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Hospitality Properties Trust (NYSE:HPT)

Q3 2010 Earnings Call Transcript

November 8, 2010 1:00 pm ET

Executives

Carlynn Finn – Manager, IR

John Murray – President

Mark Kleifges – CFO

Analysts

David Loeb – Baird

Brian Maier – Citadel Securities

Jeff Donnelly – Wells Fargo

Michael Salinsky – RBC Capital Markets

Dan Donlon – Janney Capital Markets

Operator

Welcome to the Hospitality Properties Trust Q3 2010 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to Carlynn Finn, Manager of Investor Relations. Please go ahead.

Carlynn Finn

Thank you, Larry and 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 the prior written consent of HPT.

Before we begin today’s call, I would like to read our Safe Harbor statement. Today's 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 belief in expectations as of today November 8, 2010, the company undertakes no obligation to revise or publicly release the results of any revisions 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 Securities and Exchange Commission and in our Q3 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.

Now I would like to turn the call over to John Murray.

John Murray

Thank you, Carlynn. Good afternoon and welcome to the third quarter 2010 earnings call. Today HPT reported third quarter FFO per share of $0.82. Focusing first on HPTs hotel investments third quarter RevPAR increased 6.7% across our 289 hotels driven by a 6.2 percentage point increase in average occupancy, 74.4%, it was partially offset by 2.2% decline in average daily rate to $89.43.

Compared with the 2009 third quarter, RevPAR increased in all regions except the west central and northern regions, which were negatively impacted by weakness in Texas, Arizona, Missouri and Kansas. RevPAR at our SpringHill Suites, Country Inns & Suites and Candlewood Suites hotels gained 15%, 9.3% and 8.7%, respectively this quarter.

Demonstrating the appeal of all Suites for select service and extended stay hotels. HPT's hotels are primarily in suburban locations and diversified across all hotel segments except economy with concentration in the upper scale and mid-priced without food and beverage industry segments. The average RevPAR increase of our mid scale without F&B hotels was 8.3%, slightly above the segments average.

However, in the upper scale segment RevPAR, our hotels increased 5.2%, whereas the segment was up 8.9% this quarter. HPT's hotels underperformance versus the segment as a whole, reflects our upscale hotels are primarily select service suburban assets, as lodging recovers from the great recession, urban full service upscale hotels have achieved stronger improvement because they are more surveillance impacted on the way down.

Nonetheless, our trends in occupancy rate and RevPAR continue to improve and most indications are that the positive of momentum will continue. Growing rate remains challenging, despite strong occupancy growth and mid 70s average occupancy across our 289 hotels, ADR only increased in five of our 11 hotel portfolios this quarter versus last year. Our managers continue to work on balancing guest mix to reduce this kind of business with the legacy impact of previously negotiated special rates will remain an issue through year-end.

Also while our extended stay hotels are successful in selling stays of 30 days or more, rates for longer term stays are lower. Finally, 15 of our hotels, including 12 courtyards were been renovated during the quarter causing some displacement. The mix in relative significance of each of these factors varies greatly by market and by hotel. We have seen consistent RevPAR improvement in each month and great efforts have been made to better manage rate.

There is a clear disparity between the top and bottom performing markets among Smith Travel top 25 markets and in the top 25 markets versus all other markets. More HPT hotels are located in quarter's less well performing markets of Houston, Dallas and Phoenix than in this quarter's top three RevPAR markets for New York, New Orleans or Denver. In any case, it is difficult to draw useful comparisons and conclusions between HPT's performance and average national revenue statistics.

As the economic recovery continues, updated projections by our managers generally indicate slightly positive RevPAR for the full year 2010, roughly 2%. However, there is continued uncertainty because booking windows remain short and it is difficult for our operators to accurately project monthly revenue until that month.

There is optimism as a result of steady increases in demand but it is coupled with frustration, the rate improvement takes more time and effort to implement for the reasons previously noted. Flow through of increases in revenue to hotel level cash flow is improving each quarter, but is still anemic. Incremental cost savings are difficult for our operators to achieve, especially when revenue growth is demand driven.

As we noted last quarter, there is growing cost pressure in the areas of wages and benefits, both in rooms and G&A expense. Full year 2010 hotel net operating income is expected to decline versus 2009, as expense increases more than offset revenue gains. Our hotels are recovering; in fact this is the first quarter, since the recession began where year-over-year cash – hotel cash flow available to pay our minimum returns and rents has increased.

We remain optimistic about the future growth in cash flow because of our hotels attractive location, high quality and recognized brands. We continue to be paid less than is required periodic minimum return in rents amount required under the Marriott number three, Marriott number four agreements and has drawn on the related security deposits for the efficient amount. Based on the projected performance of the existing deposits will carry us well into 2011.

Recently, we have restarted discussions with Marriott about these two portfolios because we would like to invest capital, keep them as competitive as possible, but also want to be paid our returns. Last quarter, we announced plans to sell four hotels. Hotels have been marketed over the past quarter and calls for office are expected soon. Investor interest has been very strong, so we are optimistic about how the process may turn out. The minimum returns due to HPT from ISG will be reduce this hotels are sold based on the net proceeds.

The benefits are expected to be better performing portfolios and improve coverage of our returns. We are in discussions with IHG about the portfolios of remaining hotels focusing on a capital plan over the next several years to ensure we are offering guests great hotels and attractive value. Despite improving revenues and stabilizing cash flow available to pay our rents and returns, we expect less than one times coverage of our hotel rent and returns in 2010.

Our hotel portfolios securities deposits and guarantees enabled us to whether the storm so far – but these features were not designed to last indefinitely. If economic growth does not pick up pace or things are large in demand, does not also lead to meaningfully AVR growth, some of our security feature maybe exhausted. We are confident that the existing guarantees and deposits will be sufficient to offset new return and rent shortfalls in 2010 for all of our agreements.

Because we are just now starting the 2011 capital operations budget progress, we will not provide our outlook for 2011 coverage, until our Q4 2010 conference call. Turning to our TravelCenters investments, this morning TA reported third quarter 2010 financial performance, which reflects continued improvement in U.S. economy, which enabled further improvement in fuel volume and nonfuel sales trends.

Fuel volumes this quarter were up 5.3% quarter-over-quarter, across HPTs 185 TravelCenters increasing for the fourth consecutive quarter. Per gallon diesel margins increased 21% over the 2009 third quarter and nonfuel revenues grew by 8.5% this quarter.

Together, these factors led to 29% growth in property level cash flow versus third quarter 2009. We believe the TA is heading down the road to recovery but we realize that the best two quarter of this year are now behind us despite the 5.3% quarter-over-quarter volume increase in the third quarter, volumes remain 14.7% below third quarter 2007 levels.

Also as economic growth has moderated, so two of the size of TA year-over-year fuel volume increases. TA’s ability to pay us the full contractual rent and getting in 2011 remains dependant on continued economic recovery and it is not clear they will have the capacity to repay the deferred rent amounts due on July 1 2011.

As TA notes on their earnings call this morning, they plan to engage us in discussions without these matters. Or no such discussions have taken place to date we expect that the committee comprised of HPT independent trustees, will meet with TA’s management independent directors before year-end.

HPT is one of the most well capitalized hotel REITs and we have maintained investment grade rating through this difficult economic environment. The availability of attractive hotel investment opportunities has been picking up during 2010. However, we believe some of the hotels which have traded recently, traded as aggressive prices given their performance and economic circumstances.

HPT managed that its common share total return is a mix of income and capital appreciation and we have a long-term investment perspective. We are not willing to justify investments based op five year IRR calculations with aggressive access multiples.

We intent to remain disciplined long-term investor and intend to continue to aggressively asset manage our real estate investment and maintain our strong capital base liquidity. I’ll now turn the presentation over to Mark.

Mark Kleifges

Thanks, John. Third quarter revenues for our hotel portfolio increased $17.2 million or 6.4%, versus the prior year. Our strongest performing portfolios were our IHG number one and number two portfolios with revenue increases of 7.2% and 8.5%, respectively. And our Marriott number four portfolios, which had 7.7% increase.

Our IHG number three and Marriott number three portfolios experienced the lowest growth with revenues up only 1.7% and 2.3%, respectively. With the continued absence of ADR growth in our portfolio, GOP and cash flow margins declined again this quarter. While gross operating profit increased by $3.2 million or 3.3% quarter-over-quarter, GOP margin percentage declined 100 basis points to 35.4%.

Hotel level cash flow available to pay our minimum rents and returns was slightly better than flat versus last year up $302,000 or about half a percent. However, as a percentage of revenue, hotel level cash flow available to pay our minimum rents and returns declined 1.2 percentage points versus the 2009 third quarter to 21.2%.

The continued decline in-flow through percentage was due primarily rising wage and benefit costs, resulting from both higher occupancy and wage rate increases. Increased utilities costs and increase in repair and maintenance expenses associated with previously deferred projects and step ups in the FF&E reserve percentages for certain of our hotel portfolios in 2010.

Although, hotel level cash flow increased only slightly this quarter, this was the first quarter-over-quarter increase, since the 2008 first quarter. 2010 third quarter rolling 12 month coverage of our minimum returns in rents was below one times for all of our hotel agreements. On a quarter-over-quarter basis, coverage improved for four of our hotel agreements was flat for one and declined for six agreements.

We expect coverage to be below one times for each of our agreements in the fourth quarter, but believe our available credit support is adequate to cover the shortfalls. Information regarding security deposit and guarantee balances at the end of the third quarter is included in note 12 of our form 10-Q, which we filed earlier today.

Turning to our TravelCenters portfolio. Performance was very strong this quarter with cash flow available to pay rent, up over $21 million or 29% versus the 2009 third quarter. Fuel volumes increased 5.3% and nonfuel revenues increased 8.5%, quarter-over-quarter. Per gallon fuel margin was $0.02 higher in the third quarter of 2010 than last year and nonfuel gross margin percentage increased by 11 basis points.

Slight level operating expenses increased 4.8% compared to the prior year. Property level rent coverage for the 12 months ended September 30, was 1.22 times for our TA Centers and 1.07 times for Petro Centers. Both of this coverage amounts have been calculated based on contractual cash rents and exclude the impact of the rent deferral agreement.

Earlier today TA reported third quarter 2010 corporate EBITDA of $79.8 million and TA’s EBITDAR coverage of contractual rents at the corporate level for the third quarter was 1.3 times. Adjusting rent for deferral agreement coverage of cash rents was 1.72 times for the third quarter. Year-to-date, coverage of contractual rents was 1.03 times and coverage of cash rents was 1.36 times.

Turning to HPT's operating results for the third quarter, this morning we reported FFO of $101.1 million or 82 cents per share. This compares to third quarter of 2009 FFO, of $91.1 million, or $0.77 per share, a 6.5% increase in FFO per share. This increase was driven primarily by higher rental income from our leases with TA, due to interest earned on the deferred rent balance and lower interest expense resulting from our repurchase of convertible notes earlier this year.

EBITDA was $143 million in the third quarter and our EBITDA to total fixed charges coverage ratio for the third remains strong at 3.5 times. On August 25, HPT paid a dividend on our common shares of 45 cents per share. Our FFO payout ratio was 55% for the 2010 third quarter.

With respect to our balance sheet and liquidity, at quarter end we had cash and cash equivalence of $71.6 million, which included $66.8 million of cash escrowed for future improvements to our hotels and had only $123 million of borrowings outstanding on our $750 million revolving credit facility.

Turning to our financing and investing activities, during the third quarter, $50 million of our outstanding senior notes matured and we redeemed these notes using borrowings under our revolver. Our next term debt maturity is in 2012.

As discussed on last quarter's call, 2010 capital spending for most of our hotel portfolios, has been limited to amounts available in the FF&E reserves. However, we are performing renovations this year, at 27 courtyards in our Marriott Number One portfolio and 11 Residence Inns in our Marriott Number Two Portfolio.

As a result, we have made funding in excess of FF&E reserves for these two portfolios of approximately $55 million, through the third quarter and expect to fund an additional $43 million, in the fourth quarter. In addition, under the terms of our lease with TA, we funded $3.5 million of capital improvements to our travel centers in the third quarter, completing our $125 million commitment to TA.

In closing, we are encouraged by the recent signs of increased demands at our hotels and TravelCenters and believe HPT is well positioned to manage through the remainder of this difficult period and take advantage of attractive growth opportunities.

Operator, we are ready to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of David Loeb from Baird. Please go ahead. David Loeb, you may ask your question.

David Loeb – Baird

Sorry about that. I was mid asking and realized I was still muted. John, can you just repeat what you said about TA, I think I missed part of that and I have some follow ups I think.

John Murray

The whole thing about TA?

David Loeb – Baird

No. Just about the prospects for the future and what happens from here.

John Murray

We think the prospects of the future are good. I didn't say anything about that really. Dave, on the call this morning TA indicated that we are going that they are going to engage us in discussions about the rent and the deferred rent balance. And we haven't started those discussions or seen any sort of proposals or made any sort of proposals. So we are just letting the market know that during this coming period between now and year end, those discussions are going to begin and we are not really making any predictions from where they are going to turn out since they haven't started yet.

David Loeb – Baird

Can you remind us of the terms and when the deferred rent balance is due when they can stop when they have to stop deferring rent, things like that?

John Murray

They can defer $5 million of rents per month through the end of the year and the balance we are assuming they will defer for the next couple of months. And, so at the end of December, the deferred balance will be $150 million and that balance is due July 1 of 2011.

So, TA will be heading into the first quarter of 2011, absent any changes that will be heading in without any rent deferral each month going forward and with a deferred balance to repay in six months. That's what they want to talk about.

David Loeb – Baird

Do you think that the scope of what they want to talk about includes a permanent rent, permanent changes in the contractual rent as well as how they handle that deferred balance that they owe you?

John Murray

I would rather not say what I think they are thinking. I'm just going to wait until they tell us. I think you're smart enough to know what’s on the table and so I wouldn't be surprised if any of that is discussed.

David Loeb – Baird

This maybe the hardest question for you to answer, but can you give us a little read on what your board, maybe open to or I don't want you to negotiate this on conference calls because it's not the right way to do it. But clearly your independent directors will have to get comfortable with any change in the contractual terms. I just wonder if you could just talk about what the attitude is.

John Murray

The only thing I'm willing to say is that we are open to the discussion. TA is a very significant tenant. And it's obviously a sensitive situation and we are not going to negotiate it on the conference call. So, as soon as assuming if there is some progress made, there will be announcements or updates provided to our investors.

David Loeb – Baird

Okay. I appreciate that. Thank you.

Operator

Thank you. Our next question, we go to the line of Brian Maier from Citadel Securities. Please go ahead.

Brian Maier – Citadel Securities

Good afternoon, John.

John Murray

Hey, Brain.

Brian Maier – Citadel Securities

Couple of quick questions. The capital improvements that are being made at this courtyards and Residence Inn, it seems like a fairly large amount of money. Is that a situation where by there would be rent increases associated with those capital investments?

John Murray

Yes. Improvement that we are making in our Marriott 1 and 2 portfolios, which are 53 courtyards and 18 Residence Inns, are – in some of the hotels they are complete room renovations and others they are just lobby but in both cases as HPT funds, the capital for the improvements, our returns are increased.

Brian Maier – Citadel Securities

And in light of what has been going on with Marriott, how comfortable are you making those investments relative to the hardball they have been playing for the last 18 months.

John Murray

Well, those two portfolios where we are making investments Host Marriott – Host Hotels and resorts is our tenant and those have historically been, couple of our best performing hotel portfolios. And they are recovering at least as quickly as any other hotels that we own.

So, I think we are very comfortable or we wouldn't really be making the investments. We are less comfortable on the other two Marriott portfolios and that's why to date we haven't agreed to make similar renovations in those portfolios.

Brian Maier – Citadel Securities

I mean, I'm guessing if for some reason those were two, the other ones that are not paying in full were to become something else, you would want to reserve that money for a brand conversion, wouldn't that be correct?

John Murray

I wouldn't say that that's the way we are looking at it, because we don't today have that right to rebrand. But we just – the hotels are in good condition, they've been kept up well, it's more of a question in those hotels with whether we want to have the “quote unquote, refreshing lobby in those courtyards or if we want to continue with the more standard lobby that guests have come to know over the years but which are in very good condition”.

So, if we can reach agreement with Marriott on a way forward, we do the renovations and we get paid and we will do it, otherwise are obviously going to stay where they are for the time being.

Brian Maier – Citadel Securities

Shifting gears – can you characterize, how you look at your acquisition activity this year. I guess we are all – I think fairly pleased that you are not changing some of these assets. That some of the pretty high multiples we have seen, but can you give us a little bit color on what you are looking at and if you could and is the product more select serve or more full service?

John Murray

Sure. We've been trying to nurture a couple of potential new relationships in connection with those. We've made a couple of – submitted a couple of letters of intent to acquire hotels. One of those is still outstanding and it's an off-market transaction, if it moves forward we will probably move slowly.

And we've been looking at other potential transactions ranging from small groups of full service urban properties to larger portfolios of 20 or more select service assets. So far we've not been successful because either our price has been has not been sufficiently high, or because of the terms of our agreement are a little more structured than the typical hotel owner.

There have been other hotels – I would add that, a number of the hotels that we bid just haven't traded. So I'm not sure that we are necessarily under bidding. It maybe that everybody is on the same page as us for the pricing and the hotels is not going to trade.

Brian Maier – Citadel Securities

And just one last thing and I will hand it off to someone else. Regarding TA and not the beat a dead horse but being on the call with them, it didn’t seem like there is any real sense of urgency either on their part or your part to get to the table early.

And I'm just wondering why that is, I mean, December will be upon us quickly and next June, July, we’ll be here quickly pretty too and you seem to take decent amount of time once you get to the table to actually iron everything out. Can you characterize why that might be?

John Murray

I would say – I think that's a misperception. I think if we told you we were going to meet tomorrow which we are not, then everybody would be calling us on Wednesday asking us how things turned out. So we’ve decided to let you know that discussions are going to begin and as soon as we have a resolution, or not we will let everybody know.

We didn't just want it to be – to take on any added pressure from third parties beyond the importance of the matter. We recognize and TA recognizes that this is very, very important to both sides and it is a matter of significant focus.

Brian Maier – Citadel Securities

Thanks a lot.

Operator

Thank you. Our next question, we go to the line of Jeff Donnelly from Wells Fargo. Please go ahead.

Jeff Donnelly – Wells Fargo

Good morning, John. I guess for the future, we will call you Wednesday then instead of tomorrow. Question about IHT and you desire to sell some assets. I guess first class, mechanically, can you just remind how more rent is adjusted as you sell either lower note EBITDA producing assets; was it adjusted by the book value of the assets or more of a per key basis?

John Murray

Yeah. I tried to say that in the script. The way it works, without going into too much detail. The returns due to us are reduced based on a formula that works off of the net proceeds. So there is a yield that's a yield factor that's applied to the proceeds from sale. So if that was roughly 8% say and we sold the asset for $100 million then the returns due to us would be reduced by 8 million. Obviously, I'm making those numbers up. It's just as an example.

Jeff Donnelly – Wells Fargo

Right.

John Murray

But that's how it works. Then the hotels go to whoever buys them.

Jeff Donnelly – Wells Fargo

Fine and then, I guess since I am assuming you are selling from the underperforming assets, if you will, my experience is that traditionally when those type of assets come to market they are less priced often when EBITDA type number just because of their low earnings production and more on a discount-to-replacement cost per key basis, I guess, I am curious about your experience and I know you can't speak for these assets, but as you look out in the market today where do you think select service assets that are trading hands in the market are pricing versus replacement costs?

John Murray

Well, I guess, I would say a couple of things; first I would tell you that three of the four hotels that we are selling currently are full service assets. So – and I don’t want to predict where bids are going to come in, but I would say that my experience – our experience selling assets has been reasonably good and we have taken a couple of write-downs on sales in the past, but for the most part we have had gains, I think.

And, so based on prior experience I am not really sure that I can really comment on these four assets, but the multiples and replacement costs that people have been using in justifying other acquisitions that have taken place this year leads me to believe that our expectation for pricing on these for assets is that we are going to – I don't think we are going to be disappointed.

Jeff Donnelly – Wells Fargo

And just one final question on TA or is more a point of curiosity, will you guys be employing advisors on either side? You know, you look at Comps and the marketplace for similar net lease arrangements or what have you, or is it really just a negotiation between the two entities?

John Murray

Present expectations are sort of a negotiation between the two entities. I think when we negotiated – the rent concession agreement, I think both sides engaged special counsel perhaps for the independent trustees, but I don't believe we engaged anybody else then and I'm not even sure we need special counsel right now. So, anyway, so we feel like we understand the business pretty well.

Jeff Donnelly – Wells Fargo

Okay, thank you.

Operator

Thank you. (Operator Instructions) And we now go to the line of Michael Salinsky from RBC Capital Markets. Please go ahead.

Michael Salinsky – RBC Capital Markets

Hi. Good afternoon, guys. John, I think in your comments you mentioned you were in discussions with Marriott right now as well as a few of your operators, just curious if there is any sense if you are willing to break in to some of the minimum return agreements, maybe give up some of the minimum return currently for some of the upside in the future there as you are working through those looking at the capital funding and things of that nature? Is that on the table at all or…

John Murray

Just like I wouldn't want to negotiate the TA terms on our call, I wouldn't want to get in to that on this call – put me on a call – but somebody would – where we get back to Marriott or IHG or whoever if we commented on that I think so, but I think I'm just going to leave it alone. We are interested to have long-term secure relationships with well maintained hotels and I think we are open to any discussions that center around those facets.

Michael Salinsky – RBC Capital Markets

Okay. Fair enough. Second of all, in terms of acquisitions, can you give us a sense of what the pipeline looks like at this point? I mean, is it all due to pricing that you are just not seeing a lot of opportunities or is it really more products on the market? Just give us a sense of what you are seeing in the market currently?

John Murray

No. We are seeing everything from luxury hotels in New York City, to economy hotels in every market across the country. There is loan – big loan portfolios being marketed by a number of groups that I'm sure you guys all know about it. We’ve look a little at some of those.

We've – I don’t think that 500 plus rooms older, luxury property in New York City really fits well with on a standalone basis really fits well with the rest of our portfolio. So, that's, although we’ve seen those sort of assets we are not bidding on as much on those as we are on portfolios in urban locations in good markets but not sort of New York City because that's just not where our transaction structure works well.

In terms of pricing, as I mentioned earlier, it’s hard for me to get a good sense, I think, that we bid on a portfolio of full service hotels with well respected brand companies as the manager and those hotels haven't traded yet and I think I mentioned in the same portfolio on the call last quarter. So I don't know we may have been one of the top bidders, but the seller wasn’t willing to sell it at rational price I am not really sure could be that they didn’t want to structure a deal the way with some of the deal terms that HPT requires in its structure.

Michael Salinsky – RBC Capital Markets

And third question here just – is your in discussions with Marriott and Intercontinental in terms of next year and in terms of corporate rate increases, what’s kind of the tone that you are seeing right now, what are you hearing in terms of rate increases?

John Murray

Everybody wants to get rate increases and when you hear Marriott or IHG talk about it or Hyatt or Carlson, the further up the chain of command you go, the more conviction there is that they are going to get it and further down towards the hotel level you go, the less certainty there is about it. And so every market is different. If you are in Boston, New York, Washington DC, I think you have a lot more backbone about or San Francisco or LA.

And if you are in Dallas or Houston or Phoenix, you don't have as much backbone about rate because of the lot of supply and it’s been particularly a tough couple of years. So it just varies tremendously, but on average I think, everybody is expecting that they are going to get rate increases next year, at least in the sort of mid single digits and it ranges up to nearly double digits depending on the markets and the brands. But it's really all over the board and even within hotel like hotels, whether it's across Intercontinentals or across courtyards, it's all over the board.

Michael Salinsky – RBC Capital Markets

Fair enough, thank you.

Operator

Thank you. Our next question, we go to the line of Dan Donlon from Janney Capital Markets. Please go ahead.

Dan Donlon – Janney Capital Markets

Thank you. Just had a question on the preferreds to be – they look to be trading above pars. You guys consider maybe retiring those and trying to re-issue at a lower price or just taking them down with your line of credit?

Mark Kleifges

Dan, this is Mark. We monitor that, you are right. These are callable – they are at fairly high coupon and as we get into evaluating our capital raising plan for 2011, that’s one of the things that we will obviously consider.

Dan Donlon – Janney Capital Markets

Okay. And then I guess you touched on a little bit with Marriott three and four, but what should we be modeling for 2011 in terms of capital improvements above the FF&E reserve?

John Murray

I think it's too early to say, I mean I think we've averaged probably over $100 million of HPT fund and capital over the past number of years and I think it's safe to assume that that's going to be the same going forward it will be in that at least 50 to 100 million. But we are just literally getting started on next year's CapEx plans. So, I don't have a good answer for you.

Dan Donlon – Janney Capital Markets

Okay. That's it for me, thank you.

Operator

Thank you. We now have a follow-up from the line of Brian Maier from Citadel. Please go ahead?

Brian Maier – Citadel Securities

Hi, John. Just circling back to the acquisition, it keeps coming up, is there a sweet spot size-wise for a deal that you would look at either, kind of, by number of assets, given your size or a dollar amount, I mean, what level of comfort do you have spending in as $200 million to a billion dollars to take down a portfolio of assets? Can you give us some comfort level there?

John Murray

Yeah. I mean we have great capital access, so we have $750 million credit facility with only 125ish out on it. So and we've done transactions – we like to do transactions of at least a $100 million and I think our – we have done them up to in excess of a billion. So we prefer portfolios, we prefer ten or more hotels, for our structure which is a little more income focused then some of the other REITs.

We find that upscale select service hotels have a P&L volatility that matches better with our structure. So, I would say if I had a, say there is a perfect style hotel, we like Hyatt place and we like Courtyard and we like Residence Inns and we like Staybridge Suites and those sorts of assets work well with our structure and we've been bidding on larger full service hotels and smaller hotels as well.

Brian Maier – Citadel Securities

There is very few historically hotel companies that have your level of – have full availability to deploy it at any one time. I guess, with the private funds that have been raised probably a little bit more today than there has been historically, do you find yourself kind of bumping in some of the usual suspects or is there new players out there that you are seeing?

John Murray

Well, as you know there are a few new REITs and I think some of them had some incentives to get their capital invested, quickly. So, I think that – I think – several of them did so. So I think maybe that the edge is off on that, but otherwise I don't feel like we are really running into anybody who is anybody different. It's the same – there is some private equity for certain types of deals. There is REITs and there is some other buyers.

There is middle eastern and information money in certain markets, but I would say that we feel like the – even with the newer REITs frankly the faces haven't changed. It’s just a new name, same group of people. So, it feels like – it doesn't feel like the playing field has changed that much.

Brian Maier – Citadel Securities

Thanks.

Operator

Thank you. And we would now like to turn the conference back to John Murray.

John Murray

Thank you all for joining us today. We look forward to seeing you at Marriott in a couple of weeks. Thanks.

Operator

Thank you ladies and gentlemen that does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.

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