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FelCor Lodging Trust Inc. (NYSE:FCH)

Q4 2007 Earnings Call

February 29, 2008 11:00 am ET

Executives

Stephen Schafer - VP, IR

Rick Smith - President and CEO

Andy Welch - EVP and CFO

Analysts

Patrick Scholes - JPMorgan

Chris Woronka - Deutsche Bank

Nap Overton - Morgan Keegan

William Truelove - UBS

Amanda Bryant - Merrill Lynch

Jeff Donnelly - Wachovia

Tom Schandel - Zest Capital Management

Operator

Good morning. My name is Tia and I will be your conference operator today. At this time, I'd like to welcome everyone to the FelCor's fourth quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Schafer you may begin your conference.

Stephen Schafer

Thank you and good morning. With me this morning are Rick Smith, President and CEO and Andy Welch, Executive Vice President and Chief Financial Officer. Rick will start off with some color on operations and then he will discuss our focus going into 2008. Andy will then discuss the third quarter results and our outlook followed by your questions.

I assume you had the opportunity to review our earnings release and supplemental information issued last night. The supplement can be found on our website, under the Financial Reports tab on the Investor Relations page.

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.

Forward-looking statements are expressions, current expectations and are not guarantees of future performance, numerous risks and uncertainties and 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 filings with the Securities and Exchange Commission. Although we believe our current expectations to be based upon reasonable assumptions, 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 thank you for joining us this morning. Today I want to talk to you a bit about the fourth quarter and 2007, then layout our focus for '08. Then I will turn the call over Andy who will give you some further detail. 2007 was a very busy and productive year for the company. We completed the initiatives that we had set forth and accomplished nearly everything that we had set out to going into the year. In the quarter operationally we achieved our guidance numbers, as well as continuing to make progress on renovations. We also acquired two upper upscale resort properties and finalized the budget process for 2008.

During the year we finalized the initial disposition plan ahead of schedule and at greater proceeds. We finalized the debt reduction plans, continued the progress we have made operationally with further improvements in asset management and also we made tremendous progress on our redevelopment plans including completing the Hilton Convention Center in Myrtle Beach, completing the Royale Palms condominium project also in Myrtle Beach. As of this week we have completed the Spa at Deerfield Beach. We are nearly completed with the additional meeting space at Doheny Beach and we have started the redevelopment of our San Francisco Union Square hotel to a Marriott.

Finally during the year we completed renovations at 53 of our hotels. I would like to give you a little more color on the renovation process. During the year we did major work at 68 of our hotels. This is simply unprecedented in this industry and the team did a fantastic job not only from a quality and cost perspective but also with regard to handling and resolving the unforeseen issues which arose. This is a pretty staggering accomplishment when you are working on so many hotels at one time.

More importantly we hit the return hurdles on the work we completed in 2007 and are budgeted to hit the 2008 portion of the returns as we have previously described to you. Andy will give you some more details on that shortly. As we sit here today renovations are completed at 66 of our hotels, five of which were completed in the first two months of '08. By the end of the first quarter we expect to have 75 hotels completed with the final eight being completed throughout the remainder of the year. Thus, heading into the second quarter, we are basically over the hump and back to normal course renovation spending.

Overall, we are extremely pleased with how this progress -- that this process has progressed. We will have disruption related to the completion of the '08 projects as well as significant disruption related to the redevelopment of Union Square hotel. However, most of the renovation portion of the disruption is related to first quarter and that along with Union Square is certainly contemplated in our guidance.

Now let's talk a little bit about guidance. Certainly market RevPAR growth is expected to moderate fairly significantly in 2008. We spend a great deal of time with our asset managers and with the brands over the last few months, working through a budget process that began in June. While the economy is moderating, we have considered all factors in the budget process.

We ensure that the displacement from '07 was added back, we ensured that we're getting our expected returns on the renovation work. We considered our market RevPAR growth as well as expense increases, some of which were about normal. We also analyzed the customer base for each of our hotels, specifically for the impact to the financial sector as well as any other trending, we are seeing in the economy generally.

Lastly, all of our managers finalized contingency plans in the event of a further softening in the economy. My contingency plans addressed both the expense and the revenue side for each hotel. Overall, we feel as comfortable as we can with the process and our budget given the uncertainly of the economy. Additionally, we feel very good about the position we have put ourselves and to handle whatever may happen with the economy given the condition of our hotels post the renovation plans.

I'd like to finish today by discussing our focus. As you are aware in December we acquired two upper upscale resort hotels. The hotels are been fantastic properties that certainly further our strategy in all respects. And we have a great deal of upside at each of the properties going forward given the additional opportunities as we discussed when we acquire them.

However, we are heading into an uncertain economy and our focus going into 2008 must be cognizant of that. In addition to continuing to execute the current plan by finalizing the renovation plans and redevelopment plans and continuing to improve internally we need to focus very heavily on capacity and debt levels going forward. Putting ourselves in a position to take advantage of opportunities going forward as we potentially head into a downturn is critically important. Those opportunities range from further debt repayment, being able to acquire properties within our strategy to potentially repurchasing shares.

We will look to create the capacity to take advantage of such opportunities in a number of ways. First as we've always said, we will continuously look at recycling capital. We are currently in a process of assessing our portfolio for additional asset sales.

We will do this by assessing the supply and demand aspects of the market and sub markets in which they are located, whether they have stabilized from a value perspective given the recent renovations, future capital requirements and ultimately if the current investment is the best investment for our shareholders. We anticipate bringing further hotels to market during 2008. If we achieve the price targets that meet our objectives will sell them and if we do not we will simply wait until we can.

Additionally, even though we have made great strides over the years with our capital structure we will reassess that as well during 2008 and consider aspects of improvement which would enhance capacity. With the two opportunities I just mentioned and are continued above market internal growth we will be able to enhance our capacity position to achieve our objectives.

Now let's talk about potential uses. From an acquisition perspective we would like to be in a position during the next downturn to take advantage of opportunities, potentially distressed opportunities to acquire properties that further our stated strategy. We look at share repurchase from a strategic prospective as well. We typically trade within a band of 8 to 12 times EBITDA. The times we should consider share repurchase should be when we are at the lower end of that band say 8 to 9 times and when it presents an opportunity to generate better relative returns.

Conversely, we should be willing to consider issuing equity to further our strategy when we are at the high end of the band if the opportunity is compelling. Further given the current environment it would be imprudent to acquire shares by incurring additional debt, but would make more sense with the use of assets or proceeds particularly when there is an arbitrage between selling and trading multiples. These factors could fill inside well as we begin to access further asset sales.

Lastly we could simply use generated capacity to pay down debt and prepare ourselves for those opportunities in the future. We'll continue to asses all opportunities going forward and again in 2008 we will focus on putting ourselves in position to be able to act on them when they present themselves. And with that I will turn the call over to Andy.

Andy Welch

Thanks Rick and good morning. We continue to see positive ramp up trends for the hotels that have completed the renovations and we're earning our expected returns. For the 49 hotels that completed the renovation by the end of third quarter. RevPAR increased 13.9% during the fourth quarter. For these 49 hotels occupancy grew 7% primarily driven by recapturing displaced business and average daily rate grew 7% driven by the remixing of business post renovation.

Importantly, market share for these hotels increased 5% during the quarter compared to their respective competitive sets. Hotel EBITDA increased 400 basis points, hotel EBITDA for these 49 hotels increased 31% compared to the prior year and was 2% better than budget, indicating that the return on invested capital is exceeding our 12% goal.

RevPAR for our entire portfolio of 83 hotels increased 6.2% for the quarter with ADR increasing 6.4%. For the year RevPAR increased 3.3% with ADR increasing 6.5%. During the quarter we had 27 hotels under renovation and 85,000 room nights out of service. For the year we had 68 hotels under renovation and approximately 450,000 room nights out of service. Disruption from our renovation program impacted EBITDA by approximately $2.5 million for the quarter and approximately $18 million for the year.

The good news is that we have completed renovations in over 80% of our portfolio. Rooms out of service and disruption related to our renovation program are down significantly in 2008 and concentrated in the first quarter. Adjusted FFO per share was $0.34 for the quarter compared to our guidance of $0.33 to $0.36. For the year adjusted FFO per share was $2.17 compared to our guidance of $2.16 to $2.19.

Now let's discuss our 2008 guidance. Our press release provides a fair amount of detail regarding our guidance, let me review the high points and add a bit more color. After a very thorough process, we are very comfortable with our guidance and feel if anything is conservative. Our 2008 guidance continues to be impacted by renovations in addition we have taken a conservative approach in looking at the market RevPAR growth. Our expectation of market growth is generally below that of our peers, but let me emphasize we are not seeing a systematic softness or weakness in our overall portfolio.

With that said we fully expect to continue to earn returns from our renovations and recapture disruption, which is assumed in our guidance. Even with 22 hotels under renovation and our Union Square redevelopment, our portfolio in 2008 is expect to generate RevPAR growth significantly in excess to the industry average as we earn the returns from the renovations and recapture related disruption that occurred during 2007.

We expect RevPAR growth from markets to grow between 1% and 3%. We expect the RevPAR related to our return on investment and recapturing 2007 related disruption to grow 6.5% and we expect the negative 1% impact to RevPAR due to 2008 related disruption. On an overall basis we expect RevPAR to grow between 6.5% and 8.5%. We expect operating margins on an overall basis to increase between 50 and 100 basis points. We expect EBITDA at a midpoint of our guidance and a same store basis to grow 9%.

Operating margins and EBITDA are being negatively impacted by above inflationary growth in property taxes, and state and franchise taxes. We have not factored in any savings resulted in actions that our hotels would take as a result of their contingency plans and a softening environment. To get the 2007 EBITDA for our 85 hotels up $273 million we deducted the $18.5 million gain related to the Royal Palms development and the $8 million related to the hotel sold and added the 2007 EBITDA related to the two Renaissance hotels acquired in December.

We expect EBITDA growth of $36 million related to recapturing the 2007 related disruption and earning the 12% return on invested capital. Let me reiterate how we are measuring renovation related return on investment. Our return is measured as the increase in hotel level EBITDA above market growth and after adding back the related disruption. The return is independent of market growth and we would expect the same return regardless to whether market growth was 2% or 5%.

We expect FFO per share at the mid point of our guidance and on a same store basis to increase 32% to $2.35. In addition, to the returns from our renovation program FFO is being positively impacted by lower interest rates and lower overall interest expense. We anticipate spending approximately $150 million in capital expenditures consisting of about $100 million related to finishing our renovation program with the balance related to our redevelopment projects.

For the first quarter we anticipate RevPAR growth of between 4% and 5.5%, adjusted EBITDA of between $69 million and $71 million and FFO per share of between $0.48 and $0.51. The first quarter will be our lowest RevPAR growth quarter for the year and is being impacted from completing the renovation of 15 hotels, which is negatively impacting RevPAR by approximately 1.5% and the shift of the Easter Holiday from April last year to March this year.

We expect RevPAR growth to continue to improve over the next several quarters as a result of the renovation program. In January our RevPAR was up 7.4% versus the industry of 3.8% a 360 basis points difference. Since January was one of the busiest months for renovations for 2008, we are tracking inline with where we expect to be in terms of the variance to the markets.

Now let shift to dividends. As we've discussed on previous calls, our dividend policy has been to increase our dividend overtime and stabilize it at a level that could be maintained through a downturn in the economy. At the current level of $0.35 per quarter, we have reached a stabilized level. Although the annual dividend for 2008 is slightly outside our stated FAD payout range based on our guidance. We have plenty of coverage and our payout ratio is below 100%.

When we set the dividend, we have always considered the continued growth and operating performance from the renovation program. If you look to 2009 when we have earned the returns, recapture the remaining disruption, Union Square is on line, our payout ratio should be at or below the low end of our payout range of 75%. In the future, when we are at or below the low end of our payout ratio, we will consider paying a special dividend.

Our balance sheet, we have spent the last two years strengthening our balance sheet. We have reduced debt by $400 million with proceeds from assets sales. Last August we increased our unsecured line of credit from $125 million to $250 million. We significantly lowered our borrowing rate, improved the financial covenants and extended the maturity.

Last month we closed on a term loan with our bank group to refinance a maturing joint venture CMBS facility. We were able to increase the size of the facility, while reducing the interest rate to LIBOR plus 175 basis points. Our only maturing debt in 2008 is a $15 million single property mortgage this August. Pro forma leverage is just over five times which includes the two Renaissance acquisitions. Our fixed charge coverage is over two times. We have cash of $58 million in excess to our $250 million line of credit.

Our approach on interest rate management is to have a portion of our debt to be at floating rate. As we believe it is a natural hedge to the lodging cycle. This has played out as the softening economy has led to several interest rate cuts, approximately $665 million or 45% of our debt is at floating rates.

We have interest rate caps in place on $425 million of this debt and are analyzing swapping some portion over floating rate debt. On a weighted average cost of debt for 2008 based on the forward LIBOR curve is approximately 6.6%. This compares to our average cost of debt of 7.2% at year end and 7.8% for the entire year 2007.

Let me make a few overall comments about 2008. Within the next 35 days we will have completed renovation to 75 of our hotels or 90% of the portfolio. We will clearly be over the hump. We have contingency plans in place at each hotel and with each management company. Certain hotels have already initiated Phase I of their contingency plans. We are focused on preserving and creating capacity for future opportunities.

Looking ahead to 2009, we will have completed our renovation program and earned the remaining returns related to the 22 hotels completing their renovations this year. Our Union Square redevelopment will be complete and opening in early 2009 as a full service Marriott. We expect Union Square to be one of our top producing EBITDA hotels in our portfolio. We will recapture the $8 million of 2008 related disruption. We expect RevPAR growth to again be in excess of the market. We expect our capital expenditures to return to maintenance levels as we start in our 20 year capital plans of each of our hotels.

In addition, we'll continue to pursue a number of redevelopment opportunities. Finally we expect to continue to recycle capital with further asset sales and improve the overall quality of our portfolio. Thank you and we are now ready to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Patrick Scholes for JPMorgan.

Patrick Scholes - JPMorgan

Hi good morning I have a number of questions here. Can I get a little more color on how your CapEx spend will breakdown by quarter and a little bit more color as well on the timing of renovations and degree of renovations beginning in the second quarter of this year?

Rick Smith

Hi Patrick its Rick. I can give you a little bit of color on this, we can get back to you off line with specific detail. We are finishing 14 hotels or so in the first quarter. We will finish three in the second quarter, the rest will be kind of spread out over the year. So of the approximate $100 million of renovation related capital that we'll be spending. Around 60% of that will be in the first quarter. Now from a timing standpoint some of those payments might go over into second quarter a bit. About 60% of that will go in the first quarter and then rest of it will be kind of spread throughout the rest of the year.

From a redevelopment standpoint, we are going to be spending more heavily on Union Square in the second, third and fourth quarter then we will on the first. First is kind of a finalizing, planning and things of that nature. So we'll have of that piece of it, which is the biggest piece of the redevelopment part, we will be spending most of that in the second, third and fourth quarter.

Patrick Scholes - JPMorgan

Okay, thanks. That's leads into my next question. You mentioned this year approximately $100 million of renovation and redevelopment capital. I think forward into 2009, this year you're $150 million of CapEx. Is it safe to assume that the run rate after or beginning in 2009 will be closer to $50 million to $75 million?

Rick Smith

Yes, it's safer to assume that. But let me tell you the process that we're going through and then we'll go from there. We will have by the end of this year, we will have approved by the Board, 20 year plans on every single one of our assets. So, that plan will dictate what it is, but certainly as we come out of the renovation plan that we see the run rate of that brought down significantly, yes. What you have to look into, I mean, I would look at it as 6% is where we're focused on '09 forward from a renovation standpoint. And we will continue to have some redevelopment opportunities as well. So that would be added to the 6%, but that's basically the best way to look at it going forward.

Patrick Scholes - JPMorgan

Okay. Just a couple more questions here. You mentioned the potential for asset sales and maybe arbitrage opportunities with purchasing your shares back. Give a sense of when you look across your markets, what sort of EBITDA multiples are being paid for assets similar to the once in your portfolio?

Rick Smith

Well, it's tough right now. There's not a whole lot of transacting happening. I think there is some interest in there with smaller players on the types of hotels that we'd be looking at selling. But my guess right now and this is based on -- we are still going through the process based on initial indications we're at somewhere around the 10 times multiple on averages is what we are looking at.

Patrick Scholes - JPMorgan

Okay. So there may be some arbitrage opportunities in there if you decide to go that route?

Rick Smith

Yeah. And just to give you an indication of the kind of markets. I mean the things that we would look at would be similar to what we had looked at in the past. I mean, we will look at concentration risks markets. There are a few markets where we have a number of assets we'd look at that, we'd look at what's going on in those markets. So those markets moving away from us from a demand generator standpoint or they are moving closure to us what is the overall return going forward considering the capital we have. But then down the road given what we have already done it's probably going to be a few years, and when do you get to that stabilized value based on coming out of renovations. So that's the process that we are currently going through.

Patrick Scholes - JPMorgan

Okay. I will ask one more question now and then I may ask some more at the end of the call. When I look at your 1% to 3% of RevPAR growth you say for your markets. What is your sense on the RevPAR growth of 1% to 3% specifically in your markets. How does that compare to your overall sense for the entire marketing or is 1% to 3% going to be probably higher than the overall. Do you think your markets will out perform the US in general?

Rick Smith

I don't think that our markets will out perform the US in general, we are not contemplating an out performance in the market growth. We have seen a little bit of slowdown in some transient leisure in some of our markets and haven't really seen much in group yet. I think that given our markets I would say that it's at or maybe on the lower end of the range of the overall US.

Patrick Scholes - JPMorgan

Okay thanks. I may comeback with another question at the end of the call.

Rick Smith

Okay thanks.

Operator

Your next question comes from Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank

Hey good morning guys

Rick Smith

Hey Chris.

Chris Woronka - Deutsche Bank

Couple of questions. First one is on visibility kind of for the 2Q through 4Q can you share with us anything. I know you mentioned you're comfortable with the guidance. Do you have a lot of that your group stuff on the books or how are your thinking about in terms of potentially capturing some trade down business versus potentially losing a little bit a year. Your core transient, how should we look at that?

Rick Smith

Well I mean, the first thing that well let me backup the visibility is not as great as we'd like. Obviously we don't really know what's going to happen with the economy, but what we did was we took a hard look at the sectors we know are being affected like the financial sector. Look to the customer base at each of our hotels as it relates to the financial sector. Charlotte, Tyson's, Jacksonville, markets of that nature that we have business on the book either directly or having a ripple effect from a market standpoint that is affecting us.

So we took all of that into consideration and I can tell you that tentatives are up in the third and fourth quarter. Esmeralda and Vinoy, so pace looks good there. I can also tell you that those two new hotels combined, we're ahead of budget in January and look to be ahead of budget in February so that's all good signs but we're been very cognizant of the fact that we know people are getting hit out there.

So it's hard to picture finger on exactly what it is. Now to get to the second part of your question, I think typically, what you'll see as leisure people -- the contingency plans that we have in place are not just call cost side things. And that's what I was trying to mention in the script. But the prepared comments at the beginning, but I think that what we are also seeing are good plans from a mix management standpoint and remixing in creditor programs and how to go after certain business, if we start to see that leisure falloff.

As I mentioned, we have three or four markets where we've seen it a little bit, but it hasn't been ramping yet. So, it will be work in progress as we go through the year depending on what does happen in the economy. But we do feel like we're -- we've taken everything that we possibly can into consideration. We do feel good about the process and the budget given what we're seeing, and we'll just have to kind of measure that visibility as we continue forward.

Chris Woronka - Deutsche Bank

Okay, thanks. And then on the kind of on RevPAR and margins, I am just trying to kind of back into your guidance. What's the rough split of occupancy ADR that you're assuming and can you translate that into kind of a cost per occupied room. Because I know you're going to get a fair amount of occupancy pickup which would probably flow through less. And just kind of what's embedded in there in your guidance?

Andy Welch

If you look at the mid-point, it's clearly weighted towards rate from the renovation program. At the mid-point of 7.5, it's about 5% rate and 10.8% occupancy.

Rick Smith

Yeah the other thing Chris, that's effecting us the $8 million in disruption and on the market side of things the increase in expenses in excess of market growth at 3% versus 2%. Obviously we have smaller cash balance for this year. So we have less income when you look at the bottom-bottom line and look at EBITDA margins. So it's having a reasonably big effect on how margins are flowing through. We feel pretty good about flow through from a standpoint of GOP at the properties. So it's really all the other stuff that's really affecting that, which after we get through those renovations and get Union Square back on line going into '09 they will be past all that.

Chris Woronka - Deutsche Bank

Okay. Got it thanks.

Operator

(Operator Instructions). Your next question comes from Nap Overton with Morgan Keegan.

Nap Overton - Morgan Keegan

Yeah. Just a couple of things, one Rick you mentioned a 10 multiple that you've kind of thinking about in terms of the dispositions. Is that a multiple of EBITDA or a multiple of free cash flow after a reserve?

Rick Smith

Well, that's a multiple of EBITDA but that's very much, I mean that's kind of some initial stuff that we are thinking but we haven't been to the market with anything we haven't finished our internal analysis. So, hopefully we can be a little better Nap, but that's kind of our initial blush given the credit markets and what people can finance and so forth from there standpoint right now.

Nap Overton - Morgan Keegan

Okay. And I think I know the basic response to this but I had thought that the timing of your major assets sales was extraordinarily good, because you were selling into a very strong market flushed with capital and so turn it around and talking about selling some additional assets in 2008 or in the next 12 months or so just a little bit more what you're thinking is all about the balance sheet?

Rick Smith

Well, I think that we are going to always look at and continuously at this company look at the recycling of capital. But its got to make sense and as we go through this year we are in a lesser advantages environment from a sellers perspective. Absolutely and its not a prior sales not anything we have to do its just we will as we continue the process that we go through every year as hotels start to stabilize from a ramp up perspective after renovation to the extent that we think we can do better from an alternative investment standpoint.

Whether its temporarily paying down debt to prepare for going into the downturn or utilizing some of those proceeds to repurchase shares and other proceeds. Once you're in the downturn to take advantage of some opportunities to further the cause or the strategy as it relates to improving the overall quality of the portfolio. Then those are things that we always think we should be looking at. The environment is a little tougher and we just simply won't build forward if we're not able to achieve the pricing objectives that allows us to do those things.

Nap Overton - Morgan Keegan

Okay and then just one another question kind of big picture trying to take a step back and that is that I believe you spent $266 million on the renovations and upgrades in 2007. I think that number was a $108 million in '06 and that would put you 445 or so to-date and I am not sure whether that includes the Royal Palms or not which was I think $75 million?

Rick Smith

Well it includes the equity portion of the Royal Palms and it also includes like you were talking about some of the redevelopment stuff. You also have to understand it. Like when we talk about $445 million three year renovation plan that's not always going to coincide exactly with kind of reported spend dollars. For example, we had a three year plan '06 to '08, but there were numbers reported as spend in '06 that were part of the '05 carryover and things of that nature. So it's not always really easy to reconcile that.

The primary important thing to remember is that we've been within 5% or 6% of budget on the initial 430 and so that's increased to 440, 445. And we have been on budget with regards to all of the redevelopment stuff that we've done to-date. So we're pretty much in line with where we need to be. And given the scope of the work on the big three year plan, I am extremely pleased with where we came out on that. But there are some other factors that plan that out when you start to looking at reported actual dollar spent.

Nap Overton - Morgan Keegan

Okay, thanks a lot.

Rick Smith

Thanks.

Operator

Your next question comes from William Truelove with UBS.

William Truelove - UBS

Hi, guys.

Rick Smith

Hey, William.

William Truelove - UBS

You talked about the balance sheet and the flexibility, but the amount of CapEx you're spending. Do you need to increase debt levels to complete your CapEx program for this year or on a cash flow basis?

Andy Welch

Willy, we'll draw on the line a bit this year, yes.

William Truelove - UBS

Okay, thanks.

Andy Welch

As part of the redevelopment.

William Truelove - UBS

Okay.

Operator

Your next question comes from Amanda Bryant with Merrill Lynch.

Rick Smith

I think we cut Will off. But go ahead Amanda we'll get back to Will. Sorry

Amanda Bryant - Merrill Lynch

Can you hear me?

Rick Smith

We can hear you.

Amanda Bryant - Merrill Lynch

Great, thank you. Now, let's talk a little bit about competitive supply in your respective markets. If you could talk a little bit about which markets are better or maybe worse positioned as you look out into 2009? Thanks.

Rick Smith

Okay. Well we've had some new supply not a great deal, we had some new supply in some of our markets in a couple of our sub markets in Florida and Deerfield, Illinois and Lombard, Illinois and so we have seen some issues related there. The teams have fought through that pretty well and are currently fighting through that. We have seen some impact in handful of our markets. We don’t have a great deal of stuff in the pipeline that we are aware of that will effect our markets directly from the supply standpoint. Does that answer your question?

Amanda Bryant - Merrill Lynch

Yes. Thank you.

Andy Welch

Well, Amanda too I might add that if the projects are not already started with what the capital markets are there are definitely projects particularly from a full service upper upscale perspective not getting billed.

Amanda Bryant - Merrill Lynch

Right understand thank you.

Operator

Your next question comes from Jeff Donnelly with Wachovia.

Jeff Donnelly - Wachovia

Good morning guys.

Rick Smith

Good morning, Jeff.

Jeff Donnelly - Wachovia

Rick, what are the I guess economic triggers specifically that you are watching that perhaps we could also look at. So I was to know when you are going to put your contingency plans into full effect and I guess as add-on to that what's the risk of doing that too soon on your part?

Rick Smith

Yeah, I think the risk of doing it to soon. I mean, it depends on which portions of the contingency plans are looking at. I think from a revenue side standpoint the risk of implementing contingency plans to soon gets to panic. I mean you start to remix your business to a lower rated piece of business because you are afraid something's going to go away that ends up not going away. Then you've remixed your business in a way that you shouldn't have your revenue falls and your EBITDA falls.

And from a cost standpoint I think you really have to be cognizant of customer service as well and we have to be careful about it. I want to make sure that we really understand the trends in the market before we kind of kick off any kind of contingency plans and its need to be a very thoughtful process and not a panic reaction to something that's going onto the market temporarily.

So we want to be very careful about that and that will be the process. The triggers will be different for every single market depending on what's going on in the market but it will basically be related to demand and what's happening with that and what trends we're seeing there, but we will keep a close eye on that as we go throughout the year to make sure that we are not over reacting pretty maturely but that we're reacting appropriately at the appropriate time.

Jeff Donnelly - Wachovia

This might be difficult but are you able to quantify for us I will call the upside, downside from that meaning that by continuing the sort of study state the way you are now. You think you generate X more in EBITDA or revenues and conversely if you put in your contingency plans today you can potentially drop your EBITDA by X?

Rick Smith

That's not very difficult to gauge sitting here at this point. Obviously the plans that we have in place today we think are the best plans to have in place both from a direct sales effort perspective as well as how we are running the business from an efficiency standpoint. Given what we are seeing today, so really the contingency plans -- there are a number of things in a contingency plan and it will be a stepped process and it will depend on various factors and circumstances that are happening.

The good news is that we can basically turn things on very, very quickly with the plans completed. I can tell you when I was when we had a lot of experience with this, we within about two months we've got about $100 million out of the business. Now that was a different type of business, but as long as you have the plans in place and you are ready to move on step one of the plan and then gauge where that's going before you go to step two. Then I think that we can be as efficient as possible. But I don't think I can give you how much upside or downside today sits there.

Jeff Donnelly - Wachovia

And just the one last question on that point. How much of that decision I guess a pretty contingency plan, is made by as owner versus you having to get the buying of the brands to take action?

Rick Smith

It's a team effort. The brands have the contingency plans. We've talked to them about and we've gone through them and so forth -- and we work very closely with them. We have very strong relationships with our partners and it will be a mutual decision. I don't look for there to be a ton of push back on it, though, if that's what you mean.

Jeff Donnelly - Wachovia

Okay. Just a few more quick questions, I guess for you or Andy. Are you able to isolate, I'll call it the same-store EBITDA impact in '08 and maybe the upside in '09 from the deflagging to a hotel 418 and the reflagging as a Marriott?

Andy Welch

Yeah Jeff, when you look at the '08 performance of that, we're contemplating $4 million disruption. When that thing gets converted to a Marriott, I'll put it this way in 2000 and 1999 when that was a Crown Plaza, its peak EBITDA was in the $8 million to $9 million range and our underwriting certainly forecasts that's exceeding those targets. It may not be the first year out that we're very excited about the performance of that hotel going forward.

Rick Smith

As Andy said, the upside there in addition to getting back that displacement and then you have the upside in addition to that. So we feel really good about that and that's part of the thing we were talking but as it relates to margins and stabilization from a dividend coverage standpoint. So we feel very good about that project going forward.

Jeff Donnelly - Wachovia

And last question actually, Andy pertained over $140 million refinancing. Can you talk about what the LTV and the debt service coverage that run rates we are looking for and that refinancing and I guess the second part is if you want to use that financing maybe as a model for your secured mortgage maturities in '08 and '09? Does that transaction give you any pause around your ability to refinance at a comfortable level of proceeds, your other maturities?

Andy Welch

That's a good question, that facility was 65% under valued about a one to four coverage, that was financed in the bank market. As you know, the CMBS markets effectively shutdown today. We feel very good about the relationships we've established over the years with banks and insurance companies that we've clearly have access to capital. From a leverage perspective on a secured basis we generally try to stay in that 65% to 70% range not the 90s. So feel good that we have access to that capital although there are limitations on overall perspectives.

Jeff Donnelly - Wachovia

Did you have to provide recourse or no?

Andy Welch

No.

Jeff Donnelly - Wachovia

Okay, great. Thank you guys.

Rick Smith

Thanks, Jeff.

Operator

There is a follow-up question from Patrick Scholes with JPMorgan

Patrick Scholes - JPMorgan

Hi. One more question here. On your 6.5% to 8.5% RevPAR growth and 50 to 100 basis points of margins, I thought the margin range was maybe a little bit a lighter than what I was expecting. I think you mentioned some other stuff in there in your costs that were accelerating at a greater rate from '07 to '08. Can we get little more color on that if that is in fact correct?

Rick Smith

Yeah, Patrick first just realize our margins are being negatively impacted by the $8 million of disruption. So take that in perspective Property taxes on a same-store basis we think increasing about $3.5 million state and franchises, taxes about $2 million. You have got

Stack in franchises, taxes of about $2 million and you have got certain hotels that are earning higher incentive fees or coming out of the renovation program that we are getting lower levels during the renovation program. Those are the big items.

Patrick Scholes - JPMorgan

Okay thanks.

Operator

There's a follow up question from Jeff Donnelly with Wachovia.

Jeff Donnelly – Wachovia

Hey Andy. Just one more question I will ask you on that actually on the refinancing again. How were lenders determining value when you came up with the 65% LTV either what sort of cap rate or EBITDA multiple over there you think?

Andy Welch

Well those picked had that once had appraisals done and I would say there was a fairly good level of EBITDA multiples. I mean I have not seen a big contraction in value there.

Jeff Donnelly - Wachovia

So effectively lenders might be I guess my point is that lenders are underwriting valuations that maybe were more consistent with what was observed in 2007 in terms of transaction pricing?

Andy Welch

Yes.

Jeff Donnelly - Wachovia

Hey great thank you.

Operator

(Operator Instructions) Your next question comes from [Tom Schandel with Zest Capital Management].

Tom Schandel - Zest Capital Management

Hi good morning.

Rick Smith

Good morning.

Tom Schandel - Zest Capital Management

I was wondering if you could help me out in drilling a little bit further down on the first quarter. You mentioned two effects of why would be your slowest RevPAR growth quarter of the year. One was disruption and one was the shift in the Easter Holiday and I was wondering if you could quantity the effect of the each of those for me if possible.

Rick Smith

Yeah the first quarter we have 15 hotels been completed in the renovation program. The EBITDA impact from a disruption standpoint between $2.5 million and $3.5 million. And Easter, I don’t have that number.

Tom Schandel - Zest Capital Management

Okay. And I gather just because of where it falls, Easter's not a positive thing for the hotel industry, I guess people stay at home?

Andy Welch

Right, particularly that entire week, both sides at the same day of the Sunday, you have folks come home and then travel lighter on.

Tom Schandel - Zest Capital Management

Got you.

Rick Smith

The impact there is that Easter's is in the first quarter this year and was in the second quarter last year. So softness is in March that converts so that you'll a very good April that makes up for it. So, on a blended basis we are still expecting growth over those two months, if there is a shifting for that one week.

Tom Schandel - Zest Capital Management

Terrific, thanks.

Operator

There are no further questions at this time.

Rick Smith

Okay. Thank you very much for joining us today.

Operator

This concludes today's conference. You may now disconnect.

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Source: FelCor Lodging Trust Inc. Q4 2007 Earnings Call Transcript

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