Ryman Hospitality Properties Inc (RHP) 2013 Q3 法說會逐字稿

Welcome to Ryman Hospitality Properties third-quarter 2013 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; Mr. Patrick Chaffin, Senior Vice President of Asset Management; and Mr. Scott Lynn, Senior Vice President and General Counsel.

This call will be available for additional replay; the number is 800-585-8367 and the conference ID number is 85562404.

(Operator Instructions)

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

Thank you for joining us today. This call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about the Company's expected future financial performance. Any statements we make today that are not statements of historical facts, may be deemed to be forward-looking statements.

Words such as believes, expects, or similar ones, are intended to identify these statements, which may be affected by many factors, including those listed in the Company's SEC filings and in today's earnings release. As a result, actual results may differ materially from the results we discuss or project today.

We will not update any forward-looking statements whether as a result of new information or events, or for any other reason. We will also discuss non-GAAP financial measures today. We reconcile each non-GAAP measure to the most comparable GAAP financial measure in an exhibit to today's earnings release.

I will now turn the call over to the Company's Chief Executive Officer, President and Chairman, Colin Reed.

Thank you, Scott. Good morning, everyone, and thank you for joining us today. I will begin by giving an overview of how our business performed in the third quarter, and we will provide an update on where we are relative to several of the critical integration issues that we walked you through last quarter. I'll also touch on some of the macro trends we're seeing in the group sector and how those are impacting our business, and then I will hand over to Mark to give some more color on the financials before we open up the phones for questions.

I would not be telling you the truth if I didn't say that the last six months have been quite challenging on many fronts for our Company. But I can honestly say, that I see light at the end of the tunnel and our overall results for the third quarter reflect improvement on several critical fronts. To be clear, we're not satisfied with our overall hotel results, be they revenue levels or margins. But the transitional problems we've experienced are identified and, in most cases, remedial programs put in place.

Things outside of our control, like the political stalemate and the impact to our overall -- and the impact to the overall Washington market will remain challenging. But I do believe that there are some really good things emerging in our business that give me confidence, particularly as I look forward to 2014. Now, let me try and tell why believe our results prospectively will look different from what we have experienced over the last six months.

Our hospitality business, as you all know, is heavily group-centric, and has experienced what I believe to be the perfect storm -- poor sales performance last year caused by a nervous and distracted sales team; government sequestration at the end of the first quarter of this year and the group cancellations that followed; a disappointing transition of responsibility for booking the 10- to 300-group room night segment to our managers' regional sales offices, together with a spike in attrition rates that are attributed to businesses and associations being cautious as to how they spend, given the political turmoil we are all witnessing and the general anemic economy.

Now, last quarter, we explained that a key area where the effectiveness of the integration was lagging, was in the forward-booking performance. Specifically, we mentioned three components -- underperformance in the 10- to 300-group room-night segment that tend to make up the majority of our in-the-year/for-the-year bookings; two, lower lead volumes and bookings for the 1,000-room at-peak groups, which are absolutely critical for a massive hotels like ours; and, three, overall softness in the group sector and market issues that were leading to an elevated attrition level and murky forecasts from meeting planners.

Now, I want to take a few minutes to address bookings broadly, and then each of these areas in turn. First and foremost, we are very pleased with the overall sales performance this quarter, as we booked nearly 456,000 gross room nights, an almost 35% increase from the same period last year. And, by the way, let me go off script a little bit here. A couple of the analysts have pointed out that last year was an easy comp, but this performance level of 456 in 2013 was, in fact, higher than we generated in 2011.

On a net room night basis we booked over 309,000 net room nights in the third quarter, an increase of 39% from the third quarter of 2012. Now, this quarter's performance is still a promising sign that modifications that were implemented to the sales process with Marriott last quarter are paying dividends. And, the process is now better tailored to the unique dynamics of our large group-focused hotels.

Now let's take a closer look at the regional sales office production and the 10- to 300-room night segment. Last quarter, we told you that Marriott, upon urging from us, were adding back sales resources to our hotels and dedicating resources at the regional sales offices to improve conversion and to fix lagging production rates for this category. This is exactly what has happened.

While it's too early to tell what the full, long-term impacts of these actions will be, we are very encouraged by the fact that, following the adjustments we have made, the regional sales offices performed to their historical averages in July, August, and September. Specifically, the 10- to 300-group segment room-night production for the brand is incrementally normalizing. And for September, was only down 3% to the prior year, the closest it has been to matching peak-year pre-transition levels. Importantly, in-the-year/for-the-year bookings, overall, are up 20% on a gross-room-nights basis, as compared to the third quarter of 2012, reflecting both the modifications I just discussed and the benefits we are starting to see from the rewards program and delivery channels of Marriott.

In terms of the 1,000-group segment that is paramount importance to our properties, last quarter, we outlined for you how we've been having extensive and ongoing dialogue with Marriott regarding how to drive better production in this category through a mix of new sales incentive programs for Gaylord Hotels' sales managers and the creation of a team of hunters dedicated solely to the 1,000-meeting sourcing.

While we cautioned, at the time, that the lion's share of the impact from these modifications would likely be more evident in late 2014 and into 2015, as opposed to 2013, because of the long lead time, we can report that we are on track here, and the hiring and training for this dedicated team has been completed as of October. Among those sales people are several Gaylord Legacy team members with a history of success in this particular customer group. So, we remain encouraged that they will be able to hit the ground running, and we will begin to see the benefits of this approach as we get into 2014.

Now, moving to the broader trends of group, let me start by saying that this sector is a little bit more complicated than the transient sector, and we tend to think about it through various screens, and some of them will be this.

First, one of the dynamics are performance of groups who have stayed with us over the last several months, and what are the factors that have influenced them, and are these factors relevant over the next couple of quarters? Second, what is the contracted book of business like for the next 1 to 2 years, and how will this group -- and how will the customers' current mood affect this book of business? Third, current lead volumes by customer size -- how does it stack up to previous periods? Is it healthy or an anemic bucket of opportunities?

All these things affect the likely outcome over the next 4 to 6 quarters. So let me quickly give you some color on this. First, trends in the third quarter.

While attrition increased slightly compared to the third quarter of last year, in-the-year/for-the-year cancellations were down over 55%. That said, we still felt the overall softness in the group sector this quarter, as several large in-the-year/for-the-year cancellations that occurred in the year -- earlier in the year, for the third quarter, negatively impacted our results. As an example, we saw approximately 7,600 room-night cancellations made earlier in the year, for the Texan, that weighed on the properties results.

Just touching quickly on the Washington DC market, as you can all imagine, and have likely been hearing from others in the industry, the ongoing uncertainty and dysfunctionality with our government has continued to make Washington a challenging market for the group sector. Obviously, the recent government shutdown is another contributing factor to the issues with this market. However, given the fact that our expectations for government-group room blocks had already been lowered and accounted for within our planning, we don't anticipate shutdown will have a material impact on our fourth quarter.

So, to summarize, attrition rates have stabilized, cancellations have dropped, we've had very little government business on the books for the remainder of this year and next. In addition, with the pickup in the regional sales office production, we should see healthy, short-term production going forward.

So, let's talk about the forward book of business. As of the end of the quarter, we had just over 1.3 million net room nights on the books for 2014, which is approximately 76,000 more than we had on for 2013 at this time. Importantly, we've also seen a healthy mid-single-digit increase in group rate we have these rooms on the books for, compared to the group rate, we expect to actualize for the full year of 2013.

And again, to repeat, we have very little government business booked for 2014 and 2015, and our room blocks for 2014 have been aggressively scrubbed to reflect recent trends in attrition.

So, let's give you some quick color on lead volume, because this is very important. As of the end of September our year-to-date lead volume was up 10% compared to the same time period last year. And, in fact, for September alone, Marriott and our hotel teams sourced approximately 2.1 million new leads. This continues to be very good news.

Given this period of transition we're in, I'll give you one other additional data point as it relates to group, and that is, what actually happened in October to group bookings. Our production showed year-over-year improvement, where we booked approximately 142,000 room nights for 2013, which is up from approximately -- which is up approximately 60,000 to 2012. And let me go off-script again here also -- the 142,000 for 2013, is up 20,000 room nights compared to 2011, so this is a good trajectory.

So, how about the third-quarter transient? Well, our transient and leisure room-night performance this quarter was up 28% compared to the third quarter of last year. This is a promising sign that we are really seeing -- we're really starting to reap the benefits of the Marriott reward system, and we're optimistic that this can continue to be a source of growth for us.

So, to summarize the top line, from -- both from a perspective of last quarter and outlook, we have weathered the storms of the REIT manager conversion, as well as the geopolitical issues of sequestration and government cancellations, and our forward book of business is good and growing. So, now let me switch to margin management.

As we shared with you last quarter, our asset management team conducted a thorough review of all labor management, procurement, and forecasting processes with Marriott and the senior leaders of each of the hotels. Given the complexity involved with the integration of these hotels, we wanted to ensure we were doing everything we could to help employees and leaders at the hotel level, overcome the learning curve associated with the new tools and processes that were introduced to them earlier this year, but negatively impacted the speed by which hotel-level synergies were harvested.

I have no doubt that the speed and complexity of the integration resulted in inefficiencies throughout our hotels. And as time progressed, we're seeing operations improving, with better labor and food and beverage management processes that are resulting in improving margins.

From our side, we are in a deep dive regarding the system allocation fees, as we are still not satisfied with the costs that are being applied to our business. The reasons are pretty obvious -- our margins are not where they need to be, or where they were pre-conversion. As we said to you previously, we anticipate that our manager will deliver on the hotel cost synergies that they projected to us, and we expect to see this reflected in our 2014 operating plan.

Now, one final point and then an observation. A part of our business that constantly flies under the radar is the Opry and attractions business here in Nashville. This quarter, the businesses, again, delivered very healthy revenue and adjusted EBITDA growth, with revenue improving 8.4% and adjusted EBITDA up 9.4%.

Again, this is a function of the growing interest in Nashville as a tourism market and something we see as purely positive for the outlook of our business in the periods ahead.

And now a final observation before I hand over to Mark. I've talked about the multiple storms we've had to deal with -- some self-inflicted, i.e. the consequences of converting from a C Corp to a REIT; and some macro issues, i.e. the sequestration, government cancellations -- and the overall impact that these have had on our group-centric business that, disappointingly, resulted in earlier guidance modifications.

But, the facts are, despite all of this turmoil, we made $57.3 million of adjusted EBITDA as a Company in the third quarter, which is virtually the same as we made in the third quarter last year, even after the incurrence of $3.3 million of additional management fees this year. Our business is very profitable and growing. And as I said at the outset, this has been a tough year, but we're making really good progress. And I believe 2014 is shaping up to be the year we all expected when we made this decision to convert to a REIT. Mark?

Thank you, Colin. Good morning, everyone. On a consolidated basis, Ryman Hospitality Properties revenue for the third quarter of 2013 was $221.2 million, a decrease of 1.9% from the prior-year quarter, adjusting for the outsourcing of hospitality retail operations. The revenue decline was primarily attributed to near-term softness in group demand and the transition-related structure in the group sales process that occurred in the second quarter.

During the quarter, the Company generated net income of $18 million, or $0.30 per fully diluted share. On a consolidated basis, the Company generated EBITDA of $57.3 million, and $43.5 million in adjusted funds from operations, or AFFO, per fully diluted share of $0.72. AFFO, excluding reconversion costs, was $45.7 million in the quarter, or $0.76 per fully diluted share.

It's important to remember that the GAAP fully diluted share calculations do not consider the anti-dilutive effects of the Company's purchased call options associated with our convertible notes. As a reminder, the dilution mechanics for the convertible notes, purchased call, and sold warrants, is available in the investor toolkit on our website.

Turning to the hospitality segment results, driven by Gaylord Opryland, and solid transient room-night growth across the brand, overall, hospitality segment occupancy increased 120 basis points, to 71.2%, compared to the third quarter of last year. Despite increased occupancy, RevPAR declined 2.7%, to $112.49, due to a reduction in group-room revenue which was partially offset by the increase in transient business. After adjusting the prior-year revenue for outsourcing and retail operations, total RevPAR for the third quarter of 2013 declined 2.9%, to $267.52.

While banquet revenue per occupied group room increased 3%, fewer group-room nights and lower food and beverage outlet spending led to the decline in total RevPAR. Gaylord Hotels in-the-year/for-the-year cancellations in the quarter totaled 9,790 room nights, a decrease of 55.3% when compared to 21,912 room nights in the third quarter of 2012.

Attrition rates in the quarter increased 200 basis points, to 12.2%, versus the prior-year quarter. During the quarter Gaylord Hotels collected $2 million in attrition and cancellation fees.

Compared to the prior-year quarter, hospitality adjusted EBITDA decreased 10.3%, to $54.8 million. Hospitality adjusted EBITDA margin decreased 190 basis points, to 27.5%. The year-over-year decline in margin was primarily attributed to an unfavorable group mix shift that drove a lower group ADR, reduced food-and-beverage spending associated with lower group occupancy, and increased union-related expenses at the National.

The Opry and attractions segment continued to perform very well, producing a record third-quarter financial performance in terms of revenue profitability. For the quarter, the segment generated revenue of $21.9 million and adjusted EBITDA of $6.6 million, representing an adjusted EBITDA margin of 30.3%.

With most of our corporate cost synergies in place, the corporate and other segment adjusted EBITDA total a loss of $4.1 million in the third quarter, a $5.5 million improvement when compared to a loss of $9.6 million in the prior-year quarter. During the quarter -- during the third quarter of 2013, the Company incurred just under $1 million of cost associated with REIT-conversion activities. We anticipate that all REIT-conversion costs will be complete by year end.

Moving on to the balance sheet, as of September 30, 2013, we had total debt outstanding of $1.17 billion, and unrestricted cash of $52.1 million. During the quarter, the Company settled its repurchase of $54.7 million in principal amount of its 3.75% convertible senior notes due in 2014, which were canceled, and settled a conversion of $1.2 million in principal amount of convertible notes that were converted by a holder. After these transactions, $304.1 million in principal amount of the notes remains outstanding.

The repurchases were made for an aggregate consideration of $98.6 million, funded by draws under the Company's revolving credit facility. During the quarter, the Company reported a loss on extinguishment of debt of $4.2 million, related to these repurchases and conversions. In connection with the repurchase the convertible notes, the number of options and warrants underlying the bond-hedge transaction related to the convertible notes, were proportionately reduced. In consideration for these adjustments, the counterparties to the bond-hedge transactions paid the Company 157,886 shares of the Company's common stock, which were subsequently cancelled.

On October 15, we paid our 3rd quarterly cash dividend of $0.50 per share of common stock to shareholders. We also reiterated our plan to distribute total annual dividend of approximately $2 per share, in cash, in equal quarterly payments in April, July, and October of 2013 and January 2014, subject to our Board's future determination as to the amount and timing of quarterly distributions.

Finally, turning to guidance, we are maintaining our 2013 guidance, provided on August 8, on a consolidated, as well as a segment basis. And with that, I'll turn the call back over to Colin for any closing remarks

Mark, I'm going to skip closing remarks. I think we will, Jackie, open the lines up for questions. I had one of our investors call in to say the line went dead; hopefully it was just him and not everyone else. So, Jackie, if we could open the lines up and we'll try and answer questions.

(Operator Instructions)

Amit Kapoor, Gabelli and Company.

Hello, good morning, Colin, Mark. So, couple questions, looking past the transition issues here -- which would seem like they're resolving and behind you, are you -- taking into account where the stock is trading? What you think is the best use of capital today, and would you consider an authorization or increasing authorization for share buyback? I have another follow-up.

Yes, ask your second question, Amit, then I will give you time to think about the first.

The Opry segment was clearly strong, EBITDA 9.5%. Should we view this progress as an incremental positive towards the segment becoming self-sustaining and potentially being prepared for [adulthood] at some point of potential sell or spin off?

Yes. Okay. So, first issue, first issue the-- it's stock buyback, that's really what you're getting at here. We are getting more encouraged that the issues of the transition are behind us. We've still got some work to do in terms of the margin side of the Business. There is still probably about another month of work we're doing, particularly all around allocation process, and so we look at this -- we revisit this issue of stock buybacks pretty frequently, We'll be doing that again here over the course of the next month, we're meeting with our Board in early December.

The other thing that we get a little nervous about here, like I think everybody does, is just these big macro issues that are affecting the broad economy. There's so -- some of these things are so awful that's going on here. And it's real hard when you're running a business to try and get clarity around the political processes, government shut downs, and the like. And my sense is, this is not a time for organizations to be pushing leverage, because we could have another economic issue before us. So, we are looking at this issue of stock buyback. We will certainly prefer to do things like stock buybacks than invest capital into bricks and mortar at this stage. And, look, I think our history over the last few months has been that we haven't been afraid to pull the trigger when our stock was trading at $43 and $44 a share. So we will be revisiting this issue.

As regards to the Opry, as I said to you and to your boss, multiple times -- who really likes this business, and as do we, that we see our attraction segment here in Nashville continuing to grow, and the reason for it is that Nashville is a big-time growing tourism city. Tomorrow night we have the CMAs here, it's going to be a big, big event, there will be a lot of people in town, a lot of customers in town. And we will continue to look at ways in which we can create value.

And at some point in time, this attractions business probably does need to be put aside -- not put aside, that is the wrong word -- operating separately as a business, from a typical, traditional real estate investment trust. You do not see these types of business married up with the real estate investment trust, and this is something we're constantly looking at, and it's, to me, the issue is, when one does it not if one does it.

Thank you. Colin, just one more if I may. Can you briefly talk about Maryland and the progress you see there? And the potential upside from a casino across the street, with limited rooms --?

Yes, good question. Obviously, all of the presentations were made over the last couple of -- 3 weeks to the gaming control Board there. I think, that, from everything that I read -- I didn't attend these presentations, but, if everything I read, I think, MGM did a really good job.

And, obviously, if the casino is awarded to the National Harbor location, it will be very good for, I think Maryland, for Prince George's County and, certainly, for National Harbor. And it's, certainly, going to create a lot more traffic into that jurisdiction, and -- a lot more traffic -- and that will all be good for the hotels and restaurants. It will add another amenity, I think, for the organizations, the groups that like to frequent Las Vegas. So, we will -- more to follow on that, I think we all believe that there will be a decision here sometime between now and the end of the year, in the next 4 to 6 weeks, 8 weeks, and we wait with baited breath to see the result of that.

Thank you.

Thank you

Chris Woronka, Deutsche Bank.

Hey good morning, guys. Definitely encouraged to see that lift in the transient rooms from the Marriott system. Can you tell us what the gap on the rate is right now and is there maybe a chance to close that a little bit over time?

What you mean the gap on the rate? What are you comparing it to?

I know you don't have one group rate, but maybe your typical group rate or your good group rate, a rate that you like to get?

The key to that, Chris, this is Patrick Chaffin, good morning to you. The key to that is, getting more group business in, because then we can yield up on the transient side even more. If you look at the third quarter, we're down about $3 in transient rate. Most of that is because we had not as much group room nights on the books, and therefore we drove more occupancy by driving more transient. So, the key for us is continuing to drive the group occupancy and in doing so, we will compress the occupancy and be able to yield up on the rate.

Marriott has done a very good job of starting to move us in the direction of yielding that rate more and more, and getting more quality rate into the hotels, but the basis, or the premise that we have to go with, is getting more group occupancy in.

Okay, got you. And as we think about moving forward and what kind of groups are getting, are you -- is Marriott shifting the mix any, in terms of who's booking the business? And what you think is really important in terms of the drivers? Are things like new product launches and training important, or are there any macro level changes that you're seeing in your customer mix of the result of Marriott?

We're seeing a lot more Corporate leads simply because they had 130,000 -- they have 130,000 Corporate accounts so naturally we're seeing more Corporate leads. But this whole 1,000 room -- putting back in place new salespeople to go after the 1,000 roomer, is an effort to make sure that we're booking the -- continue to book a really quality book of business on the Association side. This stuff, 3, 4, 5 years out, that is so critical for these very large hotels. I don't think we're seeing, Patrick, I don't think we're seeing a major shift in the quality of bookings or the type of companies that we're doing business with

I would agree, to Colin's point, we have seen Corporate improving, we saw a lot of improvement, specifically, for Corporate room nights booking into 2014, but not a major shift. The only thing I would point out is, we are starting to get more exposure to the international group market through Marriott's connections. As you are aware, Marriott has a lot of preferred partnerships with companies, and we've got access to those relationships as well. So, not a major shift but some good additional incremental business that will help us down the line.

Okay, very good and finally, maybe an update on your thinking with the Marriott Marquis opening in May and obviously Marriott's managing that. Do you think that helps, the fact that they have two properties they can shift large groups between or at the margin, is there folks that are staying downtown versus outside? Just your thoughts on as we get closer to that, how Marriott's managing both of those?

That's a great question. As you're aware both properties are selling against one another right now.

And have been for multiple years.

Because of its location in the district, the Marquis, obviously, will have a greater focus on business transient then our hotel does at the National. They are selling against one another, the two locations in that market are seen as pretty distinct. So I do, to your point, I do think there's an opportunity to move business back and forth based on how the two different properties are functioning and performing in the market. So, maybe a net positive for us, but, obviously, it still would be competitive to an extent.

Yes, but here is the point. That Marriott Marquis is really a rooms dormitory or the convention center. The convention center has not had a convention center-dedicated convention center hotel. So, I believe, that over time, this should make sure that more convention center business gets booked into that convention center because there now is a convention center hotel. Which will also put overflow convention business that, now is not coming to Washington, in to the other hotels in Washington, that will in fact hopefully trigger compression in that Washington market that will be good for our business.

So, I don't see this as a negative, and I know, just to drift off your question, a lot of folks, have -- not a lot of folks -- several people, when you read analyst reports, talk about the Omni opening up a month ago in Nashville, and this is going to be a problem for Opryland. Let's be clear, we had a tremendous last quarter at Opryland. Our book of business in Opryland to next year is very, very good. We've been booking against the Omni downtown Nashville for the last 3 years -- 2.5, 3 years. The convention industry into this town is very, very healthy and that will not impact our business. So I know I drifted from your question but it has -- your question has comparables to Nashville too

Sure, very good. Thanks, guys

Thank you

Andrew Didora, Bank of America.

Hey, good morning, guys. Appreciate the color you gave on some of the recent booking activity and the commentary on how on Corporate trends. Can you just give us a sense for any changes that you saw in 3Q for some of your other big customers, whether it is Association business, government or SMERF, do you see any changes in the trend in terms of how they book? And then finally, just on bookings, would you be able to give us a sense for what percentage of your 2014 business is -- has a -- Corporate, Association, government and the like?

Patrick, trends in the third quarter? I know you're --

Yes. Let me just give you just a little bit of color, I mentioned already, Corporate was up considerably, roughly about 50% for 2014. And then that's where we're primarily focused right now, is filling up 2014 is starting to sell into 2015 and 2016 as well --

To the bookings in the fourth quarter for 2014.

That's right. Association and SMERF business was down a little bit, but only, really because we are taking more Corporate business. So, we've seen some healthy trends on the Corporate side, it's not back fully to where we'd like to see it, but it's definitely moving in the right direction.

As we look at next year, I'll just give you a quick overview, we have a better mix of business going into 2014. We have a higher concentration of Corporate to the tune of -- at the end of September, we were up about 60,000 room nights in Corporate; on Association, up about 10,000, 15,000. So, higher mix of Corporate in 2014, and we are seeing a better booking performance from the Corporate groups as well. It bodes well for 2014 as we move towards it.

And our lead volume is good, a lot of Corporate in our lead volume too.

Great. Thanks. And then, Colin, how would you describe where you are now on the integration issues relative to where you thought you would be at this time, back in June?

We -- back in June, I think we had a fairly high level of confidence that we could fix the revenue side, because -- not because, we could fix the revenue side. Because we were seeing the lead volumes back in June, but we weren't converting the way we wanted to convert, and particularly with this, the 10-to-300, which is in-the-year, for-the-year stuff. The -- back in June we were-- we had some very high levels of concern, as regards the margins of our business, and we didn't have our arms around the primary drivers for this, and the implications that these negative margins would have, you know, going out into 2014.

As we have done a lot more work in this third quarter, and we have seen, you know, consistent margin improvement. I think, we have concluded that a large part of the issues that we encountered at the end of the first quarter, and into the second quarter, were really, frankly, an overwhelmed hotel management team because of the magnitude of the issues in transition. And I think they didn't have a high degree of familiarity on the basic tools that you need in a hotel -- in hotels of our size, which are -- labor management tools, food and beverage management tools, and I think as familiarity and retraining has taken place, we are seeing improvements in the margin side.

But as I previewed in the formal part of the script, Andrew, we are going to do a lot -- we are doing a lot more work with that operator in terms of allocations, because the margin are not where we need them to be at this stage. And we are still, you know, finishing up, this week, we will get more data on this whole health and benefits issue. Our managers told us that we don't expect to see any health benefit cost increases in 2014, but what we want to do, is absolutely understand why we have had these issues in 2013.

So, I'm giving you a long-winded answer, to say, I feel that we are, probably, 70% on the margin side there. I think more work will need to be done over the next month to 2 months, but I have a high degree of confidence that the important part of the Business -- not to say that margins aren't important, but if you don't generate the revenue, it's real hard to make the margin. And, I believe the revenue side of this business is getting to where it needs to be and I'm encouraged by the way 2014 is setting up.

That's helpful color, I appreciate that. And just finally one last one for me, just in terms, I know, Colin, in your prepared remarks, you said you are on track for, I guess, the Marriott synergies to be in full effect in 2014. Can you remind us what that synergy target was and if you expect in your 2013 guidance you expect any synergies in that?

Well we, just to remind everyone, when we had our Day, back in February, which seems like an eternity ago, we had two buckets of synergies-- Corporate synergies in the $16 million to $18 million, we are at $21 million right now. That's all great. The hotels, we said that are synergies would be in this $35 million to $40 million offset by $20 million in management fees, somewhere in that region mark.

And what we have been saying to the investment community, Andrew, over the last 1.5 months, is that, I think, the synergies that we're going to be getting in 2014 for the hotels -- not Corporate, Corporate going to be all fine, as we projected, it is going to be somewhere in this $30 million to $40 million range, and it's not whether it's zero, it is going to be in the $30 million to $40 million range. And the work that we are doing on things like allocations, and the processes managing food and beverage and labor, and just the whole procurement side, reservation side will determine whether it's $30 million or whether it's $40 million.

But we are going to see synergies in our business in 2014, and you can imagine that we are very animated with our operator to ensure that we get what we thought we were getting back a year ago, when we made this decision to convert from the C Corp to a REIT.

That's great, thank you

Thank you

Patrick Scholes, SunTrust

Hello, good afternoon. A question for you actually, on the rest of this year. As I calculated, it looks like through the first three quarters, RevPAR for your Company is tracking at about negative -- down negative [2%]. And when I see how you haven't changed guidance for the year, and RevPAR really implies up mid-single-digits for the fourth quarter. Is that really realistic at this point? Are you seeing that? It just seems -- I guess I'm skeptical after the results that have been posted so far this year, that it can grow mid-single-digits in the fourth quarter?

Well, Patrick, if we didn't think that would be what it is, we would not be reaffirming guidance. We don't do it that way. But just to give you some color, I think, Patrick, not Patrick Scholes but, Patrick Chaffin, I think, Patrick, leisure room night, up in October year-over-year, was up 15,000, 16,000 room nights year-over-year. That's good, and as we all know, our fourth quarter is more leisure dominated. It is the different to a lot of the -- to the other three periods of the year. So, Patrick, what else would I say here?

No, just to add to that, our October performance is starting to really come in and we're at preliminary status right now. For October, we forecast to beat prior-year, and we have, handily now, beat the forecast. So we're up a very healthy level in terms of total revenue in October over prior-year. And as Colin already pointed out, a lot of that in October was transient. We had good group production as well, group performance, and then as you look at November, we feel pretty good about transient right now as far as it is pacing. So, I would tell you that, as we said, we're comfortable with our guidance and that implies that we feel good about where RevPAR is heading

Okay that's good to hear. Last question. I saw, at least in the press article that came out today, that you're not going to be going forward with any expansion at the Palms. What are your thoughts there?

Well, let's be clear what actually happens. We had -- we've been looking at the Palms expansion. We had a deal with Osceola County dating back to, like, 2007.

2008.

Then, of course, the big recession hits us, and every 2 years, what we've done, is we've re-opt the rights to do it with Osceola County that cost us a bunch of money. And so we came together with Osceola County about a month ago, and said, look, it's not likely that we are going to be adding 500 rooms to this market over the course of the next 1 to 2 years, we can agree that we're not going to be doing it. And that is the way we think it's, probably, best for our relationship with this county that has given us great support over the years. It's not that we're not going to expand the hotel, period, it is just that we are not going to do it in the foreseeable future.

That is why we put out the release, or why -- I think there was a press comment down in Osceola County today. It wasn't a press release by us, but it's just that we have agreed that we are not going to be doing anything here over the next 12 to 24 months, and therefore we're not going to come out of pocket to have the rights to do something that is highly unlikely that we would do. And, look, if we decide because the world changes on us 12, 18 months from now, that we need to add 500 rooms, we'll go back to Osceola County and work with these folks, the likes of which we have over the last 10, 12 years and we'll figure it out at that point.

Okay, great appreciate the color, thank you

Thanks

(Operator Instructions)

Joshua Attie, Citi

Thanks, good afternoon. Outside of the bookings process, you discussed some disruption of the property level that's related to the adoption of Marriott systems and procedures. Can you talk about what some of the larger issues have been and how they're being resolved?

Yes. We could start with the entire labor Management system that we have. When you employ, Josh, 2,500 people in a hotel like Opryland, you need a pretty slick labor management system to manage the schedules of folks when they're not -- these people don't just work a standard 40-hour week, and you have, you know, a bunch of on-call people. So, putting in a new labor management system that people didn't fully put their arms around and comprehend, created labor creep in the Business. And that showed up in the second quarter, into the first quarter and the second quarter.

There's been efforts in retraining people on this particular system, and what we're seeing now, is our labor scheduling being more akin to the way we've seen it in the past and that is showing and reflecting itself in labor costs. Patrick? Do want to talk about procurement? Do want to talk about reservation systems -- I mean it's everywhere.

Food and beverage, we've seen month-over-month improvement as systems -- training has been on systems, P-Card usage have improved sequentially month-over-month. We are seeing more benefits on procurement, labor productivity, as Colin mentioned, has improved. So, it's really across the board, Josh, and it really is retraining efforts and holding people accountable, really, at the property level to utilize the systems and use the programs

Yes, and what I want to accentuate is, I'm really proud of what the properties have gone through, as far as the learning curve, because it the double whammy. Not just the system, and the process associated with that system, whether it be labor management, or purchasing, et cetera, but also their entire P&L structure completely changed. And so when you go to a new system, at least, you can fall back on the P&L and understand where the cost are coming through.

But when the geography of the P&L completely changes, it takes an incredible amount of focus to get back on the horse and understand exactly where you're heading and where the opportunities are. So, it was, across the board, exacerbated by the changes in the P&L structure.

As a normal operator, you're able to customize your procedures and systems to your unique properties. Are there any kind of procedures and systems that you are finding with the Marriott system that you just say to yourself, this is more -- this is inefficient for our properties relative to what we had before? My first question is are there things like that happening? And two, if they are happening, are you able to negotiate those with Marriott? Or, are those things that could stand in the way of full synergies been realized?

Yes, no that's a good question, and yes, we have identified some opportunities where there's an opportunity for some customization or some modification to existing systems. I would say especially on the sale side of the Business, we are now utilizing the platform known as CIT Wide Consolidated Inventory Total Yield. We do see opportunities for that to be further modified and enhanced to better support the volume of group business and the specifics around capturing that group business the right way.

I would tell you the same thing on the group housing, because we have such large groups coming in, and how we move them in and out of the hotel. So yes, there's a number of system opportunities or process opportunities, and to their credit, I would tell you that Marriott has been receptive to, let's understand the business case for making this change and then let's pursue that together.

Thanks and just one last question. Colin, I think you mentioned in the prepared remarks something about reducing the system fees that you paid to Marriott? Can you just elaborate what you meant by that?

Well I didn't say reduce the system fees, I said we are reviewing the system fees in great detail because our margins aren't where they need to be, period. And, we are going through a pretty deep dive with them, in terms of the allocation methodology and process into our business. Because we are not going to turn off the volume of noise into that Company until our margins are materially north of where they were when we handed this business over to them.

So, that's what's going on here right now. A lot of work, but other Patrick said, we've got a receptive manager, Marriott wants the same thing that we do. Which is high-quality -- these assets are very unusual, they are not like the typical, traditional hotels you see in this country. These are assets that will probably not get replicated in the market that they are in. And what we all want, is these hotels to be operating at a very high level of revenue and occupancy, and high level of margin.

We may have different approaches at times, but I would tell you, that this is not like the Democrats and the Republicans, where the two sides are completely at odds with each other, this is not what is going on here. We have a desire to create a very profitable business, and that's what we're finding here. So, more work on this and we will see where this comes out over the next 1 to 2 months.

Okay, thank you very much.

That was our final question I'd now like to turn the call back over to Colin Reed for any additional or closing remarks.

Jackie, thank you. No, that's the end of it. If anyone has any additional questions that they would like to ask, they know where we are. We're going to be, Mark and I, will be at NAREIT next week Mark, is it next week in San Francisco? And I look forward to meeting a lot of the sell side and buy side analysts as well as investors direct. So, look forward to that interaction next week, and thank you very much, indeed, for taking the time.

Thank you this concludes today's conference call, you may now disconnect.