Welcome to the Ashford Hospitality Trust's third quarter 2012 conference call. (Operator Instructions) At this time, I would like to turn the conference over to (inaudible).
Unidentified Company Representative
Good day, everyone, and welcome to Ashford Hospitality Trust's conference call to review the company's results for the third quarter of 2012. On the call today will be Monty Bennett, Chief Executive Officer; Douglas Kessler, President; David Kimichik, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management.
The results as well as a notice of the accessibility of this conference call on a listen-only basis over the internet were distributed yesterday afternoon in a press release that has been covered by the Financial Media.
At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled, Risk Factors, in Ashford's Registration Statement on Form S-3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.
In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on October 31, 2012, and may also be accessed through the company's website at www.ahtreit.com. Each listener is encouraged to review these reconciliations provided in the earnings release together with all other information provided in the release.
I will now turn the call over to Monty Bennett.
Thank you and good morning. We are pleased to report another solid quarter of EBITDA growth from improved RevPAR performance and operating margin expansion. Furthermore, our capital market strategies continued to enhance Ashford's financial flexibility. This mitigation is one of our key priorities as well as the ability to pursue accretive investments opportunities as they may rise.
During the quarter, we've seen RevPAR growth of 5.9% for all hotels and continuing operations, including 6.6% for all legacy hotels and 3.4% for hotels in the Highland Hospitality portfolio. Approximately 86% of this RevPAR growth was generated from increases in our average daily rate and we expect this trend to continue.
Overall, RevPAR growth continues to be driven by improving demand in the midst of a historically low period of hotel room supply. This improvement in the lodging industry fundamentals is occurring in spite of the sluggish economic growth. A positive change in any or all of these situations could lead to even greater acceleration in the already recovering lodging sector.
Looking ahead, PKF hospitality research continues to forecast strong RevPAR growth for U.S. hotels, a 6.2% in 2013 and 8.8% in 2014. A key factor in this growth is relatively low new supply due to the limited availability of hotel construction financing. In fact, the supply forecast on PKF have actually come down recently, projecting net new supply growth for 2012, 2013 and 2014 of 0.4%, 0.8% and 1.3% respectively. Given these favorable trends, we believe we are not even at the halfway point in this cycle, and maintain that this period appears to be a very attractive time to invest in lodging stocks.
In terms of adjusted EBITDA, we are very pleased to report on our strong growth of 14.4% over the prior year with an adjusted EBITDA of $80 million. We have seen hotel EBITDA margin improvement of 216 basis points for all of our hotels. We expect increasing revenues and our cost control measures will continue to drive improved performance. EBITDA growth is a major operational focus for our team, given that the benefits of this growth within our leverage platform and existing share count have strong potential for shareholder value creation.
In our legacy portfolio, we generated EBITDA flows of 70% and margin improvement of 221 basis points during the third quarter. In the Highland portfolio, we achieved EBITDA flows of 97% and margin improvement of 189 basis points. The Highland portfolio continued to experience strong EBITDA flow-through during the quarter, as a result of improved property management and the benefits of capital expenditures designed to unlock value in these assets.
The Highland portfolio continues to perform in line with our original underwriting expectations. And we continue to work on enhancing Highland's topline performance with the goal of achieving even better results in the quarters to come.
For the third quarter 2012, Ashford reported AFFO per diluted share of $0.31 compared to $0.38 a year ago. This year-over-year differences do impart to the gains we experienced from the interest rate hedges that terminated in 2011, affecting AFFO per share by $0.12. We expect to see declining impacts from our hedges in our financial reporting as the economic recovery continues and the hedges terminate.
As previously announced, our Board of Director declared a dividend of $0.11 per share for the third quarter of 2012, which represents an annual rate of $0.44 per share. This covered dividend is well above of our peer average. Based upon yesterday's closing price, the dividend yield is 5.1%, which is among the highest of our peer group.
Before I turn the call over to Kimo, I would like to note that we have included Jeremy Welter on this quarterly update. Jeremy is our Executive Vice President of Asset Management, and is response for overseeing the operational performance, brand relationships and the capital expenditures within our portfolio. We decided that investors might appreciate getting to here directly from Jeremy and his department from time to time.
With that, I will now turn the call over to Kimo to review our financial performance for the quarter.
Thanks, Monty. For the third quarter, we reported a net loss to common shareholders of $23,637,000; adjusted EBITDA of $79,954,000; and AFFO of $26,030,000 or $0.31 per diluted share.
At quarter's end Ashford had total assets of $3.5 billion in continuing operations and $4.5 billion overall, including the Highland portfolio, which is now consolidated. We have $2.3 billion of mortgage debt in continuing operations and $3.1 billion overall, including Highland. Our total combined debt currently has a blended average interest rate of 4.9%.
With the maturing of some of our swap positions, we currently have 63% fixed rate debt and 37% floating rate all of which is caps. The weighted average maturity is 3.6 years. Since the length of the swap did not match the term of the underlying fixed rate debt, for GAAP purposes this swap is not considered an effective hedge.
The result of this is that the changes in market value of these instruments mostly run through our P&L each quarter as unrealized gains or losses on derivatives. These are non-cash entries that will affect our net income, but we added back for purposes of calculating our AFFO. The third quarter, it was a loss of $8 million and for the year it's a loss of $23.7 million.
At quarter's end, our legacy portfolio consisted of 95 hotels in continuing operations, containing 19,967 rooms. Additionally, we own 71.74% of the 28 Highland hotels, containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 25,767 net rooms. We're also in a position in one performing mezzanine loan, the Ritz-Carlton and Key Biscayne in Florida with an outstanding balance of $4 million.
Hotel operating profit for all hotels, including Highland was up by $10.3 million or 13% for the quarter. Our share count currently stands at 85.8 million fully diluted shares outstanding, which are comprised of 68.2 million common shares and 17.6 million OP units.
During the quarter, we received a payment of $5 million from a guarantor on a previously fully impaired mezzanine loan. This payment is reflected on the income statement as a negative impairment charge and has been excluded for purposes of calculating adjusted EBITDA and AFFO.
Lastly, I'd like to take a moment to discuss the additional financial disclosure, we began providing last quarter, which is based on several conversations we had with many of you on this call. This includes a more detail disclosure of our debt and trailing 12 month EBITDA by a loan pool.
This quarter we added to one of the schedule, the trailing 12 month EBITDA debt yield. We hope that this additional information enables you to prepare a bottom-up valuation analysis on Ashford, rather than a top-down approach. We anticipate that this year will lead to more accurate indications of our value, when summarized into individual portfolios and taking them to consideration that all of our loan pools are non-recourse. We hope this additional disclosure helps you in refining your model and perspective on the company.
I'd now like to turn it over to Jeremy Welter, for some additional insight on asset performance during the quarter.
Thank you, Kimo, and good morning everyone. As previously stated by Monty, our third quarter RevPAR increased 5.9% for all hotels in continuing operations, including 6.6% for our legacy hotels and 3.4% for the hotels in the Highland portfolio. Total portfolio RevPAR index slightly increased during the third quarter. We observe strong underlying market trend across our portfolio, which contributed to significant growth in average daily rate of 5.2% and 4.7% for our legacy and Highland portfolios respectively.
Leisure travel continued it's resurgence during a strong summer season. Group travel also outpaced our expectations and many of our key MSAs. However, some of the demand growth has been neutralized by a further reduction in government related room night utilization and ancillary spending across our portfolio.
As we have stated on previous calls, the lodging recovery is broad based, with our highest RevPAR growth and major markets coming from Houston, Jacksonville, Chicago as well as Tampa and Charlotte, all of which delivered over 15% RevPAR growth for the quarter.
It is worth highlighting some one-time events that impacted our results in the third quarter. The Republican and Democratic National Convention were held in Tampa and Charlotte respectively. Our five hotels in these markets benefited tremendously from the conventions and outperformed even our own internal expectation. Despite the conventions lasting less than a week, these five properties experienced RevPAR growth of over 20% for the entire quarter.
The five-day pickup for our Tampa and Charlotte assets translated into a 155% increase in ADR, a 44 point increase in occupancy and a 366% increase in RevPAR as compared to the prior year. Affecting the performance of the Highland portfolio was this year's timing of the Jewish Holidays as well as Hurricane Irene, which provided a boost to 2011s comparable results.
Setting aside one-time events, I'd like to give you some additional color on a few of our major markets. The Washington DC area is the largest market in our portfolio, representing approximately 10% of our rooms and approximately 15% of our EBITDA. But the number of our hotels centered in this Crystal City area near Reagan Airport, the ongoing base realignment and closure plan or BRAC being implemented by the Department of Defense has been challenging.
But resilient group travel and strong summer leisure travel drove RevPAR for our DC hotels higher by 6.1%, the best quarter of 2012 yet. Our asset management team recognize the challenges in DC and proactively work with our managers to group up for our big box DC assets during the quarter, which in turn led the RevPAR gains of 8.6% and 10.6% through the Marriott Gateway and the Capital Hilton respectively.
Looking ahead, group room bookings in 2013 are thus far solid, and the long-term fundamentals in Crystal City will remain strong due to its strategic location near the Pentagon and downtown Washington DC. While the DC's market growth is still slower relative to other gateway cities, we remain confident and it's excellent long-term prospects and expect to see improved performance following the Presidential Election.
Turning to other markets, the San Francisco Bay Area was one of our strongest performing MSA's in our portfolio this quarter with RevPAR increasing over 13%, driven almost entirely by increases in ADR. Our Orlando hotels, which represent 7% of our rooms, experienced RevPAR growth of 9.1% for the quarter, which again evidenced the pick up of summer leisure.
Our asset management team continues to be among the most aggressive in the industry in resisting cost free and controlling margins as evidenced by our hotel EBITDA flows of 74% and margin improvement of 216 basis points. The team continues to be laser focused with our third-party property and brand managers, by monitoring headcounts, labor cost and scheduling. We are also pleased by the team's success and working through the challenges, we represented with Marriott sales transformation, which impacted our Marriott manage portfolio during this rollout.
The final markets were rolled out in the third quarter of 2011, and we worked actively with Marriott on deployment, business development, key account coverage and overall sales and revenue management strategies. We're beginning to see the benefits of these initiatives with a net result of 9.6% increase in quarterly RevPAR in our Marriott managed legacy assets.
Looking ahead, we remain optimistic for 2013, particularly as we consider the favorable hotel demand and net new supply and balance. We've analyzed our properties and believe average net new supply for 2013 in our specific markets should be less than 1%.
In terms of capital expenditures, we continue to strategically invest the strength in our asset's competitive positions. Year-to-date we have invested $82 million. Of this amount, $27 million or 33% was owner-funded above and beyond our FF&E reserve. We recently completed transformational lobby and public space renovations for our two Highland portfolio DC independent hotels, the Churchill and Melrose. During the second quarter we completed the rooms renovation of our Key West asset, which benefited the property in the third quarter as it grew RevPAR by 9.8%.
Now, I'd like to turn the call over to Douglas to discuss our capital market strategies.
Thank you, Jeremy, and good morning everyone. Throughout the year our capital market strategies have focused on two key themes. We're actively managing debt maturities and maintaining disciplined approaches to cash accessibility and utilization. Our capital goal remains to be in a strong position to whether any short-term market fluctuations. We're also being ready to pursue accretive investment opportunities.
We continue to carefully monitor the capital markets and has seen some improving trends, especially lately with regards to the availability of debt. We've successfully refinanced our 2012 maturities, and are already working on our loans maturing in 2013 and beyond.
The high debt yields on these upcoming refinancings, we do not expect any capital will be needed for the pay-downs. For example, we're in the process of refinancing our $101 million with loans maturing in the first and second quarter of 2013, on three very strong performing assets within Highland portfolio.
We also see an opportunity with the recent improvement in the debt markets to pursue an early refinance of the $154 million non-recourse loan currently at 12.72% interest rate that is set to mature in December 2015. We hope to make an announcement in the near future on these refinancing initiatives.
During the third quarter, we added a new participant to our senior credit facility, upsizing this facility to $165 million from $145 million. The terms of this credit facility remain unchanged and we retain the option subject to lender approval to further expand the facility to an aggregate size of $225 million.
The Syndicate now consist of six banks, including Bank of America Merrill Lynch, who they recently added, Deutsche Bank, Morgan Stanley, UBS, Credit Suisse and our lead arranger KeyBanc. Currently this facility remains undrawn and all other company debt is non-recourse.
On the transaction side during the quarter, we transferred the Hilton El Conquistador in Tucson, to receiver as part of a consensual foreclosure. By eliminating this hotel from our portfolio and removing the associated $19.7 million debt balance, it will be approximately $0.03 accretive to AFFO, based upon its trailing 12 month EBITDA contribution of negative $1.7 million.
The hotel sales effort, we mentioned earlier in the year, mainly the Doubletree Columbus has taken longer to complete. This unencumbered asset is relatively small in value and we have to report soon on our progress. Regarding other asset sales, the market for hotels remains attractive and we regularly receive interest from unsolicited buyers for several of our hotels.
Our preference is to hold on to these assets rather than selling them at this point in the lodging cycle. There are several reasons for this. We anticipate seeing improvement in net operating income in our hotels, and as a result it increase in value over time. Second, we continue to see more investment capital flowing into the lodging sector. Third, with capital flows increasing and the interest rate market remaining relatively low for the foreseeable future, we do not expect any near-term risk of cap rate expansion. Of course, we are constantly evaluating these factors and are also subject to change as conditions fluctuate.
Since we stated that it is not a good time for us to sell, you might wonder what we are buying at this point in the cycle. The answer is, refining accretive hotel investments remains a challenge for us, give our current cost of capital and share price. The acquisition market is extremely competitive for high quality hotels.
While we continue to actively underwrite opportunities, we see no need to issue equity at a depressed EBITDA multiple to chase investments. We want our growth to be meaningful and believe that our strategies are highly in line with shareholder interest, given our 21% insider ownership.
That concludes our prepared remarks, and we will now open it up for your questions.
(Operator Instructions) First question is from Ryan Meliker with MLV & Co.
Ryan Meliker - MLV & Co.
Just a quick question with regards to the dividend. I'm wondering if you can give us some color on how the board is going to think about the dividend heading into 2013. It looks like you guys have some solid FFO, and basically FFO coverage depending on how your CapEx shapes out next year. How is the board going to think about the dividend in terms of a potential raise? Is it going to be based on AFFO and cash flow or is it going to be focused more on taxable income and potential uses of the cash aside from returning it to the shareholders?
Let me try to give you a little color, at least on how we're thinking about it as well. As you know, in our December board meeting is when we all get together and we set guidance for our coming dividend policy for the upcoming year. And last year, I think we were at $0.40 for the year and this year we're at $0.44. We're not constrained in any way by taxable income, and so we've got flexibility on the dividend, so there's kind of one marker in regards to that.
Because the amortization in our loans and because our Highland pool is a cash trap, and a couple of the others are cash trap, while the properties are performing well, a lot of our excess cash goes to pay down our existing debt. And that is materially deleveraging our silver time, which a number of our investors would like to hear.
On one hand we've got our profitability GAAP based or FFO based, which is very strong and attractive. On the other hand, cash flow is not as strong as it could be, because the money is going to pay down debt, which some people kind of account that in cash flow or not. And so those are kinds of book-ins of what we're looking at.
So there's no appetite to do anything besides keeping it or raising it. But I would imagine that if it is raised, it be a modest raise, because the board and the management team just don't want to get ahead of ourselves too much on just pure raw cash flow. So I think that's our thoughts for now.
Ryan Meliker - MLV & Co.
I guess just to pry a little bit, can you help me understand other specific metrics that the board looks at to understand where they come from, whether it's a percentage of cash available for distribution after those debt amortizations, et cetera, that they're comfortable paying out or is there something else that they're really looking at to get, so we can understand if those metric start to outperform then we might be able to see a potential for some changes?
We haven't even talked about with the board this year, so what I'm relaying to you is kind of just what I can gather from our board meetings, but not specifically related to the dividends. What they will be looking at is, total cash flow without paying down the debt and amortizing, and then FFO, and AFFO, and CAD, and on and on. I wish I could give you more color on that, but I'll just be stepping out ahead of myself. It's going to be those metrics they're going to look at and deciding what to do next year.
Ryan Meliker - MLV & Co.
And then, just the second question I had is, without providing any guidance, I know you guys hate that G-word. Can you just give us some color on if you're seeing any changes in trends over the past month or so, and heading into 4Q in 2013, that would make you want to adjust how you're operating your properties, take a more cautious approach to, whether it be revenue management or managing your other properties from staffing standpoint.
You're right. We don't give the guidance, but we will talk about the industry. And the industry still seems to be hanging in there quite well. We don't see any signs, why the industries can do anything, but continue to move up and demands continue to move up, and we all know that the net new supply is pretty modest.
So we continue to remain optimistic. The question mark that everyone has with so called fiscal cliff, and how much of the drag on GDP is going to be, and then the backup to that is how much will it effect hotel room demand, because hotel room demand has been cruising along pretty well, very well actually compared to GDP performance.
And that's just an unknown. And actually that's political decision that's got to be made sometime in the not too distant future. And there's probably a lot of people that speculate on that better than we could, but those estimates, that that drag on GDP could be anywhere from 0% to 1.5% to 3%, depending upon all different types of scenarios.
But at least right now, overall in the industry we don't see that affecting the industry. And we just don't see it yet, doesn't mean it won't. All that being said we are particularly focused on costs and especially labor. And we set our labor schedules very short term, so we can flex them and we will look at the upcoming week or few weeks or months and adjust our labor accordingly.
And so you can expect that if revenue is still softened little bit that will be very responsive. Those responsive efforts are usually done much quicker and better by our affiliate at Hamilton and the brands take longer to convince them, that they should shift gears and adjust the course. So if something like that happens I think you'll see that our inventory management portfolio can adjust and will adjust immediately. And the brands just take longer as we've got a convince them that they need to start coming back.
Ryan Meliker - MLV & Co.
And then just one quick follow-up here, and I know in 3Q business investment spend turned negative, does that concern you at all or in your end, from what you just said, it sounds like you're not seeing any indication that negative turn in business investment spend, is leading to a slowing in demand, to start the fourth quarter.
We haven't seen it. The overall economic indicators are fairly mixed, and they just continue to stay mixed. And as you know, Ryan, the hotel industry is typically a lagger to overall GDP. And so whatever GDP does it shows up, a couple of quarters later in hotel demand. And so it would be natural that if that declining business then were to affect hotel demand that it wouldn't have affect it yet. And we're not seeing it.
Your next question is on line of Will Marks with JMP Securities.
Will Marks - JMP Securities
I just had a little bit of a follow-up related to no guidance but has your own view changed at all? I mean if you were giving guidance, is your outlook for the year a little bit lower than it was three months ago?
We just can't comment on it. We just can't comment guidance for our own portfolio. Regarding the industry, the industry seems to be doing well. So we don't see any big changes or movements. But again, for our own portfolio, we just aren't a habit of providing guidance.
We just don't find it constructive, because we find analyst and investors and the management team become more concerned about hitting one specific number or another rather than focusing on operations and improving performance. And as you could see, lining up our performance against our peers at this quarter end, year-to-date or even historically, our team continues to post just really great numbers on it, flow-through and EBITDA growth and the like. So I wish I could answer more of that for you.
Will Marks - JMP Securities
Did you try to look at your portfolio geographically representative of the country as a whole, but with plans are hoped to outperform?
Historically, we have focused our portfolio, just trying to be fairly representative of the entire industry, so that our RevPAR performance didn't bear materially. Over the past couple of years, that has been the case as much because in it's recovery, we found that upper-upscale hotels, especially in the last year or so, has been one of the underperforming segments. And we believe that's due to the fact while transient rebounded quickly after the fall-off in '07 and '08, group is still just slow coming back. It is just slow.
And all the additional money that are spend with group, F&B add-ons, et cetera, it's slower. And so it's interesting as you see hotels because you'll find mid-scale hotels are doing very well, and luxury hotels are starting to rebound very well and there is some rebound because they're able to cut their price and steal all the groups that's out there.
And so that leased upper-upscale hotels like Marriott and Hiltons and the like which we and most of our competitors in the REIT space own, struggling a little bit more on the group side. And whenever we can get a good solid group base, like we did in DC, at a couple of hotels this quarter, then we can really knock it out of the park, because with new manage that's a transient business.
So that is our desire, and never what I would have thought that having high quality upper-upscale hotels will cause us to under perform the overall industry for the past year or two. But that has been the case and it has been the case for our competitors. If you look at the RevPAR growth for our competitors and ourselves compared to the overall industry, the public traded REITs by in large have underperformed.
Hopefully that will start to change as group demand solidifies and absorbs all the new supply addition and start to get some traction on the group side, but it's just a slow process coming.
Your next question is from the line of Robin Farley with UBS.
Robin Farley - UBS
First is your comment on DC, it seems like a quarter ago, your body language was a little bit more, I'm talking about how that might be difficult to come back over the next year or two, there was some at the office space. So I'm just wondering what the out performance in this quarter, if there were something kind of one-time that drove out. And then you mentioned your Crystal City location is better than overall DC, but your tone seems a little different than a quarter ago. So I wanted to ask about that.
My tone on DC still remains over the next year or two, and that we finally get to earn a position of very little net new supply in the DC area. And demands is going slowly grow out there deepening upon what the federal government does, with their expenditures. And we seem to be at the bottom of the office space absorption with the BRAC closing process out of Crystal City. And so we're going to be on a long trend improving out there, but it's just going to take some time.
That said, off to the side, if you have a quarter, we have a good group month, well than you can do well. And this quarter we happen to do pretty well at the Marriott Crystal City with some nice groups and at the Capital Hilton and little bit at the Melrose Hotel with some nice groups. And so it just depends upon weather you can get some good crew bases.
And the stars and moons happen to align in the third quarter for some good groups. And we will have a nice quarter going forward, if we can get that group in there. But as you without group, it's spotty. Sometimes you meet a great quarter, sometimes you can't. In stronger times we can offset that with more transient, but with the condition of DC market that's just much harder to do. So we see gradual improvement in the DC market and then in our hotels, but I think you'll see little few bounces along the way.
Robin Farley - UBS
My another question is, I was going to ask about kind of gap between the Legacy and Highland portfolio. I think you mentioned there was East Coast exposure and Hurricane Irene last year, and I guess that was kind of suggesting that Hurricane Irene had actually been a positive for you last year. So I guess in light of Hurricane Sandy, I wonder if you could comment at all on what the impact that you've seen or that you expect from that for Q4?
Regarding Sandy, it looks like our physical damage is could be under a $1 million. Now these reports are still coming in and so we can get a surprise from somewhere as the damage reports go through the managers and back to us. But we think that damage is going to be fairly modest. We're calculating the revenue loss at about $3 million. Now, that could grow a little bit, because we still have a couple of properties without power, Hyatt Long Island and our Courtyard, Basking Ridge in New Jersey.
So that could continue to rise. However, we've already offset some of that revenue loss with incremental business from people having to stay at our hotels because their homes are without power or because of construction cruise, no light coming through. And that's been a pickup so far of about $0.5 million. And we expect that to grow certainly more materially than we expect the BI to grow.
On the revenue loss I should say, we are making application with our carriers to recover this loss business. It's a very technical process about what qualifies and what doesn't, but right now we're kind of ball parking it as maybe we'll get about half of that back of the $3 million we lost in insurance reimbursements. So that's about where we are on Sandy. And it could ultimately be in that increase. We will have to see how much incremental business we can pickup.
Robin Farley - UBS
And last year was Irene an incremental positive?
It was an incremental positive. And in comparison to, I mean our Highland assets that are East Coast concentrated, they have that comparison, and didn't performed as well preferably, because Irene was a net positive for us.
Robin Farley - UBS
And maybe this is obvious, is there something you're seeing with this year that would may get not in that positive or is it just that new more business travel would have been taking place in October versus August, last year? And that the kind of business that's disrupted is more valuable this year?
It's just hard to say. A lot of it is trying to estimate how many people say are without power and need to come and stay in our hotels and for how long and that's just hard to predict, right? How long does it take for people to get power backup in their homes for one storm versus another. The longer they're without power, the longer they stay with us. And also how close our hotels happen to be to areas that need to be rebuild and construction, and that just depends on what kind of construction crew. So I wish I could give you a little guidance on it, but it's just hard to say. It's just too early.
(Operator Instructions) Next question is from the line of David Loeb with Robert W. Baird
David Loeb - Robert W. Baird
Monty, I have a question about the margin growth and flow-through. You've had extraordinary results really in both portfolios, but particularly so in Highland portfolio of late. How long can that go on, and what should we expect this kind of normalized flow-through when you're done with kind of excess cost cutting?
The normalized flow-through as you know our internal target is about 50% and that's what we target and that's what we'd hope for. Revealing when we'd get to that 50% flow-through is probably little more guidance that I'm comfortable saying. But maybe one comment that we're pleasantly surprised that we've been able to continue those flow-throughs up through this date. At the outset, I would have thought that we would have wrung all out by now, but the crews continue to do well in bringing those flow-throughs out.
David Loeb - Robert W. Baird
And can you also just talk a little bit about Highland and in terms of exit strategy, both yours and your partners. What's the time horizon for Prudential and what sort of your longer term thought on that portfolio?
We like the assets. There is always a few that we'd like to peel off, but generally we'd like to hold the assets for the longer term. These assets are in the funded Prudential's, that's not a long term. They hold these kinds of investments for maybe four years, five years. And so I'd expect in couple, or three years Prudential would be interested in trading out of their 20% position. They know that we'd interested in buying it. And so I imagine in a couple of years, we'll start having a dialog about that, about doing something along those lines.
David Loeb - Robert W. Baird
Do you have some pre-negotiated buy-sell terms?
This will be just negotiated at the time.
And our next question is from the line of Rob LaFleur with Cantor Fitzgerald.
Rob LaFleur - Cantor Fitzgerald
Couple of question, one, did I hear you correctly that you said PKF has got their RevPAR forecast accelerating from six unchanged to eight unchanged next year?
Accelerating from 215 to 214.
Rob LaFleur - Cantor Fitzgerald
And then the second question, sort of along the lines with some of the earlier questions. When you look at your business, and are trying to gage whether that conditions are continuing with the strength, they are starting to fray a little bit at the edges. What are some of the sort of proverbial scenarios in the coal mines you look for at the asset level? What are some of the first thing that shows up when business starts to soften up, that you're on guard for right now?
The coal mine is really how the overall economy is doing, because our business lags the overall economy. And so those indicators are usually not within our portfolio as much as they are in all the public staff that are out there, GDP and the like. So again, since we're a lagger industry, we can see it coming in that direction.
As far as within our own portfolio and business, you'll see people being a little more reluctant to book group, and maybe shortening the booking window. And as far as impact on transient, many times you won't see really material impacts on those pick ups for a week or two out. So the trend is very difficult to forecast very far in advance.
Rob LaFleur - Cantor Fitzgerald
And I know you guys do a lot of the industry research. How do you sort of think about the fact that this industry is able to produce demand in excess of GDP growth, right now. Are there particulars about this economy, and where the strength is that is helping it produce more hotel demand or is this still just residuals recovering from a very deep down cycle?
I think it has to do with the way this recovery has been. Overall, the unemployment rate is about 8% or even higher, depending upon how measure it but if you're a post-graduate student, the unemployment rate is 2.5%. If you're a college grad, it's 4%. If you've got a high school diploma only, it's 10% and if you have no high school diploma it's 20%. So there is a huge diversity in the unemployment rates depending upon education levels.
And so the people that travel both, on a corporate basis, and that have discretionary dollars are people that are more highly educated and have more disposable income. And so those people in this economy are really doing, okay. Its the folks that's make a lot less, and that are further down on the economic change, that are not doing so well. And that are really pulling the unemployment rate to the higher end. But those people simply don't travel. And we think that that is what's going on here.
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