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Executives

Steve Schafer – VP, Strategic Planning & IR

Rick Smith – President and CEO

Andy Welch – EVP and CFO

Analysts

Josh Attie – Citigroup

Chris Woronka – Deutsche Bank

Will Marks – JMP Securities

Patrick Scholes – FBR Capital Markets

David Loeb – Robert W Baird

Bryan Maher – Credit Securities

Susan Berlinger – JPMorgan

Bryan Scinder – BAM

FelCor Lodging Trust, Inc. (FCH) Q3 2010 Earnings Conference Call November 3, 2010 12:00 PM ET

Operator

Good morning, my name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to FalCor’s Third Quarter Earnings Conference Call. (Operator instructions)

Mr. Steve Schafer, you may begin your conference.

Steve Schafer

Thank you and good morning to everyone on the call. With me this morning are Rick Smith, President and CEO; and Andy Welch, Executive Vice President and Chief Financial Officer. They will address the current operating environment, results for the quarter, and our outlook. Following their 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. Those 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 filing with the Securities and Exchange Commission. 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.

With that, I will turn it over to Rick.

Rick Smith

Thanks, Steve. Good morning, everyone and thanks for joining us this morning. It was a busy and productive quarter.

RevPAR, FFO per share were at the high end our expectations. We close the acquisition of Fairmont in Boston on August 18th and it has performed well thus far. We brought the first group of 14 sale hotels to market, and we are also assessing various acquisition opportunities in New York and D.C., which are our two remaining target markets.

During the quarter, we saw the moderation of RevPAR growth occurred during the summer months begin to subside and each month showed incremental improvement. RevPAR growth for July, August and September was 5.1, 6.1 and 7.9% respectively. Trends clearly have begun to strengthen again as the fears of a Double-Dip Recession abate and we are in the early stages of a lodging recovery and expect fundamentals to continue to improve.

We are seeing some pretty positive trends. ADR growth occurred six months after occupancy growth began. This is compared to 20 months in the previous cycle. The mix of ADR growth as a percentage of RevPAR growth improved each month during the quarter and we expect that to continue.

While booking remain relatively short, we have experienced significant improvement in our group booking pace. 2010 group pace was down 13% coming into the year and has sequentially improved throughout the year and was up 4% in September. Our hotels are getting a significant amount of in the month, for the month group bookings as well.

Group nights increased 17% during the quarter driven by a 28% increase in corporate group. Additionally, group rates turn positive during the quarter, up 1% and we expect that will continue to improve. Overall, transient rates increased 3%.

Premium transient rates increased 5% during the quarter, which is critical as we continue negotiations for customers for next year and agreements are driven off those rates largely. And the positive imbalance between supply and demand should continue for some time.

Supply is lower in our markets than the industry as a whole and only four of our top 20 markets have rooms under construction.

We continue to work hard on customer mix management. As corporate transient and group room nights improve and overall occupancy is strengthened, it is imperative that we take advantage and mix our customers as efficiently as possible. The manager is still in the initial phases of the 2011 budgets and we are encouraging them to be aggressive and take calculated risks on the mix. This means less government, third party and contract business and more premium corporate-rated business.

We have seen some improvement already with corporate transient room nights up 6% and leisure and discount segments down 5% during the third quarter.

Now, let’s talk about the balance sheet. As we have discussed, we anticipate selling more than 30 hotels and have begun that process with the first 14 hotels brought to market in September. It is still very early in the process and the brokers are working to finalize copies, setup tours in order to get the process moving as quickly as possible [inaudible].

There is great bill of interest judging from the copy process and other direct inquiries we have had. However, we will have to wait and see how the process goes as we will not accept prices that do not make sense for our shareholders.

The asset sales will do a number of things for us. They will reduce leverage for the company substantially. As I’ve pointed out before, with completion of the asset sale and moderate growth between now and 14, the company would be between three and four times levered.

They will significantly improve the overall quality of our portfolio. RevPAR for the 14 hotels are currently being market as 28% below the average of our remaining portfolio. They will increase barrier to entry protection, increase future RevPAR and EBITDA growth, reduce concentration risk and will significantly increase balance sheet capacity.

We will update you on the progress throughout. However, we will not disclose expected proceeds or for that matter any other information that would lead to pricing guidance. We are not going to guide the market to pricing.

As I mentioned earlier, we closed on the Fairmont during the quarter, and the first full month of operation, the hotel grew RevPAR by 14%. We are currently in the process of design work on the initial phase of the renovation. That process particularly in the public spaces is critical to recapture [ph] in corporate customer and we are being very deliberate and diligent.

In addition, we have benefiting acquisition opportunities in our two remaining target markets, New York and D.C. however; we will be disciplined and will only pursue those opportunities that make sense to our shareholders from a return and strategic perspective. There have been some opportunities that we have already passed on and some others that we are still assessing.

It is certainly a competitive landscape in those markets currently, much like Boston was when we won the Fairmont and we will find the right deals when it makes sense. We feel very good about where we are, how we are executing in the plan going forward. We remain focus on maintaining our high market share index, follow-through, continuing to strengthen our balance sheet and continuing to improve the overall quality of the portfolio.

And with that, I will turn the call over to Andy.

Andy Welch

Thanks, Rick and good morning. We are very pleased with the performance during the quarter. Operating trends continue to improve. RevPAR grew 6.3% for our 82 same [ph] store hotels. This does exclude the Fairmont Copley Plaza.

ADR growth is accelerating up 1.7% in July, 1.8% in August and 2.7% in September. For the quarter, ADR increased 2.1%. This is the first quarterly increase in two years.

RevPAR increased at 61 of our hotels. In addition, RevPAR grew in all of our major markets except Orlando, which had mixed supply last year. San Francisco, Philadelphia, L.A. and Boston had performed well all year benefiting from the strong corporate and group demand. San Diego and South Florida are beginning to strengthen after absorbing new supply added in 2009.

Food and Beverage revenues increase $4 million or 13% during the quarter. Copley Plaza contributes $2 million of that increase. On a same store basis, F&B revenues increases 7% compared to a 4% increase in occupancy. Increased group room nights drove higher F&B spending.

Hotel EBITDA increased 9% during the quarter as margins increased 67 basis point. If you exclude the 14 sale hotels, margins increased over 100 basis points.

Adjusted FFO per share was zero and was at the high end of our expectations.

Adjusted EBITDA increased $2.9 million or 6.4%, compared to prior year.

Corporate expenses increased $2 million from last year due to the timing and the level of bonus expense. Bonus expense this year was higher than last year during the third quarter as our 2010 performance is exceeding our goals. However, our corporate expense in the fourth quarter will be lower than last year.

For the fourth quarter last year, corporate expenses reflect that a bonus expense related to the successful execution of our senior notes offering and extension of that maturities. In total, corporate expenses for the second half of 2010 will be comparable to the 2009 period.

Over the past 18 months, we’ve resolved all of our debt maturity issues. This year we’ve reduced our net balance by over $200 million. We are waiting until next year to refinance the $250 million CMBS that matures in November, our long remaining material debt maturity until 2013.

As I mentioned in our last call, the interest rates very low at LIBOR plus 93-basis point. The debt service coverage is strong. Some of the hotels that secured this loan are currently for sale and I could see no issue with waiting to refinance that loan and to a closer to the maturity date.

The capital market continues to improve. Banks are ramping up their CMBS operations once again and hotel cash flows and values are recovering. During the quarter, we transferred our Piscataway hotel to the lender in full satisfaction of the $18 million secured by that hotel. This property was dispose of and in effect of multiple of 24 times trailing 12 months of EBITDA. In connection with that transfer, we recorded an $8 million gain during the quarter.

Finally, let me walk you through our new guidance, which we are adjusting based on our strong good quarter results, continue strong fundamentals and accelerate in ADR growth. We now expect same store 2010 RevPAR growth to be between 3.75% and 4.5%, which as it seems that fourth quarter RevPAR growth will be stronger than so far this year.

We also expect margin growth to be stronger in the fourth quarter relative as ADR becomes a bigger contributor to RevPAR growth. ADR growth should account for more than 50% of RevPAR in the fourth quarter.

We are raising a low end of our EBITDA and FFO guidance by $5 million. Our guidance represents strong bottom line during the fourth quarter as a result of continued strong growth in F&B revenues, the impact of owning the Copley Plaza for the full quarter and lower corporate expenses compared to 2009.

As is our customary practice, we will provide 2011 guidance in February. Our confidence and a sustained recovery is growing, ADR is improving and supply growth continues to moderate. Supply growth for the industry was just 1.6% during the third quarter, which is below historic levels and the pipeline continues to shrink. Additionally, fewer hotels are under construction in our markets, so our markets will have even lower supply growth than the industry.

To wrap up, we expect trends to continue to improve. We have resolved all maturity issues. Cash flow is positive and expects significant future growth. We’ve taken steps to reduce our leverage this year. Our leverage have improved by three turns as compared to our original guidance in February due to a combination of equity issuance, debt reduction and improved EBITDA.

As we continue to improve the balance sheet and our portfolio in an accretive manner and expect that to continue, as EBITDA recovers and we repay additional debt and reduce debt cost with asset sales proceeds.

Thank you and we’re now ready for you questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Josh Attie at Citigroup your line is open.

Josh Attie – Citigroup

Good morning.

Rick Smith

Hey, Josh.

Josh Attie – Citigroup

Hey, can you talk about what the use of proceeds would be from the asset sells, if you execute it?

Rick Smith

Sure. There’s going to be – there’s three primary priorities on that. And one is debt reduction. Of course, one is getting the preferred’s current, but that has to – the timing has to coincide with being at the proper ratios to be able to start paying current on the dividends and then the third would be opportunities in the two target markets that we’ve talked about.

Those are the three. It’s going to be – as far as, this is going to be circumstantial depending on what’s going on at the time.

Josh Attie – Citigroup

And I guess none of those things really seem that they create a sense of urgency because I don’t think – there’s no penalties for not getting the preferred’s current and you don’t really have any maturities. So, I guess if – I don’t know if it weren’t new output, if you don’t get the pricing that you want and it seems like also that operating results continue to get better, if you don’t get the pricing you want or you will – how long are you willing to hold this none core hotels?

Rick Smith

Well, if we don’t get the pricing we want, they simply will not be sold. We’re not going to sell them. I mean we don’t have to sell them as you point out. Look, getting the preferred current is a priority for this company. There is absolutely no question about it. But we’re not going to do things that make no long-term sense to handle something that may make short-term sense.

It’s got to make short-term and long-term before we’re going to do it and that goes into everything we do. So, we won’t sell them if we don’t get the pricing, but certainly getting the preferred current is a priority.

Josh Attie – Citigroup

And I know you haven’t been in the market a long time, but do you have any sense for what the tone of demand is for the suburban and the airport hotels because we really haven’t seen a lot of those type of hotels trade.

Rick Smith

Right. and I mean I think based on – like I said in my earlier remarks, based on the process to date and the direct inquiries that I’m getting that Mike’s getting, that Andy’s getting, et cetera and based on the comp [ph] process, there seems to be a lot of interest. But let me say this, in the last cycle, in every cycle, people are geared toward the major urban areas and that’s just forever going to be the case.

But in the last cycle, people were still very geared toward the major urban areas looking for opportunities in those areas and we were able to sell 45 hotels during that time that we’re in much worse suburban and airport locations and in much worse condition. I feel pretty confident that we’re going to get interest to get some movement on this stuff. But if we have to be patient, then we’ll be patient.

Josh Attie – Citigroup

And can I ask you stuff for question on the guidance. It seems like it implies RevPAR of around 5 to 5.5% for the fourth quarter. But you kind of painted a picture of RevPAR growth accelerating throughout the third quarter and ending up to almost 8% in September. Why do you think it’s going to decelerate to 5ish in the fourth quarter?

Rick Smith

Yes. Actually, Josh, at the top end of the RevPAR guidance, it’s actually higher than the third quarter actual. At the midpoint, it’s below that. But at the high end, it’s slightly above the third quarter actual.

Josh Attie – Citigroup

Did you say in the prepared remarks what October was trending for the portfolio?

Rick Smith

We did not.

Josh Attie – Citigroup

Can you?

Rick Smith

But it’s at 5.7.

Josh Attie – Citigroup

Okay, thank you.

Rick Smith

Thanks.

Operator

Your next question comes from Chris Woronka from Deutsche Bank. Your line is open.

Chris Woronka – Deutsche Bank

Hey, good morning guys.

Rick Smith

Good morning, Chris.

Chris Woronka – Deutsche Bank

Can you talk a little bit about what you expect in terms of mix next year and how big the shift could be in terms of corporate and corporate transient group relative to the leisure that you think you’re going to end up with this year?

Rick Smith

Well it’s improving every month and we certainly expect corporate to continue to pick up both on the group side, certainly on the group side, but also on the transient side to some degree. And so the mix now is 70-30 transient group but we expect – and we expect that to continue as well. From a corporate perspective, we think that what we will be able to do is that we’ll be able to take out some of the contract stuff like what I was talking about earlier. Some of the contract stuff and replace that because we are getting strong enough on the occupancy side and replace that with more of the corporate transient and or group business, corporate group that’s available in the marketplace.

So it’s really purely a remix. So we do expect the corporate piece of our business to increase next year. And I don’t have a number on the top of my head Chris, but we do expect to corporate increase next year and so we’ll see where that comes up.

Chris Woronka – Deutsche Bank

Okay, so should we assume just kind of speaking to the Embassy portfolio? Should we basically assume that occupancy is kind of flattish to up modestly and the rest of the growth is from rate, due to the mix shift?

Rick Smith

Yes.

Chris Woronka – Deutsche Bank

Okay, one more on Boston, on the Copley. Is that – you commented is the property exceeding your underwriting yet in terms of the balance of 2010?

Rick Smith

Yes. Well I mean we’re one month in. It had a good month. So we’re not jumping up there on yet. But the real critical thing I guess, it is a little bit better. It was a little bit better in September but the real critical thing as I pointed out earlier is really to get that the design work done as very, very well because recapturing the corporate customers is going to be the key long-term success there. The Boston market was strong and we participated in that strong market in September.

Chris Woronka – Deutsche Bank

Got you. One final one. In the markets you had that did not have positive RevPAR growth in third quarter, I mean could you characterize that as more of a supply issue, a demand issue or your specific property issue?

Rick Smith

Yes, well its mostly supply, I mean Orlando was the biggest offender there. And there was $6 billion loans built there last year as you’re well aware. And so we had a lot of this play coming on this year and we’re trying to write that out. Of course two of our hotels did better than the other two because they are in great locations and they are the keeper hotels. The other two which are going to be part of the assets for process. At some point, we’ll be – so we’ll get some relief from their supply issue once that occurs.

Chris Woronka – Deutsche Bank

Okay, very good. Thanks.

Operator

Your next question comes from Will Marks at JMP Securities. Your line is open.

Will Marks – JMP Securities

Hello Rick, hello Andy. On your comments about deals, you mentioned that you’re passing on some deals. Can you just talk about why is it simply valuation and maybe just discuss the environment a little bit?

Rick Smith

Sure, well the environment is fairly frothy right now. And but we’re looking at everything that we have an opportunity look at. There have been some opportunities that are kind of non-marketed private conversations which could be a way that we end up getting in there. Some are fully marketed deals. And the ones that we had passed on just didn’t make sense for us. There is a lot of fervor in the marketplace on some things, and I think that it’s reaching too far. There is assets that are outside of kind of the real compression zone in New York, which would kind of between 42nd and 59th and 8th and last and you get outside of that and you’re looking at areas where when compression starts to go away in the downturns, it’s harder to fill those hotels because you have limited demand generators outside of those areas.

And people are paying prices on some hotels that were available in those areas outside of the compression zone that didn’t make any sense to us. And hotels that have never made a whole lot of money, if there is some upside but they just didn’t make sense and we didn’t think that could make sense for our shareholders long-term. So we look at this stuff very realistically, not I mean – we want to get into New York but not at any cost, I mean it’s going to be have to be something that makes sense. Now there is a number of bills out there that we think do make sense and some we will be in a bidding process for and we’ll lose some of those but when a deal makes sense, hopefully we can make something out and get in there.

Will Marks – JMP Securities

Is the – I know that the multiples on those deals are high as you implied, I mean is there a very wide disparity between those types of deals in some of the markets you’re looking at, and what your – going to be able to sell your assets, I may know that it’s not – do you suppose it is not as certainly big to buy those deals?

Rick Smith

Correct and of course is the answer to your question. It is ever thus in New York City. And it will ever be thus as long as New York City exists.

Will Marks – JMP Securities

And how much more expense for those than some of the other markets you may be looking, whether it’s DC, Boston?

Rick Smith

Well I mean I think if you look at cap rates, I think it will be in multiples. It will be fairly profitable from price per key standpoint, it’s going to be significantly north.

Will Marks – JMP Securities

Okay, great. Thank you very much.

Rick Smith

Thanks.

Operator

Your next question comes from Patrick Scholes at FBR Capital Markets. Your line is open.

Patrick Scholes – FBR Capital Markets

Hi good morning.

Rick Smith

Hi.

Patrick Scholes – FBR Capital Markets

Just a quick question here on the Holiday Inns that you own. Where do they stand with the Holiday Inn refurbishment initiative? Have you completed most of them at this point and for the ones that you’ve completed, what types of RevPAR or market share premiums are you seeing with that post renovation?

Rick Smith

Well yes, we’ve completed it. What we’ve seen from a standpoint of return based on the refurbs, the new signage the things of that nature. It’s pretty hard to tell because, I mean it’s a little bit mix but I think we’ve had some pickup in some places, but you have to keep in mind that when we finish these things we were in the middle of like a downturn. So it was real hard to gage. Market share improved slightly at some stage, same in some. And did we pick up a little bit in those hotels where the market share improved, I’d say yes. But it’s pretty hard to quantify that what we got. We got much more out of our renovation of those hotels in ‘06 to ‘08 and we got all the refurb.

Patrick Scholes – FBR Capital Markets

Okay, very good. Thank you.

Rick Smith

You’re welcome.

Operator

Your next question comes from David Loeb at Robert W Baird. Your line is open.

David Loeb – Robert W Baird

Hi Rick.

Rick Smith

Hi Dave.

David Loeb – Robert W Baird

Good morning. I have a couple for you. When do you think that the coverage will meet the tests so that you can start paying on those preferred dividends?

Rick Smith

Well it certainly, it depends on kind of where we go from a budgeted standpoint next year, we’re pretty early in that process given that we have to wait for the managers to get them – get the round of pass. Now we’re having pretty aggressive discussions with them but that doesn’t guarantee where those are going to come out or at least the first pass are come out to us. So it’s hard to gage at this point but we certainly expect in the latter half of 2011 to get to a point to where we should be able from an operational perspective to start paying current dividends.

That’s the current expectation but then it can change, I mean we have to wait and see the budget and figure out where that’s going.

David Loeb – Robert W Baird

Okay. And second thing, what do you think is the likely timing of the asset sales. It sounds like that’s somewhat an uncertain given you concern about getting reasonable prices. And when will they be classified as held for sale in the balance sheet?

Rick Smith

Well to answer the first part of your question, the timing – it’s a little early to gage, I mean we actually expect – my comment on waiting for pricing, I don’t think we’re going to have to wait. I think we’re going to get enough interest at the pricing that we want to be able to move these off. Last time our average sell time on the 45 assets, I think was around 15 months from the time that the Board approved, for the time that we closed the deal. And those assets were way worse. So I actually hope that we can move those little quicker. But we’ll have to wait and see, I mean we’re going to have to wait and see but hopefully it will be on average around 15 months.

Andy Welch

David on the discount op side, or held for sale, as consistent with historic practices, we move those once we have a contract of hard money down.

David Loeb – Robert W Baird

Okay, so really, right when they’re ready to go, that’s when you put them on, okay. And finally, Andy can you comment a little bit, you talked about in the release lowering the average cost of debt. Which debt would you target to repay if you could and if that includes the 10% notes, how much can you repay and what kind of prepayment penalties would you have for that?

Rick Smith

First, we’re going to – we’ll repay the underlying mortgage debts, so – some of that stuff is on the higher side. And then we’ve got a prioritization by cost of debt beginning with the senior notes on down, what’s prepayable, what’s not, what’s the may call, et cetera. So that will be an evaluation of what assets and win, and that’s still there.

David Loeb – Robert W Baird

Okay. So – but on those notes in particular, there are some restrictions on that I guess and some prepayment penalties that go with those rates?

Rick Smith

We’ll buy them in the open market there’s none. If there is a tender, it would be, yes. If you negotiate us a tender price, if you sell the hotels that are part of the secured packet of bonds, we make an offer at par.

David Loeb – Robert W Baird

Got it.

Rick Smith

So there is several answers on the bond.

David Loeb – Robert W Baird

That makes perfect sense. Great, thanks for your help.

Rick Smith

Thanks.

Operator

Your next question comes from Bryan Maher at Credit Securities. Your line is open.

Bryan Maher – Credit Securities

Good afternoon, guys.

Rick Smith

Hi Bryan.

Bryan Maher – Credit Securities

Just to drill down a little bit deeper on the assets sales, can you tell us exactly when they hit the market?

Rick Smith

It was the third week of September. I can’t remember the date off of the top of my head or that’s when they were – the kind of the teaser went out from brokers at the lodging conference in Phoenix. And then, since that time, it’s been kind of squaring away everything and getting the combi process going and setting up tours and getting the offer memorandums out and things of that nature.

Bryan Maher – Credit Securities

Yes. And is it safe to say you’re just not going disclose to all of us at least at this time what properties are being sold?

Rick Smith

No, the properties are listed on our website. The properties are available and are disclosed at least the 14th. And when we decide to bring the others market, they will likewise be listed on our website. My comment was, everybody always wants to know what the net bounce is, what the EBITDA is, plus there what the expected proceeds are, and you start to having that conversation. And what it ends up doing is leaving the market to guidance on pricing and we’re just simply not going to do that.

Bryan Maher – Credit Securities

And what are the major brokers handling the listings?

Rick Smith

There is a number of brokers that are – on the first 14, I think we’re using four different brokers and then we will determine the brokers on the remaining assets as we go. NK is in there, CVRE is in there, Jones Lang LaSalle’s in there, and Lincoln.

Bryan Maher – Credit Securities

Okay.

Rick Smith

That’s on the website as well, Bryan.

Bryan Maher – Credit Securities

And regarding the sale metrics, when you talk about wanting to get your price, is your price going to be more related to or a mix of some multiples to EBIT, EBITDA, but you’ve determined or is it going to be more some percentage of a replacement cost. How are you thinking about that?

Rick Smith

I’m just not going to have that conversation. It’s all right, I wish I could. But that’s too down a road that you just don’t want to go down, because these assets – we gave a little bit of guidance last time in the first phase of asset sales as to what the expected proceeds were and things of that nature.

And the issue – I mean, well, the reason we were able to do that there, the assets that we were selling in that first phase were very, very different. I mean it was all over the map. There’s no way you could get – you could get any real good guidance based on the information we gave. If we started to give similar information in this time, it would lead people to pricing guidance and we’re just not going to do that.

We’ve got – I mean what – we’ve looked at everything from an internal standpoint as far as the capital coming down the road, the wholesale return on hold, therefore, what the sell price would need to be based on all of the factors, and it’s a global kind of view what we need to get for those assets which will make sense for our shareholders and that’s how we’re looking at.

Bryan Maher – Credit Securities

Okay, shifting gears for a second. We just all got off the Hyatt call, and I think some of us might have been a little bit surprised by the comments they made on corporate rate negotiations whereby they are looking for something in the mid-to-high single digits and the pushbacks they’re getting back from some corporates is flat to down. Can you tell us what you might be seeing out there in the market?

Rick Smith

It’s all over the map. I mean we’re seeing – we are seeing some people who want the price to go down and they’re only willing to stay if the price is going down, they’re trying one last year gasp kind of things to try to drive the pricing down, because they know where it’s headed.

And so there are people taking – doing that. And we are doing things like – I mean in addition to trying to combat that, we’re definitely taking away last room ability and things of that nature. So it’s a dance sort to speak. I mean it’s a process with each customer in each particular market unless it’s a national account of course, and working through that process. But, yes, those sides are trying to push. So I mean you’re seeing some of that of course.

Bryan Maher – Credit Securities

And just lastly on the Holiday Inn’s renovations and you can give me a short answer if you want. Does your gut check tell you that the investment was worth it or is it still too early to tell or not?

Rick Smith

Well, I think it was worth it, and let me tell you why. I mean certainly the investment that we put in [inaudible] which by the way was massively more dollars, massively, I mean exponentially, okay? That did a ton of good in those hotels. They had got the hotels where they needed to be with regard to quality versus their comps and allowed us to drive a lot of market share and improve things pretty dramatically.

But on the refurb, first of all, it wasn’t that much money, okay? It was fairly limited on what we had to do to get there. And secondly, I do think that IHD is taking the brand where it needs to be and it’s what the brand had to do for position. And so I think that that will generate something like intangible help for the direction of the brand. So I think we will get some bank for that. But like I said, it wasn’t that much money. I mean really it fails in comparison to what we did in ‘06 and ‘08 which we really got return on.

Bryan Maher – Credit Securities

Okay, thanks a lot.

Rick Smith

Thanks Bryan.

Operator

Your next question comes from Josh Attie at Citigroup. Your line is open.

Josh Attie – Citigroup

Hi, can you just remind us if there are any interest coverage or leverage coverage covenants associated with your outstanding bonds and if you’re in compliance with those?

Andy Welch

Well, yes, Josh, there is no financial covenants. The bond has in current test which rather has an ability to make restricted payment, that’s the 1.7 test that we’re below, and that’s why we’re unable to pay the preferred dividend, but that’s the only one for under.

Rick Smith

And that was – there was another question earlier asking when we expected to kind of get above that ratio and that was when we addressed that.

Josh Attie – Citigroup

Thank you.

Rick Smith

Thanks Josh.

Operator

Your next question comes from Susan Berlinger at JPMorgan. Your line is open.

Susan Berlinger – JPMorgan

Hi, good afternoon. A couple of questions. I guess, one, I know you guys aren’t giving specific 2011 guidance, but I was hoping you could help us kind of framework either margins or expenses for 2011. How should we be thinking about that?

Rick Smith

Well, like I said, I mean we haven’t seen the first round of the budgets yet, so it’s difficult to gauge. But, I mean, certainly there is going to – I think brands generally speaking are being pretty reasonable and understanding that they don’t need to be just because they’re starting to look positive, rush back and put a lot more cost back in. So I think that that is definitely a positive.

I think there will be some creep in some areas and maybe some places where they pulled back and they need to add some more cost back, whether that’s inventories, whether that’s small side of amenities or things of that nature, I think we might see some stuff. But it’s going to be difficult to answer that question without getting the first – at least the first round of the budgets.

But I will say this, we picked up a lot of cost coming back into this year with labor, which as we know is the biggest part of running a hotel, bonuses came back, wages came back after being kind of cutback for a year or two. And so we saw a big increase there, so the – that we shouldn’t see massive increases there. That should be pretty comfortable in 2011 to 2012.

I think we’ll see some – but we’re going to force them to flow through. I mean, so if they’re being aggressive and taking some risk on the mix, and they are getting a lot more in rate and they are able to flow through dramatically well, okay, that’s one thing. If they are not doing that, then it’s going to be less acceptable to be able to do things.

But we’re going to – we’re certainly going to hold their feet to the fire with regard to how the any – there’s really going to have to be a lot of rationale for any cost that’s being added back versus just while things look good, so we think we need to do it kind of thing, we’re just not going to allow it.

Susan Berlinger – JPMorgan

And then my second question was, and maybe I had something incorrect, but I thought pro forma for the Boston purchase that you had 12 unencumbered assets, and I know you said in the press release 10. And I was wondering, because the debt amount didn’t changed, it – did you encumber to your properties in the quarter?

Andy Welch

At 9/30, we had 12, and subsequent to the quarter, we did put end of small financing and encumbered to ourselves.

Susan Berlinger – JPMorgan

Okay, okay. And then my last question, Andy, I guess specifically for you. I know you talked about kind of the improvement in the CMBS market as well as we know the overall debt markets, any way to kind of quantify kind of what pricing is on mortgage debt now versus pick your time period?

Andy Welch

We’re seeing 5% to 6% land based on leverage you put on the asset. So last quarter it was 6% to 7%, so we’re continuing to see improvement.

Susan Berlinger – JPMorgan

Okay, that’s great. Thanks very much you guys.

Rick Smith

Thanks. Operator we’ll take one more question.

Operator

Your last question comes from Bryan Scinder [ph] of BAM, your line is open.

Bryan Scinder – BAM

Hi guys. Most of my questions have been asked and answered, so I appreciate that. But I did want a clarification because I wasn’t sure if I heard it correctly on your discussion on the 1.7 times in currency test, that’s a different measurement from GAAP right? So can you help sort of understand maybe with the equivalent level of the EBITDA you’d have to reach on a run rate or could I just get a clarification as to when you thought you might get closer to being above that target?

Andy Welch

Yes, it’s not quite GAAP. If you just took consolidated interest to consolidated – I’m sorry consolidated EBITDA, consolidated interest that gets you very close.

The ratio was actually a little bit better than that, because we can add back noncash expense item or interest, so today that ratio is about 1.5. And in Rick’s comments earlier, when you – we’re looking at some time in the latter half of ‘11. Again, we’re not looking – we haven’t seen 2011 budgets, but we’d be looking to get in above 1.7 sometime next year.

Bryan Scinder – BAM

Got it, thanks guys.

Rick Smith

Thank you for joining us on the call and we will talk to you next quarter. Thanks operator.

Operator

This concludes today’s conference call. You may now disconnect.

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