth, and is that impacted by the expectation on energy or is there something else going on? And as we think about '06, should we think about on a quarterly basis the margin growth maybe being somewhat back-end-loaded, given the comps on the energy side and what you just said?

Well, '06, it's hard for me to judge. It is hard to do a breakout when I don't even have property-level budgets. So I would say we will give you a better sense of how we feel '06 is loaded when we have more detailed information to do it.

As it relates to fourth quarter, I think you are directionally getting to the right place in terms of our assumptions on margins. I think there are two reasons for that. One you hit on, which is energy, certainly. We think the brunt of the energy issues was really the end of the third quarter, but more importantly fourth quarter. So we have certainly built that into our thinking.

And the other thing that is not visible so much but is clearly built into our forecasting is that we have a difficult margin comp in the fourth quarter of '05 versus '04 because in the end of the fourth quarter of '04, we had a substantial number of rebates related to -- from our operators related to the centralized costs and other charges. We don't expect -- we may get some rebates, but we don't expect that those rebates will be as high as they were, because they effectively have come and spread out throughout the year.

And so when you factor in really those two factors, along with all the other things that we're all aware of, we expect to have lower margin growth in the fourth quarter. Now obviously, for overall margin growth for '06, we're pretty optimistic, and I would not say that it all has to be necessarily back-end-loaded. We'll give you more detail on that when we can. But I think the fourth quarter is a bit of energy, but frankly I think more of the impact on our margin is the comp relative to the rebates that we got in the fourth quarter of '04.

If I can ask just maybe one last question, again margin-related, but I know you have been involved with TRIA, and I was wondering if you could talk a little bit about that and insurance costs as broadly -- the best you can right now. And then also just in regards to the unions, understanding that you've got very few unionized hotels, but they obviously have an impact on the overall markets. What's your thoughts, and how does that whole renegotiation situation play into the expectation for wage and benefit inflation next year and beyond, maybe?

Jay, that is quite a series of questions. We might take 20 or 30 minutes to answer those. But let me give you relatively short answers. But I think some were fairly comprehensive answers.

Insurance costs we think are going to go up next year, and we factored that into our analysis that we've giving you. Those are the results of the value of our portfolio going up, so that the amount of property that we are insuring is higher, but also there is an expectation -- and we don't know exactly where it is going to end up, but we expect as a result of the hurricane season, and I will come to TRIA in a minute, but as a result of the hurricane season, you're generally going to see rates go up.

So we have anticipated a fairly healthy increase in our insurance costs, somewhere between 15 to 20%. Now what we will actually experience, we will tell you when we get there. We really won't get out into the insurance markets until the first part of next year because our policy will go through April. So we are guessing a little bit, but again, I think they are pretty good, educated guesses based on work with our insurance folks both internally and externally.

TRIA, as you know and I've talked about many of times, I've been very involved on the TRIA issue, both with NAREIT and the Real Estate Roundtable. I've been spending a decent amount of time, if not a lot of time, on it in the last couple of months. You can talk about a lot of different things on TRIA and spend a lot of time on it.

I think that the net result of all of the work that's being done is that something is going to get done on TRIA, meaning it expires in December -- December 31 of this year. We have been working very hard on the Hill with the Senate side and the House side and the White House to get momentum to get it extended, either in its current form or a modified form.

And while you never know what is going to happen, and certainly the Hurricanes Katrina and Rita slowed it down a little bit because it has really zapped a lot of energy out of the Hill to deal with those issues, the net of all that is I think it will get done. I don't know exactly what will get done. My guess is what will happen is you'll get an extension for a period of time and it will be -- the program will be modified in some form, but it will be modified in a way where it still works and it allows for reinsurance capacity to be in the market so that all of us can get terrorism insurance.

So there are no guarantees on that, but I've spent a lot of time, I've done a lot of work on it up to and including yesterday, and if I had to risk assess it, I would say high -- reasonably high probability something gets done and gets done before the year is out.

On unions, you are right in that we are very light on unions. We have called it plus or minus 10% of our portfolio where we're unionized. Our belief as it relates to us is that our managers already pay very fair wages, and as a result of being very light union and the fact that we already pay fair wages and have fair benefit programs that we don't expect that there is going to be any material impact on Host Marriott.

As a relates to the overall industry situation, I guess I would say first and foremost it's probably not the best forum to have that dialogue. But as a general matter, I would say that both sides have a vested interest in getting this sorted out, and so while there can be acrimony in these types of situations, my expectation is through '06, you will find that there is a resolution of most if not all of these issues. But again, from our point of view, I don't think we view it as something that has material impact on us.

Thanks. Very helpful.

Harry Curtis, J.P. Morgan.

I think we're all set. Thank you.

Will Truelove, UBS Financial.

We are all set. Thanks.

David Anders, Merrill Lynch.

Chris, I missed -- I caught the banquet comment on food, but could you make some broader comments on food and beverage for next year? Are you going to be pricing up the menus aggressively, or is it just in the catering business where you see prices going up?

I think it is everywhere. I mean, it is a little early to say how aggressively because we haven't been through that process. But I think what you are going to see in food and beverage next year is you're going to see prices going upon the catering side, prices going up on the menus for all of our outlets, to whatever degree we can justify, and I think you are going to see as a result of the mix change within the business, particularly on the group side where you're getting more and more higher-rated groups that are high-spend groups that you're going to get more F&B spend.

So I think that -- some of -- the other thing that is happening is a general matter is the deeper you get into this recovery, I think you just find that food and beverage revenues go up more. People spend more in all categories, even the lower-rated group business and the lower-rated transient segments, you get more F&B spend as the economy gets better. But the primary driver is going to be price increases and mix change, where you have groups that are just higher-spend groups that are in the hotels.

Okay. Just as a follow-up separate issue, on the condos, probably 12 to 15 months ago everybody started talking about converting hotels to condos. You guys were one of them. And I mean, what is the probability that nothing happens with respect to your portfolio and time-sharing condominiums? Is it high, low -- I mean, where do we stand on the likelihood?

I think the probability that nothing happens is zero. Said another way, things are happening. I mean, we are working on at least one time-share project. We have talked about the one in Maui. It's a long entitlement process, which is a good news/bad news story. Bad news is it takes a long time. The good news is nobody can get entitlements, and we think we will get entitlements. And we've got, as I say, several other hotels that we are looking at for sale that would be sold as either partial or complete condo conversions.

You should not expect to see in any significant way Host get into the condo development business. It's not the business we're in. It is not a business that we understand. But certainly, where we have those opportunities and we can monetize the value up front in a sale, we're considering that. Now will we get event (ph)? I don't know. Are we working on some? Yes, and my own expectation is there is a high probability we will get something done.

Okay, thank you.

Jeff Donnelly, Wachovia Securities.

Just two questions. First, Chris, for some time I guess a large part of Host's story has been that your RevPar growth has surpassed your peers as you chewed through that lower-rated group business on the books from prior periods. But I guess I would say it has not felt like that has happened, because year to date, Host's RevPar, I guess, is, what, 9.1%, which is below the full-service composite from Marriott International North American properties, and I would have expected you to surpass that benchmark.

So I'm trying to understand what opportunity you think you guys have for embedded growth that has been on the books. Are you able to take a leap and quantify how much higher your group business on the books today might be if it were marked-to-market or what portion of your group business was booked when, say, prior to 2005 or 2004?

Yes, I will do my best to give you some directional guidance. First of all, if you look at our year-to-date RevPar, it would be higher if you look at it on a calendarized basis, so you can't -- we are not apples to apples with others. If you compare us against MI and you look at MHRS, I think we're very comparable, if not a little bit better.

I mean, part of what is happening within MI is they have a brand, which is Renaissance, that has had, as compared to MHRS, very little market share that's been gaining market share relative to where MHRS has been. And so while our absolute RevPars are still in theory a lot higher, they started at a low base and they are growing. So Renaissance is really what has driven some of that.

Our view, and we have said this many times, is maybe taking a little longer in some markets than others, is that a large part of our portfolio is driven by a lot of these big houses in these big urban markets and they hold on -- if you look at the numbers, these things performed really well and gained tons of market share in the downturn, and they take longer to build back when you are coming up the other side of the cycle moving up, because you need a lot more volume of transient business and you've got to -- it takes you a couple of years, really, to shift out on the group side to get the higher-rated groups and to get more of to groups.

And so that is really what is happening. I mean, you see right now, some of those big hotels are doing exceptionally well. I mean, we've got New York, D.C., Tampa, San Antonio, they are all year to date doing exceptionally well. You've got some other markets where we have big hotels, Atlanta, Boston, Orlando, that are lagging a bit, and we have every expectation generally that those hotels will turn the corner as well.

So longer term, I mean, it is hard to give you exact numbers or even -- I shouldn't say longer term -- intermediate term, our expectations is that those hotels will outperform. It just takes time to do it. It takes time to kind of like -- it is like moving an aircraft carrier versus a PT boat, and ultimately, though, when you get that base of business and you've got robust demand growth and demand overall in transient and in higher-rated groups, you can really yield-manage those things in a way that is very powerful.

And so we haven't in any way changed our view on that. It just takes awhile to do that. And so we've already seen some market shift and the others -- Boston, Atlanta, Orlando -- we think are going to have better years next year, and so we think that shift continues.

In terms of group business and trying to say specifically how much more rate could you have as a result, I don't have those numbers in my head. I will tell you at least directionally that if you look at what group business was booked during weaker times, defining weaker times as '04 and before, because even in '04, you didn't have real strength in the rate on group, that this year is probably 55, 60% of our business, and next year, it is probably 25 to 30% of our business. So there is a big shift-out that will occur between '05 and '06, and an even bigger shift-out that will occur as you go from '06 to '07. I mean, as you get to '07 you will have little or no business that was booked in '04 or before.

So that will be powerful. Obviously, we haven't been particularly weak in the knees in terms of our RevPar guidance for next year at 7 to 9%, and implicit in that is that we're going to get some occupancy gain as a result of the fact that you've got GDP growth growing at greater -- demand growth in the business growing at greater than supply growth, so you'll have volume increases. But you've got the opportunity for significant rate increases as a result of mix changing, both in the transient segment and the group segment, and rates going up.

I guess if I can ask it this way is wouldn't that sort of highlight that maybe you guys are being more conservative than usual in and around '06, considering that that big shift in group business and maybe you are a net beneficiary of New Orleans, and yet you are either at or below guidance on RevPar and margins vis-a-vis, say, Marriott International? Are things fair?

I wouldn't say -- I'd say that we're doing the best to give you the best sense of what we're thinking, but recognize it is really early. We haven't done property budgets, and could there be a chance that it will be better? Yes. I mean, there could be. The truth of the matter is I just don't know. This is our best sense from what I would say is a reasonably high-level look at what we see in terms of mix changes and rate changes and volume changes for next year.

Just one last question, actually, sort of in two parts. As recently as this morning, we've actually had a lot of investors continue to inquire of us whether or not Host is in discussions with Starwood regarding your purchase of a portfolio of properties. I'm curious -- could you guys confirm whether or not you are actively involved in discussions with them, and just more broadly, how deep is the market for a large portfolio of acquisition opportunities, and does perhaps Blackstone's acquisition of Wyndham maybe eliminate some of your competition?

Well, let me answer the second one first. The market is not deep, I'd say, for large portfolio acquisitions that would meet our target profile. I'm not going to get into specifically talking about what each of those opportunities might be, but there aren't that many in the sense that our view has always been that qualitatively and quantitatively, if we were to do any deal, big or small, we need to be able to add to the value of the Company, do deals that are accretive to earnings, do deals that are balance sheet-neutral to balance sheet-accretive and that are going to enhance the quality of our portfolio from a growth rate point of view.

And so when you look at all those metrics, and you look at the big portfolios that in theory could be out there, there just aren't that many of them. I'm not going to say how many, but there is not a dozen of them out there. There is probably truthfully, at least in today's world, a handful or fewer. And so it is not obviously a high probability gain when you have that few opportunities that are out there.

As it relates to Starwood, obviously, we read the papers just like you read the papers, and we work on everything that is out there, for the most part, one way or another, big and small. And the truth of the matter is most of them never happen, obviously, because we work on tons and tons of things that most of which never come to fruition.

As a result, our policy has been, always been and will continue to be that we don't comment on any deals we might or might not be working on. So that should not be a big surprise that I would answer that way. That would be the way I would have answered today, a year ago or a year before that or a year from now.

Of course. Thank you very much.

Jay Leupp, RBC Capital Markets.

I'm here with Greg Johnson. Chris, could you comment also on the increase in construction costs we have seen across the board this last year, what that's done to your return expectations on your expansion redevelopment in time-share projects, and have you actually had to cancel any of these projects as the yields have been (multiple speakers)

Not yet. Not yet. I mean, costs are continuing to go up. I mean, costs have gone up in the last few years by 30%-plus. And so that's -- on the one hand, that is painful when you're thinking about expansions and CapEx programs. On the other hand, given that we own $12-plus billion in hotel assets that are getting more valuable by the minute, it kind of offsets it -- more than offsets it.

Our yield targets have not changed on our ROI investing, Jay. We don't intend to change them based on what we see right now. We have not yet actually canceled or not pursued an opportunity as a result of the cost side of it. Remember, though, we've got a big portfolio, and while we have a big team of people in our development group -- we've probably got 20-plus people that are working on these kinds of things -- we go about a process of kind of taking the low-hanging fruit first, meaning we're always looking for the absolute -- knowing we can't do it all at once, because you can't -- it is too disruptive and you can never have enough resources to do everything at once.

And while we can do a lot, we want to take the best-yielding opportunities and do those first. And most of those have been so high-yielding as far as even with the cost increases, and we have seen cost increases -- they very easily meet the hurdle. As we get further down the line, if costs keep going up, obviously, you could see some impact, meaning it might not meet the hurdle. But we certainly haven't seen that today.

Thank you.

David Richter, ABP Investments.

I apologize if you've talked about it already, but based on the guidance, what do you think the dividend goes to for full-year next year?

You know, I would say it is a little premature to do that because that is a much more complex exercise from a modeling point of view to roll through all of the impacts of our taxable income, particularly on the CapEx side, which is why we noted in our reconciliation that this does not incorporate any major changes in the capital side. So I would love to be more specific, Dave, but we've got to work the whole budget process through, all the way down to taxable income, and it's just without having the property level part of this done, it is frankly impossible for us to do that responsibly.

I would say as a general matter, based on the assumptions that we underlie the guidance, that the dividend is going to continue to increase over time, and obviously we will, as every quarter goes by, try to be as specific as we can. But the trajectory is up over time.

The 40 -- I think it's $0.38 you will be paying this year. Are you up against that 100% of taxable income target?

We are close.

For this year? Okay.

We're close.

Great. Thanks.

And that does conclude today's question-and-answer session. At this time, I would like to turn the call back over to Mr. Nassetta for any additional or closing remarks.

I want to just thank everybody for joining us today. We're obviously very happy with the third quarter. We think the trends that we see overall, both in the fourth quarter and even more importantly going into '06 and beyond, are terrific. And we look forward to talking to you after the end of the year to describe the fourth quarter and give you an even better sense of what we think about '06. Thanks for your participation.

Once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.