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FelCor Lodging Trust (NYSE:FCH)

Q4 2012 Earnings Call

February 19, 2013 11:00 AM ET

Executives

Stephen Schafer - Vice President Strategic Planning and Investor Relations

Richard Smith - President and Chief Executive Officer

Andrew Welch - Executive Vice President and Chief Financial Officer

Analysts

Eli Hackel - Goldman Sachs

Patrick Scholes - FBR

Jonathan Mohraz - JPMorgan

Andrew Didora - Bank of America

Susan Berliner - JPMorgan

Joshua Attie - Citi

Lukas Hartwich - Green Street Advisors

Operator

At this time, I would like to welcome everyone to the FelCor fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Steve Schafer, you may begin.

Stephen Schafer

Good morning and thank you for everyone joining the call. With me is Rick Smith, President and CEO; and Andy Welch, Executive Vice President and CFO. We will discuss the current operating environment, results for the quarter and our outlook. Following those 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 the 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 FelCor's 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.

Richard Smith

Thanks, Steve, and good morning everybody. We are very pleased with our fourth quarter results as we exceeded the high-end of our EBITDA and FFO guidance. 2012 was a very productive year, as we continue to execute our plan and make great progress on all fronts that will continue to improve shareholder value.

We sold 10 hotels for $207 million, which was slightly ahead of pace. We used the proceeds to pay the accrued preferred dividends and repay debt. We completed the capital markets portion of the balance sheet restructuring, both earlier and more efficiently anticipated. This consisted of the mortgage debt completed in September; the line of credit amendment and the notes offering, both in December.

We completed redevelopment projects at Myrtle Beach and Fairmont Copley Plaza, and are progressing with the Knick and the Morgans. We completed a deal to convert eight hotels from the Holiday Inn brand to Wyndham, which will transition on March 1.

We continue to execute our remixing plan to increase ADR, which resulted in increased ADR share in 2012; as well as produced strong flow-through of RevPAR same-store EBITDA of 1.7 times, which was ahead of expectations; and we completed an extensive Road show that further clarified our long-term plan to shareholders and analysts.

For 2013, we are focused on the following: selling the remaining non-strategic hotels, currently in market and using the proceeds to repay debt; completing the Knickerbocker and Morgans projects; completing another extensive Road show to update our progress and set the stage for next step; completing the transition and renovation work at the eight Wyndham hotels; and continuing the strong operating performance at our core hotels, including recently acquired and redeveloped hotels. I'll talk about each of these in much more detail.

Asset sales, since December 2010, we have sold 19 of 39 hotels for $387 million of aggregate gross proceeds, which corresponds to roughly 11 times to 12 times prior-year EBITDA for those hotels. As of January 2013, we are marketing 11 additional hotels, most of which we expect to sell this year.

Gross proceeds for the 11 are expected to be in the $275 million range or slightly more than 11 times trailing 12 EBITDA. The remaining nine non-strategic hotels are held in joint ventures, and we and our partners are currently determining when to sell those properties.

In the end, we have sold roughly 70% and 40% of our suburban and airport hotels, respectively. The 45 core hotels are located in markets with high barriers to entry that are expected to enjoy high EBITDA and RevPAR growth.

RevPAR for our core portfolio in 2012 was $111 with their hotel EBITDA growing 10%. By comparison, in 2012, RevPAR at the 20 hotels that remained to be sold was $86 with their Hotel EBITDA growing only 5%.

Interest from private equity buyers remains strong, and transaction volume is picking up. Financing, especially the CMBS market is robust for operating properties, which is providing additional tailwinds.

Following on our 2012 asset sales and successful refinancings, we will complete restructuring our balance sheet using proceeds from the remaining asset sales to repay our sub debt, most notably the remaining $234 million of 10% senior notes that mature in 2014. The execution in 2012 has already reduced our cost of borrowing by 120 basis points and extended our average maturity to 2020.

After completing the remaining asset sales, we will have five pieces of debt: The Knick loan and the line of credit, both of which mature in 2017; the 6.75% senior notes that mature in 2019; the 4.95% of CMBS loans that mature in 2022; and the new 5.625% senior notes that will mature in 2023. Additionally, we will have reduced our cost of borrowing by another 50 basis points to below 6%.

Now to renovations and redevelopment. We completed renovations of seven hotels and redevelopments at two hotels this year. This includes many of our larger hotels. We will complete major renovations at 12 hotels during 2013, including four that started in 2012, seven beginning in 2013, including four Wyndham hotels and completing the redevelopment at Morgans.

We expect to spend roughly $65 million on normal renovation activity and $40 million in connection with converting the Wyndham hotels and completing the redevelopment at Morgans. We initially expected to finish Morgans in 2012. However, delays beyond our control pushed the completion date to April. At completion, the three additional guest rooms, brand new fitness facility and reconcepted F&B will significantly improve profitability at the hotel.

The Knick is progressing in accordance with out budget. However, hurricane Sandy pushed us back about two months. The demolition and new steel framing is largely complete. The new core walls and stair enclosures are about one-third complete. We expect to begin the interior fit-out in April.

We expect to be open in the first quarter of 2014. We are proactively building an executive team and starting the sales and marketing process. We hired a GM last fall and are close to hiring a Director of Sales and Marketing and HR Director, and we have started discussions with local accounts.

Shifting to investor communications. We will begin an investor perception study this week. Once that study is complete, we will update the investor presentation to reflect progress on our plans and look at next steps. Once that is complete, we will hold an Analyst Day followed by another extensive Road show. We anticipate completing the study and presentation in April.

A brief update on the Wyndham deal. As you know, we agreed to rebrand, renovate and reposition eight core hotels located in strategic markets from Holiday Inn to Wyndham. Wyndham Worldwide Corporation is providing a $100 million guaranty over the initial 10-year term of the agreement, with an annual guaranty of up to $21.5 million that ensures a minimum annual NOI for the eight hotels.

As a part of the agreement, the management fee structure is more consistent with prevailing industry practices and we expect to save approximately $50 million in management fees over the initial term. This was consistent with our strategy to improve the overall quality of the portfolio, enhance our return on investment, and increased earnings and shareholder value.

I am extremely pleased with our agreement with Wyndham and I am excited to work with them. Both Troy and I have a strong longstanding relationship with many members of the Wyndham team, which will provide for a great working relationship. Additionally, we have a great deal of faith in the company's growth strategy for the brand.

The partnership will be very beneficial to both companies. Of particular note to FelCor, the performance guarantee protects approximately 20% of our core hotel-level EBITDA from future lodging cycle fluctuations, and will ensure a return on investment at a superior to the hotels' historical performance.

Effective March 1, 2013, our Holiday Inn hotels in Boston, Houston, New Orleans, Philadelphia, Pittsburgh, San Diego and Santa Monica will be rebranded as Wyndham Hotel & Resort properties, and The Mills House in Charleston will become a Wyndham Grand Hotel.

Now, let's turn operations. We remain very focused on increasing ADR by remixing customer segments to premium segments as well as increasing overall rates. Room nights increased 2% for corporate group at $152 rate, 3% for corporate consortia and bar segments at $178 rate.

Conversely, room nights decreased as part of the remixing, 2% for leisure group at $133 rate, 6% for government at $119 rate, and 14% for contract segments at $72 rate. ADR increased 5.7% and generally accelerated throughout the year with most segments increasing 5% to 6%.

Successes on the areas of particular focus included ADR for our corporate transient segments increased 6%, including bar and corporate negotiated rates. ADR growth of 4.7% at the Embassy Suites hotels' exceeded budget. ADR for Marriott managed hotels increased 8.7%, and RevPAR, the Union Square, San Francisco property increased 10%. ADR for the Fairmont increased 13.3%, which exceeded budget.

We are pleased with our 2012 performance, given the ongoing economic uncertainty and extraordinary events like Hurricane Sandy, which occurred in the fourth quarter.

Overall, lodging fundamentals remain strong, transient demand continues to be solid and supply growth remains at historically low levels leading to sustained RevPAR growth for the industry in 2013. Our RevPAR increased 6.3% during January and the industry is experiencing strong momentum.

Beyond 2013, we expect our portfolio to experience superior growth relative to the industry due to; a, a diverse portfolio of hotels located in strong markets with dynamic demand generators and high barriers to entry, with average supply growth below the industry; b, performance from newly acquired and redeveloped properties.

RevPAR for these six hotels is expected to increase 10% during 2013, with EBITDA growth of 25%. RevPAR for Fairmont in January increased 98% to prior year, and RevPAR at the two Morgans hotels increased 18% compared to prior year.

Performance from our recently renovated hotels is, c, which includes many of our largest properties; and d, the eight Holiday Inns, once stabilized as Wyndham-branded and managed hotels. Repositioning those hotels was typical of our commitment to building sustainable long-term shareholder value.

In the end our core portfolio will drive outstanding growth-driven performance. Our strong balance sheet will provide critical flexibility throughout the lodging cycle, enabling us to see strategic opportunities, while providing a meaningful common dividend.

And with that, I will turn it over to Andy.

Andrew Welch

Thanks, Rick, and good morning. Adjusted EBITDA for the fourth quarter was $42 million, which exceeded analyst estimates and the high-end our guidance by $2 million. FFO per share of minus $0.01 also exceeded analyst mean estimates and the high-end of our guidance by $0.02.

Our efforts to increase rate and grow market share during the quarter were successful, which resulted in better than expected ADR growth. ADR increased 5.2% and RevPAR increased 4.8%. Our occupancy declined slightly due mainly to Hurricane Sandy. RevPAR at 11 hotels impacted by Sandy, net good and the bad, was roughly flat during the quarter and impacted our overall RevPAR growth by approximately 1%.

Food and beverage revenue increased $3.9 million or 10% during the quarter, which was better than expected. About a quarter of the increased resulted from taking over the operations at our Embassy Suites, Myrtle Beach, which was part of the redevelopment of that property. The Fairmont Copley Plaza and Renaissance Esmeralda and Vinoy hotels also had significant gains in food and beverage revenue during the fourth quarter, all three of which exceeded budget. Hotel EBITDA margin increased 87 basis points during the quarter.

RevPAR growth in our markets across the country were generally strong with only a couple exceptions. Our strongest markets were Austin up 28%, New Orleans up 17%, Atlanta up 15%, Central California up 13% and San Francisco up 8%. Many of our Northeast hotels were impacted by Sandy, including Northern New Jersey, Boston and Philadelphia.

Our hotels in Los Angeles and Myrtle Beach were both impacted by renovations. San Diego, although flat to prior year was better than expected due to a stronger convention calendar and aggressive remixing efforts, after not renewing a large crew contract earlier this year.

Let's turn to the balance sheet. We have taken prudent steps to create a strong and flexible balance sheet with historically low-cost debt. With highly favorable conditions in the capital markets, in December we issued $525 million of 5.625% senior secured notes that mature in 2023. On September 30, we closed $161 million of 4.95% single-asset secured loans that mature in 2022.

Together with asset sale proceeds, we used these funds to repay significantly higher cost debt, including $258 million of our 10% notes that mature in 2014 and $88 million multi-asset secured loan, our lone 2013 maturity and $294 million of secured loans that had an 8.44% weighted average interest rate. In December, we amended our $225 million line of credit by reducing the interest rate 113 basis points to LIBOR plus 3.375% and extended the final maturity date to 2017.

Our refinancing efforts during 2012 have reduced our cost of borrowing by 120 basis points. As a result, during 2013, we expect our interest expense to be roughly $105 million prior to asset sales or $25 million lower than 2012.

We will continue to strengthen our balance sheet and further reduce our cost of borrowing as we use proceeds from asset sales to repay debt. Following our remaining debt reduction using proceeds from asset sales, we expect our interest expense to be roughly $75 million or $30 million below 2013 levels, with a weighted average debt maturity of 2021, no debt maturing till 2019, except the Knick loan and our line of credit and our cost of borrowing below 6%.

Now, let's talk about our 2013 guidance. Our 2013 outlook reflects continued strength in lodging fundamentals, including continued demand growth and historically low supply growth in our markets. RevPAR growth has been higher than what GDP growth would indicate, because drivers of hotel demand are robust and we expect that to continue.

Factors such as employment growth, manufacturing and corporate profits indicate continued strong demand. Benign supply growth is also contributing to our ability to continue increasing rates. In 10 of our 17 core markets, there were no new hotels opened in 2012. The future pipeline is also favorable, as half of our core markets have no hotels in the construction pipeline, and the pipeline involve one market is marginal.

Our core markets are producing strong RevPAR growth and our newly acquired and redeveloped hotels are growing RevPAR above the industry, which we expect to continue for the foreseeable future. We expect our RevPAR to grow between 5% and 6% in 2013. Excluding disruptions from renovations and the transaction of eight hotels to Wyndham, our RevPAR growth would be roughly 7% in 2013.

During 2013, we expect our portfolio will experience disruption of approximately 70,000 room nights compared to about 35,000 room nights in 2012. The difference is mainly related to the disruption from the transition of the eight Wyndham hotels. This net difference equates approximately 1.5% of RevPAR but we expect that will be more than recaptured in 2014.

Our EBITDA guidance of $203.5 million to $208.5 million prior to asset sales reflects strong flow-through and better than what we achieved in 2012. Similar to our 2012 guidance, our 2013 adjusted EBITDA and adjusted FFO guidance reflects the 11 non-strategic hotels currently on the market will be sold this year.

The low-end of our outlook assumes all sales occur in April and the high-end of our outlook assumes all sales occur at the beginning of the fourth quarter. We have also provided EBITDA loss on both of these assumptions, as well as EBITDA loss for the entire year to assist with the run rate numbers.

Thank you. And we are now ready to address any questions.

Question-and-Answer Session

Operator

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

Eli Hackel - Goldman Sachs

Two questions, just one on asset sales. First, could you just give a little bit of color at the end of last year? I think you had six hotels that were in conversations to be sold, just sort of what happened there? And then were those relisted, I guess if they are not selling to the same people. And then also on assets sales, anything new on the Hilton JVs or are you just still talking to them?

And then finally, just on the remixing, you guys have some very good stats in your investor presentation about the Fairmont and the Morgans Royalton about percentage of customers and discount and where that could go. I just wondered if you had an update of those numbers for '12, maybe we could see how that progressed or maybe your thoughts about how you see some of those discount channels going in 2013?

Richard Smith

First off on assets sales, as far as the color goes, yes, we were under discussion on six assets. Last time we had a call. Two of those assets are about to go under contract, the other four was in discussion with a potential portfolio buyer that is not going to materialize. However, there was a ton of interest at Dallas, and we have completely launched everything, so we're going through a process.

The portfolio buyer is still very interested. And it's taking a look at it, but it's going to be part of a process at this point. So we still feel really good about the asset sale process. We took some time to investigate one opportunity that didn't come out, but there's lot of interest in the market. Transaction volume is picking up. We have a number of inbound calls with regard to the assets and wanting to do something with us. So we feel really good about the asset sale process.

As far as the JVs go, Mike and I are actually meeting this week with Hilton to discuss that on Thursday. And we will see where that goes.

I think we both realize the importance of what we want to do. I know, Hilton is our partner and is a really good partner of ours, wants to try to figure out something. So we're pretty optimistic that we'd be able to get something done.

Worse case, as always, is that we have to wait a bit, but we are going to try to get to some kind of a resolution that works, so we can get those on the market as quickly as possible beginning this Thursday.

As it relates to the remixing, I mean certainly, we will have the update as we move forward into our investor presentation. I don't have those numbers off the top of my head as far as the segmentation and we can get that to you offline, Eli. But we are certainly making strides in the right direction, I can tell you that.

We feel very good about both the Fairmont and Royalton. Those two made tremendous strides last year. We were under such disruption at Morgans, that it was a little tougher but we did make positive strides. But as soon as we come back on-line in April, we've set ourselves up well to make really good strides going forward. As far as the actual segmentation numbers, we'll have to get those to you offline.

Operator

Your next question comes from the line of Patrick Scholes from FBR.

Patrick Scholes - FBR

Two questions here and I maybe missed the first part in your prepared remarks. Any thoughts on where you stand with a common dividend? That's my first question. And then secondly, as we think about your RevPAR guidance, how does in your view, does that breakout between transit and growth at group convention RevPAR growth?

Richard Smith

First off on the common dividend, as we have always said, first of all philosophically, is it all based on operational income and when it make sense from an operational cash flow standpoint to be able to pay a common dividend, and be in position to pay common dividend, we still expect to be in that position by the end of this year, and we look forward to reestablishing that. And certainly, as I have mentioned all along, we do expect that to be at the end of 2013. As far as the mix and the RevPAR guidance, we think group is around 5%, and transit around 6%.

Operator

Your next question comes from the line of Jonathan Mohraz from JPMorgan.

Jonathan Mohraz - JPMorgan

Just one question. How much is the hotel development relates to the Knick and how much to other construction in progress?

Richard Smith

I'm sorry, can you repeat the question?

Jonathan Mohraz - JPMorgan

So I guess it's on page 13 of your release, you have a $146 million for hotel development, and I was just going to determine to breakout between whether that was related to Knick and what might be other construction?

Richard Smith

I'm glad, I asked you to rephrase because I totally misunderstood your question. It's all of the net.

Operator

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

Andrew Didora - Bank of America

Just had a quick question on lot of the Wyndham deal, it looks like a great deal for you guys. Just curious how that came about? Were you looking to convert these properties or were you approached by the Wyndham guys? And then as a follow-up to that, do you see opportunities like this in your current portfolio?

Richard Smith

On part one, I approached Wyndham and I asked them, if they would be interested in proposing on a group of assets. So they did propose on a group of assets. So that's kind of how the deal came together. Eric and I have a good relationship dating back to the Starwood days when we were both there in the late 90s.

So it's really great to do a deal with Eric. He is a really good friend of mine. And we also work really well with those guys. We think a lot alike operationally. We liked the direction that they are going. So it made sense from every perspective. And the fact that the financial deal worked great for us and added a ton of value for our shareholders, made a lot of sense.

As far as additional opportunities, not really, there is not a ton of additional opportunity along those lines. I mean, as things come available, we might do something here or there, but nothing along the lines of the deal that we did with them. I mean, the opportunity that we had here was kind of twofold.

I mean the financial side was great, the partnership was great, and also part of our plan all along has been to really improve the overall quality of the portfolio. And we are moving eight hotels from mid-scale to upper-upscale. And as I said, we have a very deal of faith in the Wyndham team and the brand.

Operator

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

Susan Berliner - JPMorgan

Just few questions I guess from me. One is can you just talk about what's going on in New York with the supply outlook and what you see the New York market doing over the next couple of years?

Richard Smith

With regard to supply in New York, there has been some considerable supply in New York, it's kind of spread out. There is some end, kind of what I call the golden rectangle, obviously, but we feel that will be absorbed very easily with the increasing number, year-over-year of visitors to New York and that being kind of the central area and with tremendous compression going out of that.

We feel very good about where we are located in New York, relative to that new supply. If we were in Southern Manhattan or the upper-east side or upper-west side, I'd be far more concerned about that supply. But we feel very good about how we are going to look, both from the standpoint of quality and just the location itself.

There is also a lot of talk about some conversions with residential prices being what they are. There is also a talk of some conversions. You might even see some contraction at some point on that front. But we feel, all told, that we feel pretty comfortable with our position in New York, both location and quality-wise and being able to absorb that supply.

Susan Berliner - JPMorgan

And then I had a question with regard to the convention market. Going forward, I guess, what are you seeing, are the booking windows increasing at all? And do you see any pickup in certain sectors versus what you had before?

Richard Smith

We're certainly seeing positive movement. Booking windows maybe have increased a little bit. There is not as much clarity as there once was, back before the downturn occurred but we feel like that it is heading in the right direction. Now, from a standpoint of the convention group, corporate rooms are up and SMERF is going to be down, pace is up 3.1%. And so on the corporate versus the SMERF, it kind of been to up flat but we're remixing more into the corporate rooms versus the SMERF as it relates to total convention calendar. Does that help?

Susan Berliner - JPMorgan

And just my last question, it's just a housekeeping question for, Andy. The unencumbered properties, is that nine right now?

Andrew Welch

You're correct.

Operator

Your next question comes from the line of Joshua Attie from Citi.

Joshua Attie - Citi

On the Wyndham contracts you mentioned that 20% of your EBITDA is protected, which implies the eight hotels to around $35 million to $40 million of EBITDA. Can you tell us where the guarantee level is set relative to that $35 million to $40 million?

Andrew Welch

Yes. If you look for 2013, and I'll speak a little bit on a few topics here Josh, related to this. As far as 2013 goes, if you look at the first two months under IHG plus the guarantee, you get to about that $35 million level on the guaranteed plus the first two month's actual. And then you have dramatic step-up because of all the disruption and you have some further disruption in '14 just due to the last two renovations being done in '14.

You have a greater than 20% step-up in the guaranty from '13 to '14, and then another greater than 20% step-up to '15. When I talk about the 20% of the core, I'm talking about stabilization and it's close to that now, but at stabilization once you get the guaranteed step-up in the next two years, then it will be 20% of our core EBITDA on a stabilized basis that is protected.

Joshua Attie - Citi

So on a stabilized basis these hotels will generate the $40 million of EBITDA, is that what you're saying?

Richard Smith

On a stabilized basis, it is well north of that, Josh.

Joshua Attie - Citi

And so it's $40 million today?

Richard Smith

It's $35 million today.

Joshua Attie - Citi

And then, I guess, where is the guarantee level set? So if they fall below, the guarantee level that you're saying, you said at $35 million today, and then it steps up 20% each year?

Richard Smith

Yes.

Joshua Attie - Citi

So the guarantee level is basically the current income today, up 20% in '14, up 20% in '15 and to the extent that it falls below that level, that's what Wyndham funds?

Richard Smith

Right. And Wyndham's forecast is far greater than the guarantee. If all we ever do on this deal, Josh, is make the guarantee. We have a 12% return on the money that we've invested to do the deal with zero risk to that return, as it is guaranteed. If they hit their forecast, we're closer to a 20% return.

Joshua Attie - Citi

I guess after you paid Holiday Inn $30 million to terminate their contracts, you really had a blank slate. You could have done anything you wanted with these hotels. And I understand the value of the guarantee and also what sounds like discounted management fees. But can you just talk about the Wyndham brand?

And do you think the Wyndham brand is as strong as some of the competitors that you probably also could have chose from like a Marriott or Westin, Sheraton or Hyatt in terms of the RevPAR they're able to generate, the central reservation system and frankly also the terminal value of the hotel to an institutional buyer?

Richard Smith

First, let me correct one thing. From a standpoint of discounted fees, it's much more in line with what market calls for today versus what we had under the old deal with IHG that was originally done with the Bristol transaction. So it's much more in line with market versus being like discounted banks. I think it's important to note that.

As far as the brand, look we could have done a lot of different things with these. We looked at what the opportunities were on a brand-by-brand basis, given the nature and the complexity of the deal. We felt that it was a far better thing for us to do something at one-time. And to move forward with that as it's related to that. We felt like Wyndham was our best option.

We like the Wyndham team as I said. We like the direction that they are taking the brand and growing the brands. They are doing a lot of really good things. They've got a good team. We think that the value of these assets will be for us, would be significantly higher at the end of this deal, as Wyndham's given all those factors, than they were as Holiday Inns, given that they are upper-upscale with the higher rate mark and given where Wyndham is taking the brand. So we feel very good about what we have done and the future partnership with Wyndham.

Joshua Attie - Citi

After the 10 years, is it renewable at their option or at your option?

Richard Smith

It's renewable at their option and we guarantee we'd carry it forward.

Joshua Attie - Citi

Andy, if I could ask a quick balance sheet question. The $60 million debt extinguishment charge in the quarter was that a cash number?

Andrew Welch

Yes, that was the redemption price of the bonds.

Joshua Attie - Citi

And can you walk us through some of the economics of that refinancing because that seems like a really big number relative to the interest those bonds mature in 2014. That $60 million sounds like a really large number relative to the interest rate savings that you'll get in the next two years?

Andrew Welch

There is couple of things that you need to be focused on there. Yes, the number is big for sure. We were going to pay that regardless of when we did this. And first of all, the ability to make movement on that right now was significant for us from an operating standpoint going forward. There is a two-and-a-half year payback basically with regard to the difference in cost on the new bonds versus the old bonds.

And at refinancing time, I mean, if we would be in a position to be anywhere north of the upper sixes on refinancing those bonds in '14, then it makes tremendous amount of sense for us on a go forward basis. And to take that risk off the table, because we feel like by '14, if things keep moving economically the way they're moving that where a single big credit would be issuing, would be north for the upper sixes.

We felt like the combination of that, the probability of that, plus taking the risk off the table and completing what we needed to do from a balance sheet restructure standpoint as it relates to the capital markets and removing that risk overhang from us was very important to do. Does that help?

Joshua Attie - Citi

It's fair to say that you're actually paying more money over the next two years. But you really made a decision to make a call on interest rates and where you can refinance and then you thought this was the best time to refinance.

Andrew Welch

Yes, coupled with the risk mitigation.

Joshua Attie - Citi

And then, I guess, just last question. It sounds like 2014 should be the year of their earnings ramp, but it also sounds like half of the Wyndham Hotels are going to be renovated in 2014.

Andrew Welch

No, just two.

Joshua Attie - Citi

Just two of them?

Andrew Welch

Yes, two of them were renovated last year and four of them this year and at least two for next year.

Joshua Attie - Citi

So as you think about renovation and ramp as we get into 2014, you really should have a lot more coming off renovation than you have going under renovation/

Andrew Welch

Exactly.

Joshua Attie - Citi

When you look at the whole portfolio?

Andrew Welch

Correct.

Operator

Your next question comes from the line of Lukas Hartwich from Green Street Advisors.

Lukas Hartwich - Green Street Advisors

Rick, other than New York City, are there any markets you're concerned about on the supply growth front?

Richard Smith

No, nothing. We're not seeing much of anything in our markets and particularly within our submarkets. And so we feel very good about where supply is in our core markets across the country. New York, there has been supply like I said, given where our hotels are and the quality of those hotels and what the Knick will be from a quality standpoint. I'm not as concerned as I would typically be with the level of new supply that is in that market. A lot of it is in south of that Golden Triangle and we feel very good about that. No supply or construction in most of our markets.

Operator

Your next question comes from the line of (inaudible).

Unidentified analyst

Could you just talk a little bit about once you get the portfolio totally rationalized and you get these sold, you've done a great job of producing your cost of capital, but do you believe that you have too much capital. So do you take out the preferred down the road, that's another high cost to capital or how do you view this overtime?

Richard Smith

Well, I'll tell you and we've talked a lot about this one on our Road show. So after we finish the sale of the 39, there is going to be approximately six other hotels that are going to be sold at a later point in the cycle. That's going to create a great deal of capacity. And our balance sheet will be completely restructured on the debt side of that point.

We will have the five pieces that I've talked about all long-term and all low cost to borrowing. So we'll be in great shape from that perspective. So the question is what are you going to do with the additional capacity that you've created? And there is really five or six opportunities that we have. And the good news is we are not going to be defensive anymore. We're not going to be fixing anything anymore. The total quality of the portfolio is going to be where it needs to be. The balance sheet is where it's going need to be including the level of leverage.

So we are going to be in fantastic position to be able to take advantage of opportunities strategically. And so we will look at any number of ways to use that capacity, to create shareholder value. And that's going to be the driver. What is going to drive shareholder value to grade the most? Depending on where the stock is trading at the time, is it going after the shares and reducing the share count. Is it going to be going after the preferred C? No, it is not the highest cost piece of paper in our cap structure today, but it will be then outside of common for sure.

And are there other opportunities? We have a number of really strong redevelopment opportunities, additional redevelopment opportunities that we have not pursued yet, that are sitting out there like at the Vinoy, another one at Kingston, San Diego, Santa Monica, Napa, Mandalay et cetera. There is a number of opportunities there. And we are working on entitlements on a number of those as we speak today that could vastly increase the value of those properties particularly in Santa Monica and San Diego. So is that an opportunity to use that capacity to drive shareholder value.

And then acquisitions in markets that we're not in, like Chicago and DC that would be the other thing to look at. So we are in a great position after we finished and after we've sold those other assets, where we're sitting on a good amount of capacity and going into the next downturn with some huge opportunity to further move the needle for our shareholders. And what we will choose to do out of all of those opportunities will be what will given the circumstances at that time drive the greater shareholder return.

Unidentified Analyst

May I ask you one follow-up to that? So we're equity holders, but when you go out and talk to debt holders, do they view the preferred as debt, because I guess the question I have for you is, if your cost to capital there is 8%, you've been able to do these other bonds significantly lower. Can you refinance and save your 200 or 300 basis points and take out preferred with debt or do the debt holders really view the preferred as equity?

Richard Smith

Well, the people look at it differently. Some debt holders look at it as debt, some look at it as equity. I mean for me, I kind of separate it between leverage and coverage. I mean, given the nature of the preferred, from a leverage standpoint, I look at it as equity. From a coverage standpoint, I look at it as debt.

And so as I said, is there going to be a chance? Once we're finish with all those stuff, there is going to be an opportunity to go after the fees, to further lower your overall cost of capital, absolutely there is. And if that's the best use of the capacity that we create, if that's the thing that best helps our shareholders then we will definitely do that. If it's not then we won't, because we do have that flexibility with that paper.

Thank you all for joining us, everyone and we look forward to speaking to you next quarter.

Operator

And this concludes today's conference call. You may now disconnect.

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