FelCor Lodging Trust's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: FelCor Lodging (FCH)

FelCor Lodging Trust, Inc. (NYSE:FCH)

Q3 2012 Earnings Conference Call

November 1, 2012 11:00 AM ET

Executives

Stephen Schafer – IR

Rick Smith – President and CEO

Andy Welch – EVP and CFO

Analysts

Eli Hackel – Goldman Sachs

Patrick Scholes – SunTrust Robinson

Nikhil Bhalla – FBR

Susan Berliner – JP Morgan

Josh Attie – Citigroup

Operator

Good morning. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the FelCor Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Stephen Schafer, you may begin your conference.

Stephen Schafer

Thank you and good morning to everyone. With me is Rick Smith, President and CEO; and Andy Welch, Executive Vice President and Chief Financial Officer. They will address the current operating outlook, results for the quarter – operating environment, results for the quarter, and our outlook. Following their remarks, we will take your questions.

Before I turn the call over to Rick, let me remind you that with the exception of historical information, the matters discussed on this conference call may include forward-looking statements within the meaning of Federal Securities Laws. These forward-looking statements are expressions of current expectations and are not guarantees of future performance. Numerous risks and uncertainties in the occurrence of future events may cause actual results to differ materially from those currently expected. These risks and uncertainties are described in our filings with the SEC. Although we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be attained or that actual results will not differ materially.

And with that, I will turn the call over to Rick.

Rick Smith

Thanks, Steve, good morning. First I want to say that our thoughts and prayers are with the employees and their families of our hotels that were touched by Sandy, as well as everyone who was personally impacted. While our hotels suffered only minor damage, many individuals were impacted far more extensively and we hope their lives will be back to normal as soon as possible.

We had a very productive third quarter, as we continue to execute our strategic plan to reposition the portfolio and restructure the balance sheet, which will lead to improved stockholder value. We have made very good progress on our stated goals. Those are asset sales and use of proceeds, strengthening the balance sheet, the redevelopment projects, operations and continued progress on investor communications.

First, asset sales. We will close on one hotel today. At that point, we will have sold 10 hotels this year for gross proceeds of $207 million, which is ahead of plan. To-date, we have sold 19. We have an additional 20 hotels to be sold, of those 10 have been brought to market or are in the preliminary marketing stage.

We currently are in discussion on six of these hotels with potential buyers. We expect to bring the remaining 10 hotels to market sometime in 2013. Nine of the ten hotels are owned in joint ventures, seven of which are with Hilton. We remain in negotiations with them on a solution that is in the best interest of both of our companies.

We have seen no shift in trends or transaction volume that would alter our current expectations for selling the remaining hotels from a timing or pricing perspective. In fact, transaction volume began to pick up again this quarter. We continue to see strong interest from private equity, teamed with management companies looking for hotels. Financing especially the CMBS market is robust for operating properties, which is providing additional tailwinds.

Shifting to the balance sheet restructure. We have made very good progress. We used the proceeds from the asset sales to repay the entire balance of the accrued preferred dividends yesterday. During the third quarter, we closed five non-crossed 10-year secured loans totaling $161 million and at 4.95% fixed rate.

We used proceeds to repay the $107 million Prudential loan, which had an interest rate of 9.02% and was secured by seven properties. We used assets of proceeds and the remaining proceeds from the new loan to repay our loan 2013 debt maturity.

While we used the remaining assets of proceeds to repay debt and have only two remaining pieces of debt to refinance, the 2014 notes and the Fortress mortgage at which point our balance sheet will be completely restructured, our maturity profile will be extended and staggered, and our cost of debt will be 6% or sub 6%. We will, of course, be opportunistic with regard to addressing these two remaining pieces and take advantage of opportunities as they make sense.

Our renovation and redevelopment work this year has been extensive. We completed work at 10 renovations and redevelopments. This includes six of our largest 11 hotels. The lone remaining hotel is Morgans. The permitting process took longer than expected but the work is underway.

We expect to complete the redevelopment of the F&B area and the addition of three guest rooms in January. This summer, we completed the food and beverage and lobby redevelopment at Fairmont Copley Plaza.

We rebranded the restaurant and bar from the Oak Room to the Oak Long Bar & Kitchen. The official brand reopening was in September and the reviews have been fantastic. In October, the second full month we rent about 20% above our budgeted revenue in F&B there. I couldn’t be more pleased with the results.

During the fourth quarter, we will be renovating only two hotels, the Embassy Suites LAX and Burlingame and finishing the redevelopment work at Morgans. While we had some displacement during the quarter, it will be minimal going forward other than at Morgans. With nine rooms out of service and disruption continues through January, as I mentioned earlier.

We expect our portfolio to benefit from the renovations at the hotels as well as our newly acquired hotels, which would generate above-market growth going forward. The Knick is progressing in accordance with plan, including the budget and projected timeline. The core and shell work has begun and we expect to begin the construction of the interiors in December.

We are proactively starting the sales and marketing process ahead of the opening. We have hired our GM and are currently evaluating candidates for Director of Sales and Marketing, as well as initiating sales calls and full development of the sales and marketing plan.

Now, let’s turn to operations. Adjusted EBITDA was $53.2 million, which exceeded analysts’ estimates, FFO of $0.08, met analysts’ estimates. Our RevPAR growth of 6.2% during the quarter exceeded the industry average and we expect that to continue, as we benefit from our diversified portfolio and the newly acquired and redeveloped hotels.

Our efforts to increase rate in grow market share were successful, which resulted in better than expected ADR growth. This was offset somewhat by lower than expected food and beverage profit. As a result, we met the low end of our expectations.

Food and beverage revenues increased 11.2%, compared to prior year, which was very strong. Notwithstanding this release – I mean, this increase, it fell short of our expectations due to lower group capture and displacement at Copley and Morgans, which impacted our margin growth. The good news is that we have completed the work at Copley and the initial results are very good as discussed earlier.

Taking a look at business segments. Overall, lodging fundamentals remain very strong. Transient demand continues to be solid and supply growth is at historically low levels. Our focus is on increasing ADR by remixing customer segments as well as increasing overall rates. Room nights increased 11% for corporate group and 1% for corporate transient segments while room nights decreased 2% for leisure group, 10% for government, and 20% for contract business, which is all part of the plan.

ADR increased 6.9% and ADR growth has accelerated each quarter this year. ADR for corporate negotiated segment increased 6%, ADR for group business increased 8%.

Couple of final items before I turn the call over to Andy. Recently, we finished the last leg of our non-deal road shows for the year. I think the meetings we have held throughout the year have been very helpful with regard to giving investors a clear roadmap, (inaudible) plan and the underlying assumptions.

We anticipate holding an Analyst Day at the Fairmont in Boston sometime early in 2013, which will be followed by another series of non-deal road shows to keep investors up-to-date with the progress we are making for the plan we outlined this year. We will be announcing the timing of these once the details are finalized.

Lastly, most of our markets continue to be strong. September was softer than July and August, but with October strength, we do not see that as a trend versus a shift in holidays. As October – as of October 30, our RevPAR growth was running in line with our forecast at about 7.5%. This includes the impact from Sandy for the 29 and 30, but not the 31 or into November.

At this time, we are not including any potential impact from Hurricane Sandy in our guidance as it is simply too early to determine. What we do know is that we have 14 hotels that felt some impact from the storm. However, the actual property damage is fairly immaterial, relatively speaking.

No hotels sustained material – material exterior damage. Only three of the 14 hotels, Philadelphia, Holiday Inn, BWI, Embassy, and Wilmington Doubletree had notable water intrusion, but in a limited number of rooms and those rooms should be back in service this week. Morgans is without power and not operating, which we are told will be restored by Friday or Saturday when we will be reopening.

And with that, I will turn the call over to Andy.

Andy Welch

Thanks, Rick, and good morning. Rick’s remarks covered an update on the five items central to our value creation strategy. I’d like to provide a bit more color and detail around his comments and then focus on our fourth quarter guidance.

RevPAR increased 6.2%, led by a 6.9% increase in average daily rate. We continue to focus on remixing customer segments and foregoing lower rate of business to maximize rate. We continue to do a good job on the cost side, costs per occupied room was $63.96, which was lower than budget. Hotel margins increased 58 basis points. However, as Rick mentioned, food and beverage profits were lower than expected, probably due to renovation delays. Excluding the impact of food and beverage decline, margins increased 115 basis points.

In addition, property taxes and insurance expenses increased $1.4 million, compared to last year, as a result of favorable property tax appeals and claims experience realized last year. Same-store adjusted EBITDA was $51.6 million, a 9.9% increase, compared to the same period last year. Adjusted EBITDA was $53.2 million. Adjusted FFO was $10 million or $0.08 per share.

Markets across the country were generally strong with a couple of exceptions. The strongest markets were New Orleans up 38%, Tampa up 25%, Austin up 17%, San Francisco up 15%, and San Diego up 10%. San Francisco, our largest market continues to do very well with corporate leisure and group business. The convention center is completing a two-year renovation, which will further bolster RevPAR. There was compression in the south city market, as well as Burlingame.

The Marriott Union Square continue to perform ahead of our goals, its RevPAR growth was 13% during the quarter, 7% ahead of budget and we expect continued double-digit RevPAR growth for the remainder of the year. The strength in RevPAR is further helped by a lack of supply with no new rooms constructed in downtown in several years.

San Diego had a very strong quarter do impart to a strong convention calendar, the strongest quarterly attendance projected for the year. Atlanta, which had been a challenge in the past few quarters performed better, up 3%. RevPAR declined 3% in Orlando and 0.3% in South Florida, primarily due to new supply.

Let’s shift to the balance sheet. At the end of the quarter, we had $1.6 billion in consolidated debt, $112 million of cash and cash equivalents and $82 million in restricted cash. We continue to make progress to strengthen our balance sheet, reducing leverage, and refinancing existing debt to restructure our average interest rate and stagger debt maturities.

As Rick mentioned on September 30, we closed five single asset mortgage loans, totaling $161 million. The 10-year loans mature in 2022 bear an average fixed interest rate of 4.9% and are not cross-collateralized. We repaid a 9.02% mortgage loan, which had an outstanding balance of $107 million and but otherwise mature in 2014.

The loan was repaid with secured – the repaid loan was secured by a pool of seven hotels, including four of the five hotels, mortgaged to support the new loans. The remaining three hotels that’s secured the repaid loan, two of which are non-strategic are now unencumbered.

We repaid the $88 million mortgage loan that’s secured, that was scheduled to mature in 2013. This loan was secured by five properties at the time of repayment. Of these five properties, one property now secures the new loan and the remaining four are now unencumbered.

So, after giving effect to the new loan and the repayment of the two loans, we unencumbered six properties, lowered our cost of borrowing, eliminated debt maturities through 2000 – through June of 2014 and extended our average debt maturity profile. Today, we have 12 unencumbered properties.

We repaid the remaining $38 million of accrued preferred dividend yesterday. We will use future asset sales to repay debt and reduce our leverage. We remain on track with the financing we’re putting in place for the Knickerbocker redevelopment. We expect to close the $85 million redevelopment loan next week with pricing at LIBOR plus 4% and again no LIBOR floor.

We remain on track to raise up to $45 million in funds through the immigrant investor program also known as the EB-5 program. We anticipate receiving these funds next spring. It is structured as preferred equity with the yield of 3.5%. The blended financing cost for the capital structure for the Knickerbocker will be roughly 4%.

We have lowered our weighted average cost of debt by 23 basis points over the last year and expect ultimately to reduce our cost of debt to roughly 6%, as we repay and refinance our two remaining pieces of debt, the Fortress loan and the 2014 senior notes.

We continue to look at our options to repay and refinance these two remaining pieces of debt, our approach will be dictated somewhat by the interest rate environment, and looking at all of our options given the historically low cost of debt, including reducing the burden of the amount to refinance when the senior notes mature in October of 2014.

Following the completion of that, we will have completely restructured our balance sheet, significantly lower our cost of debt and stagger and extend our debt maturities.

Finally, let’s turn to guidance. We have updated our guidance to reflect third quarter results, which met the low end of our expectations and updated timing of asset sales. We now expect RevPAR growth for 2012 to increase between 5.5% and 6%. For the fourth quarter that equates to 6.5% to 8.5%. Our fourth quarter RevPAR growth is benefiting from our recently acquired and redeveloped hotels.

We expect RevPAR for those hotels to grow by double-digits during the fourth quarter. In addition, we expect nominal displacement during the quarter as compared to last year. During the fourth quarter of last year we were under renovation at nine of our hotels. Operationally our fourth quarter guidance is unchanged and our guidance for FFO per share is $0.00 to minus $0.03.

For guidance purposes, the timing of the remaining assets to be sold has shifted from the beginning of the fourth quarter to the end of the fourth quarter. Therefore, we are increasing the low-end of our adjusted EBITDA guidance by $1 million to reflect the updated timing of asset sales. We are maintaining the low-end of our same-store adjusted EBITDA guidance for 57 hotels.

The high-end of our guidance has been reduced by $5 million due to hitting the low-end of our expectations for the third quarter. At this time, we are not including any potential impact from Hurricane Sandy in our guidance. As Rick mentioned, we sustained nominal damage to three hotels, but it is too early to assess any operational impact.

Thank you. And we’re now ready to address your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Eli Hackel, Goldman Sachs. Your line is open.

Eli Hackel – Goldman Sachs

Thanks. Good morning. Two questions. Can you just talk about – I know you gave some stats about the Copley, F&B ahead of schedule, now it’s fully operational, but more broadly for hotels, the Copley and also the Morgans and Royalton, you have a lot of detail in the investor presentation about the ramp going into next year. I just wanted to know your confidence about that ramp.

And then second question just on the hotel sales, moving to the end of the quarter, I’m not trying to read anything into it, but if all the six hotel sales that you are in discussion with including the one today – there are two more, are you in discussions with those other two ones or what’s going on with the other two hotels that maybe you’re not in talks with – could those possibly flip into 2013? Thank you.

Rick Smith

Thanks, Eli. Let me talk about the asset sales first. We are currently in discussion with various buyers. There is three separate buyers here on six of the 10 hotels that are either currently on the market or in the first stages of marketing and there is some overlap there.

We don’t and even though there is strong interest on those six hotels, we don’t anticipate actually getting any of them closed prior to the end of the year. And so, what we wanted to do in our guidance was to make sure that we stayed consistent with what we had been, the way we had been looking at our outlook previously so that you could still see the same-store 57 hotels.

However, we do believe those that we are moving on will happen at the end of the year, the early part of next year.

There has been no falloff from a standpoint of traction on assets and things of that nature as evidenced by the two, three we’ve closed in the last week or so. And the conversations that we are having on these are very strong conversations through good qualified buyers. And we will see how they come out, but we still feel very good about the overall process of asset sales, and getting the remaining – the remaining ones on the market as quickly as possible.

As far as overall, we are expecting in Boston and New York, we’re expecting around 12% for the fourth quarter. Things are looking good. There was certainly a step up in October, versus what we experienced in September, again with the shift and – with the shift in holidays that hurt September, so it stepped down a little bit from July and August. But the more important thing is on those hotels, notwithstanding the last month’s operations or anything of that nature is that, the plans are in place, the plans are moving along very well. The Morgans will be done with the redevelopment work in January and we look forward to continuing the plan from a remixing standpoint in both of those hotels.

In those we talked about in the investor presentation, that’s really the key is getting to the segmentations, getting back to the segmentations that we had prior to either Copley being redone or even on Morgans and Royalton before they spent about $100,000 (inaudible) redoing those hotels and we totally changed the sales plan from a mix standpoint. So, everything is in place. We feel very good about going forward and ADR will be going up to, through the remixing and absolute rates will be increasing as well. So, we feel very good about all of those going forward.

Eli Hackel – Goldman Sachs

Okay. Thank you.

Rick Smith

Thanks Eli.

Operator

Your next question comes from the line of Patrick Scholes, SunTrust Robinson. Your line is open.

Patrick Scholes – SunTrust Robinson

Hi, good morning. Just a follow-up question –

Rick Smith

Good morning, Scholes.

Patrick Scholes – SunTrust Robinson

Good morning. Just follow-up question on the impact of Sandy, you’ve certainly talked that the Morgans is closed and about third of your hotels. How about the recent performance of some hotels, I might think of as where people might evacuate to such as your hotels in New Jersey, Delaware, or the BWI property, how (inaudible)?

Rick Smith

Yeah. We are definitely experiencing some positive impact to go along with a negative impact. Right now, our net impact – while we were not including anything in guidance because it is too early to determine exactly what the impacts will be to date. What we know of is about $600,000 of impact and the BWI is up, and so it’s offsetting some of the negative. And we’re just going to have to let this out over the course of the next week to kind of really determine what the impact is. But there is some good to go along with the bad to your point.

Patrick Scholes – SunTrust Robinson

Okay. So just so I can assume $600,000 so far of impact to be offset by whatever extra RevPAR you get from those other hotels.

Rick Smith

Well. The net is – the net that we know right now is around $600,000.

Patrick Scholes – SunTrust Robinson

Okay, okay.

Rick Smith

But the – for the entire fourth quarter, but you know, like I said, we’re going to be doing a lot more work in the next week to assess all of that.

Patrick Scholes – SunTrust Robinson

Understood, lot of moving parts with this one. Thank you.

Rick Smith

Yeah, thanks.

Operator

Your next question comes from the line of Nikhil Bhalla, FBR. Your line is open.

Nikhil Bhalla – FBR

Hi, good morning.

Rick Smith

Good morning.

Nikhil Bhalla – FBR

Just, good morning, good morning. Just wanted to kind of dive into your guidance a little bit for the fourth quarter. So it’s hasn’t really changed, from your prior guidance, has it? If you don’t mind just giving a little more color on that? Thank you.

Rick Smith

Thanks, Nikhil. Yeah, you’re exactly right. The fourth quarter operationally has not changed, and it’s important to note that. In our guidance section in the release, what we were trying to do was to give some color as the comparison to what we’ve given before, but operationally, there has been some change on the low-end from the impact of assets on timing.

And we did hit the – while we met FFO estimates on the – for the Street, first call consensus and slightly exceeded there for the third quarter, from our internal perspective, we hit the low-end of our guidance – of our expectations. And therefore, we changed the mid and upper ends to reflect that. That’s the only change, the – so that it’s only reflective of third quarter. So fourth quarter operationally has not changed. Does that –

Nikhil Bhalla – FBR

Yep, that helps. And also just a follow up question on the trends that you’re talking about for the fourth quarter, I mean, your commentary is a little bit more bullish than, on trends that is, compared to some of the other commentary we’ve heard from some other names. Would you probably characterize, maybe the brand mix you have or is it a function of just renovated hotels? I mean how would you kind of reconcile the strength in trends you’re seeing versus where some of the other guys have come out?

Rick Smith

Yeah, I think the difference for us, Nikhil, is – I don’t know that it’s a brand related thing. I think it’s more worth coming out of – if you recall last year, we were in the middle of nine renovations during the fourth quarter last year. And so, that is very beneficial. We have completed a lot of those renovations, last three developments this year, everything but the Morgans.

And so, we’re getting some pretty good ramp on that. And so, for the fourth quarter in 2012 versus 2011, we’re expecting about 12% and October is running about 7.7%. And all of that has to do with kind of the global impact of being in those renovations last year versus being in those renovations this year. And that’s going to help us out and the 7.7% is for all hotels for October.

But the fourth quarter for those renovated and re-development of projects, newly acquired et cetera is around 12%. So, that which much like we talked about when we went through the road show, we’re going to have higher growth out of those properties on a go-forward basis than we are out of the rest of the – not only our portfolio, but the industry in general.

Nikhil Bhalla – FBR

Got it. And if may ask a follow-up question on fourth quarter trends by month, when you’re setting maybe in September and looking at the fourth quarter and at that time impact of Sandy was not exactly visible. How you’re thinking about growth trajectory through the fourth quarter? Was October at the low-end or was it at the high-end of way you thought things would come in?

Rick Smith

October was at the high-end. It will set down slightly in the – and November, November will be probably in that similar range or closer to seven and December will be similar. And again, mostly due to the – to the pickup from last year’s renovations versus as far as comparison of the industry goes.

Nikhil Bhalla – FBR

Great. Thank you.

Rick Smith

Thanks Nikhil.

Operator

Your next question comes from the line of Susan Berliner, JPMorgan. Your line is open.

Susan Berliner – JP Morgan

Hi, good morning.

Rick Smith

Hi.

Susan Berliner – JP Morgan

Just a few questions I guess, just starting on asset sales and I apologize if I missed this. But I guess if you could talk about the remaining hotels that are on the market now in terms of a run rate EBITDA as well as proceeds.

Rick Smith

Yeah, we can give you something on that. On the – are you referring to the – that are kind of in the early stages and are currently on the market and are in the early stages.

Susan Berliner – JP Morgan

Yeah, exactly.

Rick Smith

I think if you assume the 11 times to 12 times and about $215 million on the 10.

Susan Berliner – JP Morgan

Got it. Okay, great. And just one other question, I was confused as to what you were saying for the hotels for next year with the joint ventures in Hilton, what that means, does that mean that you could potentially take them all on your balance sheet or Hilton could just take them on your balance sheet and how should we think about that?

Rick Smith

What we’re talking about – and it’s going to depend somewhat on Hilton strategy, which I am not going to get much into on this call, but what we are – one thing that we are talking to them about is splitting the – we have ten, 50-50 JVs with them that makes sense to take a look at swapping interest. And so, in that scenario, we would take five, they would take five and then the five that we get from them we would then own 100% and we would be able to take those, the ones that are earmarked for sale to market immediately.

Susan Berliner – JP Morgan

Okay.

Rick Smith

And so, we’re working through that process with them right now, but there is a lot going on at Hilton right now. So, we continue to work to that process.

Susan Berliner – JP Morgan

Great. And just one other follow-up, with the two properties that were sold in October and the one that’s about to be sold, should we just assume, Andy, that that pays down the line of credit?

Andy Welch

Yeah.

Susan Berliner – JP Morgan

Great.

Andy Welch

So, the one that’s selling today is – the one that is line of credit that (inaudible) earlier where proceeds after the preferred – accrued preferred dividends and further debt.

Susan Berliner – JP Morgan

Okay, terrific. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Josh Attie, Citigroup. Your line is open.

Josh Attie – Citigroup

Thanks. Good morning. For the fourth quarter, can you give us a sense of what kind of RevPAR growth you’re expecting for the hotels that aren’t ramping off of a renovation?

Rick Smith

I think that, that is going to be – it’s probably Josh in the 5% – 5% to 6% range on the ones that aren’t ramping.

Josh Attie – Citigroup

Okay. And you mentioned that your outlook hasn’t changed from three months ago, a lot of your peers have mentioned that they’re seeing a hesitancy on the part of corporations that they weren’t seeing three months ago and that’s kind of feeding into group business, and I know you probably have a little less group business as some of your peers. Are you seeing that at all in your business and it’s just being offset by other items or are you not seeing that at all?

Rick Smith

We haven’t been seeing much of that, I mean, not certainly not enough to consider it a trend, government is down, but that was kind of not only our expectation, but also our plan from a remix standpoint. But from a corporate group and transient standpoint, we have seen no trends that would indicate that to us. Our corporate group was pretty solid in the third quarter and pace looks good about 4% ahead of last year. We are – and corporate transient was up slightly in the quarter from a demand standpoint and we expect that to continue.

Josh Attie – Citigroup

And one more question, as we head into next year, of the 45 hotels that you consider to be core, could you just remind us how many of those 45 has been recently renovated and are kind of in this period of ramp. Just help us think about 2013 growth?

Rick Smith

Well, approximately 15 of those have recently been renovated and we’ll be doing a few more next year. And also back to your original question, Josh, I just, I do want to point out that this was part of the F&B, even though we had 11% growth year-over-year in the third quarter, it was below our expectation, because we are seeing some trending with regard to ancillary or out of room spending within the – both on the group side and transient side. And so, that’s kind of what lead to that. But that’s the only thing from a trending standpoint we’d see. But we have about 15 of those have been recently done.

Josh Attie – Citigroup

Thank you. And is that –

Rick Smith

Pretty good trend.

Josh Attie – Citigroup

Is that trend of lower ancillary spending, has that continued into the fourth quarter?

Andy Welch

To some degree, yes. And we budgeted very aggressively this year, which is clearly indicated by the fact that we had 11% year-over-year growth, but we were below our expectations. We were pretty aggressive on our budgeting for F&B this year simply because we were taking over some of the F&B operations from lease operations and because of the redevelopment work that we were doing on a number of things.

And so, there has been less group capture and there certainly has been a little more displacement that we anticipated. The Copley was a month or two later than expected and Morgans has kind of pushed its way through the entire year.

Josh Attie – Citigroup

So, as that lower, as that trend of lower ancillary spending has continued into the fourth quarter, I guess how come that didn’t prompt you to lower, lower the fourth quarter guidance at all versus what you previously expected?

Rick Smith

Well, we certainly – that was part of our forecast. Those trends were part of our forecast. We’re going to have better, the rates going to be better and everything that went into the guidance for the fourth quarter is based on all the knowledge that we have currently, so that includes those trends from an F&B standpoint.

Josh Attie – Citigroup

Okay, if the guidance didn’t change from three months ago then I guess what’s offsetting that lower F&B spend?

Andy Welch

Better rate.

Josh Attie – Citigroup

Okay. So, then the ADRs you’re getting is better than what you thought three months ago?

Rick Smith

Yeah.

Josh Attie – Citigroup

Okay. All right, thank you very much –

Rick Smith

On our RevPAR for the year, we’re running more than 100% rate and that – that has been improving and accelerating each quarter. So that’s the after.

Josh Attie – Citigroup

Okay. So, just to make sure I understand that, it seems like – is lower versus three months ago, but your – the rate growth that you’re getting is better than what you thought three months ago and that’s what kind of keeps the guidance unchanged.

Rick Smith

Correct.

Josh Attie – Citigroup

Okay. Thank you very much.

Rick Smith

Thanks Josh.

Operator

Your next question comes from the line of Nikhil Bhalla, FBR. Your line is open.

Nikhil Bhalla – FBR

Yeah, just a follow up to a question I had asked before. How is a corporate customer different to – when it comes to say, a corporate customer who goes to a Marriott branded product than the one who goes to say an Embassy Suites, are there major fundamental differences because of the way, sort of Embassy Suites are with larger rooms and things like that are rare, you know, with Marriott’s reward points, things like that, if you can just give a little bit more color on how the customer itself is a little bit different when it comes to the two brands of hotels?

Rick Smith

Yeah, it typically runs to a kind of a higher position to corporate person on one versus the other, on Marriott versus Embassy and it’s a value play. I mean, look, Embassy is extremely – the customers are extremely loyal for three reasons, and those – well, three primary reasons then you get the Hilton points, but the Hilton points don’t quite compete with the Marriott point system.

But the – from a standpoint of what the customers that go to Embassy’s are looking for, it’s the thing that sets Embassy apart and Embassy is a fantastic brand for those customers because they like the same room, they like the free breakfast, and they like the happy hours, the free booze at night. And those customers swear by Embassy and they won’t stay anywhere else. And it’s those three things that drive it. That’s what differentiates that brand always has, always will. And so, it is a different customer and the Marriott customers are driven by their points like Embassy is driven by the Hilton point system, and service expectations at a Marriott relative to the Embassy.

Nikhil Bhalla – FBR

Got it, so Embassy Suites are a little bit more value play compared to say a Marriott branded product.

Rick Smith

Yes, and you know the great thing, but it’s a value play depending on how your per diem works and things of that nature. And it allows you to get higher rates than in some cases, in a lot of cases, because you’re not having to spend on other ancillary things that you typically would.

Nikhil Bhalla – FBR

That’s helpful. Thank you.

Rick Smith

Thanks.

Operator

There are no further questions at this time. I will turn the call back over the presenters.

Rick Smith

Thank you everyone for joining us for the call. And we will talk to you next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!