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Executives

Tim Bonang – VP IR

John Murray – President

Mark Kleifges - CFO

Analysts

Jeff Donnelly – Wells Fargo Securities

David Loeb – Robert W. Baird

Bryan Maher– Collins Stewart

Michael Salinsky – RBC Capital Markets

[Ryan Millaker] – Morgan Stanley

Hospitality Properties Trust (HPT) Q4 2009 Earnings Call February 28, 2010 1:00 PM ET

Operator

Good day and welcome to the Hospitality Properties Trust Third Quarter 2009 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang.

Tim Bonang

Good afternoon. Joining me on today's call are John Murray, President, and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation which will be followed by a question and answer session. I would also note that the recording and retransmission of today’s conference call is strictly prohibited without prior written consent of HPT.

Before we begin today's call, I would like to read our Safe Harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws.

These forward-looking statements are based on HPT's present beliefs and expectations as of today, February 24, 2010. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC.

In addition, this call may contain non-GAAP numbers including funds from operations or FFO. A reconciliation of FFO to net income, as well as components to calculate AFFO, CAD or FAD are available in our supplemental package found in the investor relations section of the company's website. Actual results may differ materially from those projected in any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Forms 10-Q and 10-K filed with the SEC and in our Q4 supplemental operating and financial data found on our website at www.hptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to John Murray.

John Murray

Thank you Tim, good afternoon and welcome to our fourth quarter 2009 earnings call. Today HPT reported FFO per share for the 2009 fourth quarter of $0.70. Focusing first on HPT’s hotel investments, fourth quarter 2009 RevPAR declined 16.6% across our 289 hotels driven by a 1.7 percentage point decline in average occupancy to 62% and a decline in average daily rate of 14.3% to $91.05.

RevPAR was weak across all regions, all brands, and all price points compared with the 2008 fourth quarter. Our Hyatt Place hotels showed the smallest RevPAR declines down 9.6%, and our Staybridge Suites, Holiday Inns and InterContinentals were down in the 10% to 11% range. Our Courtyards, SpringHill Suites, and TownePlace Suites by Marriott all performed poorly and our Candlewood Suites and Country Inn and Suites were also down more than 20%.

The mid priced extended stay hotel segment continues to suffer from cannibalization by upscale extended stay in all suites select service brands. Newer brands such as Hyatt Place and Hilton Garden Inn continue to erode Courtyard’s lead among upscale select service brands.

Maintaining rate integrity has been a significant challenge as suburban full service hotels continue to aggressively package room rates and other amenities to attract business away from select service hotels. A trade-up effect has resulted from these aggressive tactics in many markets, particularly those suffering from a lack of group demand.

In 2009 lodging room supply grew by about 3%. In some markets and segments, percentage supply growth was higher, but 3% was the national average. Typically in a period of economic weakness and capital market disarray you don’t see continued above average rates of new hotel room development. Even in January 2010 Smith Travel reported 2.9% supply growth.

This has impacted HPT’s hotels in certain markets including Phoenix, San Antonio, Austin, Miami, Baltimore, and Virginia. There are also markets which are experiencing substantial unemployment and declines in home values. The majority of businesses reducing headcount have already cut travel to the minimum they can.

Families with wage earners who have lost jobs or are fearful of losing their jobs or homes are similarly not spending on travel. Lodging performance in states such as Arizona, California, Florida, Michigan, Illinois, and Georgia, have been particularly impacted by these factors.

Finally Dallas and Houston continued to experience poor year over year RevPAR this quarter due to strong Hurricane Ike related performance last year. Lodging is a market by market business and HPT’s hotels are geographically diversified. With the issues and challenges they face are also more widespread today than we have previously seen and some of these issues such as high unemployment and weak housing markets may not quickly resolve themselves.

The economy may be slowly recovering and year over year comparisons will be easier in 2010, but we don’t expect improvement in RevPAR for our hotels until the second half of this year. Projections by our managers for 2010 generally indicate flat to minor RevPAR deterioration in 2010 with declines in the first half and improvement in the second half as demand returns. At the same time incremental costs savings are difficult for our operators to achieve. In fact there is growing cost pressure in areas such as wages, and benefits.

Also, as occupancy is expected to improve ahead of rate, this too will cause margin pressure. Accordingly there will be further declines in hotel net operating income if the RevPAR forecast prove accurate. Nonetheless we are confident our hotels will participate in the coming recovery and gradually return to past levels of cash flow because of their attractive locations, high quality, and recognized brands.

Despite current challenges our hotels continue to achieve encouraging Smith Travel RevPAR indices with an average premium to their competitive sets of 20%. While we never expected current industry circumstances we structured our hotel agreements with credit support from our operators and the calculated balance between upside participation during strong markets and downside protection during weaker markets.

Although none of our hotel portfolios generated positive coverage of our minimum returns in rents this year, we were paid our full contractual returns and rents under each hotel agreement except from two Marriott portfolios. We continue to be paid less than the required periodic minimum return and rent amounts required under the Marriott No. 3 and No. 4 agreements and have drawn on the related security deposits for the deficient amounts.

During 2009 we drew $9.2 million on the Marriott No. 3 deposit, and $8.6 million on the Marriott No. 4 deposit. The remaining security deposits for these two portfolios totaled $46.9 million at year end. Based on our projections and the budgets prepared by our operators we expect less than one-times coverage of our rents and returns again in 2010 but believe that the existing guarantees and deposits will be sufficient to offset minimum return rent shortfalls in 2010 for all of our agreements including the Marriott No. 3 and No. 4 agreements.

Our hotel portfolio security deposits and guarantees were not designed to last indefinitely during a lodging downturn as deep or prolonged as the one we’re operating in today. If economic growth does not pick up pace as expected and if increases in lodging demand don’t occur or occur at a tepid pace some of our security features may ultimately be exhausted.

However we are confident at the present time that our security will prove sufficient in 2010. 2011 and beyond is too far on the horizon to predict with confidence at this time. Turning to our TravelCenter investment, this morning TA reported fourth quarter 2009 financial performance which also reflects economic weakness in the US but showed continued improvement in fuel volume trends.

It does appear that a bottom has been reached and demand may be turning up. Fuel volumes this quarter were up 3.1% quarter over quarter across HPT’s 185 TravelCenters compared to a 2.9% decline last quarter. Also encouraging is the fact that December volume at HPT’s centers were up 6.5%. Full year volumes were down 6.5% versus 2008.

Unfortunately as expected per gallon diesel margins declined in the 2009 fourth quarter from the level experienced in the 2008 quarter, more than offsetting volume gains. So despite some encouraging signs, TA continues to face headwinds. At December 31 TA had approximately $156 million of cash on hand, availability under its line of credit, access to additional CapEx reimbursement from HPT, and the ability to defer up to $5 million of rent per month through December 2010.

We remain hopeful that TA’s working capital issues have been successfully addressed and that TA may be heading down the road to recovery. However while TA has demonstrated the ability to pay us rent at the reduced amount, keep in mind that fuel volumes at our TravelCenters in 2009 were down 20% from 2007, meaning TA’s ability to pay us full contractual rent beginning in 2011 is dependent on a strong economic recovery.

HPT remains one of the most secure hotel REITs in the industry and we have maintained our investment grade rating throughout this difficult economic environment. The pace of availability of attractive hotel investment opportunities has been disappointing but we are hopeful activity will pick up during 2010.

The trickle of acquisition opportunities we are seeing has increased slightly but the trend by lenders to extend and/or modify troubled situations continues. We are ready for growth opportunities. We have an undrawn fully available $750 million revolver, over $130 million of unrestricted cash, $6.5 [million] of unencumbered property, and no significant debt maturities until 2012.

This remains a challenging economic environment and we intend to continue to aggressively asset manage our real estate investments, maintain our strong capital base and liquidity, and grow our real estate portfolio. I will now turn the presentation over to Mark Kleifges, our CFO.

Mark Kleifges

Thanks John, the continued weakness in the economy and hotel industry was highlighted by the operating performance of our hotel portfolio in the 2009 fourth quarter with cash flow available to pay our minimum rents and returns down 43.7% quarter over quarter, due to an 18.3% decline in hotel revenues, and a 6.3 percentage point decrease in hotel gross margin percentage to 34.4%.

For the 2009 year, cash flow available to pay our minimum returns and rents declined 42.4%. As John noted coverage of our minimum returns and rents for the year was below 1x for all of our hotel agreements. And while we expect this trend to continue in 2010 we believe our available credit support is adequate to cover these expected shortfalls through at least this year.

Turning to our TravelCenter portfolio cash flow available to pay rent at our TravelCenters decreased $44.8 million or 49% from the 2008 fourth quarter. For the 2009 year cash flow available to pay rent at our TravelCenters decreased $74.2 million or 22.7%. Property level coverage for 2009 was 1.12x for our TA centers, and 1.05x for our petro centers.

Both of these coverage amounts have been calculated based on contractual rents and exclude the impact of the rent deferral agreement. Earlier today TA reported 2009 corporate level adjusted EBITDAR of $201.8 million and TA’s adjusted EBITDAR coverage of contractual rent at the corporate level for 2009 was approximately 0.84x.

Adjusting for the $60 million rent deferral during the year, coverage of cash rent was 1.1x. Turning to HPT’s operating results for the fourth quarter this morning we reported FFO of $86 million or $0.70 per share. FFO for the quarter includes what I would characterize as one-time federal and state income taxes of $3.7 million or $0.03 per share associated with certain tax strategies we implemented in 2009.

EBITDA was $134.4 million in the fourth quarter and are EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3x. With respect to our balance sheet and liquidity at year end we had cash and cash equivalents of $155.5 million, which includes $25.1 million of cash escrowed for future improvements to our hotels, and we had no outstanding borrowings on our $750 million revolving credit facility.

During 2009 we raised $373 million of common equity and $300 million of unsecured debt and we repurchased $367 million of our debt at a $64 million discount to par value. As a result of these actions we lowered our debt to total book capitalization from 50% at the beginning of the year to approximately 42% at year end, and reduced our 2010 to 2012 debt maturities from $1.1 billion to $419 million.

Turning to our capital needs, we have only one $50 million debt maturity in 2010. Our hotels have historically been well maintained and given the more limited wear and tear during 2008 and 2009, for most portfolios 2010 capital spending will be limited to amounts available in the FF&E reserves.

However we are planning renovations at 27 Courtyards in our Marriott No. 1 portfolio and 11 Residence Inns in our Marriott No. 2 portfolio during 2010. As a result we will fund CapEx in excess of the FF&E reserves of approximately $110 million in 2010 and our annual rent under these agreements will increase by 10% of the amounts funded as those advances are made.

In addition under our lease with TA we are committed to fund an additional $7.3 million of capital improvements to our TravelCenters. It is our current expectation that absent an acquisition or other large unforeseen capital use we will fund both the debt maturity and capital improvements from our cash balances.

In January 2010 HPT announced the reinstatement of a regular quarterly cash dividend on our common shares of $0.45 per share per quarter. We paid the first quarter dividend yesterday using existing cash balances. In closing we believe HPT with its manageable debt maturities, strong cash flow, $750 million of availability under its revolving credit facility, and access to the unsecured debt markets, is well positioned to both manage through this difficult period and take advantage of attractive growth opportunities.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Donnelly – Wells Fargo Securities

Jeff Donnelly – Wells Fargo Securities

Just I guess on the acquisition front, one of your competitors on their earnings call made a comment that competition for single assets was extremely high by competition for portfolios particularly with new term debt maturities could be an opportunity and that seems to be right in HPT’s wheelhouse, I guess what is the depth of the market either today or that you see down the road for portfolio acquisitions.

John Murray

Well we’ve, I think that’s probably right. I think we’re probably better capitalized then many potential acquirers and I think that that positions us better to have a little bit less competition. We have seen a couple of portfolios on the market however we felt that the seller’s expectation in terms of the pricing that they were trying to achieve was still way out of line and so we didn’t bid on those particular opportunities.

We have looked at individual assets and we have heard about other individual assets that we’ve passed on and understand that in certain markets in particular there have been upwards of 20 bidders, often times more than that for individual assets. However we’re looking at a couple of individual assets right now that we believe because of their size may be, I think there’s a lot of bidders when you’re talking about a property that’s in the $10 to $50 million range.

But if you’re talking about properties that are getting north of $50 million I think just like with portfolios the number of bidders starts to drop off. There still remains a much smaller pipeline than, I think its picking up versus last year but smaller than any other years since we’ve been public.

Jeff Donnelly – Wells Fargo Securities

Do you think the reason for the decline, that interest about $50 million is just a lack of financing that’s available for those assets or it just, that’s just a thinner segment of the market to begin with.

John Murray

I think it’s a lack of financing.

Jeff Donnelly – Wells Fargo Securities

I guess maybe to build on, you said some of the deals you have seen just aren’t of interest to you, I’m curious whether or not they’ve closed yet, are you able to give us some metrics around how some of these things are being priced, I guess on a per key basis, or discount replacement and what do you think—

John Murray

Interestingly I haven’t seen them close. One of the reasons why we’ve, one of the portfolios that comes to mind that we looked at perhaps most recently, they were select service assets of similar brands to ones that we own and some of them were in markets where we own hotels already and so we have a pretty good, and they were reasonably new assets. So they were developed within the last couple of years or maybe it was in the last year and haven’t really ramped up yet.

And so they seller who is also the developer had pretty lofty expectations for the value that he thought he created and we have hotels already operating and mature in those markets and that gave us reason to believe that the seller’s expectations were out of line with the reality in those particular markets.

So that was only a couple of the hotels out of a larger portfolio but we extrapolated that to the rest of the hotels and decided that we just thought it was too aggressive and that’s something that’s been within the last couple of weeks so it may not close. Assuming that they get bidders at an acceptable price for them, they probably won’t close for another couple of months maybe.

I don’t know what to tell you about cap rates. There just hasn’t been enough activity to say.

Jeff Donnelly – Wells Fargo Securities

Just one last question and it actually relates to acquisitions but I guess by way of TA, and I guess I’d argue that the ownership of TA is something of a drag on HPT’s valuation potential and in my opinion and my concern is that if 2011 proves to be something of an environment with robust acquisition activity HPT could be something of a disadvantage because maybe your cost of capital just doesn’t make you as competitive as you once were for acquisitions, I know it’s a tough question but is the Board ever contemplated even spinning out TA, or do think an event of that magnitude could ever be on the horizon because I guess I’d have to imagine that the pieces could garner an evaluation that exceeds the value of the whole.

John Murray

That was a tough question, I guess I won’t comment on the first half but I would say that our Board is not presently considering spinning off TA. We continue to believe that maybe there was bad luck in terms of the timing of this unusual economic collapse and that when trucking picks up our TA centers will perform pretty well and particularly since they’ve cut a lot of expenses out, and so we’re still hopeful that that will look like a very smart investment once the economy kicks back into shape.

But I guess as a final caveat to that I would say that around here we try never say never, things change in the world and from time to time you reevaluate the decisions that you make and so I wouldn’t rule it out that we would never ever consider something like that, but certainly we’re not considering it right now.

Operator

Your next question comes from the line of David Loeb – Robert W. Baird

David Loeb – Robert W. Baird

Let me start actually with the kind of simple housekeeping, I think you mentioned CapEx specifically for Marriott No. 2, how much was that CapEx you were talking about for that portfolio.

Mark Kleifges

It was actually Marriott 1 and 2 and it will total $110 million.

David Loeb – Robert W. Baird

Can you break out how much of that is No. 2.

John Murray

About $35 million.

David Loeb – Robert W. Baird

It seems to me that your investment of capital in Marriott 2 is really more, is not designed really to get the 10% increase in rent because you won’t get that for very long. Its sounds like that’s really more to position that portfolio to have good results when you actually own the upside [or] downside, is that a fair assessment.

John Murray

Yes, our taxable REIT subsidiary is going to be taking over that portfolio at the end of this year and its always better if you can to renovate your properties during a weak market so that when the market turns your hotels are cranking and we’d like them to be cranking when we take over in January so we’re, and its also the case that just the way the timeline works, these properties are about 18 or so years old and so they’re do for room renovations.

So it’s a few things coming together but we want to make sure that when we start off 2011 with hotels that are in as good a shape as possible. The other hotels in that portfolio have already been through this renovation so this is really the last, its 10 hotels that we’re going to renovate in that portfolio out of 18. The others are already, that’s already been accomplished.

David Loeb – Robert W. Baird

And on TA in the release you mentioned that you were current on all other obligations but it was under the hotel section, can you just assure us that you’re current on TA and that they’ve paid interest on their deferred rent balance.

Mark Kleifges

Yes TA rents are current. They did take, the January rent that was due February 1 they did take advantage of the $5 million rent deferral and they also paid us $900,000 of interest for January.

David Loeb – Robert W. Baird

And just looking at their financials, they’ve got about $155 million of cash as of 12/31. It looks like they’re probably burning cash at least in the kind of quarter they had in the fourth quarter, and by the end of the year if they continue to defer they’ll have $150 million of deferred rent. What are your thoughts about what 2011 will look like for your investment in TA and what do you think happens on June 30 of 2011.

John Murray

We’re still hopeful that the economy is going to recover as we move through this year and that trucking is going to pick up. Trucking has been a leading indicator in the past and a wildcard is certainly where fuel prices are and that impacts TA’s business but we do believe that over the course of this year that fuel volumes which have already started to trend up will pick up and so we’re hopeful that TA gradually works themselves into a better financial position and that we’re hopeful that they’re able to repay us next year.

David Loeb – Robert W. Baird

And back to the hotel side, I appreciate your comments about not being able to see too far into the future, I guess that’s similar with TA, but can you number one just run through the guarantee amounts that are left for InterContinental, Hyatt and Carlson, and number two, give us your thoughts on when those may run out and what happens beyond that.

John Murray

I’ll let Mark give you the amounts.

Mark Kleifges

For InterContinental, we have at year end about $65 million left on the guarantee and we also are holding a security deposit of almost $37 million and just to remind people that security deposit can be utilized for InterContinental No. 1, 3 and 4 but not No. 2. And then with Hyatt we have $31.6 million remaining at year end and Carlson $35.5 million remaining at year end.

David Loeb – Robert W. Baird

So I gather from John’s remarks that you think those are sufficient to get you through 2010.

John Murray

That’s correct.

David Loeb – Robert W. Baird

And InterCon of course took the reserve for the entire I guess, whatever it was, the 65 and the 37, as they’re anticipating that they’ll run out and they just took it up front. When they use up the corporate guarantee and you use up the security deposit you just get less rent, right.

John Murray

Well assuming that that, we haven’t jumped to that conclusion that they’re going to burn through all that yet I guess would be the first comment that I would make. I think that they’ve made that assumption because if they don’t make that assumption then they have to take, they may have to hit their P&L as they fund and so I think its an earnings thing for them.

But if they ran out, I think that’s an important distinction a lot of people when they look at, when they think about us running out of our guarantee or security deposit think that our returns go to zero like they might in some other types of real estate and that’s not the case with us.

We would get the cash flow from the properties if the security was to disappear and so you could look at what our coverage ratios are and you could look at what those coverages are going to be at the end of this year and there may, if we were to burn through the security, our cash flow might decline but it wouldn’t go away.

David Loeb – Robert W. Baird

And then once the recovery happens, you would reaccrue the security deposit for IHG but what about the guarantees.

John Murray

There’s a lot, I’m a little bit hesitant to go to far into that because we’re not, I don’t want anyone to think that we’re a sort of in agreement that that’s going to happen. But if it were to happen there’s a lot of different things that get considered at that point. Perhaps IHG might, well if IHG is not paying us the full returns that are required under the agreement, that gives us a termination right for instance.

We have to look at the environment that we’re in at that time, and decide how to move forward and if assuming that the agreements are not terminated then there’s provisions for both the security and the guarantees to be earned back but the water falls on each of the agreements are a little bit different in terms of where in the waterfall those due get replenished and its not the same in the IHG agreement as it is in the Marriott agreements.

We still get paid first before there’s any replenishment that takes place but the IHG guarantee and deposit get replenished a little bit deeper in the waterfall after IHG would get a sort of a current management fee.

David Loeb – Robert W. Baird

The answer I was looking for was not so much if you ran out but when the tide turns do you start building back up and it sounds like the answer is under some circumstances yes.

Mark Kleifges

Probably not as quickly as we will under the two other Marriott 3 and 4 contracts.

David Loeb – Robert W. Baird

And Hyatt and Carlson, are they similar to the IHG structure.

John Murray

No, the, first of all I think those are much say further away from being at risk of being burnt through. That’s I guess the first point I would make but then I think the way the waterfalls work is a little bit more simplified in the Hyatt and Carlson one so those would replenish right after HPT gets its return. So very much like the Marriott arrangement.

Operator

Your next question comes from the line of Bryan Maher– Collins Stewart

Bryan Maher– Collins Stewart

Just following up a little bit on David and Jeff’s questions, if the security deposit runs out and you’re getting the cash flows from the property, what are the managers getting and how and why would they be incented to stay on board with that deal.

John Murray

Each agreement is a little bit different but what they get are a few things. One is that there’s cost reimbursement for like reservation systems and marketing fund contributions. There’s the ability to keep their signs up along the, out in the center of large business parks and other attractive locations so there’s some value to billboards if you will. What they won’t be getting is base management fees.

Another thing that they would be getting if they continue to stay in is the as we’ve mentioned in say the IHG case would be the ability to earn back amounts that they’ve advanced when cash flow improves. So we have during this difficult period benefited from continued payments under those guarantees and when the tide turns and cash flow rises, we do provide in those guarantees that those advances can be earned back.

So, if they believe in the future there’s probably some likelihood that they’ll want to hang around and get that money back, $125 million, that’s probably a big number even to IHG.

Bryan Maher– Collins Stewart

And within the last couple of months, let’s say that last four to six weeks, have you actually been a bidder on any of the assets out there. Just kind of a yes or no you don’t really have to tell me what you were bidding on.

John Murray

No. We’ve discussed where we, the range of bidding where our bids would be and determined not to bid.

Bryan Maher– Collins Stewart

And in the portfolios that you’re seeing and I guess they’re being shopped to you from investment bankers and what have you, what size are those that you’re typically seeing, say number of hotels or dollar amounts wanted.

John Murray

We’re looking at a couple just individual assets and then I would say there’s a couple of portfolios that we’re trying work our way into on a, just between us and the seller, with people that we know. And I think that’s, I would put on a more long-term track. And then the things that we’ve looked at and decided not to bid on were in the dozen hotel size and roughly $125 to $150 million size.

Bryan Maher– Collins Stewart

So you’re not seeing any 20, 30, 40 hotel portfolios in the half a billion dollar size. You’re not seeing anything like that.

John Murray

No.

Bryan Maher– Collins Stewart

And then lastly the whole [upper] scale, room rate debacle, is impacting everybody and I’m sure its having more than its fair share impact on you given where your hotels operate, can you quantify even if its just a guess how much RevPAR degradation your portfolio has had because of what’s going on in the upper upscale.

John Murray

I’m not sure that I can do that off the cuff here in the conference room, I think our mix of, it varies by portfolio but our mix is probably was lost and our RevPAR decline probably 70-ish, 75% of our RevPAR decline has been because of rate declines most recently and so I think that we’re seeing occupancy start to firm and what we’re not seeing improve is rate integrity.

So, I’m not sure the best way to answer your question other than to say that we think a large part of the problem is the inability to hold rate and without getting occupancy to pick up, I don't think most of the operators are going to do better on rates.

Bryan Maher– Collins Stewart

In the InterContinental portfolios what percentage of InterContinental’s Candlewood and Staybridges do you think in each of those brands you own. So I mean how hurtful would it be to them if those were [inaudible].

Mark Kleifges

We own 76 of 254 of the 254 Candlewoods, and Staybridge, there are 182 Staybridges as of year end, and we own 30.

Bryan Maher– Collins Stewart

So its not insignificant.

John Murray

Its not insignificant and its more significant as, in terms of the amount that they manage, those numbers that Mark just gave for the total. Most of them are a franchise.

Operator

Your next question comes from the line of Michael Salinsky – RBC Capital Markets

Michael Salinsky – RBC Capital Markets

On the $110 million you talked about that’s above and beyond the FF&E reserves correct.

Mark Kleifges

Correct.

Michael Salinsky – RBC Capital Markets

And going to the real estate taxes there, I think you mentioned there was some tax, it was related to prior adjustments, not prior adjustments, but tax planning and prior events, the jump up in income taxes there, was any amount of that would you consider non reoccurring and going forward what does, it seems like there were some true-ups, what’s a normalized run rate for that.

Mark Kleifges

I think as I mentioned in the comments about $3.2 million of the total income tax provision this quarter is what I would call one-time or non recurring income taxes and it was, most of that was associated with state taxes that resulted from some of our tax strategies at year end and the biggest component was we made a decision to defer for federal income tax purposes the gains we realized on debt extinguishment.

However the states do not recognize those deferrals for income tax purposes so we ended up paying state income taxes on those gains.

Michael Salinsky – RBC Capital Markets

I think in your comments you mentioned the potential for positive RevPAR, it seems like some of your hotels have seen a little bit more pressure than some of your peers right now, and more in the upper upscale segment there, just curious I think Marriott has kind of provided a guidance range of down 2.5 to up 2.5. Host has come out there down 5 to flat, how are you feeling this year about RevPAR.

John Murray

I guess I’m not, I guess to try and clarify whatever comment I may have made earlier, we expect that in the second half we’ll see some positive RevPAR but continued weak RevPAR and a declining RevPAR in the first half. So the range of where our forecast and our operators’ forecasts have come in for 2010 is sort of in the flat to down 4% range. So not that much unlike what Host said.

Michael Salinsky – RBC Capital Markets

And finally the $7.3 million that’s remaining to purchase from TA via improvements and stuff like that, is the expectation that you’re going to spend that this year.

Mark Kleifges

That’s really TA’s call, but if you look at the historical run rate of what they’ve used, you would think that they would utilize that this year. That’s the way we’re planning things.

Operator

Your next question comes from the line of [Ryan Millaker] – Morgan Stanley

[Ryan Millaker] – Morgan Stanley

Just a quick question as it relates to Marriott 3 and 4, it looks like back of the envelope calculation looks like these portfolios are running at about a 27% NOI [inaudible] margin in 2009 if you’re talking about RevPAR down flat to four or at the low end of that, and we think that maybe we’re looking at overall revenues down 5% and margins down 200 bps or 300 bps, it seems like we might start to put pressure on these security deposits heading into 2011. Have you thought at all about that, have you thought about what its going to take to get you to the point where you’re going to be, where these security deposits are going to be at risk and you’re going to start reassessing the situation and reevaluating what you’re going to do going forward with these and then I know it was asked earlier about what your opportunities are and one of the possibilities is maybe taking the properties back from the lease. What would spur you to do that for any of these portfolios.

John Murray

There’s a lot there, I guess I would start with the first part, we’ve looked pretty hard at the numbers, where the expectations are for RevPAR and for margins and we think that the balance heading into 2011 will be smaller than the balance that we headed into 2010 with. But we’re not going to be at zero heading into 2011 we don’t believe based on our projections and Marriott’s projections that we have. And I guess I would note that over the past few periods as Marriott has been making sort of true-up payments on the Marriott 3 and 4 portfolios, because they’ve been paying at the beginning of the month, the projected cash flow from the properties and then the actual cash flow has tended to be better than they projected.

And so we’re hopeful that that continues and we’re also hopeful, one of the big uncertainties and one of the reasons why we’re not giving guidance about where we think these deposits and guarantees are going to be in 2011 is because there’s a lot of time between now and then and a lot of opportunity for the economy to change and we’ve never seen a downturn of this magnitude.

The last one that we said similarly was we’ve never seen a downturn like this was after 9-11, there was a very rapid decline because every body was afraid to travel. So the reasons why travel dropped off may have been different and it may have caused a bit of a recession but what we did see was a very steep drop and subsequently a pretty steep recovery and if it turns out that this downturn matches with that downturn then maybe it takes a little while for that pick up to start but once it starts it could be very very steep and it could be that we go into 2011, everybody in this industry is celebrating.

But similarly it could be a long slow recovery and its just too early to say and so how we react to where we are in 2011 obviously it depends on where we end up being in 2011 but it also has to do with why we end up there. If the whole economy is still in a shambles and there’s no credit and you can easily make the case that its not Marriott’s or IHG’s fault that they’re burning into credit support. I think you will react differently if you go into 2011 and the economy is picking up and many of the hotel operators around the world are seeing strong performance but Marriott or IHG are continuing to burn through their credit support.

Maybe we react differently but I think its just far too early to sort of broach that.

Operator

Your next question is a follow-up from the line of David Loeb – Robert W. Baird

David Loeb – Robert W. Baird

I feel like we’ve been beating you up so I wanted to ask a little more upbeat question, can you talk a little bit about the dividend and where you are assessment is today of taxable income and how the dividend relates to that. Trying to gauge number one the security debt but also number two the possibility that you may need to supplement that at the end of the year.

Mark Kleifges

You know how we feel about guidance but I think what I will say on the subject is we evaluated in setting that dividend rate we evaluated where we thought our taxable income would be for the year and we’re comfortable that that dividend will take care of any distribution requirements we may have.

David Loeb – Robert W. Baird

So it sounds like the dividend is calibrated fairly closely to where you think taxable income would be so as long as taxable income is stable the dividend should be stable and if at some point taxable income actually increases you’d probably need to consider increasing the dividend, is that fair.

Mark Kleifges

That’s not really what I said, I said that I thought that the dividend would take care of our distribution requirements for the year and I’m not going to comment whether its above or just at taxable income.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

John Murray

Thank you all for joining us today and hope we all have a much more positive 2010. Thanks.

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Source: Hospitality Properties Trust Q4 2009 Earnings Call Transcript
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