Oct 10, 2008
Executives
Gregory J. Larson - Executive Vice President - Corporate Strategy and Fund Management W.
Edward Walter - President, Chief Executive Officer, Director Larry K. Harvey - Chief Financial Officer, Executive Vice President, Treasurer
Analysts
Joseph Greff - J.P. Morgan William Truelove - UBS Celeste Brown - Morgan Stanley Charles Scholes - Friedman, Billings, Ramsey & Co.
Steven Kent - Goldman Sachs William Crow - Raymond James David Loeb - Robert W. Baird & Co., Inc.
Mike Salinsky - RBC Capital Markets Amanda Bryant - Merrill Lynch
Operator
Welcome to the Host Hotels & Resorts, Inc. third quarter 2008 earnings conference call.
(Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to the Executive Vice President, Greg Larson.
Gregory J. Larson
Welcome to the Host Hotels & Resorts’ third quarter earnings call. Before we begin I’d like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws.
As described in our filings with the SEC these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and we are not obligated to publicly update or revise these forward-looking statements. Additionally, on today’s call we will discuss certain non-GAAP financial information such as FFO, adjusted EBITDA and comparable hotel results.
You can find this information together with reconciliations to the most directly comparable GAAP information in today’s earnings press release, in our 8K filed with the SEC and on our website at www.hosthotels.com. This morning Ed Walter, our President and Chief Executive Officer, will provide a brief overview of our third quarter results and then will describe the current operating environment as well as the company’s outlook for the remainder of 2008 and next year.
Larry Harvey, our Chief Financial Officer, will then provide greater detail on our third quarter results including regional and market performance. Following their remarks we will be available to respond to your questions.
Now here’s Ed.
W. Edward Walter
While we are pleased that our third quarter performance was better than expected, there is no doubt that the significant economic and financial turmoil occurring over the last several weeks is impacting our business and the travel industry overall, which will likely make the next few quarters challenging from an operations perspective. The events of this past week have only accentuated the situation.
With that in mind we will review our third quarter results, discuss our outlook for Q4 as well as offer some thoughts related to 2009. Our comparable hotel RevPAR for the third quarter decreased 2.1% which was near the better end of our guidance driven by a decline in occupancy of 2.6% points which was partially offset by a 1.3% increase in average room rate.
Food and beverage revenues at our comparable hotels decreased 4.6% as banquet business declined as a result of lower group volumes and outlet revenue declined due to lower occupancy and more conservative spending patterns. Overall comparable revenues decreased 3.1%.
Comparable hotel adjusted operating profit margins decreased by 140 basis points for the quarter. The adjusted EBITDA of Host Hotels & Resorts LP was $270 million a decrease of $27 million from the third quarter of 2007.
Our FFO per diluted share for the third quarter was $0.31 which exceeded the consensus estimates by $0.03 and also the high end of our guidance. On a year-to-date basis comparable RevPAR increased 0.6% driven by a 2.6% increase in average rate which was partially offset by 1.5% decline in occupancy.
Year-to-date adjusted EBITDA was $951 million and FFO was $1.21 per share. The decline in RevPAR for the quarter was driven by continued weakness in our transient segments and by much lower group business than we experienced in the first half of the year.
Overall our occupancy dropped to approximately 75% in the quarter. Perhaps more importantly, our results were clearly affected by the difficulties faced by our two Hawaiian properties.
The reduction to airlift to the Maui market combined with increasing ticket prices resulted in a 19% point decline in occupancy and a 9% decrease in average room rate. The combination of these factors led to a 28% decline in RevPAR.
Excluding these hotels, our comparable portfolio RevPAR for the quarter would have been just 0.4%. In the third quarter overall transient room nights were down 3.2% which matched our year-to-date experience.
Business travel weakened further in the quarter declining by roughly 11% due to higher air fares, decreasing airline capacity and cost cutting measures implemented by companies to travel restrictions. In addition, leisure travel remains soft due to household economic pressures and higher airline ticket pricing.
The decrease in demand was most prominent in our higher-rated transient segment and we were able to offset only some of this decline with lower-rated business. Although our premium corporate and professional corporate rates increased nearly 3%, the negative shift in the business mix and the difficult operating environment in [valley] caused the slight decline in the overall transient rate resulting in a 3.6% decrease in transient room revenues.
Given the weak economic outlook for the next few quarters we expect that both business and leisure demand will continue to weaken. During the first half of the year our group activity was up 1.3% in room nights and nearly 6% in revenues which provided a strong base of support to our operating results.
Unfortunately this trend reversed in the third quarter as group room nights declined by 6% and the decline was only partially offset by a solid increase in group average room rate of 4.9% resulting in a decrease in group revenues of 1.3%. We had expected that the third quarter would reflect lower group demand as our booking pace had been behind the prior year’s pace.
Unfortunately we are continuing to experience slower near-term bookings and a slight increase in attrition rates which suggests that group volumes and revenues will continue to decline in both the fourth quarter and at least the first half of next year. Given the trends we are experiencing we are working very closely with our operators to identify alternate sources of business such as additional special corporate accounts and expanding leisure promotions to fill need periods.
As evidenced by our strong segment specific rate growth we are attempting to maintain rate discipline as our experience in the 2001 to 2003 downturn indicated that it is difficult to induce business travel by cutting rates. Looking at our investments in the quarter we continue to make significant progress on our capital investment program.
For the quarter we completed approximately $153 million of projects building our year-to-date total to $463 million. Approximately $78 million of our third quarter total was invested in ROI or repositioning expenditures which also represented roughly 45% of our year-to-date amount.
During the quarter we completed construction of our new 26,000 square foot ballroom in the Atlanta Marquis, the renovation of 2,900 guest rooms, 137,000 square foot of meeting space and 130,000+ square foot of public food and beverage space. We expect to continue to spend approximately $640 million to $660 million in total for 2008.
While we are still refining our capital program for 2009 we would expect total expenditures would decline by at least 30%. On the domestic front we continue to work on additional asset sales with active and interested purchasers.
However the current state of the credit markets continue to pose significant challenges for buyers in obtaining financing and therefore makes it difficult to predict the likelihood or timing of dispositions. On the other side of this equation, the extreme turbulence in the financial markets and the lack of clarity and visibility regarding the operating outlook suggests that we would be better served by allowing events to further evolve before committing to any acquisitions.
Ultimately we intend to be opportunistic as market conditions change. Now let me turn to our outlook for the remainder of this year.
As you’re all well aware, the issues confronting the credit markets have not abated and we are caught in a credit crunch that will likely last through the end of 2008 and into 2009. This and other economic pressures are forcing both individuals and businesses to restrain their travel spending, thus impacting our business.
For the fourth quarter we expect that comparable hotel RevPAR will decline by 3% to 5% which will lead to full-year RevPAR growth in the range of flat to down 1% which is at the lower half of our second quarter guidance. In this weaker operating environment combined with higher inflationary cost pressures we expect that hotel adjusted operating profit margins will decline between 100 and 125 basis points for our comparable hotels.
Based on these assumptions we expect our FFO per diluted share for the year to be $1.75 to $1.80 and adjusted EBITDA post-[LT] to come in between $1.375 billion and $1.4 billion. Turning to our dividend we continue to expect to pay our regular $0.20 quarterly dividend for the fourth quarter.
With respect to our special dividend we are now estimating that it will range from $0.00 to $0.05 on the assumption that none of the asset sales we are currently working on will close in calendar year 2008. To the extent we are successful in closing any of these sales, it could result in a higher special dividend.
As we look towards 2009, the events of the last five weeks and especially the extreme market turmoil of the last week frankly make it very difficult to predict what the operating environment will be next year. It is apparent that the various solutions that are in the process of being implemented by the Treasury, the Feds and several other central banks have not yet sufficiently restored investor confidence to allow our financial markets to return to some semblance of normality.
While the potential impact these events may have on the economy is difficult to quantify, it certainly appears likely that the economy will deteriorate potentially significantly in the near term. Finally we have just commenced our budget process and do not have any detailed sense of operating forecast for next year.
In light of these circumstances we do not believe it is insightful to offer guidance with respect to our anticipated performance in 2009. However what we would indicate is that if one accepts what I would describe as the consensus level economic forecast in place last week, which predicted that unemployment would increase, business and investment profits would decline moderately and GDP growth would be anemic at best, we can offer some insights into our expectations for the industry.
Combining those factors with the turmoil in the financial industry and continued weakness in the housing market, which appears to be undermining leisure travel, we would expect to see a modest decline in absolute lodging demand in 2009 especially in the first half of the year. This analysis is confirmed by our general sense that the industry is experiencing weaker group booking paids for 2009 which is trending behind last year and by transient bookings which are also slower than prior year levels suggesting continued weakness in corporate and premium rate segments.
The combination of negative lodging demand growth with upper upscale supply growth that will likely exceed 2% suggests that the industry will suffer a 2% to 3% point decline in occupancy in 2009. Given that many properties are experiencing a mix shift to lower-rated business and it is becoming more difficult to increase rates, we would expect that average rates will slightly decline in many markets.
Given these assumptions our sense pre the events of this week was that upper upscale RevPAR would likely decline in the range of 4% to 6% for the full year. I would caution you that the overall situation remains quite fluid especially as it relates to the impact of the financial crisis on the economy and on the lodging business, and we are quite focused on managing our response to challenging business conditions.
As this all relates to our own portfolio, our asset management team is closely evaluating the revenue and expense strategies in place at each of our hotels, and we and our operating partners are making every effort to reduce operating expenses as business volumes decline. Unfortunately we experienced this drill several years ago and we understand how to work purposefully to maximize profitability in a less-than-ideal environment.
As the events unfold and we make additional progress on our budget process, we will look for an opportunity to update you in the future with respect to our expectations for our portfolio. In summary, given the environment we are reasonably pleased with our third quarter results but expect the remainder of the year and 2009 will continue to be a challenge.
As we have discussed on prior calls, we are confident that the steps that we have taken over the last five years in renovating our portfolio and significantly improving our balance sheet and liquidity profile have positioned us to succeed during this period of economic uncertainty and provided us with the capacity to take advantage of potential opportunities that will arise. Thank you and now let me turn the call over to Larry Harvey, our Chief Financial Officer, who will discuss our operating and financial performance for the quarter in more detail.
Larry K. Harvey
Let me start by giving you some detail on our comparable hotel RevPAR results. Looking at the portfolio based on property type, our urban hotels performed the best during the third quarter with flat RevPAR led by strong growth from our New York, San Francisco and Canadian hotels.
RevPAR for our suburban hotels fell 0.6% while RevPAR at our airport hotels decreased by 1.6% and our resort conference hotel RevPAR decreased by 12.4% as our two hotels in Maui continue to struggle due to reduced airlift and overall weak demand. When you exclude the two Hawaiian hotels from resort conference, the RevPAR decline for the third quarter was down just 1.1%.
Turning to our regional results, the DC metro region performed well with RevPAR growth of 3.4% as the suburban hotels in the region had their first good quarter of the year coming off of the renovations in the first half of the year and our downtown hotels continued to outperform. In particular RevPAR growth for the JW Marriott exceeded 14%.
We expect the fourth quarter to be weaker as higher rated transient demand decreases due to less activity with Congress out of session and the election. RevPAR for the Mid-Atlantic region increased 2%.
RevPAR growth for our New York properties was exceptional at 6.7% even though the W New York experienced negative RevPAR for the quarter as a result of a rooms renovation. The outperformance was driven by strong rate growth from international travel.
On a relative basis we expect the New York properties to have a decent fourth quarter although there is clearly risk of lower financial sector business and lower international travel. As we discussed on the second quarter call, the Philadelphia market continued to struggle in the third quarter due to fewer city-wides, weaker group bookings and a decrease in leisure demand.
The Philadelphia market will perform better in the fourth quarter on a relative basis to the third quarter. The Florida region had RevPAR growth of 1.3% driven by the Harbor Beach Marriott and the Orlando World Center Marriott.
Results for the quarter were muted by rooms renovations at the Miami Biscayne Bay Marriott, the Tampa Waterside Marriott and the Orlando World Center as well as the impact of Hurricane Fay. We expect the fourth quarter to be weaker due to a significant amount of business disruption with two properties under room renovations.
Overall RevPAR for our Pacific region declined 4.8% for the quarter; however results varied by market. While we expected the San Francisco market to rebound strongly in the third quarter, the RevPAR growth of 12.6% exceeded our expectations.
The results were driven by increased city-wides and higher transient demand. RevPAR declined 0.9% for the Los Angeles market as higher rated transient demand was down forcing the hotels to book lower-rated business.
RevPAR for our Hawaiian properties declined 28% because of lower leisure and group demand. We expect that trend to continue into the fourth quarter.
At this point San Francisco is the only market in the Pacific region that we expect to have positive RevPAR in the fourth quarter. We anticipated the New England region which had RevPAR growth of 7.2% for the first half of the year and Boston in particular would have a challenging third quarter with RevPAR down 6.5% due to fewer city-wides and softening leisure demand.
In addition, group attrition and cancellations were higher than expected. We expect the region to continue to struggle in the fourth quarter.
While we expected Atlanta to have a weak third quarter, results were worse than expected with RevPAR declining 8.8% as group attrition rates were higher than our forecast and short-term transient and group demand were lower than expected. We expect the Atlanta region to perform marginally better in the fourth quarter.
Fortunately the Ritz-Carlton Buckhead rooms renovation was completed at the end of the quarter and will no longer be a drag on the region’s results. Year-to-date the international region has been our best region with RevPAR growth of 17.1% in US dollars or 6.1% in constant US dollars.
These results were primarily driven by the weak dollar and strong growth in our Chilean assets and the Calgary Marriott and Toronto Wheaton Center Marriott. The Florida region was our second best region with RevPAR growth of 4.6%.
The North Central region with a RevPAR decline of 4.8% and the Atlanta region with a decline of 4.5% have been our weakest performers. Our European joint venture had a weak quarter with RevPAR calculated in constant Euros declining by 5.1% primarily due to lower transient and tour group demand, particularly lower US leisure business as well as three properties undergoing renovations.
The properties in Warsaw, London, Rome and Venice were the most affected by the decline in demand. If calculated in US dollars, RevPAR was up by 7.7%.
On a year-to-date basis RevPAR calculated in constant Euros was flat and increased by 14% in US dollars. The Westin Palace in Madrid and the Renaissance Brussels outperformed at both the quarter and year-to-date periods.
With the 2.1% decline in RevPAR and the 4.7% decline in food and beverage revenues in the quarter, adjusted operating profit margins for our comp hotels decreased by 140 basis points. Our efforts to control costs and the implementation of contingency plans at each of our properties helped to constrain the margin deterioration.
In fact wages and benefits increased by less than 1% as our managers were generally able to right-side the workforce to the level of business generated. Although utility costs increased by 9.1% for the quarter, the remaining unallocated costs increased by only 1.8% reflecting the impact of the cost-cutting measures.
Real estate taxes increased by 8.7% and property insurance costs decreased more than 35%. At this point all of our properties have implemented contingency plans and a substantial majority are at the highest level of implementation.
As the quarter evolves we expect additional properties to move to the highest level. Our managers have been actively cutting costs including travel and entertainment, training, employee relation costs and amenity packages.
Additional savings were realized by not filling vacant positions and by closing restaurant outlets or modifying their operating hours as well as several other cost-saving measures. To date our comparable adjusted operating profit margins have decreased by 60 basis points.
For the fourth quarter we expect margins to come under further pressure as our transient mix shifts to lower-rated business and food and beverage revenues decrease particularly in the more profitable business areas such as banquet and audio visual. We finished the quarter with $494 million in cash.
Subsequent to the end of the quarter we increased our available cash by $200 million through a draw on the revolver portion of our credit facility. We currently have $400 million of remaining available capacity under the credit facility.
Since March of this year we have been maintaining higher than historical cash levels because of the uncertainty in the credit markets, and we will continue to do so until the credit markets stabilize and the timing of the economic recovery is more clear. One last item with respect to our comparable operating results and guidance that I would like to bring to your attention is that 2008 is a 53-week year for our Marriott managed hotels, which represent approximately 50% of our revenue.
Marriott uses a fiscal year ending on the Friday closest to December 31 and typically reports 52 weeks or 364 days of operations versus a calendar year of 365 days. Every six years or so Marriott reports a 53-week year, the last of which was in 2002.
The fourth quarter of 2008 for our Marriott properties will include 17 weeks versus the typical 16 weeks. We believe that reporting the 16 week and 52 week statistics for 2008 represent the more appropriate operating data when comparing hotel results to 2007 and accordingly our comparable hotel results and guidance are based on that comparison for the fourth quarter and full year of 2008.
This completes our prepared remarks. We are now interested in answering any questions you may have.
Operator
(Operator Instructions) Our first question comes from Joseph Greff - J.P. Morgan.
Joseph Greff - J.P. Morgan
I appreciate the comments for ’09 with respect to your upper upscale outlook. Where do you see luxury for next year and where would you characterize urban relative to the other areas on a relative basis?
W. Edward Walter
My guess is that we’re going to generally find that luxury will underperform the upper upscale segment. And the reason why I would say that is I think if you look across the business, the customer base of most luxury hotels typically has a higher proportion of financial and that business is going to, by I think most estimates, decline slightly next year.
I also think that in the normal context of things when the economy is tougher, while the true rich continue to stay at luxury hotels, the next level down will often make the switch in terms of segmentation to an upper upscale hotel. Consequently we’ll probably find that even on the leisure side, business at the luxury hotels is a bit weaker.
So I would be expecting that they would underperform slightly. From an urban perspective, I would probably expect at this point that urban perform in line with upper upscale.
I’m not certain I would see a big distinction. I think we’ve been finding our urban group has performed pretty well over the course of this year and I would see that that would continue into next year.
Operator
Our next question comes from William Truelove - UBS.
William Truelove - UBS
On the comparable RevPAR you say is only going to include the normal 16-week for Marriott. You also disclosed a total non-comparable RevPAR which is what we use.
Is that going to include all the weeks for Marriott or still just the 16 or you haven’t decided?
W. Edward Walter
We’ll put everything in there.
William Truelove - UBS
Maybe you guys can talk about fourth quarter outlook for New York City. The second question is on mortgage debt.
Other than the Orlando World Center Marriott, which you disclosed in your 10Q, what’s the next large maturity date on the mortgage debt side? And finally, what would you say would be the minimal amount of cap ex you would have to spend?
I know you haven’t done your budget for 2009 but just perhaps if you were to think about say 2008 and you said, “What would be the minimum we had to spend on life safety issues or whatever?” What is that kind of number?
W. Edward Walter
Let’s deal with those in order. As it relates to New York in the fourth quarter, we certainly have been concerned since the beginning of this year that the problems in the financial sector and the financial industry would negatively affect New York.
So far for the year, while I think we have seen some weakness in the financial sector, that has been more than overcome by strength emanating from international and I guess other leisure sources. So New York this summer was quite strong.
I think Larry quoted a stat that said New York was in the 5% or 6% range for the quarter but that actually understated the performance in New York from our perspective because the W was under renovation. If you leave the W out, the other three hotels were up about 9%.
So New York had quite a strong summer. As you look into the fourth quarter, so far I think it’s still been trending positive at least at our hotels through last week and while we continue to have some level of skepticism about being able to maintain that momentum, the outlook from our asset management group and close consultation with the properties is that the quarter is going to be positive.
And at this stage we would rank New York as one of our top three or four markets for the fourth quarter in terms of our expectations. Now in terms of dealing with the mortgage debt, I think the next maturity we have is a $175 million mortgage that comes due on the San Diego Marina Marriott in the mid-summer of next year.
It’s a fairly low leverage loan. It was one that was put in place 10 years ago and certainly a loan that we feel fairly comfortable that we’d be able to refinance.
William Truelove - UBS
And then the minimal cap ex?
W. Edward Walter
I think it’s hard to say what the absolute bottom amount of cap ex would be. If you just put that into the context of emergency repairs and you did nothing else, it would be fairly minimal, literally less than $25 million because there’s not a lot of what we would view as life safety that is necessary or required to be done on our portfolio.
I would tell you that our expectations with respect to cap ex have been being refined as we’ve worked our way through the year. And while I probably would have said to you that the decline compared to this year would have been more moderate if we’d been having this discussion in August, we see the situation is certainly changing so we have been refining our program for this year.
Clearly our cap ex is going to come down by at least 30%. I would tell you that to the extent that the overall economic environment deteriorated more significantly, I think we could cut it significantly more than that.
The way we’re approaching that issue though is that certain things are already in process, materials have already been ordered, and it generally makes sense to move forward with those projects because in the long run, and frankly we’re thinking in the long run, you want to try to get the advantage of the materials that you’ve done and do these things in the most cost effective way. We have a few meeting room projects that were planned for next year.
I think we probably would continue with those projects because that space has already been blocked and at this point it would be difficult to book business for that space. So I think we would go ahead and do those projects.
But outside of sort of the commitments like that, everything’s on the table in terms of just being intelligent about what really needs to be spent now and what could possibly be deferred.
Operator
Our next question comes from Celeste Brown - Morgan Stanley.
Celeste Brown - Morgan Stanley
I know the visibility is tough on a lot of the business, but what kind of visibility do you have on the international side? Is that booking several months in advance so you have some comfort or are you getting uncomfortable with – you mentioned it weakening, but can you sustain yourself through the end of the year as financial markets are in trouble everywhere else too?
W. Edward Walter
A lot of the international business that we have probably would be ultimately classified as leisure or certainly as transient. So as I know you know that business is not booked that much in advance.
If we were to try to look at what we’ve seen happen over the course of the last four or five weeks and draw some conclusions from that, I think the conclusion that we would draw is it is weakening slightly. I wouldn’t say that it’s dropping off in a material sort of way but the signs are right now that there’s been some weakening in international travel.
Having said that, as we’ve talked about before while it depends upon the market we have seen a very healthy increase over the course of this year in certain markets, like in New York it’s been up 25%, so maybe some abatement from that shouldn’t be viewed as a surprise.
Celeste Brown - Morgan Stanley
You’ve talked a lot about conserving cash and capital and capacity. You guys are obviously in a much stronger position than you were in the early part of this decade, but at what point does RevPAR decline to a level that you have to think about cutting the dividend to continue to preserve capital for the company?
Not saying that you’re close to that today, but just so we can think about it.
W. Edward Walter
I don’t know that we’ve pinpointed a particular RevPAR point because obviously it really gets down into when you start to see declines in EBITDA to the point where you’d consider that. Let me say this on the dividend in general.
At this point we have no plan to change the $0.20 regular quarterly dividend that we have in place. We designed this structure a few years ago to anticipate the fact that our business is a bit more volatile and there are ups and downs in terms of our taxable income and our operations.
Having said that I think as we look into next year and as we work our way through next year the factors that we will look at relative to any decision to change the policy with respect to the dividend are going to end up being: What’s our taxable income next year including any taxable income that would be generated from asset sales? What are the operating conditions and outlook for ’09 and for 2010?
And finally, what do the financial markets look like and what does overall liquidity in the business environment look like? And I think as we look at all of those different things, then we would make some decisions about whether or not we would make an adjustment to the dividend.
Celeste Brown - Morgan Stanley
On a RevPAR decline of 4% to 6%, what kind of margin compression would you expect?
W. Edward Walter
I guess what I’d say in terms of trying to estimate what might happen in the industry with respect to margins, that’s obviously very difficult to do certainly from the standpoint of looking at our own portfolio. It’s way too early to try to be precise on that front.
We will be working very closely with our operators to try to refine our expense structure. One of the benefits that you get out of some of the excitement that we’ve all experienced lately is I think it’s much easier to get your hotels and your operators to focus on adjusting costs when they see some of the things that have been happening in the financial markets of late.
So there’s no doubt in my mind that our team and their teams are working closely to try to understand what’s going to happen next year. In a directional sense if we look back in history, what I think we have found in our company is that if you go back to ’02 and ’03 where we had a RevPAR declines that were within the range that we’ve just mentioned today that we thought could apply to the industry is that in ’02 we found that margins declined by about 200 basis points.
In ’03 we found that margins declined around 300 basis points. Now over the last three y ears we’ve taken a lot of costs out of our system.
I think as a company we’ve done a very good job of improving our margin over this period of time where we had the good years. As I think about what would likely happen next year, I think you probably would expect that we’d be more like ’03 in terms of what would ultimately happen with margins.
But having said that, it really is early to tell and that’s really a place that’s going to get an extreme amount of focus over the course of the next few months.
Operator
Our next question comes from Charles Scholes - Friedman, Billings, Ramsey & Co.
Charles Scholes - Friedman, Billings, Ramsey & Co.
My question is slightly related to the last one. As I look out at some of the forward reservations that have been made, it looks like for the most part rate is holding flat and maybe even slightly positive year-over-year but really occupancy is slipping.
In your opinion at what levels would occupancy have to fall to where we begin to see rate cuts really happening?
W. Edward Walter
That’s going to clearly depend upon the individual hotel in the individual hotel market, which I know you know, but thinking about that in a portfolio context I would probably say that we’re approaching the point in time where that becomes a risk. We’re not there right now.
If you look back at our experience in the prior quarter, we’re still seeing rate growth almost across every single segment. So I think that’s still a good sign.
You obviously are running a risk that rate could decline not because the segment rate has been dropped but because the mix has changed, so you run some risk on that front. Based on the guidance that we gave or the outlook that we talked about for the industry, I think our sense is that if we experience the two to three point decline in occupancy that we think is reasonable to assume for next year, you’re probably going to get to the point where you run the risk that there is in some markets certainly reductions in rates.
Charles Scholes - Friedman, Billings, Ramsey & Co.
With asset or hotel operations clearly coming down and you folks have a decent balance sheet, how much further would prices have to come down before you start to become interested in making acquisitions?
W. Edward Walter
I think the issue around buying properties right now is not really going to be driven as much by where the price it. It’s really going to be driven by our sense of the outlook for the future, our confidence and some visibility with respect to projections, and ultimately the returns that we think we’re going to be able to generate from those assets.
That’s really I think going to take a while for that to work its way through, which is why our guess is that the acquisition environment for us probably wouldn’t heat up till the end of next year, maybe even into 2010. Pricing clearly is getting better from a standpoint of cap rate performance but you’re also going to have to layer into that analysis what’s happening on the operating side in order to understand what the real return is going to be from the investments that you’re looking at.
Charles Scholes - Friedman, Billings, Ramsey & Co.
I don’t know if you mentioned it in your previous comments, but on Hawaii 2009, any chance of improvement there or is it just getting worse?
W. Edward Walter
I think it may flatten out a bit but I would still expect it to be slightly negative next year. If you look at what the core problem is with Hawaii right now, it is really tied very directly to the lack of flight capacity.
I think I talked about occupancy for Maui being down 17% to 18%. If you look at capacity in the third quarter, that’s basically what airline capacity into Maui was in the third quarter, down about 18%.
So to some degree we’ve got to see that situation stabilize and improve in order for Maui and the rest of Hawaii to start to show some better operating results. I suspect that that happens.
Those have long been very attractive destinations. That hasn’t changed.
I think we’re suffering from the fact that two airlines went bankrupt and that particular type of a flight is one that’s been very expensive for the airlines to really manage. The reality is as oil continues to come down in price, the attractiveness of those flights will improve, the pricing on those flights should improve and clearly there are rooms available in Hawaii to draw customers.
So all those factors should ultimately start to weigh in our favor instead of against us.
Operator
Our next question comes from Steven Kent - Goldman Sachs.
Steven Kent - Goldman Sachs
I know Celeste asked a question about dividends. I’m assuming share repurchases too move much, much further away but I just want to get confirmation of that.
And secondarily, I just want to understand this a little bit better, which is you talked about conference conventions, some delegate attrition, maybe the booking window being a little bit shorter. Are you seeing outright cancellations as Corporate America basically now starts to think that it’s politically incorrect to have these big events?
We’ve already seen AIG be scrutinized for an event and then actually cancel one at the St. Regis.
What are you hearing from your conference and meeting people today about these kinds of issues?
W. Edward Walter
I’ll answer the questions in reverse order here. As of last week, what we were generally hearing from our operators is that while attrition levels had increased and booking pace was slower, they were not seeing a meaningful increase in cancellation activity.
That certainly has been something that we have been monitoring very carefully but on a repeated question, the answer has generally been that there are always cancellations in our business. There have probably been slightly more this year than what we’ve experienced in the past.
But the bottom line was that we are not seeing a tremendous increase in cancellations. Over the last week, I have become aware of a couple of isolated examples of institutions and in particular financial institutions who have cancelled events.
I am not getting the sense that that is a landslide of any degree. I think that we’ve heard of a couple more.
I think there is a concern certainly at the upper end or the luxury tier of properties that there is a risk that the attention that was drawn to the St. Regis and to AIG could filter into other areas.
But so far we have not seen that happen. Let’s recognize that’s really only a one-week-old story.
I think some of that is just the week’s been a very long week. As it relates to your question on share repurchase, I think the policy and the approach that we’ve taken to share repurchase this year has served us well.
We started off with the concept of being measured as opposed to being aggressive in the beginning of the year and I’m glad we chose that policy. I would say that you’re correct in your assumption that given the economic outlook and given the financial outlook, if we called it measured before, I’d call it cautious today.
And I think it really is going to relate as it has in the past to our sense of the operating outlook, it’s going to relate to the financial liquidity issues, it’s going to tie a bit to asset sales to the extent that we’re able to sell assets in this environment and buy our stock. That obviously in today with the multiples that we’re trading at and the cap rate that we’re trading at, our stock’s a tremendous value.
But echoing a theme I think I’ve already made a couple of times today, our focus right now is really on maintaining liquidity, it’s on managing our portfolio, and really focusing on our operations because I think in this environment that’s the most important thing to do.
Operator
Our next question comes from William Crow - Raymond James.
William Crow - Raymond James
Ed, could you quantify the number of full-time equivalent employees that have been laid off and maybe compare where we are today to where we were in the post-9/11 period from that perspective?
W. Edward Walter
The short answer to that is I don’t think I can quantify that. I would tell you that certainly compared to post-9/11 the adjustments in personnel have been nowhere near that type of a level because we just haven’t suffered that level of change in terms of our occupancy.
Conditions are weaker but they certainly don’t approach what we saw in that period or frankly even in the period that existed before 9/11. What you’re seeing right now at properties is you’re seeing positions not being filled and you’re seeing food and beverage be adjusted especially in light of the weakness in food and beverage revenues during the course of the summer.
But some kind of a broader number than that, I just don’t have an answer for.
William Crow - Raymond James
Could you get a feel though? I mean are we going to start to see the headcount shrink pretty sizably as ADR starts to go negative?
W. Edward Walter
I think you’ll see an increase in layoffs at the hotels to the extent that business levels decline materially. In other words, it’ll just depend on the hotel.
We’re moving into a period of time as we get to the end of the year where we naturally have lower occupancies, so on a seasonal basis you typically see lower employment there. I think a lot of the theme that we’ve had all along here is to try to craft in a lot of different departments within the hotel people who can perform different skills so that you’re not centered in sort of a silo system where people can only do one thing.
So there’s a high level of attrition that exists within our business anyway. That obviously gives us a fair amount of flexibility to adjust our workforce in a down environment like this.
William Crow - Raymond James
Let me follow up on one question asked earlier about acquisition opportunities and you thought late ’09 might be a better time. Does that hold true for your global joint ventures?
Do you anticipate being less active there? And how do you feel about maybe more of an enterprise acquisition M&A sort of transaction even against this rather bleak environment?
W. Edward Walter
I think as it relates to the international side, we’re fully invested in Europe at this point. We’re in conversations with our partners about in effect committing and raising the capital to do a second fund.
But without putting strict time parameters around it, the investment in Europe is going to probably feel a lot like the US as we wait to see how conditions evolve. As it relates to Asia, we just opened up an office there.
We have a great capital partner there. That part of the world is doing a little bit better.
I could foresee that we would be making some investments in Asia prior to making investments in the US because I think the overall outlook for the markets that we’re looking at there is brighter than what we’re seeing in the US. But I think again you should expect that we would be cautious in our approach given the overall economic environment.
William Crow - Raymond James
And the M&A? And the reason I ask is that even though multiples may not have come down given the reductions in the expectations, certainly as you look at things on a per room basis or replacement cost basis, there are plenty of stocks including yourselves that have to look awfully cheap to you.
How do you think about that?
W. Edward Walters
I’m certainly not going to argue with you that our stock and most of our other competitors’ stock look cheap right now. I think though the answer on M&A is that’s not something that we’re focused on right now.
In general if you look at how we’ve built the company, we’ve done a couple of larger deals. I think in general we’ve built this company one acquisition at a time, and as I look out to what’s likely to happen in the future over the next couple of years my best guess is that we’ll continue to build it that way.
We won’t be looking for large portfolios for other public companies. What we’ll be looking for is assets that we want in our portfolio for a long period of time.
Operator
Our next question comes from David Loeb - Robert W. Baird & Co., Inc.
David Loeb - Robert W. Baird & Co., Inc.
I apologize if I missed this. I do find the current environment a little distracting.
W. Edward Walter
Yes, I understand I’ve got some competition today on this call.
David Loeb - Robert W. Baird & Co., Inc.
Competition across the world I think. I noted the draw on the credit facility after the end of the quarter and that seems really sensible.
My question is under what circumstances would you draw more or the rest of your availability under the credit line?
W. Edward Walter
I think our sense of doing that would be if we began to have a higher level of concern about the participants in the credit facility, then I think you could see us draw additional funds to make certain that we continued to have access to that cash for the point in time that we need it. I think we’re comfortable.
As Larry described, we have an incredible amount of liquidity right now. So that certainly is not an issue from our perspective.
And if you look at our bank group, we have a pretty solid bank group. It’s led by Deutsche Bank and B of A and I think generally as we review, and I will tell you we’re reviewing it far more often now than we ever have in the past, we feel generally good about the capabilities about the groups that are in there.
To the extent that that opinion was to change, then I could see that we would draw more on the facility. Right now we feel good with where we are.
David Loeb - Robert W. Baird & Co., Inc.
After 9/11 you guys made what was really a prescient decision to draw fully on the credit facility. Was that more because you feared you might bust covenants and not be able to draw?
And can you foresee a scenario where that would be the case in this cycle?
W. Edward Walter
When we drew the funds after 9/11, the thing is we were actually already planning on making a draw in mid-September because we knew as part of our business plan we were going to need to make a draw. It had to deal with some funding obligations that we had coming up.
We increased the size of that draw after 9/11 primarily because the outlook was very uncertain and our general sense was that having liquidity was a very good insurance policy to protect us against anything that could happen coming down the road. That same philosophy is really what drove us as Larry mentioned in his comments to increase the amount of cash that we were holding back in March, because while clearly there’s a little bit of a negative [inaudible] on holding additional cash collateral, our sense has long been that the insurance benefit of that is well worth the minor cost to FFO.
I think that’s really the policy that’s been guiding the way we look at this.
David Loeb - Robert W. Baird & Co., Inc.
I take that as you don’t have concern about covenants kicking in at this point?
W. Edward Walter
The short answer is our facility has an incredible amount of flexibility, and you’d have to see an incredibly significant deterioration in our EBITDA for the covenants to come into play.
Operator
Our next question comes from Mike Salinsky - RBC Capital Markets.
Mike Salinsky - RBC Capital Markets
You talked about the mortgage debt that you have maturing on the San Diego Marriott. Can you just talk generally about the financing environment?
I mean if you were to go out today, who would be lending, what kind of terms, what LTV, what kind of interesting rate would you be looking at on mortgage debt?
Larry K. Harvey
Well, obviously over the last couple of weeks things have tightened up. Fortunately it’s at our event in San Diego.
That’s July 1. We’ve already had very recent productive discussions with multiple lenders including the one that has the debt right now.
As you look through if you start with our senior notes, they’re trading obviously in the 11s. With respect to secured debt, spreads have widened.
Fortunately in general the underlying treasuries are down but I’d put a secured deal probably right around the 400s. I’d say on the bank side the same thing.
And of course as we’ve discussed before on the bank side, for larger loans you’d need multiple participants.
W. Edward Walter
Part of what we’re seeing right now in the financing environment is that there are some people that have just exited the business. On the other hand there are a number of people who are recognizing that the spreads, consistent with what Larry just mentioned, are levels that frankly none of us have seen in a long period of time.
We are finding that those investors that are better capitalized are certainly interested in lending and looking for opportunities. So I think that while at times you will find that people will be a bit cautious as they try to evaluate what’s going on within the market, the bottom line in there is there’s still an active lending market especially for I would say the higher profile better capitalized lower leveraged customers.
You can’t get the same level of leverage that you could get a few years ago. Frankly you can’t get what you could get 12 months ago.
So on hotel lending you’re probably looking more in the 50% to 55% range instead of 75% to 80%. But there’s still a market out there.
It’s just gotten a bit more expensive.
Mike Salinsky - RBC Capital Markets
You touched a little bit on the acquisition and kind of your outlook for fiscal year ’09 and ’10 and when you’d start purchasing. In terms of the market right now, are there people actively out there bidding on these properties and where is pricing right now if you were to gauge where that was?
Larry K. Harvey
There are people out there bidding. There is a mark although having said that, it certainly does seem to take a while for any transaction to close.
In terms of where things are being priced today, I think you’re finding that it’s at the top end of the market where the bulk of our portfolio sits. If cap rates a year and a half ago were probably in the mid-to-high 6’s, today they’re roughly in the mid-7’s.
I think there’s some risk that that could deteriorate a little bit further, but that generally seems to be when you see real activity around the property, it’s probably in that range. If you look at assets that might be more suburban hotels or might be airport and full-service hotels, back a year and a half ago that would have been in the upper 7’s type cap rate.
Today you’re probably somewhere around the 9 to 9.5 depending on the asset and the outlook.
W. Edward Walter
So quickly, pricing has deteriorated is from a cap rate perspective and I think that’s not surprising given what’s happened with the cost of financing and volatility.
Mike Salinsky - RBC Capital Markets
You touched on replacement costs for the portfolio on prior calls. Just given what we’ve seen in commodity prices backing up as of late, where is the replacement cost for the portfolio would you estimate?
W. Edward Walter
Despite some of the weakness we’ve seen in the overall economic environment, we have not seen any reduction in construction costs so far. I think you’re finding that you’re getting more people to bid on projects so I think that will help restrain cost increases.
But I think as we will look at the value of our portfolio from a replacement cost perspective, we’d still be right around $340,000 to $350,000 a key. I don’t know where the stock is at this minute, but I know walking into this room based upon yesterday’s closing price I think we were trading around $160,000 to $165,000 a key.
So that’s a pretty good delta.
Operator
Our last question comes from Amanda Bryant - Merrill Lynch.
Amanda Bryant - Merrill Lynch
What if any changes have you seen on the supply side of the equation in your particular market since you last updated us three months ago? Essentially are there any projects under construction that have come to a screeching halt?
W. Edward Walter
I don’t know that there’s a lot that’s come to a screeching halt yet but my sense in talking with our team about what’s going to happen on the supply side is that completions this year are probably going to come in a little bit short of what we thought before, that projects are being delayed. That’s a natural response in this type of an environment.
So I think supply competitive with our portfolio is going to probably be closer to slightly more than 1% this year. The outlook for next year is probably still consistent with our prior expectation which was around 2%.
And I think the part we’re really trying to get a better handle on is what’s going to happen in 2010 because I have to believe your assumption that the financial market volatility, the operating condition volatility, has got to lead to less construction in 2010. It’s clearly coming down from the 2009 level and I suspect that if a project’s not started and not well along at this point, it’s going to be reconsidered.
Operator
I would like to turn the conference back over to Mr. Ed Walter for any additional or closing remarks.
W. Edward Walter
Thank you for joining us on this call today. We have appreciated the opportunity to discuss our third quarter results and outlook with you, and we look forward to talking to you following the close of 2008.
Have a great weekend and let’s hope it’s a quiet one for a change.