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Interstate Pares Fourth-Quarter Revenue Expectations

Against the backdrop of rising hotel supply and lower occupancy rates, Interstate Hotels & Resorts has attempted to shield itself from the ongoing economic downturn with a diversified earnings base.

“The economic outlook remains bleak. We are clearly in one of the most difficult operating environments in many years,” says Thomas F. Hewitt, CEO of Interstate Hotels & Resorts based in Arlington, Va.

The nation’s largest independent hotel management company, which has ownership interests in 57 hotels and resorts, has taken steps to protect the company’s financial health. “In this environment, we benefit from the stability of our third-party management contracts, where we are currently focusing our strategic growth efforts,” Hewitt says.

“Our strategy since early 2005 has been to diversify our earnings stream between wholly owned hotels, joint-venture investments and third party management contracts,” the CEO adds. That approach, along with diversifying geographically and in the company’s breadth of product types, has helped to temper the volatile market conditions, Hewitt says.

Interstate’s third-quarter earnings report shows that despite the increasingly difficult operating climate, the company’s overall revenue per available room (RevPAR) increased 1.6% for the quarter, which compares favorably with an industry-wide third-quarter RevPAR decrease of 1.1%, as reported by Smith Travel Research.

In the company’s owned portfolio, RevPAR increased 2.5%, excluding two properties that are undergoing renovations in Atlanta and Columbia, Md. In addition to the properties in which it has ownership interests, including seven that are wholly owned, Interstate manages 227 hotels with approximately 46,500 rooms in the U.S. and abroad. The company also has contracts to manage 17 properties in the pipeline, with about 4,300 planned rooms.

But the news isn’t all good. Interstate reports a net loss per common share of $0.05 for the third quarter compared with earnings per share (EPS) of $0.03 for the third quarter of 2007.

Decline in the company’s operating performance for the third quarter over the same period last year is due mainly to ongoing renovations at an Atlanta Westin property, and softness in the Concord, Calif. and Arlington, Texas markets, the company reports.

The loss in common share earnings was offset somewhat by the addition of a Sheraton Columbia hotel to the company’s owned portfolio, as well as strength in the Houston, Texas, and Baton Rouge, La., markets. In Houston and Baton Rouge, properties reported double-digit growth in RevPAR, mostly due to hurricane-related business.

Given the expected continuation of weakness in the economy and the lodging industry, Interstate will focus on revenue management and maximizing profit, as well as on preserving capital and liquidity, Hewitt says.

In the company’s third-quarter earnings teleconference, Hewitt noted that the company will not invest in joint ventures next year and will focus its efforts on its third-party management business to conserve cash.

While hotel markets in larger gateway cities such as New York had managed to hold up earlier this year, such markets were not immune from the global economic turmoil in the third quarter, Hewitt says. As a result, the company anticipates a negative RevPAR growth for the fourth quarter and is lowering its RevPAR estimate for the year. In the revised guidance for 2008, Interstate expects RevPAR to remain flat or to increase a mere 1% on a portfoliowide basis.

On its owned properties, excluding the two properties undergoing renovation, Interstate expects RevPAR to grow up to 1%.

After closing at $0.98 on the New York Stock Exchange on Nov. 4, Interstate’s stock was trading in a range of $0.98 to $1.07, as of midday on Nov. 5. Over the past year, the Interstate stock price has hit a low of $0.85 and a high of $ 5.53.

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