Host Hotels & Resorts Inc (HST) 2009 Q3 法說會逐字稿

Good day. Welcome to the Host Hotels & Resorts, Inc. third quarter earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Executive Vice President, Mr. Greg Larson. Please go ahead, sir.

Thank you. 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 publicly update or revise these forward-looking statements. Additionally, on today's call, we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDA, and comparable hotel results. You can find this information together with reconciliations to the most directly comparable GAAP information in today's earnings press release, in our 8-K filed with the SEC, and on our website at hosthotels.com.

This morning, Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our first quarter results and then will describe the current operating environment, as well as the Company's outlook for the remainder of 2009. Larry Harvey, 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. And now, here's Ed.

Thanks, Greg. Good morning, everyone. While the financial results I will discuss shortly reflect the exceptionally challenging operating environment we have been facing, I should note that our performance this quarter exceeded our expectations and we are seeing some favorable trends begin to develop, which I will discuss in a few minutes. But before I get to that, let me first talk about our results for the third quarter.

Our comparable hotel RevPAR for the third quarter decreased 21.3% as a result of a 16.2% decrease in average rate and a decline in occupancy of 4.6 percentage points. Our average rate was $155 per night and our average occupancy was 70%. Food and beverage revenues at our comparable hotels decreased 20% for the quarter, as banquet business declined as a result of lower group volumes and outlet revenue declined due to lower occupancy and more conservative spending patterns. Third quarter comparable hotel adjusted operating profit margins decreased 685 basis points and resulted in adjusted EBITDA for the quarter of $139 million. Our FFO per diluted share for the quarter was $0.11.

On a year to date basis, comparable RevPAR decreased 22.3% and adjusted profit margins declined 560 basis points. Year to date adjusted EBITDA was $570 million. Year to date FFO per diluted share was $0.33, and that includes a reduction of $0.24 a share related primarily to year to date noncash impairment and interest charges.

While overall demand continues to be weak compared to pre-downturn levels, and this weakness is translating into much softer room rates across all segments, we did see several positive trends develop this quarter. Starting with our transient business, for the first time in seven quarters, we did not experience a significant decline in transient room rate, as the number of room nights sold this quarter matched the prior year total. Demands in our corporate and special corporate segment fell by just 10%, which was the lowest decline in the last five quarters, and increases in demand for the lower rated segments fully offset this reduction, leading to flat transient occupancy. The combination of a shift in business to lower rated segments and rate competition across all segments resulted in an average rate decline of 20%, which translated to a 20% decline in comparable transient RevPAR.

While the average rate declines are clearly a concern, we were pleased by the improvement in demand on the transient front, which we believe was genuinely driven by improved leisure business in many markets. And while it is challenging to analyze the results for the last few weeks because of the shifting impact of the Jewish holidays, so far we have been seeing transient room nights run ahead of last year's pace in the fourth quarter despite the expected decline in leisure-related trends, which suggests that corporate demand may be beginning to stabilize.

On the group side, the fallout from the cancellations experienced at the end of last year and the beginning of this year continue to take a toll on group occupancy. Despite better bookings and less than expected attrition in the quarter, group room nights still declined by over 15%, with the most significant decline concentrated in our higher rated corporate segment. Competitive pricing pressures led to corporate group discounts and short-term group rate concessions, and as a result, group average room rate fell more than 10% in the quarter, leading to a group revenue decrease of approximately 24%.

While our group business does continue to be impacted by the weak economy, there are some indications that this aspect of our business is beginning to stabilize. The short-term net group bookings in the quarter for the quarter exceeded the levels attained in both 2007 and 2008, and on a relative basis, the number of overall net room nights booked in the third quarter for 2009 and 2010 improved significantly when compared to our results in the first half of the year. While the booking pace for the fourth quarter continues to trend behind last year's pace, the bookings cycle continues to be very short, which offers the potential for additional pickup in the quarter.

As we look into 2010, we are pleased to see that our transient demand is improving, albeit lower rates, because we expect that the first signs of better results will ultimately be driven by that segment. Our group booking pace for 2010 is still behind last year's pace, although the decline has moderated from what we experienced earlier in 2009, and the combination of easier comps in improving economies suggests that this gap should begin to close.

That said, despite the relative improvement in RevPAR from the second quarter to the third, and our expectations that this trend will continue into the fourth quarter, we still expect that the combination of low occupancies and customers now accustomed to seeking lower prices will mean that RevPAR will continue to climb during the early months of 2010. As the economy improves, especially on the investment and employment front and demand particularly from our corporate customers begins to recover further, that equation should begin to change. Based on historical trends, occupancy will recover first and then we will see improvements in pricing. Given that we are currently experiencing record low levels of occupancy, in general, we would expect that we will need to see a meaningful improvement in occupancy before we see pricing strength, although ultimately this will be a market by market and even day of the week by day of the week event.

Turning to our balance sheet and capital investment activities, as Larry will discuss in greater detail, we were able to continue this quarter to improve the strength and flexibility of our balance sheet as we repaid nearly $570 million in debt and enhanced our investment capabilities by issuing $130 million of common stock to our recently announced continuous equity programs.

On the asset sale front, we sold four non-core properties during the quarter, three of which we announced on our prior call. In addition to the sale of the Sheraton Stamford, Washington Dulles Marriott Suites, and the Boston Marriott Newton, which we mentioned in July, we also closed on the sale of a Hanover Marriott in August. The net proceeds of these sales totaled approximately $90 million, leading to total asset sales for the year of roughly $200 million. Consistent with our theme over the last several years, these hotels were selected for sale because they had less obvious growth prospects compared to the remainder of our portfolio and in some cases, required significant capital reinvestment. At this point, we do not project any additional dispositions for the remainder of the year.

On the investment front, there are a few signs of an evolving market, as publicity around real and potential foreclosures continues to grow. As of yet, there is little on the market that we find tempting, but we continue to monitor activity and we expect to see deal flow improve in 2010, as the combination of looming debt maturities and depressed operating results create more motivated sellers or inadvertent owners. In fact, looking forward through 2014, there's over $30 billion of hotel CMBS debt that is coming due, and although difficult to precisely calculate, we think there is over $100 billion of hotel, bank, and life company debt coming due during that time period. Given the reductions in cash flow the industry has experienced and the prevalence of higher initial leverage levels on many of these loans, we would expect that we would see additional assets enter the market over the course of next year and into 2011. We intend to be to be opportunistic as market conditions evolve and are optimistic about the future prospects in this arena.

As we mentioned on previous calls, our level of capital spending has declined in 2009, although we have continued to reinvest in our portfolio to assure that our assets are well positioned for the future. One benefit of completing capital projects in this environment is that our construction costs have decreased roughly 8% to 10% and the business interruption impact is reduced. For the quarter, our capital expenditures totaled $63 million, which included a return on investment and repositioning projects totaling approximately $40 million. This quarter, several projects were completed, including a 62,000 square foot ballroom, with three function spaces at the Chicago Swissotel and the renovation of nearly 1,500 guest rooms at our Sheraton Boston hotel, San Francisco Marriott at Fisherman's Wharf, and the Westin Tabor Center. Year to date, capital expenditures totaled $255 million, including $141 million of return on investment and repositioning projects. We continue to expect our capital spending for the year will total about $340 million.

Now let me spend some time on our outlook for the remainder of the year. Unfortunately, our visibility continues to be very limited, given the extremely short booking cycle. However, assuming that demand continues to stabilize at current levels and we continue to see pressure on average rates, we would anticipate that our comparable hotel RevPAR decline would range between 20% and 22% for the full year, which is slightly better than what we had projected in July, which reflects our improved operating results this summer. At these RevPAR levels, we would expect our full year comparable adjusted margin decline to range between 600 and 640 basis points, leading to a projected adjusted EBITDA range of $760 million to $800 million. This will translate into FFO per share of $0.46 to $0.51 for the full year, and that includes $0.25 per share of costs related primarily to noncash charges for impairment and noncash interest expense.

As I mentioned earlier, we assume that lodging demand will continue to be weak into the first half of 2010 and our results for the year will depend on the strength and pace of the economic recovery. Due to the current uncertainty surrounding the economic climate, the short booking window, and the fact that we are at our initial stages of our property level budgeting process, we are not comfortable giving 2010 guidance at this time, but will provide more detailed insight into our 2010 expectations during our fourth quarter call in February.

With respect to our common dividend, in September we declared a common dividend of approximately $0.25 per share, payable on December 18, 2009. We will take advantage of the IRS ruling, which allows us to pay up to 90% of the dividend in the form of newly issued stock. As a result, we expect that our common dividend will be comprised of a cash distribution of about $0.025 per share, with the remainder paid in stock.

Given our perspective on the business, our operating strategy for the next several months will evolve with the market. At the property level, we have stressed realistic revenue forecasting and aggressive expense reductions in an effort to maximize our EBITDA and property cash flow. As various markets begin to show signs of stabilization, we will look to adjust pricing strategies to maximize revenues. While the current environment is challenging, the longer-term fundamentals of our business are improving. Supply growth is moderating, especially after 2010, and will likely remain at historically low levels for several years, which sets the stage for solid RevPAR growth once demand recovers. Since the current distressed operating environment should ultimately result in acquisition opportunities that meet our pricing and quality requirements, we are refining our views of key markets and working hard to prepare to execute efficiently and intelligently as the market for acquisitions improves.

Thank you, and now let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance in more detail.

Thank you, Ed. Let me start by giving you some details on our comparable hotel RevPAR results. Looking at the portfolio based on property types, our urban hotels performed the best during the third quarter, with a RevPAR decline of 19.6%. RevPAR for our airport hotels decreased 23.1%, while RevPAR at our resort conference and suburban hotels fell 24.6%.

Turning to our regional results, the South Central region performed the best with a RevPAR decline of 7.8%. As expected, the outperformance was driven by flat RevPAR for our San Antonio properties and continued strength at the New Orleans Marriott, where RevPAR only fell 4.2%. The San Antonio market benefited from an increase in city-wide activity and the third quarter 2008 lobby renovations at the San Antonio Marriott Riverwalk. The New Orleans Marriott benefited from strong leisure business. We expect the New Orleans Marriott to have another good quarter, while the San Antonio market will underperform the overall portfolio in the fourth quarter due to a year-over-year drop in city-wide activity.

The DC Metro region continued to perform better than the overall portfolio, with a RevPAR decline of 10.5%. Our downtown properties benefited from strong government and government-related demand, as well as solid leisure business. We expect the DC Metro region to continue to outperform on a relative basis in the fourth quarter.

The Atlanta region outperformed the overall portfolio with a RevPAR decline of 18.1%. The decline was driven by reduced group and city-wide demand. We expect the Atlanta region to underperform the portfolio in the fourth quarter, due to lower group and transient demand, and a more significant decline in rate.

As we anticipated, the New England region rebounded in the third quarter, with a RevPAR decline of 16.1%, a significant improvement from the 28.7% decline in the second quarter. Had two of our hotels not been under renovation, results would have been even better. City-wide room nights in Boston were up over 2008, although rates were lower. We expect the New England region to perform much better than the overall portfolio in the fourth quarter due to growth in city-wide room nights compared to last year.

Overall RevPAR for our Pacific region fell 23.2% for the quarter. However, results varied by market. The Seattle market outperformed the rest of the region, with a RevPAR decline of 17.4%, as our hotels were able to induce demand by offering value promotion. As expected, RevPAR for the San Francisco market declined 26%, as the third quarter of 2008 had very strong transient and city-wide demand. RevPAR for our Hawaiian properties decreased 22.9% due to weak transient demand, which led to lower rates to induce leisure demand. For the fourth quarter, we expect the Hawaiian market to outperform the majority of the Pacific region due to easier comparison. We expect the San Francisco market to continue to struggle due to weak group and corporate demand, and Seattle will also likely underperform due to lower group demand and weaker transient business.

RevPAR for the Mid-Atlantic region decreased 27.2%, as our New York properties experienced a RevPAR decline of 29.2% with significant declines in rates. While group demand declined significantly, transient demand was strong, but at a lower price point, as international leisure demand continued to increase throughout the quarter. We expect New York City to continue to struggle in the fourth quarter, although we have seen positive signs in short lead group bookings.

The Philadelphia market continued to perform well on a relative basis, with a RevPAR decrease of 17.2% driven by stronger transient and group business. We expect the Philadelphia market to continue to outperform in the portfolio due to continued strength in business transients.

As expected, the Florida region underperformed in the third quarter, with a RevPAR decline of 25.1%. Our Tampa properties continue to perform well, with RevPAR down 11.3%, as occupancy was only down slightly. RevPAR for our Miami-Fort Lauderdale properties was down 16.9%, as short lead leisure business was induced by discounting rates. RevPAR for the Orlando World Center Marriott declined 38.4%, as group cancellations were significant in the quarter. In the fourth quarter, we expect the Tampa region to continue to outperform, the Miami-Fort Lauderdale region to struggle due to renovations at the Harbor Beach Marriott, and the Orlando market to rebound based on improvements in transient and group demand.

RevPAR for the international region, which includes our four Canadian hotels, two hotels in Chile, and one hotel in Mexico City, declined 23.6% for the quarter. However, using constant US dollars, RevPAR declined only 14%. Year to date, the DC Metro region has been our best region with a RevPAR decline of 4.6%, followed by the South Central region with a RevPAR decrease of 15.3%. The Mid-Atlantic region with a RevPAR decline of 27.2% and the international region with a RevPAR decline of 29.4% have been our worst performers. However, using constant US dollars, RevPAR only declined 14.2% for the international region.

For our European joint venture, RevPAR calculated in constant Euros decreased 18.3% for the quarter. On a relative basis, the three Italian hotels and the Sheraton Warsaw outperformed the rest of the portfolio, while a major renovation contributed to the poor performance of the Crowne Plaza Amsterdam. On a year to date basis, RevPAR calculated in constant Euros fell 22.8%.

For the third quarter, adjusted operating profit margins for our comparable hotels declined 685 basis points. As we have previously discussed, the treatment of the ground rent for the New York Marriott Marquis negatively impacts our margins for 2009. The effect for the third quarter was to reduce margins by 50 basis points. Year-over-year comparisons were less favorable in the third quarter of 2009, as the implementation of our contingency plans increased in the third quarter of 2008.

Our managers continue to actively cut discretionary spending and have been very proactive in implementing new cost saving measures. Profit flow-through in the rooms department was higher than anticipated due to reductions and controlled expenses and improvement in productivity. Food and beverage flow-through was also quite good due to reductions in costs and productivity improvement as well, despite the fact that the revenue decline was driven by the loss of higher margin banquet and audiovisual revenues.

Overall wages and benefits decreased 11.2%, and unallocated costs declined by 13.6% for the quarter as hotels reduced the management headcount and significantly lowered other controllable costs. Utility costs decreased 17.3% through a combination of lower usage, lower rates, and the impact of energy-saving capital improvements. For the quarter, real estate taxes were flat, while property insurance costs increased by approximately 18%. Year to date, our comparable adjusted operating profit margins declined 560 basis points.

Looking at the fourth quarter, we think the comparable hotel adjusted operating profit margins will decline more than we experienced in the rest of the year, primarily due to the significant level of fourth quarter 2008 high profit cancellation revenues, the high level of cost contingency measures implemented in the fourth quarter of last year, and decline in average rates in 2009. As a result, we expect comparable hotel adjusted profit margins to decrease in the range of 600 to 640 basis points for full year 2009. The treatment of the New York Marriott Marquis ground rent and business interruption proceeds received with respect to our New Orleans Marriott in the first quarter of 2008 will reduce our margins by approximately 55 basis points for 2009.

In the third quarter, we repaid the $175 million mortgage loan on the San Diego Marina Marriott, the $135 million mortgage on the Westin Kierland, and the $210 million term loan outstanding under our credit facility. We also repurchased $49 million of our 2007 exchangeable debentures. We have no further debt maturities in 2009 and only $325 million exchangeable debentures that holders have the right to put to us in 2010. We finished the quarter with $1 billion in cash and cash equivalents and $600 million of capacity on our credit facility.

We have reduced our debt by approximately $570 million since the end of the second quarter. We believe our balance sheet strategy of primarily utilizing unsecured debt has been beneficial, as that market has recovered more quickly than secured debt market, it provides greater access to capital, and rates have continued to decline. In addition, as a result of our secured debt repayments in the third quarter, we have $1.2 billion of secured debt on 11 properties, leaving us with 101 unencumbered assets, which could be available as collateral for other secured loans. We continue to evaluate the secured debt market and have recently started to see reductions in mortgage loan pricing and additional availability.

In August, we announced a continuous equity offering program, which we believe is a cost efficient way to raise equity capital that we intend to utilize for acquisitions and other investments. We issued $130 million of equity at a net price of $10 per share in the quarter. With our substantial cash balance and access to capital, we are very comfortable with our liquidity position.

I want to mention one last thing prior to starting the Q&A session. The full year guidance that Ed discussed in his comments includes $0.01 to $0.015 per share reduction for accounting guidance recently proposed by the EITF that would require companies to account for dividends paid in common stock to be included in the weighted average shares calculation for EPS and FFO purposes as of the beginning of the year. Put simply, instead of including the shares distributed to shareholders on our December 18th dividend date, the shares would be included as if they were distributed to shareholders on January 1 of 2009, assuming that the proposed requirement is ratified by the FASB in November.

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

(Operator Instructions). Let's first go to Joseph Greff with JPMorgan.

Thank you, everyone. I have three questions. Two are related to occupancy volumes and one is on CapEx. Ed, you mentioned in your earlier comments, that occupancy would need to meaningfully improve to get pricing up -- you said something about same-store pricing up, and it's market by market, geography by geography. Can you maybe talk about -- are we 200 to 300 basis points away from getting pricing, or 500 to 600 basis points? And particularly, with respect to New York, because we look at New York as a leading indicator market? And then another comment on occupancy, Ed, you also mentioned this, that the first half of next year, you expect demand to be weak. Do we interpret that comment on the first half of 2010 as occupancy is down or occupancy is up, but still well below the normalized threshold, or below on a two-year basis? My final question is how are you thinking about 2010 CapEx? What is the minimum level of maintenance CapEx you can get away with, do you think? Thank you.

Joe, with all of those questions, we might be half an hour here in formulating an answer. Let me start with thinking a little bit about occupancy. I think the question that you raised about how much of an occupancy increase do we need to see is an interesting one, and as carefully as we've tried to look at it, it really does come down to a market by market issue. If we -- markets like New York and probably L.A. and DC, where in New York we're running 90% right now and L.A. and DC we're running close to 80%, I think there's an opportunity to market like that. But as we start to see a little bit of improvement in demand, it will fairly quickly translate into some pricing strength. We're not at that point quite yet, but we're certainly approaching that. And on the other hand, if you've got a market like Atlanta and Denver where we're running at a 60% range right now, it's going to be much more -- you're going to need occupancy to rebuild a lot more before you're going to really see any pricing power.

Now, as you know, this happens -- it really does happen day by day, because where we get pricing power ultimately comes about on the days where we have more demand than we have room. So when you get to that scenario, that's where the opportunity really drives pricing by trying to raise -- to go talk about my comments maybe relative to 2010, I think what we would -- the way we were thinking about that a little bit on the demand side is that we would probably start off, certainly -- I think we expect a little bit lower occupancies in the beginning of the year in 2010, but I think the bigger issue for 2010 is really rate. Rate's really the bigger challenge. As we transition from where we are finishing this year and into next year, we're concerned that rates are just lower than where they have been. So in the context -- describing weak demand at least in the beginning of 2010, that's really more of a rate commentary than anything else.

To maybe speak to that just a bit more, I mean I think everybody knows that our business is pretty much tied to what's happening in the economy. We are going to be looking fairly carefully as both employment and corporate investment to try to get a sense as to how quickly a recovery might happen. A lot of that consensus projections out there right now seem to be expecting that employment would not pick up until the second half of the year, and really show investment at this stage for 2010 as being relatively flat to 2009. Those are some of the factors that lead us to conclude that it would probably take until the second half of the year before you would start to see some sort of a meaningful rebound in RevPAR.

I think another factor that we look at is that the run rate that we are -- when we think over a two-year time span of where RevPAR sits, say, in 2009 compared to 2007 and use that as the proxy for trying to get a sense as to what's going to happen with RevPAR, our sense is that the fourth quarter, even at the better end of our expectation, is probably -- is going to be running behind where we were in Q1 of this year. And consequently, it's likely that we would expect to see that the first part of next year would start off negative compared to this year. On the other hand, as we look further into the year, we all know that supply, especially in our segment, is moderating. It should come in at roughly 50% in 2009 levels and some of our -- some of the themes that we discussed in our prepared comments about both transient and occupancy stabilizing, as well as some signs that group is getting better, too, offer some hope for the recovery, especially in the second half of the year.

The other comment I would make in this area is that we mentioned before that we thought there was some chance that there was business that didn't happen in 2009 that was postponed because of political issues and could conceivably rebound in 2010. In fact, there's no clear indication yet that that is happening, but we did get some feedback from a couple of our operators, and they are finding that they are having conversations with corporate customers around having events that were canceled in 2009 and having those in 2010. So it'll be interesting to see if that business materializes.

Switching over to the capital question, we're looking at our capital budget right now for 2010, and I think our sense is that our spending in 2010 will probably be slightly less than what we're doing in 2009. I think in fact we still have the ability to refine that as we get clear, a little bit more clear perspective on what 2010 is going to look like from an operational perspective. But our liquidity position is very solid, as Larry mentioned, and especially for our core hotels. I think it's important that we continue to have hotels that are in good physical condition. As I mentioned in my own comments, pricing in this area right now is fairly attractive, and to the extent that we're comfortable that an expenditure is necessary, and that's all that we would really be doing next year anyway, to the extent that we're comfortable [that it is a smart] expenditures, doing it next year really affords us an ability to do it for less and with less disruption, which is why I think ultimately you'll see our budget be just slightly less than where this year's is.

Mr. Greff, anything further?

I'm all set. Thanks, guys.

Thank you so much. Let's take our next question from Mike Salinsky with RBC Capital Markets.

Good morning. You talked a good deal about acquisitions and when you expect it to be [making them]. Can you talk a little bit how pricing is in the market right now, what the expectations are out there among those properties that are on the market? And also, where you stand right now with regard to your two funds and when you expect to begin making acquisitions of those as well?

Sure. There's not a lot of detail on where pricing is right now, because frankly not a lot of transactions happen. I think we made some reference in the last call to the fact though that one trend that we were seeing is as people become more comfortable that we are either at the bottom or approaching the bottom in terms of operating results, you're starting to see cap rates decline, and I think that's happening as a natural progression. As people get more comfortable than we're hitting the bottom, you begin to build in the growth that you expect to see come in the future into any acquisition. If we look at where cap rates have been on the properties that we've sold, what we're seeing is that cap rates on the ones we've sold have been in the 7.5% to 8% range just on current year numbers. But if you really add in the capital that we are -- we felt was necessary for the property, you're probably starting to look at cap rates that are in the 6% to 6.5% range. I think that as you look across the markets and look at different pricing segments, you would probably find that at the higher end where the damage has been greater, cap rates have probably dropped lower than that -- again, depending on an individual buyer's expectations of the future. But that's probably a fairly good proxy to where cap rates would be for the typical Marriott and typical Westin hotel. What was the second part of your question?

With regards to your two funds, when you expect to begin deploying proceeds and what the opportunities look like both over in Europe as well as Asia at this point?

I think in Europe, we are -- the Europe market at this point feels a lot like the US. There really -- I would say there's even fewer properties in Europe on the market. But we are in a wait and see mode there, but it wouldn't surprise me at all if we didn't deploy capital in Europe next year.

In Asia, I think you all know the Asian economies have recovered more quickly than in Western Europe or in the US. While we don't have anything to announce in Asia at this time, we are working fairly hard on a number of transactions. Our focus in Asia, as we've mentioned in the past, is not just on full service. It's also on select service opportunities, and our sense of those types of opportunities is they continue to be attractive. Everything, however, takes a little bit longer to get done than it has in the past. I wouldn't expect in either case we would be announcing anything this year. But at this stage, I'd feel fairly confident we'd be announcing at least some investment in Asia next year.

Great, thank you.

Moving on, let's go to Jeff Donnelly with Wells Fargo.

Good morning, guys. Ed, if I could just build on your earlier response, just trying to reconcile your comments on cap rates, maybe how we should be thinking about distressed asset pricing, if and when we do see it. Typically assets that [REITs] have handed back and other private companies have handed back were on pace to deliver EBITDA in 2009 of say 60% to 70% below their peak. Do you think that when we see someone such as Host make acquisitions that you'll be using those mid single-digit cap rates on those types of trough numbers? Or is it possible that we could actually see assets that are even cash flow negative or much, much lower cap rates, effectively even some earnings, earnings dilutive of any long-term [into] accretive?

Jeff, I don't know that there would be too many assets that I would see us buying where you would look at it as being -- where we would be buying negative cash flow. Although I wouldn't concretely rule that out, because it would be -- you have to look at specific circumstances around an acquisition to see if that would merit it. If it was a situation with mismanagement or an opportunity to change brands, something like that, that might create a situation where we would make that type of an acquisition. The way we're going to look at acquiring hotels this cycle is going to be pretty similar to the way we've looked at it in the past. And that is -- we'll underwrite the 10-year IRR on the asset and try to build in what we think are reasonable growth prospects over the life of that hold period. And we're going to look to buy assets that will be at a premium to what we believe our cost of capital is at that time. If we were looking today, we would probably be expecting, depending upon the market, the quality of the property, things like that, for properties that would deliver a return somewhere between 11% and 13% on an unleveraged IRR basis. If you think about the way that the analysis and the way that evaluation process works, you could end up with -- I'd love to see properties that were bought in that 7% to 8% to 9% cap range. But there may be other opportunities where you end up at a lower cap rate, and that was simply because our evaluation of the recovery for those particular assets would be stronger than the assets that might be being bought in the 7% to 9% range.

That makes sense. How are lenders right now -- I know there's not a tremendous amount of activity, but how are lenders looking at I guess mortgage financing on these types of assets? Because -- using arbitrary example of an asset has $10 million in EBITDA and it fell to [3], you really couldn't support that much leverage at the trough versus over a typical period of time. So I guess how are you thinking about employing it? How are lenders offering it today?

I think for us, we have typically not bought properties with property-specific debt as part of the financing package. So we typically have done our acquisitions on an all-cash basis and then figured out the leverage either using corporate debt or in some cases secured debt after the fact. But I think you raise a good point, which is that one of the things, one of the challenges that people that rely on secured debt for acquisitions are going to run into, is that secured debt is still pricier than where it was during the last cycle, even though those levels are getting a little bit better right now. And I think what Larry's generally indicated in the past is it's hard to find leverage that's much above 50% loan to value, and even that value and that context is fairly conservatively underwritten. So my guess is in the equation you were laying out, you would probably see, especially as we get a little bit more price discovery in the market, you should start to see lenders get comfortable with slightly lower cap rates for valuation purposes, but those loan to value ratios are still going to be relatively low.

Just one last question, if I could, is that Marriott had indicated on their call that they would expect to see owners would see a few points of operating expense growth going forward. How are you guys thinking about expense growth in Q4 and beyond, now that we're beginning to anniversary on expense cuts? Is there much less to implement, particularly if you think demand's going to be rising?

As we progress through each quarter of this year, you see in our results that the margin comparison gets more difficult, and as a result, you've seen the margin deterioration each quarter become a little bit more significant. I think you're right to identify that as you look through both Q4 and into next year that that scenario is going to get more challenging, because there have been, I think, tremendous efforts that redesign the way we deliver services and how much that costs at our properties, which is why we've been fairly happy with the margin results that we've had, given the revenue decline that we've experienced. That challenge -- while I think there's still going to be opportunities to do better and to take some costs out of the system, and obviously there are some costs in a negative revenue environment that will go down -- those are fee-based costs. There's a chance next year that utilities and taxes could be a little bit lower -- again, in the utility cases, depends on a lot of external forces.

So not everything about expenses next year is necessarily about an increase. Some things could be better. As we've thought a little bit about next year -- and we haven't even started on a property level budget, so these sort of comments are incredibly directional because they are not really based on anything specific yet -- one way we've thought about it is that if you go back to the last downturn and you look at the third year in the last downturn, that being 2003, our RevPAR in 2003 was down 4 to 4.5 points and our margins were down around [300]. So as you think about what that may mean in the context of 2010, obviously the -- if the RevPAR number is better, then the margin number would have been better. But I think there's some sense of guidance that one can take from that type of an estimate.

Do you think that period of time, was as applicable? Because post 9/11, many operators and owners were very slow to cut costs, because 9/11 wasn't a planned event and its impact wasn't -- people didn't understand how long its impact would be felt for. It felt like expenses got cut late in the cycle, not early.

I would agree with you in part, although by the time we got to 2003, we really -- as you'll remember, the events of 9/11 dwarf everybody's recollection of what was happening in 2001, but we were already headed to a negative RevPAR year in 2001 before 9/11, and that just exacerbated it. But then at least as a full service vector -- 2002 was negative. And then obviously as we worked our way through the second half of 2002, we had that buildup for the Iraq war that was present in everyone's mind.

So as we look at what happened in our portfolio back then, I think the margin results in 2001 were actually pretty good, given the level of decline that we experienced in 2001. In 2002, we dropped around 5% in RevPAR and only 200 basis points in margin. But as you got to 2003, I think they had pretty much exhausted their options and that's why you saw worse margin performance, actually slightly better RevPAR decline. So I think -- it's not perfect. And there's a lot of factors that change from market to market, or from year to year, but I don't think it's -- it's at least a place to start in terms of evaluating what might happen next year.

All right, thank you.

From Deutsche Bank, let's go to Chris Woronka.

Good morning.

Good morning.

I was hoping you could talk a little bit about -- we've heard some of the operators, as they are going back and trying to get group contracts finalized -- instead of additional rate cuts, I think there's been a lot of talk about them throwing in some incremental items -- [ABCs], parking, breakfast, things like that. How should we think about that impacting? Is that a meaningful impact on margins next year, or is it -- I have to think it's optimal to cutting rates, but just how do we think about that? Is that even a blip on the radar, or is it too insignificant?

I would call it a blip on the radar, because I think you're right that that has been happening to some degree with a variety of different customers. It obviously trends a little bit differently in different markets. I think it's hard to separate that effect out from the other issues. I mean that may be one of the reasons why you'll see -- you may see food and beverage revenues decline a bit more than what one might expect. But I think it's probably -- I think you can see that being captured in the overall margin results that are being delivered right now.

Okay, great. Thank you very much.

And now to Andrew Wittmann with Baird.

Good morning, guys.

Good morning.

I want to kind of focus back in the on the acquisition market and take a little bit different approach. I think we would agree, as you look at numbers of CMBS maturities, other bank debt, insurance debt maturities, that the opportunity set for distressed acquisitions is out there. But I guess I wanted to get some color. Practically, are you gaining any confidence with what lenders or special services are actually doing in the marketplace that suggest that they are going to take action and not just delaying [praise], as the industry terminology goes today?

That's a great question, and I would say that right now the answer to that is relatively muddled. You're right -- a lot of special servicers are lenders right now, in part because they either don't have confidence on the ability to exit if they take a property back, or concerned about the loss in the market they might face if they act now, are in many cases kicking the can down the road and wait and see what happens.

Now, in order for that to happen, though, the general theme that we hear is that generally requires that the borrower is prepared to continue to cover debt service. And so in a sense, if they are in a scenario where there's no real pain associated with taking action on the property, then they are prepared to wait a little while. On the other hand -- obviously there have been a number of highly publicized incidents of this -- there are other scenarios where the owner is taking a look at the -- at funding a negative cash flow situation in order to cover debt service. And in those sorts of situations, if they are not prepared to fund, I think you've begun to see lenders take stronger steps. It still takes a while, even in those situations for the process to, for an asset to work its way through the process, and I think that's why you haven't seen too many properties come to market.

Our sense is that as we get a little bit further into next year and into 2011, as the shortfall to refinancing becomes a little bit more apparent and at some point as this starts to become more expensive for a borrower to subsidize a property where they don't see a good outcome, you'll probably start to see activity begin to accelerate. And so I think that's -- will every property that's struggling right now end up on the market? Certainly not. I mean a lot of these property deals are going to get worked out in some other fashion, but there still is a lot of -- there still are a lot of properties that are overlevered that are ultimately going to make their way to the market. And we don't -- I think we'll have an opportunity as a result of that to make some good acquisitions.

The other thing I would add, by the way, is that while it's exciting to talk about distressed acquisitions and everything else, but the reality is that there will be other properties that will come to market outside of just that environment. You may see more activity initially flow from that, but as the environment becomes a little bit better, you're still going to see some acquisitions and dispositions that are happening, in some ways for the same reasons ours were. We were not a distressed seller. We did not need the capital. But what we were making is a judgment that in the long run those assets did not belong in our portfolio and we saw better use for that capital. I think you will also see that happen with other people who are transitioning their business in some fashion and may see a better place to invest capital, in which case they are a seller, even if they are not under distress. So that's another area where acquisitions may come from.

Makes a lot of sense. Actually just to keep going on that one a little bit, can you just talk a little bit about the nature of the buyer of those assets? Are we still seeing all equity buyers with plans to refinance later? And is that foreign money, domestic money, high net worth? Can you give us a little bit of a feel about who some of the buyers are on your assets?

In our transactions, it's generally been domestic buyers, and my sense is that they bought -- they had the cash available to complete the acquisition and then they were planning on levering up at some point after that. I think some of the other transactions that I'm aware of involve some foreign money, and some of that's come from Asia, but I don't know that -- I don't know that you have seen a huge influx of foreign money that's actually closed on transactions. I just think they are obviously a little bit better positioned than some of the US buyers from a capital perspective, which is probably why they are looking here.

Okay, great. Thank you very much.

Our next question comes from Smedes Rose with KBW.

Hey guys, it's Smedes Rose. You answered most of ours, but you mentioned that in the quarter, for the quarter, group bookings in New York I think picked up. I wasn't sure if it was for the third quarter or the fourth quarter, and I was just wondering if you could talk a little bit more about the makeup of those group bookings? Is it to your traditional sort of customers that are just having shorter lead times, or is it coming from new areas? What's behind that a little bit?

I don't think -- I know I said in our comments that we saw an increase in the quarter, for the quarter bookings. We didn't necessarily attribute that to New York. My comment on New York was more about the fact that occupancies in New York were fairly strong. I would say in terms of where the customers have come from, the bulk of the business was probably more in the discount category than anywhere else. I think there was -- there certainly were some bookings that happened on the corporate side, but by and large, those bookings were warped by the overall decline that we experienced in corporate business, and that's been the weakest segment in the corporate group, or in the group side. So where we saw a relative uptick appears to be more on the discount area, which probably isn't surprising, given the environment.

Okay, and then it looks like the guidance just for the corporate expense line item went up by about $10 million for the year. Was there anything specifically behind that?

It's -- the bulk of it is basically our stock compensation getting back to more normalized levels.

Great, okay. And then the final thing, on the disposition front, are you -- are there still more asset and non-core assets that you would like to sell in the pretty near term, or are you done for now?

I -- there certainly are over the next two or three years, a number of additional non-core assets that we would look to sell. Our sense is that we probably would not be that active over the next 12 months. I would never rule out that there might be something that happens on an opportunistic basis where there is a buyer that finds some additional sources of cash and we can facilitate a deal because of that. But by and large, at least as we think about 2010 right now, I would expect that our disposition pace would probably be a bit slower than what we saw this year.

All right, thank you.

At Goldman Sachs, let's go to Steve Kent.

Hi, good morning. Just to go back to the question I think from, I think two ago, about essentially inadvertent owners, which I don't think I've heard you guys talk about since Chris and Terry were running the Company. But that was different. That was the RTC and others. And I just want to understand the logistics of how quickly you can buy something? And then the other thing that I always struggle with with your company is that you are inherently net buyers. I mean if you look out in two years, are you going to be bigger or the same size or smaller? Because I guess there's also an opportunity for you to start to sell some of the assets.

In answering the second question first, I think you're right is that ultimately over time we have been a net buyer, and I would say looking out over the next two years, I would expect that that would happen again. I think that we are in a good position from a capital perspective and from a management infrastructure position to be able to take on more assets and create value through those acquisitions. So while I would project, as we think about the next several years, that we will probably see an additional sales velocity to what we did over the last seven to nine years, I still think over time we will have grown in terms of size, and we will be a net buyer.

On the inadvertent owner side, and thinking a little bit more about how that process works -- it's interesting that I would probably guess this time around, it's going to be a lot more complex than what we faced in the 1990s. And that is because -- in a number of transactions, there are so many different layers of debt that you have to work through the different layers of debt in order to actually get to an ultimate resolution. But an example of that might be the infamous St. Regis at Monarch Beach, where I think at this point as I understand it, there's been one level of a foreclosure where Citibank has stepped in and taken control of the asset and now they are trying to decide what they are going to do. Below them sits a -- there is both senior piece of debt and a junior piece of debt, and Citi with the mezzanine piece of debt. So depending upon where value on that asset ultimately falls out, you could have to work your way through a couple of different foreclosure proceedings before you actually get to an entity who can be a seller.

But I do think at the end of the day, whether it's through that [source] of steps, whether it's special service ultimately selling an asset, or it is a traditional commercial bank lender who ends up with the title to the property, we are going to find -- different from what we found in, say, after the 2001 to 2003 downturn, we are going to find more financial entities or institutions that are owning hotels that don't want to. And they will end up having to be a seller of those.

Okay, thank you.

Ladies and gentlemen, at this time, that is all the time we do have for your questions today. I would now like to turn the conference over to Ed Walter for closing remarks.

Well, thank you, everybody, for joining us on this call today. We appreciate the opportunity to discuss our third quarter results and outlook with you, and look forward to talking with you following the close of 2009, with more detailed insights into 2010. Have a good remainder of the week, and do us all a favor, travel a little bit more. We could use it. Thanks again, everybody.

Once again, that does conclude today's conference call. We thank you for your participation.