Ryman Hospitality Properties, Inc. (RHP) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Ryman Hospitality Properties, Inc. Third Quarter 2012 Earnings Conference Call. Hosting the call today from Ryman Hospitality Properties are Mr. Colin Reed, Chairman and Chief Executive Officer; Mr. Mark Fioravanti, Executive Vice President and Chief Financial Officer; and Mr. Carter Todd, Executive Vice President and General Counsel. This call will be available for future replay. The number is (800) 585 8367 and the conference ID number is 39255748. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Carter Todd. Sir, you may begin.

Thank you and good morning. My name is Carter Todd, and I'm the General Counsel and Executive Vice President for Ryman Hospitality Properties. Thank you for joining us today on our third quarter 2012 earnings call. You should be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Ryman Hospitality Properties' expected future financial performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in our filings with the Securities and Exchange Commission and in our third quarter 2012 earnings release. And consequently, actual operations and results may differ materially from the results discussed or projected in the forward-looking statements. Ryman Properties undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. I would also like to remind you that in our call today, we will discuss certain non-GAAP financial measures, and a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures has been provided as an exhibit to our earnings release and is also available on our website under the Investor Relations section. At this time, I'd like to turn the call over to our Chairman and Chief Executive Officer, Colin Reed.

Thank you, Carter. Good morning, everyone, and thank you for joining us today. I will start by talking about the third quarter and then provide a detailed update on our REIT conversion process and the transition with Marriott, then Mark will provide additional detail on our financial performance, and then we will take some questions. Over the past 8 years or so, our company has been confronted by a number of extremely challenging periods, be they the worst global recession since the Great Depression, shareholder activism, and not to mention, a thousand-year flood. As a company, we have come together to meet these challenges head on and, ultimately, emerged as a stronger enterprise. It's almost 1 year to the day that we sat with our Board and talked about ways in which we can unlock value, and I now understand why very few companies make the leap from a sequel to a real estate investment trust. Today, Ryman is very different to the Gaylord of 12 months ago. And as a consequence, the company is so much stronger than at any time in its past. As you all know, after much deliberation, we announced our chosen path at the end of May of this year, and the real heavy lifting has occurred during the 5 months since then. As a consequence, the announcement of the selling of Gaylord Hotels brands in Marriott that occurred on the eve of our third quarter essentially put our company into quite a bit of emotional stress. The circumstances that we dealt with this quarter leading up to 1st of October, when we transitioned our properties to Marriott and converted to Ryman, was difficult on a number of fronts, simply because many of our employees at both the corporate and hotel levels were faced with a great degree of uncertainty of their futures as we fundamentally restructured our company. Understandably, many of them were primarily focused on whether they would still have a place within the new REIT or the new hotel business. Consequently, as a management team, it was a priority for us that we treat our employees as compassionately and responsibly as possible as we crafted the structure of the new company. We also -- we were also tasked with ensuring a smooth transition with Marriott, and at the same time, doing everything necessary to meet our regulatory requirements essential for the REIT conversion. Simultaneously, we increased the level of communication to you, our shareholders, that included the execution of a major stock repurchase and secondary offering that enabled us to focus on the future, and thus ensure that we have the support from our shareholders to complete this transformation. And when you take into account this exceptionally challenging backdrop and the array of distractions, I can honestly say I'm very pleased with how our business performed during this last quarter. In previous quarters, I've normally summarized for you our detailed performance, but it would seem to me that what you, as investors, are interested in now is what does the future look like and does the picture we painted for you in mid-August still look the same. But first, here are my brief thoughts about the very unusual third quarter. Notwithstanding the turmoil, our top line and bottom line performance was decent, with a slight increase in revenue and CCF across our business despite the fact that 2 of our hotels had all-time record-setting third quarters in 2011. Often in times when distractions are at the forefront, eyes get taken off the ball and margins slipped, but that did not happen in our hotels nor our corporate. Also, I was pleasantly surprised with our level of room night production, particularly, as I've said, most of our sales personnel were extremely preoccupied in questioning whether they would still have a job once Marriott took over management. So let's talk about the transition, both within our hotels and at corporate. First, the hotels. Now there is an extraordinary amount of work that has gone into the planning and execution of this operational handover, but I suspect you want to know about 3 things as they relate to the transition of Gaylord Hotels. First, are they any -- are there any material problems in the transition thus far? And the answer to that appears to be solidly no. The work that both we and Marriott put into this phase has paid dividends. Second, costs. Are we getting the hotel level synergies that we anticipated? And you will remember, we indicated that we expect to get somewhere between $19 million and $24 million net of management fees. As we sit here today, we feel pretty confident that we will reach this goal once all of the array of systems that Marriott is planning to implement actually get installed. And we expect the systems side of the transition will be completed in the second quarter of next year. Third, revenue enhancements. Now there are 2 pieces of information I'll share with you as a precursor to the guidance we will issue once our planning process for 2013 with Marriott is fully complete. First, what we have seen so far in October is a decent increase in group lead volume that is coming from the Marriott engine, and this we are encouraged about. Now regarding transient room nights. In order for the Marriott reward system to function seamlessly, each of our hotels need to be converted to the Marriott -- to Marriott's property management systems. So far, Palms, National and Texan have been converted in October, and that's all gone pretty well. And as of October 29, Marriott Rewards can be earned on stays in these 3 hotels. Now Gaylord Opryland's property management system integration is planned for January of next year, post the high-volume holiday season that Opryland will be benefiting from. Whilst it is too early to talk about Marriott's reward production, our overall October performance, excluding the last couple of days with Hurricane Sandy, showed decent year-over-year revenue growth. Now let me switch to corporate costs. We've done a lot of work here and are in the final stages of constructing our plan for 2013. In the many meetings we've conducted with investors in August and September, we indicated to you that we anticipate reducing our corporate costs by somewhere in the $14 million to $16 million range. It now seems that given the reduction in staffing, the complete overhaul of our technology systems and the resetting of compensation, particularly at the top of the house, to reflect the fact that Ryman is a very different company today, corporate savings will come in higher than our original estimates. And we'll give you more detail on this as our guidance for '13 is ready. But a large part of our cost savings have already occurred or will occur over the next couple of months. And so this element of cost savings is no longer speculative. The one last point as it relates to Gaylord Hotels' transition, which is particular of interest to both the Board and to me. One of the key factors in our decision making as we were evaluating potential partners was the value Marriott places on building a strong employee culture that translates to exceptional guest service, a core characteristic of the culture that we have built at Gaylord over the years and something that you've heard me talk about every single earnings call over the last 10 years. We've certainly seen this culture on display over the past several months. And although any transition project of this scale is bound to have some bumps along the way, we are very pleased with how the process has gone so far, and Marriott has done a really good job of maintaining the strong Gaylord culture. And as a consequence, our guests will benefit as a result. As regards to the conversion costs, we are tracking slightly higher with our projections, mainly due to higher severance and retention costs, but the offset are our synergies will be better. And Mark will elaborate on that. Now let me set the stage for the guidance tweak we are making. As all of you know, our financial performance for the first 6 months of this year was pretty good overall. But as I've said, the emotional stress that occurred within the third quarter caused what we believe to be a temporary glitch, particularly to the short-term bookings that we were anticipating in the third quarter. The fourth quarter started pretty well in October, but over the last few days, we've been impacted by the devastation that we've all witnessed in the Northeast. Our hotel in Washington survived Sandy with little damage, but we've had 1/2 dozen or so groups that have canceled. In total, we estimate the impact of Hurricane Sandy to be in the $3 million CCF range to Gaylord Hotels. Given all of this and the fact that our leisure and holiday bookings are trending ahead of last year, we are making a modest change to our CCF guidance for the overall year by marginally dropping the top end of the range to $245 million. We're also tightening the top end of our RevPAR and total RevPAR guidance range to 4%. As we've communicated to you since announcing the transaction with Marriott and our plan to convert to a REIT, our chief focus leading up to 2013 is on the integration and building of a strong foundation for our new company. We anticipate this will remain our priority over the next few months. Looking at growth, we feel that we have a number of strong opportunities to expand our business organically, such as through room and meeting space expansion and the addition of new food and beverage offerings and other amenities to make our properties even more attractive. In terms of external growth, as we have discussed, we have a very informed sense of potential acquisition targets that are out there in the marketplace. That said, I want to reiterate that we are in no hurry to deploy capital while we are still concentrating on optimizing the integration process and the maximization of free cash flow for '13. Before I turn the call over to Mark to walk you through the financials, I just want to take a moment and thank our shareholders for the confidence and support through this process. This has not been an easy undertaking for any of us and certainly not for so many of our employees, who unfortunately were negatively impacted by this transaction. However, now that we stand almost on the other side of this process, I can say with confidence that the future looks extremely bright. I'm very confident that in 2013, we will produce the highest level of profitability that this company has ever produced, and our free cash flow will be very substantial, given the fact that our capital expenditure commitments and our leverage levels are modest. The fun question for us is how much of the free cash flow do we return to shareholders through dividends and stock buybacks, how much we use to continue to delever the balance sheet and how much we deploy to growth. Unlike most hospitality REITs, we will start '13 with relatively low leverage and substantial AFFO per share, and this gives us great flexibility. As we finish our planning for '13 with Marriott, we will, of course, be ready to be explicit on these questions, but whatever the answer, our financial position gives us a ton of flexibility for this company. And needless to say, a significant amount of value has been created. Thank you. And with that, I will turn over to Mark to talk about the financials and guidance in a little bit more detail.

Thank you, Colin. Good morning, everyone. On a consolidated basis, revenue for the third quarter grew 1.3% to $228.1 million. During the quarter, income from continuing operations was a loss of $26.7 million or $0.57 per fully diluted share based on 46.5 million weighted average shares outstanding. This loss includes $51.4 million of expenses related to the company's planned conversion to a real estate investment trust. And as we outlined in our release, we have separated these costs in our financials for your benefit. Consolidated cash flow was $22.6 million in the third quarter of 2012 compared to $48.8 million in the same period last year and included $30.3 million of cost associated with the conversion process. Turning to the Hospitality segment, RevPAR decreased to 0.9% while total RevPAR was flat compared to the same period last year. Gaylord Hotels' in-the-year, for-the-year cancellations in the quarter totaled 21,912 room nights compared to 19,927 room nights in the third quarter of 2011. Attrition rates increased 0.8% year-over-year to 10.2% in the third quarter. During the quarter, we continued to benefit from attrition and cancellation fee collections, and collections totaled $1.7 million compared to $1.4 million for the same period last year. Gaylord Hotels' consolidated cash flow increased 4.1% in the quarter to $57.8 million, leading to a year-over-year improvement in CCF margin of 100 basis points. The Opry and Attractions segment continued to perform well in the quarter, with revenues increasing 11.4% to $20.2 million, driven by increased attendance at the Grand Ole Opry. CCF increased 25% to $6 million in the third quarter compared to $4.8 million in the prior-year quarter. Moving to Corporate and Other. CCF, excluding REIT conversion costs, improved to a loss of $10.7 million compared to a loss of $11.4 million in the prior-year quarter. As I mentioned earlier, we incurred $51.4 million of REIT conversion costs during the quarter. These costs included non-cash impairment charges of $21.3 million, professional fees of $14 million, employment and severance costs of $10.3 million, underwriting costs of $2.8 million and other transaction costs of $3 million. The impairment charges were incurred as a result of our shift in development strategy, included a $14 million write-off of previously capitalized costs associated with the future -- a potential future expansion of Gaylord Opryland in our previous development project in Mesa, Arizona. We also abandoned certain other projects associated with our existing business and recorded an additional impairment charge of $7.3 million during the quarter, which was primarily related to information technology system. For the full year 2012, excluding non-cash impairment charges, we expect to incur approximately $73 million in onetime costs related to the REIT conversion. While this estimate is higher than our initial estimate of $55 million and includes approximately $12.5 million in additional charges he had not planned for, such as a TRT repurchase, additional sales incentive costs and certain changes in property level accounting treatment. However, when factoring in lower-than-expected Federal income taxes and earnings and profit distributions, we anticipate the overall net cash impact of the transaction to be approximately $50 million higher than originally anticipated. On November 2, we announced that our Board of Directors declared a special dividend of $309.7 million or $6.84 per common share relating to the REIT conversions. The dividend is payable to stockholders of record of November 13, and our stock will begin trading x dividend on November 8. Moving on quickly to the balance sheet. As of September 30, we had long term debt outstanding of approximately $1,148,000,000, including the current portion, and unrestricted cash of $24.2 million. Additionally, $216 million of borrowings remained undrawn under our credit facility, and our lending banks issued $8 million in letters of credit, leaving $252 million of availability under our credit facility. In addition, on October 1, following the close of the quarter, we received $210 million from Marriott in association with the sale of the management business. And finally, turning to guidance. In addition to the short-term bookings impact associated with the REIT conversion process, we had approximately 14,000 room nights canceled as a result of Hurricane Sandy. While these cancellations were minor at Gaylord Opryland, Gaylord Palms received a cancellation notice from a 6,000-plus room night military group whose attendees were unable to depart from the Washington, D.C. area, and Gaylord National received cancellations that totaled over 7,000 room nights as a result of the storm. We estimate that the total CCF impact from the storm is approximately $3 million. As a result of the impact of the storm, coupled with the temporary slowdown in our bookings during the transition process, we believe it's appropriate to revise our guidance to more appropriately reflect our expectations for the remainder of the year. We are therefore revising our guidance for Hospitality segment RevPAR from an increase of 3% to 6% to an increase of 3% to 4%, and we're revising our guidance for total RevPAR from an increase of 3% to 6% to an increase of 3% to 4% year-over-year. While the hurricane has negatively impacted our Hospitality segment results, we are outperforming our initial expectations in our Opry and Attractions segment as well as our Corporate and Other segment. Therefore, we're tightening the top end of our consolidated guidance to reflect a total company CCF range of $235 million to $245 million in 2012. It's important to note that this guidance excludes the expenses incurred in the company's conversion to a REIT. We anticipate that we'll provide guidance as a REIT for 2013 when we report our fourth quarter and 2012 full year results in February 2013. And with that, I'll turn the call back over to Colin for any closing remarks.

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

[Operator Instructions] Your first question comes from the line of Jeff Donnelly with Wells Fargo.

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

Yes, well, when you say that I -- mine did too, so...

Jeff, it made sense to me.

I mean, that's really good news because, obviously, we'll have $50 million more to continue to delever. I'll figure out what we do in terms of returning stock to -- returning cash to our shareholders, but anyway...

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

Yes, we should end up with total debt at year end around $930 million or so, I think is about where we'll end up. [indiscernible] last quarter.

Okay. And that's your gross debt? Is that -- that includes the converting or?

Yes.

And do you have a sense for cash penalty as well or?

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

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

If you -- just to kind of walk you through our estimate right now, if you assume that we have positive net income in the converts or in the money, we would end up, on a fully diluted basis, with about 16.2 million shares on a GAAP basis. On an economic basis, it would be about 55.3 million shares. Now obviously, if we don't have positive income, then you don't count the convertible notes and the warrants.

Jeff, that means that we do 80-20.

That's 80-20. That is -- that's the -- in respect for dividend, 80%. We've assumed a share price of $32.39 [ph] in that calculation. Obviously, that price will be set on December 10, 11 and 12. We're just [indiscernible].

And then, I guess, maybe a 2-part question for you, Colin, just in terms of returning capital to shareholders. You touched on it in your remarks. One, I guess, how are you thinking about share repurchases at this point, because obviously the price that's implied by [indiscernible] the REIT. And then secondarily, as you look forward to 2013, I know you haven't specified what your dividend is going to be, but are you going to narrow down some folks? What's probably the likelihood permissible ranges for FAD payouts? Is it 60% to 80% with a payout in the 70%, and what do you think you are leaning to at this point in that range?

Yes, Jeff, this was -- these 2 questions were questions that we heard basically in every investor meeting we did back in August when we were doing the TRT secondary [ph]. And the way we answered the question -- let me talk about stock buyback. The issue is, what is the most effective deployment of our capital? Go out and buying something of these high multiples, 14x, 16x, or hypothetically, if we're trading at 11x, buying our own stock. The answer is, we believe -- I suspect our Board will believe that the investment in our sales, because we happen to have a very good sense of the quality of these assets and what we believe they will do, will probably make more sense to us. But it's an issue of what's the alternative opportunity for the deployment of capital if we see an asset that is a screamer that we can get at, and we believe we'll create a substantial improvement in NAV at this company, then we would seriously look at it. But we are not just going to sit here and hold money. Paying down debt is not a bad thing, but the fact of the matter is we will have relatively low leverage when '13 arrives here. So we will look at potential stock buybacks based upon where this company is trading as a multiple of its cash flow. In terms of dividends, obviously, as we have talked to the REIT investment community, we have been conditioned on a couple of things. What the REIT community wants to see from a company like us is a consistent decent dividend policy, and that's what we intend to do. And we're not going to amplify on what decent means right now, but we're going to have a lot of flexibility with the free cash flow that this company generates. So we will have a decent dividend, and when we get through the planning phase with Marriott, which we're in the middle of right now, and we will be ready then to release guidance. One thing we will be doing is being very clear about what our dividend policy will be for '13 and forward.

And just one last question, actually, on transition issues. Do you think there's going to be [indiscernible] potentially for transition issues into Marriott to persist into Q4 or Q1, whether it's the entire expenses or sort of slippage in revenue, I guess, especially what you're thinking about that.

I'm not sure I understand the question.

Well, I'm just -- I guess I'm digging into results of just the transition to Marriott, like you mentioned that there is some systems that will need converting over at off in land [ph] in January. I guess I'm just trying to set expectations around the possibility that things would be -- you're not firing in all 8 cylinders over the next 100 days, I'm just -- I guess I'm trying to figure out the impact [indiscernible].

I don't anticipate us having the same issues in the fourth quarter that we had a little bit of in the third quarter. And the reason why things are different now is because in the third quarter, people just didn't know. Well, after we announced this transaction at the end of May, a month before the third quarter, we had a reasonably -- given a reasonably decent June, as we announced at the end of our second quarter, but that was because, basically, June was booked in solid, and the momentum was very good. But what happened was, when we announced this, was that basically every major department of our company, both at corporate and within our hotels, were looking around saying, "Oh my God, what does this mean for me? Do I still have a job? Am I going to just get just consumed into the Marriott machine?" And unfortunately, what occurred was there was some just major cultural shock that went through this organization, and we spent so much of our time communicating to our people. And then as we were building who stays, who goes with Marriott, and Marriott were actually able to go into the hotels and meet these people and determine who were the keepers, who were not the keepers, that plan of action was all rolled out during this third quarter. So at the end of -- by the end of the third quarter, every one of our sales folks knew who was staying, who was going. We had put in place a retention plan for those that we wanted to keep. We had put in place a special sales program to incent our sales people who were leaving to make sure that they delivered the room nights for the customers that they were communicating with. And so by the time we got to the fourth quarter in early October and Marriott took over, there was a massive game plan that had already been laid out, and the people in our sales organizations knew their roles, knew who was staying, who was going. And I think the fourth quarter is going pretty well. And we have done a lot of staffing this fourth quarter. So I don't see disruption carrying through to the fourth quarter. But there are -- these hotels there or thereabouts generate somewhere between $200 million and $250 million, in the case of Opryland, almost $300 million of revenue. These are not like converting Holiday Inns to Marriotts. These are massive hotels, and the amount of technological infrastructure that needs to change here for these to be plugged in, it's just -- it's massive. And so there will be technology systems that we'll be implementing through to about April, May of next year. That's just the way the plan of action has been put together to make sure that we don't miss a step, we don't miss a beat. So hopefully, that wasn't a too winded -- too long-winded response, but this has been a very, not difficult, but very challenging transition because of the number of people that have been involved here.

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

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

When we reach our goal [indiscernible] seniority, from what you did hear from most of your lodging peers this earnings season, and [indiscernible] about a slowdown in corporate demand [indiscernible] that they expect it to continue through year-end. We also saw your attrition and cancellation fees tick up, albeit modestly, in 3Q. You mentioned the transition in type [ph] of bookings in the quarter, which I'm sure was a good part of it. But I guess, Colin, could you speak a little bit more fundamentally what kind of change, if any, have you seen that improved planning behavior over the last few months?

Yes, happy to do that, Andrew. First of all, the issues that we had, I think, in the third quarter were really mainly around the short-term stuff. It's the corporate client that books the 50-room, 100-room small meeting. So we had a system working pretty well. In the first quarter, second quarter, hotels performing very, very well. Then we come to this massive change, caused a lot of squirreliness with our sales organization. And then we hand over to Marriott on the first of October. And by the end of October, our lead volume, our lead bucket is up double-digit from where it was this time last year. So we're getting a lot more exposure because Marriott has a much bigger bench of salespeople and much deeper sort of relationships with corporate clients all across the country. And we're happy and pleased with the uptick that we're seeing in our lead volume, which as I said, is almost 20% up from where it was a year ago. So it's very difficult for us to gauge whether the group side is still as vibrant as it was a year ago or still as vibrant as it was at the end of June just looking at this uplift that we have seen, because Marriott's machine is just so much bigger. But I would tell you, I don't think we are seeing, as a company, a decline in interest to hold meetings across our businesses. I just don't think we are seeing that. Now what we did witness in the third quarter, and you may want to jump in on this, Mark and Patrick, is we did see a tick down in the outside-of-the-room spend. And obviously, we did see a massive tick down in outside-of-the-room spend in '09 and '10 as the world was going into a recessionary shock. But it was not -- it was modest. And the thing for us is that each group is not created equal. One group still will spend x outside of the room, and another group will spend more outside of the room. And the last third quarter we had was one of the best third quarters this company has ever had. So I don't see any systemic change taking place here, and I feel very good, though, about the way our hotels are positioned for '13.

And I think the outside-of-the-room spending, the change that we saw in the third quarter was driven more by mix. And then naturally, behavioral change.

Right.

That's helpful. I guess, kind of to follow-up -- one follow-up question. Just in terms of your October bookings, what is the main driver of the strength that you saw? Was it corporate, association business? Can you give us a sense of what kind of customer kind of lead in [indiscernible]?

I didn't -- we didn't disclose October bookings. What we disclosed was October lead production. That's what we talked about. And I think it was all of the above. It was both in the corporate section and I think in the association sector.

Great, and one last question for me, kind of just switching gears a little bit to the conversion and the transition process here. What do you think are the biggest topline -- where these topline synergy opportunities will come from now that Marriott's kind of been running the assets for a bit over a month now? Have you identified anything that might be different than what you were thinking about pre-Marriott management?

No, it's -- the answer is no. And I don't want to sound cavalier about this, but in all of our internal hypotheses, and I think what we consistently said to our shareholders was our assumption for the reason of doing this was not revenue synergies. We assumed in all of our hypotheses that we will get a goose egg on revenue synergies. Now what we followed that up with was we don't believe that. But that was the hypothesis. Now I really believe that in a market like Orlando, where we basically get 0 business that comes in from the international arena, the Marriott frequent flyer program should really add, in our minds, incremental room nights from the international region because we have very little exposure to that right now. So I think we're going to see uplift in the rewards pipeline delivery, as well as the massive, both corporate and association, sales tentacles that the Marriott organization has. So we're looking, over the course of the next 2 to 3 years, the growth in room nights from each of those 2 major drivers. And let me just say one last thing. We don't have a plan delivered by these guys yet, and we're going to be in this planning process with them over the next few -- several weeks. And I'm sure it won't be, "Here it is. Thank you very much." I'm sure we'll be in very deep discussions about the delivery channels and why and how do we improve it. So we will be, as we talk guidance, be able to give you a lot more specificity around these delivery channels.

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

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

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

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

Well, Proposition 7, which is the proposition that was heavily nurtured by Governor O'Malley and passed in the legislature, which is the expansion of gaming in the State of Maryland to increase -- put table games in a licensed -- in Prince George's County, will go before the voters of the State of Maryland and the counties today, and it's been almost as vitriolic campaign as the presidential campaign, with massive amounts of money being spent by the proponent, MGM, and our development partner up there, Milt Peterson, and to a small extent, us. And the -- on the other side, as you should go up the antis, they are being heavily supported by Penn Gaming. So we will know the answer to that question at about 8:00, 9:00 tonight. But if gaming gets approved in Prince George's County and expanded in the State of Maryland to include table games in the great facility with limited guest bedrooms that's built in National Harbor, that will be good for our business.

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

In terms of the hotels or in terms of corporate?

It's corporate, in corporate.

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

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

We will exceed in the...

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

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

Great. And then I didn't -- I missed it. I know you gave a number, but the expected gross debt on the books at the end of the year, 900 -- I didn't quite catch that number.

Yes, it's going to be between $930 million and $940 million. Now that -- obviously, that doesn't account for the Prince George's County bonds, which we carry on our balance sheet, which are about $145 million. So I mean, I guess, if you want the net load [ph] against that debt, it would reduce debt.

And that second tranche of Prince George's County bond state will be go -- will go [indiscernible].

Okay. And then finally for me, you guys had previously announced a belief that the venture with Dolly Parton, I think it was, to propel the park that's dead, isn't it?

Oh, it's dead with Dolly. But what's interesting is we've had several other companies that have come to us, and we are in discussions with 2 other companies to do something similar in -- here in National. And we don't know where that will go, but both of these organizations seem to have some -- and these organizations that are not fly-by-night. These are major companies in the water park space, and they have an interest, and we're talking. So we'll see where that goes.

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

Just had a question, as you look forward, more bigger picture here. Maybe you can give us a sense of how you're thinking about peak occupancy level targets as you move forward with the understanding that you had Marriott Rewards customers now online, and that you'll likely see higher leisure guests on kind of call it Thursday, Friday, Saturday business. Maybe you can give us a sense of where you see occupancy levels going?

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

Okay, maybe an easier one here for you. As it relates to the conversion costs going to $73 million versus the prior estimate of $55 million, of that, is it still call it $15 million to $20 million in required CapEx to get the properties on the Marriott systems? So you give the actual impact, just [indiscernible] $15 million to $20 million?

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

And that's cash.

That's cash.

Yes, so we're -- so that's IMAC [ph]. And we're hoping that comes in a little bit less than that, but that's what their number is.

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

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

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

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

That's a really good question. So let me try and give you an answer. The -- in terms of group room nights and group occupancy, there is a requirement to make sure, in order to maximize occupancy, you've got to make sure that you transition to groups who are not "space hogs" so you can put more groups into the hotel, the hotel with the size meetings that we tend to do in this company, historically, that we have done. And you look at the average space that an average group consumes, the theoretical peaking occupancy for us in group is somewhere in the 68 to 70 points of group occupancy, okay? Now if you do more corporate business, and you bring down the amount of space that each group uses, that occupancy, that theoretical occupancy, can potentially go up a little bit. But right now, we do, occupancy-wise, Patrick, somewhere in the 60 points of group business. So we have the ability, if we manage our space well -- Marriott manages our space well, to increase the group side 3, 4, 5 points here over the course of the next 3 to 5 years. In terms of the leisure side, though, this is a big opportunity for us because, if you look at our Smith Travel data and you look at how we do as a company, even though our occupancy is high, it's because we dramatically outperform the competitive set on the group side, but we underperformed on the leisure side. There's a reason for that, and that is that we do not have, like the Starwoods, the Hyatts, and the Hiltons and the Marriotts, our own frequent flyer program. We don't have that dedicated pipeline. So we expect to see leisure business grow here over the next 2 to 3 years. And what you've got to remember is that on any -- not any given night, because it doesn't work this way with the patents, but we want about 75 points of occupancy. So de facto, 25% of our rooms over the course of the year are empty. And we think that we can move those room nights -- those occupancies more towards the 80-point measurement. And that's been something that we have talked about as a company consistently here over the last 3 to 5 years. So yes, we do. It's a long winded way of saying, yes, we do have the ability to put more group business in these hotels if we manage the space right. But we also have the ability to put more leisure room nights into this business substantially, so...

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

It is cash. And it will be in -- it's annual payment. You're talking about the marketing payment, that is a [indiscernible] payment. We do have the ability to monetize those bonds today. We can sell them to a QIB. The tax basis in them, though, is 0. And so the challenge for us has been, historically is, is that we have these 2 bonds that yield 8%, 10%. We have a 0 tax basis. And so to monetize them, you have to have a pretty compelling use of proceeds to make it work economically.

Yes, right now, given the fact that the Bs [ph] just don't have the money, it doesn't make any sense for us to settle those bonds, pay the 35% tax rate, and then take that money and then go and repay our revolver, which is 2.25 of a LIBOR.

So it sounds like the plan is to help these through medium term to hold them for income.

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

If you were [indiscernible] the maturity date for those bonds, would you get the principal back?

The average of -- the principal is amortized over the life of the bond. But they're 35...

Okay, and how long is it?

They're 35-year bonds. I think they're 35.

That long.

And I think they've got, what, 28 years left on them, something like that.

Yes. [indiscernible] details, Josh.

And then, Josh, the other thing is if gaming does -- is approved in Prince George's County, those bonds, they then have more value to them. I mean, they just are [ph], because the volume of business in that community is substantially different. So we're not in any rush off this.

[Operator Instructions]

If other folks have questions, well, you know how to get hold of us.

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

Just a broader-breast question to ask for you, Colin. Just how would you characterize what transaction activity has looked like in those markets and those sort of specific type of hotels that you'd be looking at over the next couple of years to acquire? I know you're seeing good supply come to market. How would you characterize -- or the perky or the multiple earnings prices being paid for, any color just on what your bucket of hotels is sort of trading like right now?

Our bucket of hotels there have been a handful of hotels that have come to market that would probably fit in our profile. And the multiples on current cash flows are pretty rich. And the issue for us is what happens with this economy over the next 2 to 3 years? How does RevPAR continue to grow in this country? I think we'll know a lot more given today in the next week, 2 weeks as to the general direction of this country. And -- but we -- as we look at just the broad question, Fred, when we look at the broad multiples, people are paying up for these things. And we don't -- given our balance sheet, given our free cash flow in this company, we're not in a mood at this moment to destroy value by overpaying for an asset. Well, look, thank you, everyone. There's so much noise in this third quarter, and I know Mark and Patrick and I and Carter sit around late in the evening when we talk about this, what's going on in this company here over the last few months. And this has been a very extraordinary time for us. I never come to work these days thinking the decisions we've taken are wrong. What we've done, I think, is the right thing for the company, right thing for our shareholders, and I know there's been a lot of pain and hardship with a lot of our people. And there's been some community fallouts here. But at the end of the day, we're going to create a lot of value here, and we'd like to again thank our shareholders for navigating this process with us. So if anyone has any further questions, they can get a hold of Mark, Patrick or I with the -- using the communication channels that you normally get a hold of us through. So thank you very much indeed.

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