Host Hotels & Resorts Inc (HST) 2011 Q3 法說會逐字稿

Good day, and welcome to the Host Hotels & Resorts Inc. third-quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Larson, Executive Vice President. Please go ahead, sir.

Thank you. Welcome to the Host Hotels & Resorts third-quarter earnings call.

Before we begin, I'd like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. 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 in today's earnings press release and 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 third-quarter results, and then we'll describe the current operating environment as well as the Company's outlook for the remainder of 2011. 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. We are pleased to report another strong quarter of operating results despite the impact of Hurricane Irene on our East Coast hotels, and the headwinds emanating from global economic concerns over the last several months. Let's start by reviewing the quarter, and then we will offer some insights into the rest of 2011 and next year.

Our comparable hotel RevPAR for the third quarter increased 6.4%, driven by an improvement in our average rate of 3.7%, combined with an occupancy increase of 1.9 percentage points. Our average rate for the quarter was $169 and our average occupancy was nearly 76%, which is only 1.3 points shy of 2007 levels. This performance fell slightly short of our expectations because of the arrival of Hurricane Irene in late August, which resulted in group cancellations in Washington and Philadelphia, and the complete evacuation of the Marriott New York downtown hotel. Altogether, the storm caused an approximately 60 basis point hit to our RevPAR for the quarter. In addition, as we mentioned last quarter, our comparable hotel results do not include the performance of the $1.7 billion of acquisitions we have completed over the last 15 months, which averaged better than 14% growth in the quarter.

Comparable hotel F&B revenue growth of 4% contributed to an overall revenue growth of 5.3% for the quarter. This increase, when combined with our comparable hotel adjusted operating profit margin increase of 110 basis points, and the performance of our acquisitions, resulted in a 28% increase in adjusted EBITDA to $212 million and FFO per diluted share of $0.16. On a year-to-date basis, comparable hotel RevPAR increased 6.3%, driven primarily by rate improvement.

Total year-to-date comparable revenue growth of 5.3%, combined with profit margins that increased 80 basis points, resulted in year-to-date adjusted EBITDA of $669 million, which represents an increase of over 23%, and FFO per diluted share of $0.57. Year-to-date FFO per diluted share was negatively affected by $0.03 for acquisition debt repayment and impairment costs.

Business mix trends were generally favorable this quarter, as we realized demand and rate increases in both our transient and group business. As in the past quarter, transient demand and rate were the primary drivers of RevPAR growth. Overall, transient room nights for the quarter increased 3%, led by a 5.5% increase in special corporate demand. While retail rated room nights were down slightly, the segment still recorded solid revenue growth, driven by a 6.5% increase in average rate. The strong rate performance in this segment, combined with rate increases in all other transient segments, contributed to an overall rate increase of more than 4%. The increase in both transient demand and average rate produced transient revenue growth of more than 7%.

Turning to our group business, we were pleased to see a 1.3% improvement in demand despite the weather-related cancellations. The increase was driven entirely by a nearly 15% increase in demand in our higher rated corporate business, as the discount segment declined 6%. The combination of average rate increases in our higher price segments and positive mix shift resulted in an overall increase in group rate of more than 3%. This increase in rate, combined with the demand improvement, resulted in a nearly 4.5% increase in group revenue for the quarter.

Despite the upheaval in the equity markets created by headlines about legislative gridlock and slow employment growth in the US, and sovereign debt risks in the EU, our outlook for the remainder of the year remains quite positive. Our fourth-quarter group booking pace is quite solid compared with last year, with bookings up over 2% and revenues ahead by almost 5%. In addition, our transient bookings are up over 6%, with very strong rate growth.

While a realistic appraisal of the impact of weaker economic data suggests that we will not experience significant outperformance in the fourth quarter, we do expect that fourth quarter RevPAR growth will generally be in line or slightly better than what we experienced in the last two quarters, leading to full-year RevPAR growth of between 6.25% and 6.75%. Assuming that adjusted margins -- profit margins expand between 80 and 90 basis points, we would project that adjusted EBITDA will range between $1.015 billion and $1.025 billion, which will reflect full-year growth of 23% over 2010. We project FFO per diluted share of between $0.86 and $0.88, which has been reduced by $0.03 per share for acquisition, debt repayment and impairment costs.

While we are not prepared to offer any specific guidance relative to RevPAR or revenue growth for 2012, and we fully appreciate the event risk that may threaten overall economic growth for next year, we would confirm the sentiments offered by others in the industry that the fundamentals for our business continue to be attractive. We would start by noting that supply growth in 2012 is projected to be roughly 0.05%, which is a small fraction of the long-term industry average. This would suggest that occupancy rate should continue to grow even if economic growth is more modest than expected earlier in the year.

The group booking pace for next year is strong, with room nights up over 4% at higher rates, especially in the important second and fourth quarters where room nights are ahead by more than 9%. The recently issued government per diem rates, which increased an average of 5% across our major markets, plus expectations for successful special corporate negotiations, all point towards higher transient rates. Given the significant recovery and occupancy rates over the last two years, we should be starting the year in a position of strength, which suggests that we should benefit from both mix shift and absolute rate increases across most segments. In short, there is a clear opportunity for very solid RevPAR growth for next year.

On the investment front, we had a relatively quiet last couple of months. As we noted in the press release, on behalf of our joint venture, we recently completed the previously announced acquisition of the Pullman Bercy for EUR96 million. This is the venture's first hotel in Paris, and the property is located in the growing business district of Versailles. Despite the financial issues in the EU, RevPAR in the overall Paris market has increased 17% year-to-date, and we would expect the market and the hotel to perform well over the next several years.

We also noted in the release that we had negotiated an extension of the closing date at no additional cost for our previously announced acquisition of the Grand Hyatt Washington, D.C. Given the recent volatility in global equity markets and general uncertainty in the eurozone and the US, we determined that extending the closing date would allow us to remain flexible, and to further monitor economic trends, global developments and capital markets, while establishing a clear understanding of their impact on 2012 operations. Should we choose not to close at the end of the extension period, we will forfeit our initial deposit and record a one-time charge of $15 million. We still believe that this hotel is a terrific asset, centrally located in one of the world's top markets, with good long-term potential.

While we are continuing to review potential acquisitions, at this point, it appears unlikely that any other transactions would close before year-end, so the guidance we provided does not assume any incremental investment. On the disposition front, we are marketing a few selected properties for sale, but would expect that these transactions would most likely not close until the first quarter of next year.

We remain confident that investing in our existing portfolio provides very attractive returns. Continuing our pattern throughout 2011, capital spending in the quarter continued to increase, as in total, we invested $95 million this quarter compared to $49 million in 2010. Redevelopment and return on investment project spending totaled $32 million this quarter, and included redevelopment projects at the Chicago Marriott O'Hare, the Sheraton Indianapolis, and the Atlanta Perimeter Center. For the full year, we expect to spend $220 million to $240 million on these types of projects.

In terms of maintenance capital expenditures, we spent $63 million in the third quarter, which included the renovation of the 45,000 square foot Broadway Ballroom at the New York Marriott Marquis. During the quarter, we began work on extensive room renovations at the JW Marriott Buckhead and the JW Marriott Desert Springs Resort & Spa. For the year, we expect to spend approximately $300 million to $320 million on maintenance capital expenditures.

Overall, given the overhang of uncertainty regarding the US economy and international sovereign debt issues, we were very pleased with our results this quarter. While we can, at some level, appreciate the sentiment that has caused equity valuations in this sector to decline, we suspect that only the risks in the risk/benefit equation are being noticed.

As we highlighted, the fundamentals of our business remain attractive. Transient demand is strong and group demand continues to improve. As RevPAR is increasingly driven by improvements in average rate, margin growth and flowthrough will accelerate. Additions to supply have been restrained and will likely remain well below historical levels for at least the next three years. Finally, we note that our current equity valuations suggest a value of roughly $200,000 per hotel room, which is about half of what it would cost to replace our portfolio.

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 detail on our comparable hotel RevPAR results. Our top performing market for the third quarter was Phoenix, with a RevPAR increase of 24.4%. Strong group demand resulted in an occupancy increase of over 7 percentage points. Some of the group demand improvement was due to meeting space renovations at the Westin Kierland and the Ritz-Carlton Phoenix in the third quarter of 2010. The ADR growth of 8% was driven by increases in both group and transient rates. We expect our Phoenix hotels to have an outstanding fourth quarter due to an excellent group and transient demand, and further ADR growth.

Our Miami and Fort Lauderdale hotels had another great quarter, with RevPAR up 20.6%. Occupancy increased over 12 percentage points as group demand was very strong and ADR improved nearly 2%. The renovation of the Miami Biscane Bay Marriott in the third quarter of 2010 contributed to the strong RevPAR growth. We expect our Miami and Fort Lauderdale hotels to have a great fourth quarter because of strong group and transient demand, as well as some improvement in average rates. Despite these results in Miami and Fort Lauderdale, our Florida region was affected by significant renovations at the Ritz-Carlton Amelia Island and the Hilton Singer Island.

Our San Francisco hotels continue their exceptional performance. RevPAR increased 17% as ADR improved over 11%, and occupancy increased 4 percentage points. The improvement in ADR was driven by both rate increases and the shift in the mix of business to higher-rated segments. Both group and transient demand were strong. We expect the San Francisco market to continue to perform well in the fourth quarter. Our Houston hotels had another strong quarter, with RevPAR up 12.6%, as occupancy increased over 6 percentage points while ADR increased 2%. The occupancy increase was driven by strong corporate transient demand. We expect the Houston market to continue to perform very well in the fourth quarter.

RevPAR for our Hawaii hotels increased 6.8%. Occupancy improved 5 percentage points to nearly 85%, driven by wholesale and leisure promotions as well as increased airline capacity. For the fourth quarter, we expect Hawaii to significantly outperform the portfolio, due to improvements in transient demand, a shift in mix to higher-rated business, and the benefit from the renovation of the hotels in the fourth quarter of 2010.

RevPAR for our Chicago hotels increased by 6.7%, driven by an increase in occupancy of over 3 percentage points and an improvement in average rate of over 2%, as higher transient demand offset lower levels of group business. We expect our Chicago hotels to have a good fourth quarter due to strong group bookings.

RevPAR for what New York hotels increased 6.7%, due to an ADR improvement of nearly 8%, while occupancy fell 1 percentage point. RevPAR growth would have exceeded 8% without the negative effect of evacuations and cancellations related to Hurricane Irene. We expect our New York hotels to have an excellent fourth quarter.

RevPAR for our Washington, D.C. hotels increased 2.1%, with ADR increasing nearly 2% and a slight occupancy increase. Operations were affected by concerns surrounding the budget and debt ceiling, which led to less government and government-related group and transient business. We expect the D.C. market to perform better in the fourth quarter, as government per diem rates have increased in the market.

RevPAR for our Boston hotels decreased 1.4%, with a slight decrease in both occupancy and ADR. Results were affected by the lack of group demand and rate, particularly at the Sheraton Boston. While we expect strong transient demand in the fourth quarter, group demand is expected to continue to be weak.

Lastly, our worst performing market for the third quarter was New Orleans. RevPAR fell 10.5%, primarily due to the substantial amount of BP contract room nights generated by the Gulf oil spill in the third quarter of last year, and a decline in government-related group business. RevPAR fell as occupancy declined over 12 percentage points. However, ADR did increase over 6%. We expect the New Orleans market to have a rough fourth quarter due to the reopening of the 1200-room Hyatt, year-over-year reduction in demand generated by the Gulf oil spill, and a renovation of the meeting space at our hotel in the fourth quarter.

Year-to-date, San Francisco has been our best performing market, with a RevPAR increase of 19%, followed by Hawaii with a RevPAR increase of 13%, Phoenix with a 12.2% increase, and Houston with an 11.9% increase. Our worst performing markets have been Philadelphia, with a RevPAR decrease of 4.5%, and Boston with a 0.3% increase.

For our European joint venture, RevPAR calculated in constant euros increased 5.2% for the quarter, as ADR increased 6.2% and occupancy fell roughly 1%. Group demand was weak due to three of the JV hotels having their meeting space under renovation in the quarter. In particular, the Sheraton Roma had a significant negative impact on RevPAR due to its meeting space renovations. Excluding the Sheraton Roma, RevPAR would have increased over 8% in the quarter. On a year-to-date basis, RevPAR calculated in constant euros improved 8%, as average rates improved 5.5% and occupancy increased 1.7 percentage points.

For the quarter, adjusted operating profit margins for our comparable hotels increased 110 basis points. Margins for the quarter benefited from better productivity, as wages and benefits on a per-occupied room basis were essentially flat. Rooms flowthrough was good at roughly 75%. Food and beverage revenues increased 4.1% for the quarter. F&B flowthrough was approximately 26%, which was better than the first half of the year, but profits were still lower than expected.

There were two primary reasons. The first is that we had a number of restaurants and some meeting space under renovation in the quarter, where the negative impact on F&B profits was higher than anticipated. In addition, a few hotels had lower group spend, only a portion of which was anticipated. Unallocated cost increased approximately 3%. This increase was primarily driven by expenses that are variable with revenues, including credit card commissions, reward programs, and cluster and shared service allocations. Utility costs increased 3.7%; insurance cost increased significantly, due to an increase in replacement cost and premium increases as part of our June 1 renewal of our property insurance program.

Looking forward to the fourth quarter, we expect margins to generally perform in line with what we experienced in the first three quarters of the year. We should get some benefit from a RevPAR increase, driven more by rate growth than occupancy, and the potential for improvement in F&B flowthrough. We do, however, expect unallocated costs to increase more than inflation, particularly for awards and sales and marketing costs, where higher revenues will increase cost. And we expect property taxes to rise well in excess of inflation, due to refunds received in the fourth quarter of 2010 that will not recur in the fourth quarter of this year. As a result, we expect comparable hotel adjusted operating profit margins for the full year to increase 80 basis points at the low end of the range, and increase 90 basis points at the high end of the RevPAR range.

One last item, the full-year guidance that we gave on the second quarter earnings call assumed that we closed on the acquisition of the Grand Hyatt in Washington, D.C. in mid-September. That guidance included $9 million of projected EBITDA in 2011 from the Hotel during our anticipated period of ownership. With the extension of the closing until mid-December, our current guidance assumes that there would be minimal EBITDA from the acquisition in 2011. If we do not acquire the Hotel, we would forfeit our $50 million deposit and reduce our 2011 adjusted EBITDA by $15 million.

For NAREIT FFO per share purposes, it's a little more complicated. Our second-quarter earnings call guidance had very little FFO for the Hyatt because of interest expense related to the assumed debt, and the assumed payment of a $7 million transfer tax for the acquisition, which together, roughly offset the property level EBITDA of $9 million. The transfer tax is considered an acquisition cost under GAAP and deducted from NAREIT FFO. Accordingly, our current guidance includes a loss of approximately $0.01 per share for FFO, primarily due to the payment of these transfer taxes. If we do not close the acquisition, NAREIT FFO would be an additional $8 million or roughly $0.01 per share lower than our current guidance. This amount represents the loss of the deposit, partially offset by the transfer taxes and interest expense that we would not have to pay.

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

(Operator Instructions). Eli Hackel, Goldman Sachs.

Two questions. First just goes on -- the deal from the transaction market. Can you just talk a little bit -- I mean, you mentioned D.C., how you're viewing deals? I mean, it seems to me a little bit that evaluations have come down so much now, maybe it's a good time to purchase; and just how the capital markets go into making those decisions, if they're available, if they're not. I know you still have a lot of cash on your balance sheet. Or just have sellers not lowered their prices that much?

And then the other thing just related to group business for 2012. You mentioned volume, I think, but can you just give us an idea where rates stand for next year? Thank you.

Yes. I would tell you that rate is up a little bit for next year. It's probably around the 1% range so far. That number does tend to vary a bit from period to period, but it's roughly up about 1 point right now. Going back to the deal market, I guess what I would say is we're trying to assess that right now. Sellers have clearly not dropped their prices yet. The cost of capital for most buyers has gone up a bit, which probably suggests that buyers are looking to pay a little bit less. There has not been a whole lot of activity over the course of the last 90 days since the equity market started to move.

We are seeing good activity on the properties that we are marketing. I would say that generally, we're seeing less activity from the other REITs. And I think everybody would understand that with REIT share prices lower, then REITs are going to be a little bit more careful in how they extend whatever cash or liquidity that they have, recognizing that they probably are not comfortable in returning to the equity market right now, given where equity market prices are.

So I think that I would suspect overall that the pace of activity in the second-half of the year will fall short of what folks expected it to be back in June, primarily because of the reduction in share prices. But having said that and looking at the response that we're getting for some of the properties that we have on the market, there's still an active market out there. But I would also agree with your point that pricing could get a little bit more attractive as sellers begin to accept the new reality. And that's one of the reasons why we continue to be interested in completing acquisitions.

Then just taking that just to D.C. for a second, so how much of your decision to extend to D.C. was capital markets and how much maybe was economic uncertainty?

I don't know that I could give you a percentage of either, but they're just -- unfortunately, the world did change a lot from our perspective, at least from a capital market's perspective after our last call. And so looking at the scale and the size of this particular transaction, we're still very comfortable with the acquisition, but it would utilize a fair amount of our existing liquidity to complete. And I think we just wanted to let the world have a little bit more time to get a little bit clearer indication of direction before we complete the purchase. I think one of the points intuitively from that is that it gives us a little bit more flexibility, is not a bad thing right now.

Great. Thank you.

Felicia Hendrix, Barclays.

I was just wondering if you could clarify a couple of things for me. In the last quarter -- well, you said in this quarter, that the fourth-quarter bookings were up 2%, which is similar to what you said in the last quarter, which is clearly positive, given there hasn't been any deterioration, given the economy. But I'm wondering if you can just get a little bit more granular with that data point? And I'm wondering did anything change in that since the last quarter? You mentioned revenues were up 5% for the bookings. I was wondering if that was better or also unchanged?

I think net-net, the bookings for the fourth quarter are better than where they were earlier in the year. We have seen a consistent trend throughout the year, that -- the fourth quarter was the only quarter that, back in January, was significantly negative in terms of both room nights and revenues. The other quarters were generally positive, especially from a revenue perspective.

As we've worked our way through the year, we've seen continued improvement in the fourth quarter. Probably more importantly, as we look at what has actually happened over the course of the last 60 to 90 days, our bookings for the fourth quarter were stronger than they had been in 2010. So we booked more room nights in the last 60 days for the fourth quarter than we did last year, and those bookings were also ahead of the pace that we had seen in 2007. So net-net, while there was a bit of a hole that needed to be filled in the fourth quarter, we have been pleased with the progress throughout the year, but we certainly have been pleased with the progress that we've seen at the end of the summer, despite all the noise that was out there at the time that that was happening.

That's really helpful. Thank you. And then regarding your outlook, which now is basically for the fourth quarter, last quarter, you had said that adjusting for disruptions in the second-half should be -- in terms of RevPAR, should be about greater than 7%. And now if we take the guidance that you've given, it looks like that number is lower than that. So I'm just wondering what's changed there?

You know, I think there's a couple of things that changed. One was what I talked about in my comments, which is the fact that we did lose some group activity and some fairly strong bookings in the East Coast that -- because of Hurricane Irene. Then we had a big group in Philadelphia that canceled. We had to shut down the Financial Center Marriott for the entire weekend. So you never want to see that happen in New York.

And in Washington, D.C., we were expecting a fair amount of business, both group and transient, related to the celebration of the -- I guess, the presentation -- the opening of the Martin Luther King Memorial, all of which were rained out by Hurricane Irene. So the net effect of that was that we lost about 60 basis points in the quarter. And if we had that, we obviously would have been at the 7% level or maybe slightly above that for the quarter. So I think that's the first things that changed.

I think that the other part of it as we looked at the fourth quarter is that, overall, we continue to feel that the quarter is going to be good. Our property level forecasts are frankly stronger than the guidance that we're giving. I think the properties are a bit more optimistic than we are, but I think we felt like it made sense to dial back a little bit on that. And I think that's why I made the point about the fact that we -- we're not going to outperform in the fourth quarter but we still expect to perform in line in Q4.

Okay, thanks. I should have been more clear, because I was definitely more focused on the fourth quarter. So that was helpful. And just maybe it's housekeeping, maybe it's not -- but corporate expense was lower than we were expecting by about $10 million. Maybe you addressed it in your prepared remarks. If you did, I missed that.

I think the bulk of the change in the corporate expenses is due to the fact that a significant part of our compensation is tied to restricted stock. With the reduction in stock price, I think two things happen. We will probably earn less of that restricted stock compensation because it is primarily performance-related. And the second thing is that with the stock price being measurably lower, that also reduces the amount. So I think the bulk of that change is due to -- really due to changes in what we expect to pay in restricted stock.

Okay. Hey, Felicia, this is Greg. Going back to your prior question, I mean, if you take the midpoint of our full-year guidance at 6.5%, to achieve 6.5%, that means we need to achieve 7% growth in the fourth quarter. So that's the 7% that you were just talking about. And obviously, if we hit 7%, that would be the strongest quarter of the year.

Okay. I mean, I just -- maybe this is splitting hairs, but if you were -- made the adjustments, you kind of would have done 7% this quarter. And then last quarter, you said fourth quarter would be better than the third. So I was just trying to figure out what was going on, but I think I've got it now.

Good. Thank you.

All right, thanks.

Smedes Rose, KBW.

I was just curious what your thought on share repurchase is at these levels, given, as you point out, that your stock trades well below your NAV and a lot of these companies have traded off, your leverage is low, you have a lot of cash on the balance sheet. What are your thoughts around that?

You know, certainly, we would view it as an attractive purchase. And I think, as you know, Smedes, we've bought stock back in the '90s; we bought stock the last four or five years when similar situations have existed. Generally, I think our philosophy on this is stock purchases are best funded from the proceeds of asset sales, where you're effectively selling a part of the Company at a market level price, and getting an opportunity to buy part of it back at a discount price.

And as I mentioned in my comments, I think we've got some sales -- a small amount of sales out there on the market, but I don't expect any of them to close in the real near-term. I think until we start to see both the results of those sales and get a little bit more clarity on how 2012 is going to play out, I think we'd be relatively cautious about instituting a stock buyback. I think, ultimately, as we generate proceeds from some of these -- from the sales, we'll look, as we always do, at what the other options are -- whether it's to pay down debt by investing in our existing assets, look at other acquisitions, or buy part of the Company, and make a decision at that time what's the best use of that capital.

Thanks. I was just wondering, you may have said this, but could you just recap what you're seeing in 2012 on the group booking trends, I guess, relative to the last time you guys gave us an update in terms of just revenue and demand trends?

What we had talked about is the fact that room nights were up about 4% and then rate was up roughly 1%.

Great. Thank you.

Josh Attie, Citigroup.

You've acquired a lot of assets over the last year or so, and I know you usually wait until they've been in the portfolio a full calendar year before including them in your comp set. Maybe, to give us an idea of how the portfolio is performing, if you could give us either RevPAR growth for the third quarter for the whole portfolio, or what the full-year guidance would be, including all of the hotels, that would be helpful.

Yes, Josh, what I'd say is if you looked at what Q3 would have been if we included all of the acquisitions -- so, in other words, our acquisitions were up over 14% in the third quarter. So if we looked at that on a pro forma basis compared to last year, that would have added an incremental 70 basis points to our third-quarter RevPAR growth. So 6.4% would have gone to 7.1%; and obviously, if you had the hurricane disruption and you end up at 7.7% for the quarter.

I don't know off the top of my head what the number is for the full year, but I mean, I think we've generally been seeing -- if you -- I think in the last quarter, we were up about 100 -- you know the impact of the acquisitions added about 100 basis points. So we're somewhere between that 0.75 and 1 point benefit incremental to what we're otherwise showing -- what we're reporting on a comp basis because of the acquisitions we've completed.

Ed, it's Michael Bilerman speaking. Just -- I'll just come back to the stock repurchase, because -- at least in your opening comments, you talked about the best investment that you could make is investing in the properties, right? So you're putting more dollars into the assets, so you obviously have some confidence in the long-term prospects of the hotels.

I can appreciate that you want to get a little bit more clarity on where things stand heading into next year. I think the unfortunate part is once you get that clarity, your stock is already going to reflect what that clarity is, and hence, will be at a valuation level that is a lot different than where it is. And based on your more -- your confidence in putting money to work, you would probably err on the side that the stock would be higher a year from now than lower. So I guess I'm just curious, why not try to be more aggressive if you're trading at such a substantial discount to the underlying assets, which you have a lot of confidence in because you're putting money to work in them, why not be more aggressive today?

Michael, that's a great question, but I think that, ultimately, what the answer is right now is that while we are -- as we look at the world today, and if we assume that we don't have a problem, that the problem in Europe doesn't get worse, and we assume that the blue-chip or the industry consensus, the economic consensus, on next year plays out, we feel very good about 2012. But I think if you -- as we also listen to what economic forecasters are predicting and you look at the fact that there are risks that suggests that there could be some problems out there. And I think, frankly, those risks are what are reflected in our stock price right now, is why it's so low.

At the end of the day, I think the more prudent step for us to take is to be a little bit more cautious and a little bit more conservative with what we do with our capital, at least until we've sort of generated -- completed some of the asset sales that I think, ultimately, are the best way to fund the stock buyback. And, in fact, what you're suggesting is have confidence that you get the sales done and then use those proceeds now to buy at a lower price.

There's a lot of logic to that, but ultimately, at the end of the day, what has served us well over the last decade when we approached some of these times of uncertainty, is to be maybe a little bit more cautious in how we use some of that incremental capital, be a little less quick to pull the trigger on financial transactions similar to buying stock, and just make certain that you kind of are comfortable that the world is headed in the right direction. Because liquidity can make a difference at different times in the cycle.

And so, I think ultimately, I would wholeheartedly agree with you about the value that's there, but I'm comfortable that that value is going to be there ultimately in '12 and in '13 and in '14. And it's only going to be going higher. What I need to make certain of is that we don't take any steps now that may force us to do something stupid later, which might be selling an asset at a bad price or borrowing at a very expensive rate.

So that's -- it's an issue that we're talking about regularly here; it's an issue that I'm talking about with the Board. But I think right now the prudent call is to wait until you get the asset sales done and then re-evaluate the opportunity. (multiple speakers) And the good news is the stock price is a lot higher.

Right. I guess just to drive returns, you could maximize by buying cheap and then selling equity at a higher price if you want to fund the growth. And you can also use some of your under-leverage, where if you're not going to buy assets, why not buy into the assets that you know the best; the assets that you're investing money in and the assets that you're operating every day, why not take leverage up a turn and still have capacity. I'm not saying do a leveraged recap ,but certainly have some capacity to move in the existing structure, even without selling assets.

Yes, I think -- again, I'm not really disagreeing with your sentiment, but maybe the only part of what you just said that I would probably take issue with is that we are very comfortable with the progress that we have made in reducing our leverage over the course of the last two years. But we have been pretty clear that we are ultimately working to be even more lowly levered because we think that there are a series of reasons, including a lower cost of capital, that make that an important goal. So I don't think at this point in time, I wouldn't want to go the other direction. I wouldn't want to lever up today. It could easily work out well but I just don't think this is the time to be making that sort of a move.

Okay. Thank you.

Jeff Donnelly, Wells Fargo.

I guess maybe I want to build on Michael's question a little bit -- not so much on share repurchase, but just how you're thinking about allocation of capital. I think there's some talk out there that Host had walked away from buying the St. Regis in the third quarter. I'm curious, when it comes down to that decision, Ed, is it more about just the uncertainty in the economy that drove that equation, and that it ultimately could have been solved by a price adjustment? Or is it more to do with, I guess, the relative value of your stock versus the price of that asset that drove that specific decision?

It's probably a little bit of both, Jeff. But I think, ultimately, what I would say is sort of consistent with some of the comments I just made in response to Michael's question is, as we looked at that deal, we were excited about the property but we also were -- I think we're really trying to be pretty disciplined here about making certain that we are paying attention to what's happening with our balance sheet as we grow.

And while we don't want to necessarily sit here and say that we're trying to find every acquisition of 100% with equity, because that's not the case. I also don't think, especially at this juncture, I don't know that we're in a position where we would be comfortable in funding a big acquisition entirely with debt. And given what had happened with the equity markets over the -- since our last call, we would not have been comfortable in issuing stock in order to fund the equity portion of that particular investment. And so as a result of that, we determined that the best decision was to not move forward with the deal.

Okay. If I could maybe switch gears and come at the -- just the group comments for 2012 out a little bit differently. When you think about next year, I know you haven't given guidance -- I don't expect you to -- but do you think revenue growth from the group segment could lead or lag your portfolio average next year under most economic scenarios? I'm curious, do you think the attrition and cancellation experience you had in '08 and '09 causes you to think differently about the resiliency of group revenues over a cycle?

I hesitate to try to use what happened in '08 and '09 to guide our thinking about long-term group activity. Because I think so much of the decline there was related to the fear of being on the front page of the Post or the Journal or the Times. That -- I think that was a big driver behind the unprecedented level of cancellations that we had.

If you go back to another period of time -- which, even there, was probably a little bit irregular because of the events of 9/11 -- what we saw in that downturn is that group activity actually declined more slowly than transient, but overall, the room night decline was really pretty equal. I mean, our portfolio, both group and transient, were down about 9% in the '01 to '03 timeframe.

So when I look at that, and when I look at the issue and look at what happened in this last downturn, we tend to still think that in the long run, it's good to have a portfolio that is a little bit over-represented in the group sector, because we ultimately think that through a normal cycle, without the political rhetoric, the group will tend to hold up a bit better than transient will.

Now as we look at next year, I think your question is a very good one. Clearly, this year, we've been experiencing better revenue growth on the transient side. Our transient activity and our transient demand is already ahead of where we were in '07. So, in effect, you could argue using that as a peak, transient activity is back to where it was before. I would point out that at least in our portfolio, transient activity is not quite back to where it was in 2000.

So I do think there's still room for growth on the transient side. But I do think the opportunity for next year is on the group's side. I mean, the reality is, is we've been seeing solid demand growth in the corporate segment, that's the most volatile segment of our group -- of our overall group business. So I think seeing continued growth there is important to trying to drive an ultimate recovery in group.

Now on the group side, we're still 9% to 10% below where we were in '07. We're not that far below in rate, but we're way behind in terms of room nights. So when I think about '12, I think that's the area where we have an opportunity for outperformance, as group activity continues to improve.

I'm curious if the dovetail added in negotiated rates. I mean, I don't know if you find that there is a relationship, but if much of the strength that people are talking about in corporate negotiated business for 2012, seem to do more on the rate side than the volume side, I guess. Does that influence your thinking about how you think about group prospects next year? Or do you find that there is not necessarily a correlation between the two?

I don't know that I have necessarily seen a correlation. I mean, there probably is some correlation from the standpoint that if companies are comfortable in spending on the transient side, it would at least indicate a willingness to spend on the group's side. We have seen tremendous growth in special corporate business over the course of the last two years. So I would expect that as you look at that opportunity next year, it tends to be more on the rate side than on the room night side, simply because the demand piece of that has already been quite strong.

Just one last question and I'll yield the floor. It's just -- thank you for your comments earlier on your outlook for RevPAR, but can you maybe give us a little more color just specifically on what the negotiations for rate and volume have been for, on the negotiated rate side for 2012? And maybe related to that, what your reaction was to Marriott's industry guidance for 2012? I know you made some remarks, but I'm just curious, did it strike you as reasonable and achievable, given what you are already seeing in negotiated rates? Or did maybe their guidance seem like a stretch one way or the other?

I think it's still -- on a negotiated rate point, I think it's still fairly early to understand how that' going to play out. I think that the fact that we already have much stronger occupancy in the industry is a big plus relative to the whole negotiated rate discussions. Because as our properties, on an individual basis or through each operator, are more and more comfortable about the level of occupancy that they have, the fact that they're more comfortable about the level of group activity that they have on the books, all of that I think creates a better foundation for our side of this discussion to happen on. Because while we want special corporate business, we probably don't need it as desperately as we did back when we were having these discussions in 2009. So I think that creates the right sort of atmosphere for these discussions to happen.

Now where exactly they're going to play out, I think Arnie gave some color in his comments. I'm sure that Starwood and Hyatt will in the next few weeks. And they are one step closer to that process. So I mean, really, at this point, we're watching, we're monitoring, we're cheering them on as they push for higher rates. And we hope that they are able to achieve the higher rates. I think we've got the right sort of environment right now to be able to get that.

And I guess your other question was -- what was the second part of that?

Marriott's RevPAR guidance for next year.

Oh. Jeff, I don't know that I want to get too specific on that because, at the end of the day, I think Marriott provided a fairly broad range of RevPAR outlook for the year that's dependent upon a series of different things. I mean, in general, I would say that looking at all the positive points that we laid out, that if the event risk doesn't happen, I would certainly think that we would be comfortable in seeing numbers in those range. I mean, it's a broad range, but the bottom line is that we feel pretty good about next year, as long as something doesn't kind of blow up and cause a problem that changes everybody's outlook. If it continues to track the way it is, I don't know why we don't see solid RevPAR growth next year.

Okay. Thanks, guys.

Ian Weissman, ISI Group.

Just a quick question on your outlook. I understand obviously there is a backdrop of potential issues globally. But if things don't work out and the optimism changes, how much fat could you possibly cut out of the system? Like the last time, you were able cut a lot of headcount in the front office. I mean, how well are the properties operating and how much cost can you technically take out currently?

Ian, I would probably say in answering that question is that to the extent that the weakness that you're -- the potential weakness that you're describing comes in the form of reduced demand -- and I think if it happens, that's the way it's going to show up -- then I think that there would be reductions that we can achieve at the property that would be related to that demand.

So, at some level, if you start to see a meaningful fall-off in occupancy, then you're going to see that you're going to go back and cut the hours that F&B outlooks are open; you're going to end up with fewer housekeepers; and you're going to end up with fewer managers then where we have right now. So I do think there is an opportunity to make additional cuts.

I don't know that I would necessarily -- I would suggest, though, that we could make the same level of cuts that we made in 2008 and 2009, because we have certainly been working hard with each of our operators to make certain that where we thought they had cut fat last time, we haven't wanted that to return. So I think at the end of the day, there is an opportunity to make reductions; most of them would be demand-related, but it's probably not to the same degree that we had last time.

Have you added a lot of headcount back to the properties at this point? Or not yet?

Not a lot. I mean, I would -- I think, again, it depends upon where demand has gone. My guess is we have seen, in our portfolio of occupancies, gone from about 66% up to around 72%, kind of on an estimated full-year basis. And so if you think about that, my guess is the headcount adds are roughly in line with that increase. I mean probably a little -- at least in housekeeping and in certain manager functions, but still well below the levels where we were before.

And just two last questions. Rate growth was up 3.7% this quarter but it trails the first and second quarter, which came in around 5%. Can we take that as the hotels are being a little bit more defensive in pushing rate last quarter, just given the economic uncertainty?

I don't know that that's necessarily the case, because I actually think that within some of our segments -- inside of transient and inside of group -- we actually had very strong rate growth. So I think really more what you're seeing may be attributable less to broad trends and more to the fact that the business during the summer is a little bit more leisure-focused. It's probably a little less business-focused. And consequently, part of what you saw was the discount segment versus the retail segment and transient was it grew a little bit more on a relative basis.

And so it's not that you didn't have -- you had good rate growth, but you didn't necessarily see as big of a benefit from mix shift in Q3 as you have in other -- in some of the other quarters. I don't know that we necessarily view it as a long-term trend.

Okay, and finally brokers that I talk to say that private markets valuations are maybe down 5% or 7%, but there's not a lot of comps to necessarily test that thesis. If you were thinking about deals today, okay, and you were going to your deal model, how would things change? How would your underwriting change today as opposed to three months ago, in terms of your growth?

That's a good question. Longer-term, if you thought about RevPAR growth over a seven to 10-year period, as we would look at the outlook today, it really wouldn't be much different from where it was before. I mean, I think we still feel pretty convinced about the fact that the industry is in the right spot for a long-term recovery. So I think we probably -- it would depend a lot on the individual market, but just like the industry experts are probably a bit more cautious about '12 now than they were, say, six months ago. My guess is that we would probably be a bit more cautious about '12.

But as we would look out to the long-term in terms of what we were expecting to see an individual markets. As we have looked at deals, we have continued to be comfortable that the right type of dynamics are in place to support long-term revenue and profitability growth, consistent with what we would have seen before. So I really don't look at what's happened in the near-term as changing that.

And I think the other thing that has happened is probably relates to that 5% to 7% price reduction that you're describing, is that I suspect that a fair amount of that is on the buyer side, not the seller side, because I'm not certain sellers have gotten there quite yet. It relates to the fact that everybody's cost of capital has crept up a little bit. And so at the end of the day, we tend to want to invest at a spread to our cost of capital. That's going to effect how we're going to look at what we can afford to pay for a property.

But it's safe to say that cap rates have backed up. I mean, obviously, the cap rate on every deal is different, but I've heard as much as 50 to 75 basis points across some markets. Is that too aggressive?

I suspect that that is -- could be true in certain markets. I would imagine that the cap rate differential has -- I don't know that it's moved a lot in the top gateway cities. So I'm not really -- again, we both have to caution this discussion with the fact there's just not been a lot of evidence about where deals are pricing, because the market has turned so radically. It's really only been a two and one-half month phenomenon.

But I don't know that there has been a big change in the major markets. I suspect that some of those comments could relate to the secondary markets, which we're starting to improve over the course of the spring. I think that, again, we're still getting feedback that there is still activity in those markets, but it would stand to reason that since they were the last to sort of feel the recovery in pricing, they also might likely be the first that might back away a little bit, to the extent that some players are out of the market.

Okay. Great. Thank you.

We'll take our last question from Joe Greff from JPMorgan.

I know the topic of 2012 group bookings have been beaten to death here, so I'll add one more question to that list. When you look at the 2012 group room nights on the books now, what percentage of your total anticipated group nights is that? What does that represent and how does that compare to history at this point?

We're at about -- Joe, we're at about -- right now, we're at about 55% of what we would at this point estimate would be our total room nights for 2012. I don't think that that's too far off from where we would normally be. We would expect to get to the end of the year and be around 70% of our room nights for next year booked.

So I think it's pretty consistent. I don't think there's any surprises on that front. Actually, to be honest, I hope that that turns out to be a lower percentage of our group rooms for next year, only from a standpoint that, as I commented earlier, I continue to believe that the group side represents a real opportunity for us. And consequently, I'm hoping that we'll see outperformance in that segment of our business as well.

Okay. And then one final question. The EBITDA impact from the Hurricane Irene in Philadelphia, D.C., New York, did you quantify that for us? Did I miss that?

It's about $4.5 million -- $4.5 million to $5 million.

Great. Thanks, guys.

Ladies and gentlemen, that's all the time we have for questions today. I'll turn the call back over to Mr. Walter for any closing comments.

Well, thank you for joining us for the call today. We appreciated the opportunity to discuss our third-quarter results and outlook with you, and appreciate all of your questions. We look forward to talking with you in February to discuss our year-end results, and we'll give you a lot more detailed insights into 2012 at that point in time. Have a good remainder of your week. Thanks.

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