Ryman Hospitality Properties Inc (RHP) 2012 Q3 法說會逐字稿

Welcome to the Ryman Hospitality Properties Incorporated third-quarter 2012 earnings conference call. Hosting the call today from Ryman Hospitality Properties are Mr. Colin Reed, Chairman and Chief Executive Officer; Mr. Mark Fioravanti, Executive Vice President and Chief Financial Officer, and Mr. Carter Todd, Executive Vice President and General Counsel.

This call will be available for future replay. The number is 800-585-8367 and the conference ID number 39-25-57-48. At this time, all participants have been placed on listen-only mode.

It is now my pleasure to turn the floor over to Mr. Carter Todd. Sir, you may begin.

Thank you and good morning. My name is Carter Todd, and I am the General Counsel and Executive Vice President for Ryman Hospitality Properties.

Thank you for joining us today on our third-quarter 2012 earnings call. You should be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding Ryman Hospitality Properties' expected future financial performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing words, such as believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements.

You are hereby cautioned that these statements maybe affected by the important factors among others set forth in our filings with the Securities and Exchange Commission and in our third-quarter 2012 earnings release. And consequently, actual operations and results may differ materially from the results discussed or projected in the forward-looking payments. Ryman Properties undertakes no obligation to update publicly any forward-looking statements, whether as the result of new information, future events, or otherwise.

I would also like to remind you that in our call today we will discuss certain non-GAAP financial measures, and a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures has been provided as an exhibit to our earnings release and is also available on our website under the investor relations section.

At this time, I like to turn the call over to our Chairman and Chief Executive Officer, Colin Reed.

Thank you, Carter. Good morning, everyone, and thank you for joining us today.

I will start by talking about the third quarter and then provide a detailed update on our REIT conversion process and the transition with Marriott. Then Mark will provide additional detail on our financial performance, and then we will take some questions.

Over the past eight years or so, our Company has been confronted by a number of extremely challenging periods, be they the worst global recession since the Great Depression, shareholder activism, and not to mention a thousand-year flood. As a Company, we have come together to meet these challenges head-on, and ultimately, emerged as a stronger enterprise.

It is almost one year to the day that we sat with our Board and talked about ways in which we could unlock value. I now understand why very few companies make the leap from a C-Corp to a real estate investment trust. Today, Ryman is very different to the Gaylord of 12 months ago, and as a consequence, the Company is so much stronger than in any time in its past.

As you all know, after much deliberation we announced our chosen path at the end of May of this year, and the real heavy lifting has occurred during the five months since then. As a consequence, the announcement of the selling of Gaylord Hotels branch and Marriott that occurred on the eve of our third-quarter essentially put our Company into quite a bit of emotional stress. The circumstances that we dealt with this quarter leading up to 1 of October when we transitioned our properties to Marriott and converted to Ryman was difficult on a number of fronts, simply because many of our employees at both the corporate and hotel levels were faced with a great degree of uncertainty of their futures as we fundamentally restructured our Company.

Understandably, many of them were primarily focused on whether they would still have a place within the new REIT or the new hotel business. Consequently, as a management team, it was a priority for us that we treat our employees as compassionately and responsibly as possible, as we crafted the structure of the new Company. We were also tasked with ensuring a smooth transition with Marriott, and at the same time, doing everything necessary to meet our regulatory requirements essential for the reconversion. Simultaneously, we increased the level of communication to you, our shareholders, that included the execution of a major stock repurchase and secondary offering that enabled us to focus on the future, and thus ensure that we have the support from our shareholders to complete this transformation.

Now, when you take into account this exceptionally challenging backdrop and the array of distractions, I can honestly say I'm very pleased with how our business performed during this last quarter. In previous quarters, I have normally summarized for you our detailed performance, but it would seem to me that what you as investors are interested in now is what does the future look like? And does the picture we painted for you in mid-August still look the same? But first, here are my brief thoughts about the very unusual third quarter.

Notwithstanding the turmoil, our top line and bottom line performance was decent, with a slight increase in revenue and CCF across our business, despite the fact that two of our hotels had all-time record-setting third quarters in 2011. Often in times when distractions are at the forefront, eyes get taken off the ball and margins slip, but that did not happen in our hotels nor our corporate. Also, I was pleasantly surprised with our level of room night production, particularly as I have said, most of our sales personnel were extremely preoccupied and questioning whether they would still have a job once Marriott took over management.

So let's talk about the transition, both within our hotels and at Corporate. First, the hotels. Now there is an extraordinary amount of work that has gone into the planning and execution of this operational handover. But I suspect you want to know about three things as they relate to the transition of Gaylord Hotels. First, are there any material problems in the transition thus far? An the answer to that appears to be solidly no. The work that both we and Marriott put into this phase has paid dividends.

Second, costs. Are we getting the hotel-level synergies that we anticipated? And you all remember, we indicated that we expect to get somewhere between $19 million and $24 million net of management fees. As we sit here today, we feel pretty confident that we will reach this goal once all of the array of systems that Marriott is planning to implement actually get installed. And we expect the system side of the transition will be completed in the second quarter of next year.

Third, revenue enhancements. Now there are two pieces of information I will share with you as a precursor to the guidance we will issue once our planning process for 2013 with Marriott is fully complete. First, what we have seen so far in October is a decent increase in group lead volume that is coming from the Marriott engine, and this we are encouraged about. Regarding transient room nights, in order for the Marriott Rewards System to function seamlessly, each of our hotels need to be converted to the Marriott -- to Marriott's property management systems. So far, Palms, National, and Texan has been converted in October. And that has all gone pretty well. And as of October 29, Marriott Rewards can be earned on stays in these three hotels.

Gaylord Opryland's property management system integration is planned for January of next year, post the high-volume holiday season that Opryland will be benefiting from. Whilst it is too early to talk about Marriott's Reward production, our overall October performance, excluding the last couple of days with hurricane Sandy, showed decent year-over-year revenue growth.

Now let me switch to corporate costs. We have done a lot of work here, and are in the final stages of constructing our plan for 2013. In the many meetings we have conducted with investors in August and September, we indicated to you that we anticipate reducing our corporate costs by somewhere in the $14 million to $16 million range. It now seems that given the reduction in staffing, the complete overhaul of our technology systems, and the re-setting of compensation, particularly at the top of the house, to reflect the fact that Ryman is a very different Company today, corporate savings will come in higher than our original estimates. And we will give you more detail on this as our guidance for '13 is ready. But a large part of our cost savings have already occurred or will occur over the next couple of months. So this element of cost savings is no longer speculative.

One last point as it relates to Gaylord Hotels transition, which is particular of interest to both the Board and to me. One of the key factors in our decision making as we were evaluating potential partners was the value Marriott places on building a strong employee culture that translates to exceptional guest service, a core characteristic of the culture that we have built at Gaylord over the years and something that you have heard me talk about in every single earnings call over the last 10 years. We have certainly seen this culture on display over the past several months. And although any transition project of this scale is bound to have some bumps along the way, we are very pleased with how the process has gone so far. Marriott has done a really good job of maintaining the strong Gaylord culture. And as a consequence, our guests will benefit as a result.

As it regards to the conversion costs, we are tracking slightly higher with our projections, mainly due to higher severance and retention costs. But the offset are as synergies will be better, and Mark will elaborate on that. Now let me set the stage for the guidance tweak we are making. As all of you know, our financial performance for the first six months of this year was pretty good overall. But as I have said, the emotional stress that occurred within the third quarter cost what we believe to be at temporary glitch, particularly to the short-term bookings that we were anticipating in the third quarter.

The fourth quarter started pretty well in October, but over the last few days, we have been impacted by the devastation that we have all witnessed in the Northeast. Our hotel in Washington survived Sandy with little damage, but we have had a half dozen or so groups that have canceled. In total, we estimate the impact of hurricane Sandy to be in the $3 million CCF range to Gaylord Hotels. Given all of this and the fact that our leisure and holiday bookings are trending ahead of last year, we are making a modest change to our CCF guidance for the overall year by marginally dropping the top end of the range to $245 million. We are also tightening the top-end of our RevPAR and total RevPAR guidance range to 4%. As we have communicated to you since announcing the transaction with Marriott, and our plan to convert to a REIT, our chief focus leading up to 2013 is on the integration and building of a strong foundation for a new Company. We anticipate this will remain our priority over the next few months.

Looking at growth, we feel that we have a number of strong opportunities to expand our business organically, such as through room and meeting space expansion, and the addition of new food and beverage offerings and other amenities to make our properties even more attractive. In terms of external growth, as we have discussed, we have a very informed sense of potential acquisition targets that are out there in the marketplace. That said, I want to reiterate that we are in no hurry to deploy capital while we are still concentrating on optimizing the integration process and the maximization of free cash flow for '13.

Before I turn the call over to Mark to walk you through the financials, I just want to take a moment and thank our shareholders for the confidence and support through this process. This has not been an easy undertaking for any of us and certainly not for so many of our employees, who unfortunately were negatively impacted by this transaction. However, now that we stand almost on the other side of this process, I can say with confidence that the future looks extremely bright. I am very confident that in 2013 we will produce the highest level of profitability that this Company has ever produced, and our free cash flow will be very substantial, given the fact that our capital expenditure commitments and our leverage levels are modest.

The fun question for us is how much of the free cash flow do we return to shareholders through dividends and stock buybacks? How much we will use to continue to delever the balance sheet, and how much we deploy to growth? And like most hospitality REITs, we will start '13 with relatively low leverage and substantial AFFO per share, and this gives us great flexibility.

As we finish our planning for '13 with Marriott, we will of course be ready to be explicit on these questions. But whatever the answer, our financial position gives us a ton of flexibility for this Company. And needless to say, a significant amount of value has been created.

Thank you, and with that, I will turn over to Mark to talk about the financials and guidance in a little bit more detail.

Thank you, Colin. Good morning, everyone.

On a consolidated basis, revenue for the third quarter grew 1.3% to $228.1 million. During the quarter, income from continuing operations was a loss of $26.7 million, or $0.57 per fully diluted share based on 46.5 million weighted average shares outstanding. This loss includes $51.4 million of expenses related to the Company's planned conversion to a real estate investment trust, and as we outlined in our release, we have separated these costs in our financials for your benefit. Consolidated cash flow was $22.6 million in the third quarter of 2012 compared to $48.8 million in the same period last year, and included $30.3 million of costs associated with the conversion process.

Turning to the hospitality segment, RevPAR decreased 0.9% while total RevPAR was flat compared to the same period last year. Gaylord Hotels in the year for the year cancellations in the quarter totaled 21,912 room nights, compared to 19,927 room nights in the third quarter of 2011. Attrition rates increased 0.8% year over year to 10.2% in the third quarter. During the quarter, we continued to benefit from attrition and cancellation-fee collections, and collections totaled $1.7 million, compared to $1.4 million for the same period last year.

Gaylord Hotels' consolidated cash flow increased 4.1% in the quarter to $57.8 million, leading to a year-over-year improvement in CCF margin of 100 basis points. The Opry attraction segment continued to perform well in the quarter with revenues increasing 11.4% to $20.2 million, driven by increased attendance at the Grand Ole Opry. CCF increased 25% to $6 million in the third quarter compared to $4.8 million in the prior-year quarter.

Moving to corporate and other, CCF excluding REIT conversion costs, improved to a loss of $10.7 million, compared to a loss of $11.4 million in the prior-year quarter. As I mentioned earlier, we incurred $51.4 million of REIT conversion costs during the quarter. These costs included non-cash impairment charges of $21.3 million, professional fees of $14 million, employment and severance costs of $10.3 million, underwriting costs of $2.8 million, and other transaction costs of $3 million. The impairment charges that were incurred as a result of our shift in development strategy included a $14 million write-off of previously capitalized costs associated with the future -- a potential future expansion of Gaylord Opryland and our previous development project in Mesa, Arizona. We also abandoned certain other projects associated with our existing business, and recorded an additional impairment charge of $7.3 million during the quarter, which was primarily related to information technology systems.

For the full-year 2012, excluding non-cash impairment charges, we expect to incur approximately $73 million in one-time costs related to the REIT conversion. While this estimate is higher than our initial estimate of $55 million, it includes approximately $12.5 million in additional charges we had not planned for, such as a TRT repurchase, additional sales incentive costs, and certain changes in property level accounting treatment. However, when factoring in lower than expected Federal Income Taxes and earnings in profit distributions, we anticipate the overall net cash impact of the transaction to be approximately $50 million higher than originally anticipated.

On November 2, we announced that our Board of Directors declared a special dividend of $309.7 million, or $6.84 per common share relating to the REIT conversion. The dividend is payable to the stockholders of record of November 13, and our stock will be in trading ex dividend on November 8.

Moving on quickly to the balance sheet, as of September 30, we had long-term debt outstanding of approximately $1.148 billion, including the current portion, and unrestricted cash was $24.2 million. Additionally, $260 million of borrowings remained undrawn under our credit facility, and the lending banks issued $8 million in letters of credit, leaving $252 million of availability under our credit facility. In addition, on October 1 following the close of the quarter, we received $210 million from Marriott in association with the sale of the Management business.

And finally, turning to guidance, in addition to the short-term bookings impact associated with the REIT conversion process, we had approximately 14,000 room nights cancel as a result of hurricane Sandy. While these cancellations were minor at Gaylord Opryland, Gaylord Palms received a cancellation notice from a 6000+ room night military group whose attendees were unable to depart from the Washington DC area, and Gaylord National received cancellations that totaled over 7,000 room nights as a result of the storm. We estimate that the total TCF impact from the storm is approximately $3 million.

As a result of the impact of the storm, coupled with the temporary slowdown in our bookings during the transition process, we believe it is appropriate to revise our guidance to more appropriately reflect our expectations for the remainder of the year. We are therefore revising our guidance for hospitality segment RevPAR for an increase of 3% to 6% to an increase of 3% to 4%. And we're revising our guidance for total RevPAR from an increase of 3% to 6% to an increase of 3% to 4% year over year.

While the hurricane has negatively impacted our hospitality segment results, we are outperforming our initial expectations in our Opry attractions segments, as well as our corporate and other segment. Therefore, we are tightening the top end of our consolidated guidance to reflect a total Company CCF range of $235 million to $245 million in 2012. It is important to note that this guidance excludes the expenses incurred in the Company's conversion to a REIT. We anticipate that we will provide guidance as a REIT for 2013 when we report our fourth-quarter and 2012 full-year results in February of 2013.

And with that, I will turn the call back over to Colin for any closing remarks.

Mark, thank you.

I just want to make one comment, Mark. In the middle when you were talking about the overall transaction costs, there was a sentence you used, and I just want to make sure everyone understands precisely what you are saying. When you said the overall net cash impact of the transaction would be approximately $50 million higher than originally anticipated, I want to make sure everybody understands that the original projection, $210 million coming in, all of the different costs, including the dividend would leave us with about $25 million to $30 million of cash -- $20 million of cash. That number is now $70 million. So when we talk about the overall cash impact of the transaction to be $50 million higher, that is good, not bad. Not $50 million more of costs. So forgive me on that.

So operator, we will open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Jeff Donnelly with Wells Fargo.

Thanks for clarifying that, because my heart just skipped a beat.

When you said it, mine did too.

Jeff, it made sense to me.

Of course.

That is really good news, because obviously we will have a $50 million more to continue to delever or figure out what we do in terms of returning stock to -- returning cash to our shareholders. But anyway.

It's always good to find money in the seat cushions. Actually, I'm curious -- I have a lot of questions, but I'll just ask a few, starting with you, Mark. Because there is a lot of confusion out there, I think among investors where they are trying to work through the transition piece. Maybe it is a little bit of housekeeping, but are you able to give us a rough sense of where you see cash balances and debt balances at year end?

We should end up with total debt at year end around $930 million or so. I think that is about where we will end up as we work through this last quarter.

Okay. And that is gross debt? That includes the convert thing?

Yes.

And do you have a sense for cash balances as well?

Well at that level, we would have a minimal cash balance.

Okay. And related to that, are you able to give people a sense of what the share count is going to look like on a fully diluted basis for Q4 or even at the start of 2013? I know there's a lot of moving parts in the convert, but --

Just to walk you through our estimate right now, if you assume that we have positive net income and the converts are in the money, we would end up on a fully diluted basis with about [60.2] million shares on a GAAP basis. On an economic basis, it would be about 55.3 million shares. Obviously, if we don't have positive income, then you don't count the convertible notes and the warrants.

Okay.

That is something that we do 80/20.

That is 80/20. That is the special dividend at 80%. We have assumed a share price of $32.39 in that calculation. Obviously, that price will be set on December 10, 11, and 12. An estimate.

Okay. And a two-part question for you, Colin, in terms of returning capital to shareholders. You touched on it in your remarks. One, how are you thinking about share repurchases at this point, because obviously, the price that's implied by Ryman is very low vis-à-vis the REITs. And then secondarily, as you look forward to 2013, I know you haven't specified what your dividend is going to be, but are you going to narrow down for folks what is the likely and permissible ranges for FAD payouts? Is it 60% to 80%? Is it 60% to 70%? And what do you think you are leaning to at this point in that range?

Jeff, these two questions were questions that we heard basically in every investor meeting we did back in August, when we were doing the TRT secondary. And the way we answered the question, let me talk about stock buyback. The issue is, what is the most effective deployment of our capital? Go out and buying something at these high multiples, 14, 16 times or hypothetically, if we are trading at 11 times buying our own stock in. The answer is we believe, I suspect our Board will believe that the investment in ourselves, because we happen to have a very good sense of the quality of these assets and what we believe they will do will probably make more sense to us. But it is an issue of what is the alternative opportunity for the deployment of capital? If we see an asset that is a screamer that we can get at, and we believe will create a substantial improvement in NAV of this Company, then we would seriously look at it. But we are not just going to sit here and hold money. Paying down debt is not a bad thing, but the fact of the matter is we will have relatively low leverage when '13 arrives here. So we will look at potential stock buybacks based upon where this Company is trading as a multiple of its cash flow.

In terms of dividends, obviously, as we have talked to the REIT investment community, we have been conditioned with -- on a couple of things. What the REIT community wants to see from a company like us is a consistent, decent dividend policy. And that is what we intend to do. And we are not going to amplify on what decent means right now, but we are going to have a lot of flexibility with the free cash flow that this Company generates. So we will have a decent dividend. And when we get through the planning phase with Marriott, which we're in the middle of right now, and we are ready then to release guidance, one thing we will be doing is being very clear about what our dividend policy will be for '13 and forward.

And one last question actually on transition issues, do you think there is going to be -- or what is the propensity for transition issues if Marriott to persist in to Q4 or Q1, whether it's entire expenses or slippage in revenue? How should we be thinking about that?

I'm not sure I understand the question.

I guess I'm thinking as a result of the transition to Marriott, like you mentioned that there is some systems that are going to be converting over at Opryland in January. I'm guess I'm trying -- set expectations around it, the possibility that things would be not firing on all eight cylinders over the next 100 days. I guess I'm curious about the impact around that.

I don't anticipate us having the same issues in the fourth quarter that we had a little bit of in the third quarter. And the reason why things are different now is because in the third quarter, people just didn't know. After we announced this transaction at the end of May, a month before the third quarter, we had a reasonably decent June, as we announced at the end of our second quarter. But that was because basically June was booked and solid, and the momentum was very good. But what happened was, when we announced this, was that basically every major department of our Company, both at corporate and within our hotels were looking around saying -- of my God, what does this mean for me? Do I still have a job? Am I going to just get consumed into the Marriott machine?

Unfortunately what occurred was there was some major cultural shock that went through this organization. And we spent so much of our time communicating to our people. And then as we were building who stays, who goes with Marriott, and Marriott were actually able to go into the hotels and meet these people and determine who were the keepers, who were not the keepers. That plan of action was all rolled out during this third quarter. So at the end of -- by the end of the third quarter, every one of our sales folks knew who was staying, who was going. We had put in place a retention plan for those that we wanted to keep. We had put in place a special sales program to incent our sales people who were leaving, to make sure that they delivered the room nights for the customers that they were communicating with.

And so, by the time we got to the fourth quarter in early October and Marriott took over, there was a massive game plan that had already been laid out. And the people in our sales organizations knew their roles, knew who was staying, who was going. And I think the fourth quarter is going pretty well. And we have done a lot of stuff in this fourth quarter. So I don't see disruption carrying through to the fourth quarter. But there are -- this is -- these hotels, there or thereabouts generates somewhere between $200 million and $250 million, in the case of Opryland, almost $300 million in revenue.

These are not like converting Holiday Inns to Marriotts. These are massive hotels, and the amount of technological infrastructure that needs to change here for these to be plugged in is just -- it's massive. As so, there will be technology systems that we will be implementing through till about April, May of next year. That is just the way the plan of action has been put together to make sure that we don't miss a step, we don't miss a beat. So hopefully, that wasn't a too winded, too long-winded response. But this has been a very -- not difficult, but very challenging transition, because of the number of people that have been involved here.

Great, thanks.

On the systems side, I guess the comment that I would make is that we now have converted the Palms, the Texan and DC sequentially. So with each one of those implementations, we learned from the previous one and made improvements. So as we roll into Opryland and work through that system conversion in January, it is the fourth one; we have learned a lot. So I think that the process is pretty well refined at this point. I think there's a lot less risk on the technology side going forward, given that we have got some experience.

Thanks.

Jeff why don't we give someone else some opportunities to ask questions, and we will get back to you if you've got a whole host more.

I'm done.

Your next question comes from the line of Andrew Didora with Bank of America.

We have heard a lot from -- we've heard from most of your [lauding] peers this earnings season. And they've spoken about a slowdown in corporate demand of late and that they expect it to continue through year end. We also saw your attrition and cancellation fees tick up, albeit modestly in 3Q. You mentioned the transition impact in bookings in the quarter, which I'm sure was a big part of it. But I guess, Colin, could you speak a little more fundamentally, what change, if any have you seen in group planning behavior over the last few months?

Yes happy to do that, Andrew. First of all, the issues that we had I think in the third quarter were really mainly around the short-term stuff. It is the corporate client that books the 50-room, 100-room small meeting. So we had our system working pretty well. First quarter, second quarter, the hotels performing very, very well. Then we come to this massive change, caused a lot of squirrelliness with our sales organization. And then we hand over to Marriott on the 1 of October. And by the end of October, our lead volume, our lead bucket, is up double-digit from where it was this time last year. So we are getting a lot more exposure, because Marriott has a much bigger bench of sales people and much deeper set of relationships with corporate clients all across the country. And we are happy and pleased with the uplift that we are seeing in our lead volume, which as I said, is almost 20% up on where it was a year ago.

So it is very difficult for us to gauge whether the group side is still as vibrant as it was a year ago or still as vibrant as it was at the end of June. Just looking at this uplift that we have seen, because Marriott's machine is just so much bigger. But I will tell you, I don't think we are seeing, as a Company, a decline in interest to hold meetings across our businesses. I just don't think we are seeing that. Now what we did witness in the third quarter, and you may want to jump in on this, Mark and Patrick, is we did see a tick down in the outside of the room spend. And obviously, we did see a massive tick down in outside of the room spend in '09 and '10 as the world was going into recessionary shock. But it was modest. And the thing for us is that each group is not created equal. One group will spend X outside of the room, and another group will spend Y outside of the room. And the last third quarter we had was one of the best third quarters this Company has ever had. So I don't see any systemic change taking place here. And I feel very good, though, about the way our hotels are positioned for '13.

I think the upside of the room spending change that we saw in the third quarter was driven more by mix than necessarily behavioral change.

That's helpful. I guess to follow up, one follow-up question, just in terms of your October bookings, what was the main driver of the strength you saw? Was it corporate association business? Can you give us a sense on what customer can (inaudible)

We did not disclose October bookings. What we disclosed was October lead production. That's what we talked about. And I think it was all of the above. It was both in the corporate sector, and I think in the association sector.

And one last question for me, switching gears a little bit to the conversion and the transition process here. So what do you think are the biggest top-line synergy opportunities will come from now that Marriott has been running the assets for a bit over a month now? Have you identified anything that might be different than what you were thinking about, pre-Marriott management?

No. The answer is no, and I don't want to sound cavalier about this. But in all of our internal hypotheses, and I think what we have consistently said to our shareholders was our assumption for the reason of doing this was not revenue synergies. We assumed in all of our hypotheses that we will get a goose egg on revenue synergies. Now what we followed that up with was we don't believe that. But that was the hypotheses. Now I really believe that in a market like Orlando, where we basically get zero business that comes in from the international arena, the Marriott frequent-flyer program should really add, in our minds, incremental room nights from the international arena. Because we have very little exposure to that right now. So I think we're going to see uplift in the rewards pipeline delivery, as well as the massive, both corporate and association, sales tentacles that the Marriott organization has. So we're looking over the course of the next two to three years, growth in room nights from each of those two major drivers.

Okay. I appreciate the color. That's it for me.

Let me just say one last thing. We don't have a plan delivered by these guys yet, and we're going to be in this planning process with them over the next several weeks. And I'm sure it won't be, here it is, thank you very much. I'm sure we will be in very deep discussions about the delivery channels and why and how do we improve it? So we will be, as we talk guidance, be able to give you a lot more specificity around these delivery channels.

Your next question comes from the line of Bill Crow with Raymond James and Associates.

A couple of questions. It seems appropriate today to ask you about what the prospects look like in DC for the inauguration. And are you in negotiations with both parties? How does that work?

The answer to that question should be posed to Marriott. Forgive the trite answer to your question, because it's -- they are responsible for those types of endeavors now. But look, we benefited the last time we had a change of government. Actually, we did have a massive ball at our hotel back in 2008 that the Republicans held. I think it was the Texas Republicans, if I remember rightly. But so look, we have got the best physical product in that market, and we expect that we should benefit from that. And our friends at Marriott are very well equipped be all over both the Republican and the Democratic parties.

Okay. Then for those of us that don't focus on gaming, can you just give us an update? Is the expansion in that part of the state, is that dead? Is it still ongoing? Where are we from that perspective?

Proposition 7, which is the proposition that was heavily nurtured by Governor O'Malley, and passed in the legislature, which is the expansion of gaming in the state of Maryland to increase -- put table games in. And a license in Prince George's County will go before the voters of the State of Maryland and the county today. And it has been almost as vitriolic campaign as the presidential campaign, with massive amounts of money being spent by the proponent, MGM, and our development partner up there, Mel Peterson, and to a small extent us. And on the other side is you've got the antis that are being heavily supported by Penn Gaming. We will know the answer to that question about 8.00, 9.00 tonight. But if gaming gets approved in Prince George's county and expended in the state of Maryland to include table games in a great facility with limited guest bedrooms, built in National Harbor, that will be good for our business.

Okay. Two quick questions for Mark. Mark, do you have a G&A run rate that would be appropriate to model going forward?

In terms of the hotels or in terms of corporate expenses?

Corporate.

Well, I guess the best way to think about that until we give guidance, Bill, is that we've provided a range of corporate-level savings of $14 million to $16 million. So that would be a starting point.

Which, by the way, we've said this morning, we will exceed.

We will exceed.

And should we use the third quarter as the base of that savings?

Well the third quarter had some noise as folks were getting ready to start exiting. I think the second quarter may be a better proxy.

Okay. Great. And I missed it, I know you gave the number, but the expected gross debt on the books at the end of the year -- $900 million, I do not quite catch that number?

It is going to be between $930 million and $940 million. Now that obviously, that doesn't account for the Prince George's County bond, which we carry on our balance sheet. We carry about $145 million. So I guess if you want the net up against that debt, it would reduce that.

And that second tranche of Prince George's County bonds will be [go cart] this year.

Okay, and then finally for me, you guys had previously announced, I believe, that the venture with Dolly Parton, I think it was, to build the park, that is dead, isn't it?

It is dead with Dolly, but what is interesting is we've had several other companies that have come to us, and we are in discussions with two other companies to do something similar here in Nashville. We don't know where that will go. But both of these organizations seem to have some -- and these are organizations that are not fly-by-night. These are major companies in the water park space. And they have an interest, and we are talking. So we'll see where that goes.

Your next question comes from the line of Kevin Milota with JPMorgan. p

I had a question, as you look forward more bigger picture here. Maybe you could give us a sense for how you are thinking about peak occupancy level targets as you move forward, with the understanding that the Marriott Rewards customers are now online and that you will likely see higher leisure guests on, call it, Thursday, Friday, Saturday business. Could you give us a sense for where you see occupancy levels going?

So Kevin, I'm sorry, but I'm going to disappoint you here. Again, we are getting into this whole budgeting detailed sessions with our friends from Bethesda as we speak. And so for us to give you aspirational targets of where we think, I think would be a little bit getting the cart before the horse before we finish all of these very healthy dialogues and discussions. But I think when we get ready to announce the -- our guidance for '13, we will talk long-term aspirationally where we think these assets can go. One thing I would say to you, absent a massive double dip, we only expect our occupancies and our RevPARs to go up.

Okay. Maybe an easier one here for you, as it relates to the conversion cost going to $73 million, versus the prior estimate of $55 million. Of that, is it still, call it, $15 million to $20 millions in required CapEx to get the properties on the Marriott systems? So the actual impact to CCF would be the $73 million less $15 million to $20 million?

It's $16 million is the Marriott conversion cost.

And that is capped.

That is capped.

So that is finite. We are hoping that comes in a little bit less than that, but that is what that number is.

Your next question comes from the line of Joshua Attie with Citi.

Following the REIT conversion, do you have any plans to turn out the balance sheet with longer duration debt? I know that the revolver doesn't mature until [2015], but you are effectively financing long-term assets with shorter-term floating rate debt, which obviously helps the free cash flow of the Company. So help us think about what the future cash flow might be available for dividends. Can you tell us what the financing strategy will be post REIT conversion?

As Colin mentioned, we are working through right now the various options in the planning process, and obviously, part of that will be what we do with the balance sheet. What I can tell you at this point is that we will be looking at how we restructure the balance sheet going forward. It will likely incur -- or include more fixed-rate debt given where rates are today. It will include longer-term debt. We will try to ladder our maturities so we don't face these large maturity stacks. But those are all activities that we will be undertaking through the middle of next year.

Okay thanks. That's helpful. And one more question on the operating side. When we think about lead volumes being up, and more activity in the portfolio now that it is being integrated into Marriott systems, looking at the occupancy of your hotels, they seem pretty high, and they seem like it implies that they are pretty full during group meetings periods. I guess my question is do you actually have space and capacity in the portfolio to accommodate a lot more incremental group meetings? Or is the potential revenue synergy mainly on the leisure side?

That is really good question, so let me try and give you an answer. In terms of group room nights and group occupancy, there is a requirement to make sure -- in order to maximize occupancy, you have got to make sure that you transition to groups who are not quote space hogs, so you can put more groups into the hotel. The hotel with the size meetings that we tend to do in this Company historically that we have done, and you look at the average space that an average group consumes, the theoretical peaking occupancy for us in group is somewhere in the 68 to 70 points of group occupancy. Now if you do more corporate business and you bring down the amounts of space that each group uses, that occupancy -- that theoretical occupancy can potentially go up a little bit. But right now, we do, occupancy-wise, Patrick, somewhere in the 60 points of group of business. So we have the ability if we manage our space well, if Marriott manages our space well to increase the group side 3, 4, 5 points here over the course of the next three to five years.

In terms of the leisure side though, this is a big opportunity for us. Because if you look at our Smith Travel Data, and you look at how we do as a Company, even though our occupancy is high, it is because we dramatically outperformed the competitive set on the group side. But we underperform on the leisure side. And there is a reason for that, and that is that we do not have the Starwoods, the Hyatts, and the Hiltons and the Marriotts, our own frequent flyer program. We don't have that dedicated pipeline. So we expect to see leisure business grow here over the next two to three years. And what you have got to remember is that on any -- not any given night, because it does not work this way with the patents, but we run about 75 points of occupancy, so de facto, 25% of our rooms over the course of the year are empty. And we think that we can move those room night -- those occupancies more towards the 80 point measurement. And that has been something that we have talked about as a Company consistently here over the last three to five years. So yes, we do. It is a long-winded way of saying, yes we do have the ability to put more group business in these hotels if we manage the space right. But we also have the ability to put more leisure room nights into this business substantially.

Thanks Colin. That is really helpful. If I could ask one more question with respect to the national bonds. One, is that $2 million that you're going to get every year, is that cash? And two, how should we think about potentially monetizing those bonds? Could you sell them today if you wanted to? And what is your tax basis?

It is cash, and it will be an annual payment. You are talking about the marketing payment. That is a cash payment. We do have the ability to monetize those funds today; we could sell them to [a quib]. The tax basis in them though is a 0%. So the challenge for us has been historically is that we have these two bonds that yield 8% and 10%. We have a 0% tax basis, and so to monetize them, you have to have a pretty compelling use of proceeds to make it work economically.

Right now, given the fact that these have just gone into money, it does not make any sense to us to sell those bonds, pay the 35% tax rate, and then take that money and then go and repay our revolver, which is 2.25 over LIBOR.

So it sounds like the plan is to at least for medium term to hold them for income?

Yes. Exactly. And then take that income and dividend it to the shareholders, or take that income and buy stock back. Or, if all of a sudden here's a screamer of a deal that generates a substantial return on the invested capital, and we don't have the alternative to get our hands on capital at an affordable rate, then those bonds all of the sudden are in the cross hairs to be monetized.

Can you remind us what is the maturity date of those bonds, when you could get the principal back?

The principal is amortized over the life of the bond.

How long is that?

They are 35-year bonds. I think they are 35. And I think they have got 28 years left on them, something like that.

Okay. Thank you very much.

And the other thing Josh is if gaming is approved in Prince George's County, those bonds will have more value to them. They just are, because the volume of business in that community will be substantially different. So we're not in any rush on this. Thank you.

(Operator Instructions)

Jackie, we will do one more question; it is reaching the top of the hour. And then if other folks have questions, they know how to get hold of us.

Your next question comes from the line of Fred Lowrance with Avondale Partners.

Just a broader brush question to ask you, Colin. How would you characterize what transaction activity has looked like in those markets and in those specific type of hotels that you would be looking at over the next couple of years to acquire? Are you seeing the supply come to market? How would you characterize the per key or the multiple earnings prices being paid for it? Any color on what your bucket of hotels is a trading like right now?

Our bucket of hotels, there have been a handful of hotels that have come to market that would probably fit in our profile. And the multiples on current cash flows are pretty rich. And the issue for us is what happens with this economy over the next two to three years? How does RevPAR continue to grow in this country? I think we will know a lot more given today in the next week, two weeks as to the general direction of this country. But as we look at the broad question Fred, when we look at the broad multiples, people are paying out for these things. And given our balance sheet, given our free cash flow in this Company, we are not in a mood at this moment to go destroy value by overpaying for an asset.

Thank you, everyone. There is so much noise in this quarter. And I know Mark and Patrick and I and Carter sit around late in the evening, and we talk about this -- what has gone on in this Company here over the last few months. And this has been a very extraordinary time for us. But I never come to work these days thinking the decisions we have taken are wrong. What we have done I think is the right thing for the Company, the right thing for our shareholders. And I know there has been a lot of pain and hardship with a lot of our people and there has been some community fallouts here, but at the end of the day, we're going to create a lot of value here. And we would like to again thank our shareholders for navigating this process with us. So if anyone has any further questions, they can get a hold of Mark, Patrick, or I using the communication channels that you normally get hold of us through. So thank you very much indeed.

Thank you. This concludes today's conference call. You may now disconnect.