Host Hotels & Resorts Inc (HST) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to this Host Hotels & Resorts Incorporated third quarter 2006 earnings 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 Vice President, Investor Relations, Mr. Kevin Jacobs. Please go ahead, sir.

Thank you, [Cynthia], good morning, everyone and welcome to the Host Hotels & Resorts third quarter earnings call. Before we begin, 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 that could cause future results to differ from those expressed and we are not obligated to differ from those expressed and we are not obligated to publicly update of revise this forward-looking statements.

Additionally on today's call, we will discuss certain non-GAAP financial measures that we believe are useful to investors, such as FFO, adjusted EBITDA, and comparable hotel results. You can find this information together with reconciliations to the most directly comparable GAAP measure in today's earnings press release in our 8-K filed with the SEC and on our website at hosthotels.com.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide a brief overview and we'll describe the current operating environment, as well as the Company's outlook for the remainder of 2006 and next year. Ed Walter, our Chief Financial Officer, will then provide greater detail on our third quarter results, including regional and market performance. Following their remarks, we will be available to respond to your questions.

Now, let me turn the call over to Chris.

Thanks, Kevin and good morning, everyone. We're pleased to report another strong quarter of operating results with earnings that exceeded the high-end of our guidance driven by solid revenue growth and margin growth that exceeded our expectations. We also continue to feel very good about the remainder of the year and next year, which I'll discuss in more detail in a few minutes.

First let's talk more specifically about our third quarter results. Our FFO per diluted share for the third quarter is $0.28, which exceeded the high end of our guidance. Comparable RevPAR growth for the quarter was 9.1%, which was driven by a 10.5% increase in average rate and a 1 percentage point decline in occupancy. Comparable hotel adjusted operating profit margin growth was strong for the quarter with margins increasing 220 basis points, which led to an increase in comparable hotel adjusted operating profit of approximately 18% versus the third quarter of 2005. The adjusted EBITDA of Host Hotels & Resorts LP increased approximately 58% from the third quarter of 2005 to $253 million. Year-to-date basis, our comparable RevPAR is up 8.9%, our comparable margins have grown 220 basis points, and the adjusted EBITDA of Host LP is up roughly 33% to $812 million.

Our growth in comparable food and beverage revenue was solid at 5.4% and continued positive mix shift from outlet revenue to banquet and AV revenue led to an increase to food and beverage profit margins of 120 basis points during the quarter. As I noted previously, our occupancy was down one percentage point for the quarter, which was somewhat lower than we had anticipated. This occupancy decline was due to somewhat weaker transient business, particularly in the discount segments, which was the result of a continued mix shift away from lower rated discount and contract business in favor of higher rated premium and corporate transient business as our operators yielded out more of this lower rated demand than was accommodated by the other segments.

Obviously this mix shift paid dividends in terms of rate, RevPAR, and flow through. In fact, overall transient rates increased approximately 12% during the quarter. As Ed Walter will discuss in more detail later, we also saw isolated transient demand softness in certain markets for a variety of reasons, including our Florida, Houston, and Washington, D.C. markets. And certain assets where renovations has somewhat more of an impact on operations than we had anticipated. That said, transient demand remains strong in many markets including New York, San Diego, Chicago, and Denver, particularly in the higher rated premium and corporate segments where overall demand was up 3% and rates were up significantly.

On the group side, overall demand was strong during the quarter with room nights up over 3% and rates were up nearly 8% due to a significant mix shift in the higher rated corporate and association groups. The group demand growth was particularly strong in the Atlanta, Boston, Orlando, and Philadelphia markets. Group demand growth was hindered somewhat by lower than expected group room nights including Washington, D.C., Los Angeles, Palm Springs, and Tampa. As we look forward, our group pace remains strong for the fourth quarter and for 2007 with rates for group bookings in both periods up approximately 7% at our comparable hotels.

On the M & A front, during the third quarter, we closed on the previously announced acquisition of the Westin Kierland Resort and Spa, a spectacular 4-year-old 732 room resort property in Scottsdale, Arizona for $393 million. We believe we purchased this property at very attractive pricing and the hotel is already performing well above our expectations. We are also in the very beginning stages of determining the highest and best use for the approximate 5 acre excess development parcel at the site, which we hope to be able to report more on in the future.

Going forward in North America, as we said last quarter, while we're always interested in attractive opportunities to execute single asset acquisitions on an off market basis, or to use the benefits of our structure to complete sufficient M & A transactions, at this point we're more focussed on investing in ROI, repositioning, and value enhancement opportunities to our existing portfolio, and thus are not forecasting additional domestic acquisitions for the remainder of the year.

In Europe, we continue to be very active in evaluating potential acquisitions for our European joint venture. During the third quarter, the joint venture acquired the Hotel Arts Barcelona for 417 million Euros. This newly renovated 482 room Ritz Carlton hotel is one of the finest hotels in Europe. We believe this acquisition is representative of the type of transactions we can execute in the joint venture. An offmarket acquisition of an extremely high quality asset in a market with strong growth prospects acquired in what we believe would be very attractive yields to us and our joint venture partners.

On the disposition front during the quarter, we completed the disposition of two hotels. The 224-room Detroit Marriott Livonia for approximately $21 million, and the 444 room Ritz Carlton Atlanta for approximately $80 million. On a combined basis, these two hotels generate a book gain of approximately $31 million. We remain focussed on recycling capital out of lower growth assets and have several assets we expect to sell either near the end of this year or the beginning of 2007, which we expect to produce proceeds of $150 million to $200 million.

Now let me spend a minute on the outlook for the remainder of the year and next. For the full-year, we're forecasting comparable RevPAR growth of somewhere between 8 and 8.75 and comparable margin growth of between 170 and 200 basis points. This guidance is reflective of our results for the third quarter and our outlook for the fourth quarter. Based on these assumptions, we now expect diluted FFO per share for the year to be approximately $1.50 to $1.53, which includes $0.06 per share related to costs associated with refinancing and nonrecurring Starwood acquisition costs. The adjusted EBITDA of Host LP for the year is expected to be $1.255 billion to $1.270 billion.

As we look to 2007, we believe the fundamentals of the business will remain solid, with demand growth exceeding supply growth. Our group booking pace remains strong with good rate growth and while early in the negotiations, indications from our managers are that special corporate rate increases will be in the 8 to 10% range. While we are just beginning our property level budgeting process, our current guidance is that RevPAR growth will be in the range of 6-8% for the year.

Given how early we are in the budgeting process, we're not comfortable giving guidance on margins or earnings at this point. However, based on the modestly lower top line growth assumptions, it's likely that comparable margin growth will be somewhat lower next year. We will give you more specific guidance once we have completed our budgeting process, but it's fair to say that based on these modestly lower top line and bottom line growth assumptions, our absolute growth in FFO per share will be lower next year than it is this year.

To finish up, we're pleased with our third quarter results and still feel very good about the business for the remainder of this year and next. We continue to believe the supply demand environment in our industry will remain favorable for at least the intermediate term and thus are confident that we have plenty of growth left in this cycle.

Thank you now let me turn the call over to Ed Walter, our Chief Financial Officer, who will discuss the quarter in a little bit 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, during the third quarter, our urban hotels performed the best with RevPAR growth of 12.4%, as we benefited from strong performance in several downtown markets such as Chicago, New York, and Philadelphia. Our resort hotels increased by 7.4%, driven primarily by great performance in Naples and Orlando. RevPAR at our suburban hotels increased by 4.7% for the quarter and our airport hotels increased by 3.4%.

Rate growth in these last two categories was very solid, averaging 9.2%, but was partially offset by occupancy declines that resulted in lower RevPAR growth. In particular occupancy rates at our airport properties were off by 4.8 percentage points in part because renovations at our two large San Francisco hotels limited our supply of available meeting space. Year-to-date, our urban hotels performed the best with RevPAR increasing 10% while our suburban hotels increased by about 8.5%. Resort hotels increased by 7.4% and year to date, our airport hotels increased by 6.9%.

Turning to our regional results for the quarter. Our top performing region was the New England region, which saw 18.5% RevPAR growth as the downtown Boston market has very strong group demand. Our two Boston area Hyatt hotels had another exceptionally strong quarter with RevPAR growth averaging more than 29%. Although the outlook for group bookings for the market remains favorable, growth will likely moderate in the fourth quarter in the New England region as the number of citywide events decline.

The Atlanta region also enjoyed a great quarter with 16.4% RevPAR increase as all of our hotels in this market has a solid quarter benefiting from in-house group and strong transient demand, which resulted in a 1.7 percentage point improvement in occupancy. This outstanding performance will not continue into the fourth quarter, primarily because the year-over-year comps toughened considerably as the Atlanta market was a significant beneficiary last year from the disruption created by the multiple hurricanes that hit the Southeast portion of the United States.

Last year, our fourth quarter RevPAR growth in the Atlanta markets surpassed the initial forecast by 10%, creating a very difficult challenge to overcome in 2006. That 2005 hurricane benefit represents almost a full percentage point drag on the entire portfolio's fourth quarter 2006 RevPAR growth. Our north central region had another solid quarter as RevPAR increased 13.2% due to strong growth across all segments of demand, especially in Chicago where occupancies increased by an average of 4.5 percentage points. Overall our Chicago area RevPAR increased by an average of 21% with the market generating increases across all segments of demand. This region and the Chicago markets should continue to outperform in the fourth quarter.

The mid Atlantic region benefited from solid performances in both New York City and Philadelphia. Our New York City hotels at an average RevPAR increase of approximately 15% as we benefited from very strong transient demand. In addition, as we predicted in our second quarter call, group activity ramped up in Philadelphia, leading to more than a 16% increase in RevPAR at our convention center hotels. In the fourth quarter, the New York markets should continue to do well while activity in the Philadelphia market will moderate slightly.

The mountain region enjoyed a great quarter with RevPAR growth of 11.8%, as average rate growth exceeded 15% and both the Phoenix and Denver markets performed well. Phoenix benefited from stronger group demand last year while Denver experienced better transient demand. The outlook for the fourth quarter remains very positive in both markets.

Results in the DC market were disappointing, as RevPAR growth was flat year-over-year. Demand in the city was hurt by low attendance and forecasting errors at the convention center related to three larger convention events as well as weak transient demand. One of our larger suburban hotels, the Fairview Park Marriott, was under construction during the quarter. Activities should improve in the fourth quarter, but business transient demand in the city will be limited by the short session in Congress, which is only scheduled to meet for 14 more days this year and group activity will remain below last year's level.

The Pacific region slightly underperformed with RevPAR growth of just 7.2%, due primarily to weak group demand in the Los Angeles Palm Springs markets, which resulted in more than a 2% decline in RevPAR. The rest of the region did well as RevPAR in San Diego improved about 8.8% and RevPAR in San Francisco grew by 9.7%. In both cases, our large convention center hotels had a good quarter generating better than 10% RevPAR growth. Overall trends suggests the fourth quarter will continue to be slightly slower in the pacific region.

Finally our Florida region also underperformed in the third quarter as weak performance in the Miami Fort Lauderdale market partially offset solid performance in Naples and Orlando. The weakness in Southeast Florida reflects softer transient demand, which was accentuated by the impact of Hurricane Ernesto, as well as a reduction in group bookings related to general hurricane fears. RevPar at our Orlando World Center Hotel increased by 12.5% as a result of strong group bookings. At this point, and subject to how the remainder of the hurricane season plays out, we expect the region should do well in the fourth quarter.

Year-to-date, our three best markets have been the New England region with RevPAR growth of 20.1%, the Atlanta region, with growth of 18.2%, and the north central region where RevPAR improved 16%. The South Central region with RevPAR growth of 5.9% and the Washington, D.C. metro region, which has grown RevPAR by just 0.7%, were the weakest.

Looking at our European JV, we had a strong third quarter as RevPAR based on the local country currencies increased by 11.6%. Year-to-date the properties have benefited from a 8.8% RevPAR increase. Performance has been strong in all markets with the Westin Palace in Madrid leading the group with a 20% RevPAR growth for the quarter. Continuing the trend that we've been enjoying all year, comparable hotel adjusted operating profit margins improved significantly in the third quarter, increasing by 220 basis points, which generated EBITDA flow through of approximately 50%.

The 10.5% improvement in average daily rate and improvements in and productivity contributed to strong rooms profit flow through of more than 80%. Solid F & B growth resulted in more than 12% as the continued shift in F & B revenues towards catering business which helps reduce food cost as a percentage of sales and increased meeting room rentals resulted in roughly 40% flow through in that department. The port cost increases were minimal, averaging less than 2% when utilities costs are excluded. Partially offsetting these positive developments, despite continuing to moderate, utility costs were still up by approximately 8% and insurance costs increased by more than 56%.

Looking forward to the fourth quarter, we continue to expect above inflationary increases in insurance and in wage and benefits. We are also expecting real estate taxes to increase significantly in the fourth quarter as our revised assessments begin to reflect the impact of improved operating results and increases in value in our assets. Utility cost increases should moderate as oil prices decline and we face easier year-over-year comparisons.

One aspect I'd like to add to Chris's comments and our full year guidance concerns our progress in resolving our insurance negotiations in New Orleans and Florida. Although we have made substantial progress in resolving the various issues around the physical damage and business interruption claims, we have not yet reached full agreement on these issues. Our forecast continues to assume that we will receive and recognize approximately 7 to $8 million in business interruption proceeds related to the New Orleans property. If we do not finalize these negotiations by year-end, these amounts will not be recognized until 2007.

We finished the quarter with unrestricted cash of $223 million, this does not include the net cash of approximately 100 million that we received from the sales of Ritz Carlton in downtown Atlanta and the Livonia Marriott. The total cash of approximately 320 million will be used to maintain working capital of 100 to $125 million, as well as fund additional investments in our portfolio. Acquisitions by the Company, our European JV, or for other corporate purposes. We also have full capacity in our $575 million credit facility.

With respect to the fourth quarter, we expect RevPAR growth to range from 7 to 8%. This estimate reflects our expectation that we will continue to experience pockets of softness and markets such as Washington, D.C. and some west coast markets like Palm Springs. The fact that we will be facing tough comparables in Atlanta and Houston and that we expect that we will see some disruption from construction at certain individual properties.

One technical point I would like to cover with respect to the fourth quarter. As Chris mentioned earlier, our updated FFO per share guidance for the full year is $1.50-$1.53, which includes $0.06 per share of costs associated with refinancing and nonrecurring Starwood acquisition costs. I should point out that simply subtracting our year-to-date FFO per share of $0.94 which includes $0.05 per share of refinancing and nonrecurring costs from our full-year guidance to arrive at an estimate of our fourth quarter FFO per share forecast will overstate our projected fourth quarter by $0.01 because the fourth quarter and the full-year have a different number of weighted average shares. Our first fourth quarter forecast for FFO per share is $0.55 to $0.58, , which includes $0.01 of costs associated with refinancings and nonrecurring costs.

As we have detailed today, we are seeing great results on both the top line and bottom line, leading to very strong EBITDA and FFO growth and operating trends remain very favorable. With a strong balance sheet, we are optimistic about the remainder of the year and are well-positioned to take advantage of the opportunities we expect to see over the next several years. This completes our prepared remarks, we are now interested in answering any questions you may have.

[OPERATOR INSTRUCTIONS]. We will take our first question from Bill Crow with Raymond James. Please go ahead.

Couple of questions for you. First of all, the Starwood portfolio underperformed your overall portfolio, any comment there?

It did and, Bill, we had expected that it would. We came in at about 8.3 versus 9.1. Pretty much entirely driven by lower group pace and lower group bookings. We've known for the entire year that the third quarter for Starwood would play out that way. We expect the fourth quarter to be much stronger and frankly the fourth quarter for that portfolio to be over the fourth quarter for our comp portfolio and the full-year numbers to be right in line with what we would have thought, which is a bit above where our comp portfolio is going to end up.

All right. I know we covered this a little bit last quarter, but there's been some disagreement about the weakness in occupancy. And you mentioned it was transient business. Others have mentioned it's leisure. Could you at least give us an update on what you're seeing on the leisure side of things given your exposure?

Maybe just take that opportunity with the question to kind of talk about what we're seeing across the board, Bill. By the time we're done, I think people will have asked all of these questions. Obviously from a big picture point of view, while we have seen some limited weakness, things are -- I think everybody should keep in perspective, things are still very good. In absolute terms, when you look at our third quarter and you look at what we're expecting for the fourth quarter and thus the full year and even looking into next year, the growth that we're seeing is still very good.

Is the fourth quarter a little bit lower than our expectations? Yes. Did we have a little bit less of occupancy? Yes, I guess my first comment would be let's everybody keep it in perspective that what we're looking at as a result of a third quarter what we think about the full year and next year are strong, they're strong in any historical sense. So I would start with that.

When you think about the third quarter, obviously the group was very strong, where you had the weakness and where you lost the occupancy getting to your specific question was really in the transient and it was really entirely focussed in the discount side of the transient business, which is in part related to the fact that our operators, most of our operators were very focussed on rate as we want them to be because we get better flow through and obviously better margin results, but they were focussed on rate and so focussed on it that they excluded in terms how they yielded out some of the business, they excluded a lot of lower rates by count business, which is generally good, but our sense of it probably is a little too much of the discount business in the end got yielded out. In other words, maybe we didn't need to have quite as much impact in the third quarter from an occupancy point of view as we did. Obviously we've had discussions and are having discussions with all of our operators on that point.

For the most part, it was good. You're yielding out lower rated business, better flow through, but if you had capacity for some of that discount business, which we probably did have on the margin some additional capacity, we'd like to see that. So part of it is clearly discount -- I would say a large part of the driver in our opinion, in our analysis is driven by yield management. You had some weak markets on the transient side in the third quarter. D.C., Ed talked about, Southern California, Ed mentioned Florida was weak. You had the fears of hurricanes, which kept a lot of people out of Florida. And the Southwest was weak, particularly at the end of the quarter as it related to some of the hurricane issues of last year.

From our point of view, some of the weakness in transient was just capacity, meaning we had a lot of rooms and meeting space under renovation in the quarter. And while we always estimate the impact from that and we work hard with our operators to get it right, we're not always perfect. And the fact of the matter is in the third quarter, and I'll talk about the fourth quarter in a minute, we had a little more disruption than we'd anticipated is the bottom line. So that's kind of third quarter and, again, what I'd say was, some weakness in occupancy entirely driven by transient, a lot of it was mix management and focusing those markets that I described. But in our analysis, frankly a very good quarter and great flow through, better than we expected and the bottom line results were good.

As we think about the fourth quarter and Ed mentioned a couple of these points, again, we think in absolute terms it's a very solid quarter. If you look at the third and fourth quarter combined versus the first half of the year, you're really not that different. The second half of the year may be modestly weaker than the first half of the year. Which shouldn't be a surprise because we are experiencing somewhat slower overall economic growth in terms of where the economy is. But really the second half of the year is not much different than the first half of the year. I think part of what's happening in the fourth quarter is caught up in forecasting.

All of our operators had -- expected a pick up in the second half of the year, particularly in the fourth quarter with an assumption earlier in the year that the economic growth would be stronger than it is. Part of it is, they said the second half isn't much different than the first half, but if forecasting had anticipated a pickup. The group in the -- and obviously that pickup isn't occuring, the group in the fourth quarter remains very strong, like the third quarter. There is some transient weakness, Ed covered this.

But the Southwest and Atlanta markets because of the hurricane affect are a large part of that. The comps there are very difficult. There's over a point of impact. Point of impact if you add in the rest of the Southwest markets over a point of impact. D.C. is very weak, very bad calendar in terms of overall meetings in the city as well as Congress, basically, not working at all in the fourth quarter. And southern California, we are definitely seeing some pockets of weakness on the transient side. And as I mentioned in the fourth quarter. We do expect based on our third quarter experience to have a little bit more, trying to be a little bit more conservative on the construction disruption from our ROI and reposition and CapEx that we'll have a little bit more weakness than we thought as a result of that. And this being prudent given our recent experience.

There's some strong markets, too. As Ed mentioned, Florida, New York, we think will be -- continue to be very strong. Chicago, San Antonio, I guess, that hopefully gives you a lot more than you asked, Bill. But I know maybe answered some other questions that are coming. Overall, obviously the third quarter was at the lower end of our guidance for the reasons I described on the transient side and occupancy, a lot of which was mixed management and yield management. The fourth quarter is a little bit less than we would have expected the last time we caught up with you all. But still very solid and I think they're all the reasons I described that are the make up of that decline. And next year, obviously is we think going to be a real solid year.

The guidance we're giving you is directional in nature, but we had a lot of discussions with all of our operators and all of our GMs, and we're looking at a very healthy group booking pace, we're looking at a very healthy rate increase on the group side, a very healthy rate increase on the special corporate. And demand, again, keep in perspective, demand is in absolute terms very good. Are there some pockets of weakness? Yes. Are we seeing some lower rated discount business in the transient side being a little bit weaker? Yes. As I said part of that driven by specific markets, part of it driven by our desire to manage that type of business out, and part of it probably driven by a little bit of weakness. Overall perspective that we have, which we feel good about and don't feel like we're being overly aggressive about next year is that demand is sound and fundamental from the supply side are going to continue to look good for the next 2-3 years, and so we have a very healthy attitude about next year and where we're going generally.

That's helpful, Chris. And following up on your answer, as we think about 2007, should we think of RevPAR growth, or do you think there's some occupancy left to gain?

I think there's some occupancy left to gain. And if you think about what I just said about some of the discount business and yielding maybe a little too aggressively there, you should interpret that we think there's a little bit of occupancy. And this year, obviously, we're 100% or more rate, and next year it'll be largely rate driven by there'll be a little more balance of occupancy to try to pick up a little bit more of that business where we have capacity.

All right. Thank you very much.

We will take our next question from Will Truelove with UBS, please go ahead.

Hey, guys. As you're talking about seeing a pocket of weakness here or there, have you thought about how you want to manage the balance sheet as you go through 2007 in relation to doing the ROI spending versus maybe being able to pay down debt? And what is the ability to pay down debt over the next two years?

Will, with my comment, as I finished up on my soap box talk there on where supply and demand were, I would say based on where we are and the strength and absolute terms that we see in growth next year that we're not, we don't have any plans to kind of change our investment strategy, which is right now very much focused on investing in our existing portfolio, so they are ROI, enhancement opportunities. We think we have more than adequate balance sheet capacity next year to do it. Our credit ratios when we finish this year will be the strongest in our history. Probably 2-3 years ahead of our plan in terms of what we set out in terms of balance sheet goals. We don't see it. We feel like if the investments make sense, we intend to do that.

In terms of debt pay down, we do have debt coming due in January of next year of $450 million and I think we've got another couple hundred million dollars that is coming due throughout next year. So in theory, we would have an ability to take available capital and pay down debt. I would say to you right now that's not our intention given the strength of the balance sheet. And by the way the balance sheet that gets stronger every day as operations continue, as we continue to see growth in the fourth quarter and into next year. So our intention is really with our free cash flow is to use that predominantly to invest in our existing portfolio. And we think we're getting great returns, yes.

As you heard in the third quarter and a little bit in the fourth quarter there can be more disruption as a result of doing that sometimes more than we'd like. But the fact of the matter is, yields on this are terrific, and long-term they're incredibly good decisions and very good from the right thing to do from a capital allocation point of view. And we don't see -- they're pockets of weakness, and individual assets you'll make an independent judgment on a decision to go or no go on these things. As a general matter, we still see things as very strong, we still see significant opportunities to be reinvesting in the portfolio and plan on continuing to do that.

Thanks.

We will take our next question from Harry Curtis with JP Morgan, please go ahead.

Good morning, guys.

Good morning, Harry.

Chris an opportunity to get back on the soap box. As you look across your entire system, how much supply growth do you see on a percentage basis in '07 and '08?

I think clearly, when we look at our markets and the upper end and what's truly competitive, I think this year ends up being '06 ends up being plus or minus one, one to one and a quarter. We think when you really boil it down to what's truly competitive, '07 is very similar, maybe a tick higher, maybe a quarter of a point higher. And as you get into '08, there are some numbers that have been bantied about that are much higher, but when we look at it and kind of look at our markets and what's truly competitive and when we try and put it through the filter of what we are pretty confident we'll get done, we think '08 is higher, but ultimately we still think '08 is well below the historical averages that if we're in the low ones, 1.25, going to 1.5, it's still below 2%.

And so our view is that next year and in '08, that we will have a positive, meaning demand will be greater than supply in the business. Next year we think will be fairly similar, a little bit more supply next year. '08 a little bit more supply so that delta between the two in '08 will be a little bit less. But we still think that '08 has the opportunity to be a pretty healthy year from a fundamental point of view.

And do you see it below that 2% level?

Yes. Definitely. I was talking about '08. I think '07 is going to be smidgen higher than our competitive market..

That's great, thank you.

Yes.

We will take our next question from Joe Greff with Bear Stearns.

Good morning, guys.

Morning.

If you were to calendarize your same store portfolio and the star portfolio, what would have RevPAR growth have been?

I don't have the exact number in my head, believe it or not. I think if you calendarize our portfolio, it would be a little bit less. But I don't have the exact number. I don't think it would be materially different. And with Starwood, it would probably be a little bit less, as well.

Okay. And then for the --

Starwood doesn't include, our numbers for Starwood don't include September.

Got you. And for the Star portfolio, the margin improvement in the third quarter, was that materially different than the --

We didn't state it and as a general matter, we don't give out operator specific margins for obvious reasons. I would say it was lower.

Lower, okay. And kind of big picture question for this year, next year, as you're forecasting management fees you paid to third parties, are those coming in higher than maybe what the initial forecasts were? Or where is that trending relative to where you had seen it previously?

I think it's generally in line. I mean, it will track whatever's happening between the top and the bottom line. So I think it's plus or minus in line with -- with what would have expected, nothing abnormal going on there.

Great, thanks, guys.

Yep.

We will take our next question from Jeff Donnelly with Wachovia Securities.

Good morning, Chris. Actually a follow-up to Harry's earlier question on supply. Has your expectation for supply growth changed much in the past 3-6 months?

It sure hasn't in the last three months, it might have changed a little bit in the last six months in the sense as we scour the country and go through the data bases that are available and kind of sit down ourselves and apply common sense of what we know is happening, there may be a few more that are getting done, but it hasn't changed much, honestly, Jeff.

A lot of the supply in the next couple of years is driven by, 3 to 5 really big projects around the country, the Hilton in San Diego, and properties in Orlando. If you look at the percentages, it's really a handful of properties. And we've known about those for the last year or year and a half in most instances. We're not sure all of them would get done, but we were certainly tracking them and aware of them, so. I guess that's a longer answer that you needed. But it hasn't changed materially.

I'll try to keep you off your soap box --

You know I love that soap box.

You do. I know you do. I think there's a concern out there, though, among the people that a softening economy is weighing on the fundamentals, recent results people see are just providing evidence of that trend. I was curious, tell us your view on whether you think Hurricane Katrina might have had a more broad or favorable impact across more travel markets in late 2005 than was originally anticipated and maybe that's some of the root cause of some of the weakness we're seeing in markets beyond Atlanta, San Antonio, Dallas.

You took one of the top 20 markets in the country and you shut it down and you took not 100% of that business because some percentage of it didn't go anywhere, but you took a large percent of that business and you spread it all around. The Southwest and the Southeast were the greatest beneficiaries of it, but D.C. got benefits, the Palm desert got benefits, Palm Desert got benefits, California got benefits. So, I think, clearly as we look at the effect and we look at our budgets and forecasts. I think it's fair to say that none of us, certainly none of our operators fully reflected the impact of that in their budgeting and forecasting. And we were definitely seeing that.

I think you're also right, people are worried about the economy slowing down and the impact on lodging and the fact of the matter is as I said before, things are still in absolute terms very, very strong. Are we seeing a little bit lower growth kind of in the fourth quarter and going to next year than we've had? Yes, but the reality is that you're seeing a little bit lower overall economic growth, not bad economic growth, but a little bit lower economic growth and that ultimately will have some impact. We said 6-8, I think that's reflective of the fact that hey, we've still got a really strong business. Bookings look great, rate looks great, special corporate negotiations look great.

But the fact of the matter of is embedded in that analysis or our guidance is the fact that we like everybody else are hearing, reading, and thinking that the economy while isn't going down the tubes in any way is going to be a little less robust in growth and that's why you see 6-8% growth next year vis-a-vis something that's higher this year and last. For us when we look at it and we look at it versus other sectors of real estate and frankly other industries, I mean when you start to think about 6-8% with some margin growth.

And I know we haven't been specific, we will, you're getting into low, double digit kind of EBITDA growth. And you know what? We're not embarrassed about that. We think that's pretty darn good. It may not be quite as strong as what we would experience this year, but most other industries, you know what? That still feels really good. The demand still feels in absolute terms really good and as I said, I mean , if you look at the supply side of it, we don't think you've got a material problem for a few years, I think it's easy to get caught up in the cross winds of all of the debate of what's going on with the economy.

Our own belief is that the economy's fine. We look at a lot, we have a lot of data points. We talk to a lot of people. We study it, we think the economy could be, will probably be moderately slower and thus will have some impact. Supplies low, fundamentals are good. And we feel really good about the business and so I think that's kind of message obviously I've said two or three times I want to get across is yeah, there is some impact. It's Katrina-related, it's assumption the economy is going to be a little slower, it's by no means an assumption that the business is in trouble or the economy's in trouble or that growth isn't going to be really strong and frankly as I said, growth is going to be better than what you'll find in most other places.

Again, I think the industry is in good shape, we're in good shape and have a, you know, have a lot of growth opportunity in are front of us.

If I could just give Ed a chance to get up on his soap box --

I'm happy to turn it over to Ed.

Just one quick question. We've been basically hurricane-free with only a few weeks left in the season and early reports that I think people might have seen are that the energy department is saying that maybe we're in for a more mild winter. I suspect you'll be conservative here, but what are the odds that we only see moderate growths in '07 due to lower usage or lower loss experience, do you think?

I guess I say on the utility side it's hard to predict, obviously the fourth quarter feels fairly good on a utility cost perspective given what's been happening with oil prices and given how tough the comps were last year. So as I indicated in my comments, I think that's going to come down and I would have to think if that trend continues, next year feels to be a little bit more reasonable on utility front.

On insurance, that's a much more complex question. If you think about it in the context of Host. We will have, since we renew our policy on April 1, we will have one more quarter of the difficult comparison, that being this year's policy versus the one that we had that ended in March 31st of 2006. So the first quarter will be showing the same fairly considerable increase, which on a run rate basis we've talked about is a little north of 60%. If you look at what's likely to happen in '07. Right now it's frankly too early to tell. The only thing I would throw out. I wouldn't be overly optimistic that we are going to see some sort of pull back in rates. We obviously need to get through the rest of this year.

But at least in my experience, I've traditionally found that when you have a series of events that cause insurance rates to jump, It's usually a couple of years of no major losses before you start to see price and get more competitive. And based on some of the initial conversations we've had so far, I'm not hearing anyone talk about rate reductions for next year. I certainly wouldn't be expecting increases near the magnitude of what we've seen this year, but I wouldn't necessarily -- there'd be a pull back either.

Great, thank you.

We will take our next question from Jay Cogan with Banc of America Securities. Please go ahead.

Yeah, at the risk of Chris jumping through the phone here. I just have maybe one follow-up question. You said for Atlanta it impacts you by 100 basis points in the region down the south impacting you by more than 100 for the fourth quarter. If you tried to isolate it into '07 given your mix maybe relative to other companies and the industry as a whole. Can you give us a sense of how you're thinking about that into '07?

I think, Jay, it's hard to be overly specific. Obviously, if it's hurting you this year in theory, it could help you a little bit next year. But I don't think it's viewed as a major driver in our guidance.

Okay and --

Part of that is -- part of that is, Jay, again, we've been very upfront in saying we're giving you kind of directional guidance. It's not us guessing at it, it's after a lot of work, but it's not based on individual property level budgets that would roll up to corporate level budgets. So we'll have a -- I think directionally it's good guidance and we feel very comfortable with it. But as we get into the asset by asset, we'll have a lot better sense of those kinds of things.

Other than your best guess on the economy, your best guess on the hurricane issues, your best guess on the renovation impacts. Is there anything else that really moves the needle one way or the other?

There could be lots of things. But as you pointed out, we've given it our best guess on all of that.

Have you factored in? What would move your RevPAR guidance meaningfully?

In our 6-8 for next year and frankly our 7-8 for the fourth quarter, we have tried to bake in the benefit of all of our thinking. Construction disruptions -- Everything we've talked about today we've tried our best.

As you think about margins for 2007, Ed just commented a little bit on utilities, could you remind me, 8% in the quarter, what are utilities year-to-date and as it relates to wages and benefits in some of the other kind of major line items, any other -- any other incrementals you can provide there in terms of what's going into the thought process?

Yeah, utilities year-to-date are up 12. For full-year we expect them to be up 9, 9.5. In the quarter they were up about 8. Wages and benefits this year when you look at it are going to end up at mid 4s, I think and that's probably from the same point of where we sit today not an unreasonable assumption for what we're thinking about for next year.

Got it. In terms of margin growth. Your margins have been better than anyone predicted nine months ago in the 200 and change range right now and going to be close to that for the year. When you're saying margins might not grow as fast next year, it's not like you're talking about with this kind of RevPAR growth and this kind of cost growth. Doesn't sound like you're looking for margins to be up maybe 150 next year.

If I were prepared to answer that, I would have given you guidance. All I will say is if you just do the math on that revenue level and have expense growth overall of 4-5% when you bake it all in, you can do the math. It's clearly lower than the, it's lower than the 200 level that we're experiencing this year. So once we've gone through the budgets, I'm not trying to be coy with you. It's a very granular exercise and with individual operators on cost improvement programs et cetera, and until we've done that, I just don't want to be specific.

I think you can, with the numbers we've given you, you can make some assumptions. And ultimately if you do the math right, you're going to get something lower than what we're experiencing this year.

Yeah, thanks a lot.

We will take our next question from Smedes Rose with Calyon Securities. Please go ahead.

Hi. Good morning.

How are you doing?

Good. Just another question on your market expansion, you guided 170-200 for this year, which I think is up from 160-200 previously, but your RevPAR guidance for the year is down. Significantly on the high end, and I was just wondering if you could, I guess talk about that a little bit what's going on the margin side.

a real simple explanation as we're just having much better success in our benchmarking and working with all of our brands in being more efficient in the hotel, greater productivity. I think we said early in the year, when we gave guidance, which is obviously lower than where we're ending up that we were hopeful that the benefits of our some of our work we're doing using our proprietary technology platform and the data we have through benchmarking and the hard work we were doing on productivity and efficiency with our individual brands was going to pay off and that we, I believe I said that we were hoping we'd get 25-50 basis points. There was some up side potential in that kind of range. And we've achieved it this year and I think it's the result of a lot of hard work of our entire team and our asset managers and frankly a lot of credit goes to our operators working very diligently with us to get greater productivity and efficiency.

We're very proud of the fact and think these are some of the best margins you will see that even in the face of what obviously was a little bit lower RevPAR in the quarter for the third quarter and what is lower in the fourth quarter that we're achieving those results. Obviously rate growth is helping. I mean, you're talking about a scenario where it's really 100%, pretty much rate growth and that helps. It's a lot more than just rate growth. It's a lot of work on our part. And to the credit of our operators, on their part.

And then on the margin guidance, which I assume includes the Starwood portfolio, that came down a bit, does that just reflect the layering of the Starwood properties?

It's just, they reflect changes and depreciation. I think the numbers I was just referencing are probably the ones that, you ought to focus on.

Okay. Thank you.

Yep.

We will take our next question from Celeste Brown with Morgan Stanley, please go ahead.

Good morning. Just a quick question, guys. With a comparable number for next year, comparable RevPAR, does that include Starwood because you didn't have Starwood all of this year?

It does not, that 6-8 does not include Starwood. If you think about how Starwood as a portfolio would perform then back to my earlier comments, we expect this year for that portfolio to be in excess of what our comp portfolio is. And so within the range, you know, Starwood, we would hope would be more towards the higher than the lower end of that range. Probably within that range, but better than the result for our existing comp portfolio.

Great. Thanks.

Yeah.

At this time, there are no further questions. Mr. Nassetta, I will turn the conference back over to you.

Well, thank you for joining us. You've heard enough from me today I suspect. So I will thank you and tell you that we appreciate your time and, obviously, as we get to the fourth quarter, we'll look forward to catching you up on the trends in the business. So thanks and have a great week.

Ladies and gentlemen, this will conclude today's conference call, we do thank you for your participation, and you may disconnect at this time.