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FelCor Lodging Trust Incorporated (NYSE:FCH)

Q2 2012 Earnings Call

July 25, 2012 11:00 am ET

Executives

Steve Schafer - VP, IR

Rick Smith - President & CEO

Andy Welch - EVP & CFO

Analysts

Eli Hackel - Goldman Sachs

Nikhil Bhalla - FBR

Patrick Scholes - SunTrust

Tim Wengerd - Deutsche Bank

Josh Attie - Citigroup

Susan Berliner - JPMorgan

Smedes Rose - Keefe, Bruyette & Woods

Operator

Good morning, my name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to FelCor’s second quarter earnings conference call. (Operator instructions) After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Steve Schafer, you may begin your call.

Steve Schafer

Thank you and good morning. With me are Rick Smith, President and CEO; and Andy Welch, Executive Vice President and Chief Financial Officer. They will address the current operating outlook 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. These forward-looking statements are expressions of current expectations and are not guarantees of future performance. Numerous risks and uncertainties in the occurrence of future events may cause actual results to differ materially from those currently expected.

These risks and uncertainties are described in FelCor’s filings with the SEC. Although, we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be attained and that actual results will not differ materially. And with that, I’ll turn the call over to Rick.

Rick Smith

Thanks, Steve and good morning everyone. We had a good and productive second quarter. Our focus continues to be on the five [guidelines] that I outlined to you both on previous calls and during our extensive road show. They are operations, investor communications, asset sales and using the proceeds to reduce debt, pay the accrued preferred dividends, further strengthening our balance sheet and our redevelopment projects.

Operationally, we had a strong quarter. EBITDA was $66.2 million. This was at the high end of our expectations and approximately 1 million above consensus. FFO per share was $0.18 and equaled to consensus. RevPAR was in line with our budget at 5.9% with ADR representing more than a 100% of that growth.

I feel good about how we ended the quarter, particularly given that we had disruptions at these hotels under renovation, which had an occupancy decline of 4.4%. RevPAR growth improved sequentially throughout the quarter as we completed most of the renovation projects resulting in a very strong June which had an increase in RevPAR of 9.9% with rate of 8.3%. Lodging fundamentals remain strong and we’re experiencing strength in most markets. As such we expect the trends to continue, which accounts for our increase in operational guidance for the remainder of the year.

Our strongest markets were San Francisco, San Diego, Tampa, Philadelphia, Boston and New Orleans, which on average increased RevPAR 12%. San Francisco continues to perform very well and the Marriott Union Square continues to be well above budget with a 13% increase in RevPAR and we expect that to continue. The markets where we had challenges during the quarter were Atlanta, South Florida and Orlando.

Atlanta suffered a general drop in business in the airport market while other Atlanta properties did well. Our biggest area of focus this year operationally has been on revenue management across the portfolio and particularly in the Embassy brand and the Morgans hotels. The plans in both cases are bearing fruit. The Hilton managed hotels had a 6% increase in corporate rates which was slightly ahead of budget.

The Morgans hotels had an 11% increase in corporate rates and a 16% increase in group rates. Overall, rate at the two Morgans hotels grew 10%, which was 2% ahead of budget. Occupancy declined at the Morgans hotel due to the redevelopment work and while this will continue through the remainder of the year, the two hotels are expected to generate an average 10% RevPAR growth during the third quarter.

Overall for the portfolio, all segments had an increase in rate led by corporate negotiated which increased 8%. Our focus for the remainder of the year remains on revenue management and driving rate throughout the portfolio, not only for 2012 results but also to set the tone importantly for 2013 RFPs. One final note on ops before I turn to other items.

During the second quarter, our EBITDA margins improved only 62 basis points. This was primarily driven by the hotels under renovation which experienced a 35 basis point decline in margins. We full expect margin improvement to be in excess of a 150 basis points in the second half of the year.

Turning to other items. We completed our three months road show during the quarter and hit every major market. The new investor presentation gives investors a much better roadmap as to where we are headed and how we will get there and it was well received. We anticipate another road show this fall to some additional or secondary markets as well as some follow up in the markets previously visited.

As you are aware, we closed on the six hotel portfolio sale at the end of May. The $103 million in proceeds allowed us to pay 73 million in debt and related costs and provided 30 million to pay a portion of the accrued preferred dividends. That 30 million will be paid on July 31st, and we are anticipating that we will pay the remaining balance with proceeds from asset sales by the end of the year.

To refresh your memory, we are selling 39 hotels. To date we have sold 15. We have 10 hotels currently in the market, the remaining 14 are expected to be brought to market later this year or in early 2013. Currently we have one hotel, the Embassy Anaheim-North under hard contract as we have previously disclosed. We have two other hotels in our contract which are set to go hard in late August and close in late September.

We are in varying stages of negotiation on most of the remaining hotels on the market, inclusive of initial discussions on a small portfolio of hotels and as deals come together we will be updating you. Assuming we only sell the three hotels currently in the market we will have sold nine hotels for approximately $200 million this year which is ahead of schedule.

In addition to the use of assets of proceeds to reduce debt, we are also busy working on other aspects of the overall balance sheet restructure. In conjunction with the sale of the hotels currently under contract, we anticipate pay off the remaining 88 million of CMBS debt that matures in 2013. Additionally we anticipate closing on a refinancing of the Prudential Mortgage loan is September at a rate of 4% approximately lower than the current rate which will lower our cost of borrowing and greatly improve our maturity profile.

This will leave us with two primary pieces of debt to address going forward to complete the restructure of the balance sheet. The Fortis loan that we can full prepay in May of 2013 and the 10% notes that mature in 2014. As I have said before, we will either pay off the Fortis loan with assets of proceeds next year or if rates remain fairly constant, we will potentially refinance the Fortis loan to lock in the low rate for the long term and preserve excess proceeds coupled with assets of proceeds to address the 10% notes in 2014.

Before I turn the call over to Andy, I would like to update you on our renovation and redevelopment projects. We completed work at 9 of the ten hotels undergoing renovations and redevelopments this year. The lone remaining hotel is Morgans. Due to a delay in permitting with the city which we anticipate receiving very soon, we expect to complete the redevelopment of the fitness area, additional guest rooms and F&B area by year end.

The additional displacement is included in our new guidance. The two redevelopment projects, the Fairmont Copley Plaza and the Embassy Suites, Myrtle Beach are finished and look fantastic. The restaurant at the Copley opened this month and I couldn’t be more pleased with the finished product. RevPAR increased 12% during June and we expect similar growth in the third quarter and more than 20% growth in the fourth quarter.

While we had some displacement during the quarter, we expect our portfolio to benefit from the improvement at these hotels as well as our newly acquired hotels which will generate above market growth going forward.

RevPAR at newly-acquired hotels and redevelopment hotels increased 16.4% in June and we expect that to continue as I said. The [news] is progressing in accordance with the plan including the budget and project timeline. The core and shell work has begun and we expect to begin the construction of the interiors later this year. We are working with a consultant related to hiring a GM and director of sales and marketing in order to proactively begin the sale and marketing process, and building corporate customer relationships far ahead of the opening late in 2013.

Additionally, our financing will be better than it was initially underwritten. We have solidified the terms of the $85 million senior debt fees and we expect to finalize the $45 million EB-5 portion in September. And with that I will turn the call over to Andy.

Andy Welch

Thanks Rick and good morning. Rick’s remarks covered an update on the five items central to our value creation strategy. I will provide a bit more color and detail around his comments and then focus on the effort revision to our guidance.

Regarding operations, we are pleased with the RevPAR and revenue growth during the quarter. Moreover, adjusted EBITDA was at the high end of our expectations. While hotel EBITDA margins increased only 62 basis points. We had two non-recurring factors impacted margins during the quarter and don't expect those to impact the portfolio going forward.

First, we had eight hotels under renovation and redevelopment at some point during the quarter. Hotel EBITDA margins for those hotels declined 35 basis points compared to the prior year. We completed all of those renovations as of July.

Second, general liability expense increased $750,000 during the quarter partly due to credit realized in the prior year. Excluding these two items, hotel EBITDA margins would have increased a 123 basis points. We continue to do a good job on the cost side despite the two items I referred to.

Cost per occupied room was $63.53 which was more than a $1 lower than budget. Overall flow through was strong during the quarter, up more than 100% of budget and 42% over prior year.

Now let's turn to the balance sheet, our balance sheet remains a very high priority in our long-term plan. We continue to make progress strengthening our balance sheet by paying accrued preferred dividends, reducing leverage and refinancing debt to lower our average interest rate and stagger debt maturities.

We are using the proceeds from the six hotels sold during the second quarter and the three hotels currently under contract to repay $158 million of mortgage debt including the $88 million CMBS which will eliminate our loan debt maturity through 2013.

Additionally, we will pay our accrued preferred dividends. Proceeds from additional asset sales will be used to further reduce our debts after repaying any underlying mortgage debts. Rick mentioned the refinancing of $108 million mortgage line of prudential that we expect to close in September.

The current loan has a loan-to-value in the 30% to 35% range is secured by seven hotels carrying a 9% fixed interest rate and matures in the spring of 2014. We are close to finalizing terms and expect the new loan or combination of loans will be signed in the area at $160 million, have a loan-to-value of [165%] to be secured by five hotels on a [non-cross] basis and that in general result in encumbering two current collateral hotels. We will have a maturity of 10 years and have a fixed interest rate at or below [5%].

The debt marks have actually improved somewhat since our last earnings conference call. We made strong interest on both CMBS providers and light companies. I now expect that our overall proceed will be slightly higher and the interest rate will be at least 25 basis points lower than what we expect at 90 days ago.

Rick discussed our approach to our many pieces of debt to be refinanced or paid off. Let me comment on the finance we are putting in place for the Knickerbocker redevelopment. Due to the very attractive terms offered through the immigrant investor program, also known as EB-5, we’re putting in place a capital structure that includes a senior mortgage and a subordinated preferred equity component.

We have received commitments for an $85 million mortgage on Knickerbocker. The term will be up to 42 months and pricing will be LIBOR plus 4% with no floor on LIBOR.

We’re also raising $45 million in financing through EB-5. These financial restructured is preferred equity and be subordinated to the redevelopment line. The preferred dividend yield is 3.5% fixed and is redeemable in five years.

We expect to close the senior finance in September and begin receiving proceeds from EB-5 financing next spring. I am very pleased with the capital structure we’re putting in place. The blended financing cost will be roughly 4%.

Finally, let's talk about RevPAR revision to our guidance. We are increasing our 2012 operating outlook to reflect second quarter results and higher RevPAR growth for the second half of the year. We now expect RevPAR growth in the second half of the year to increase to 26% and 9% driven by strong double digit growth at our newly acquired and recently redeveloped hotels.

As a result, we are increased in the EBITDA guidance from improved operations by $3 million on a low end and $1 million on a high end. We are also raising our guidance to reflect the update on timing of asset sales by $4 million in a low end and $2 million on the high end.

For guidance purposes, we continue to assume the sale of 12 hotels during the remainder of the year, the hotels are comprised of nine currently marketed for sale. One hotel is scheduled to be sold in August and the two additional for which we have received unsolicited offers. The sale of the Embassy Suites-Anaheim is assumed to occur in August and the sale of the two hotels under contract is expected to occur at the end of the third quarter.

For the nine remaining hotels, the low end of our outlook now assumes the sales occur near at the end of the third quarter. The high end of our outlook now assumes the sales occur near the end of the fourth quarter.

Overall, the low end of our guidance is increasing by $7 million while the high end of our guidance is increasing by $3 million. And again, the improved operations from hotels are $3 million and $1 million respectively.

Page five of our earnings press release provides the table of reconciles our 2012 adjusted EBITDA outlook. Thank you and we will now take your questions.

Question-and-Answer Session

Operator

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

Eli Hackel - Goldman Sachs

Just two questions. One just on the remixing in the Morgans portfolio. Could you just a little more color I know you are still doing some innovations what the reaction is as different cooperate so far, and trying to get some higher rates into those hotels?

And then second just on the timing of the asset sales. I am a little bit confused, it seems like you are shifting on the sales a little bit move by half a month back, is there anything changing there and how that flows through into the EBITDA? And also just the confidence level you have at all nine of those hotels will close this year? Thank you.

Rick Smith

Let me take the second part first and then we'll come back to the Morgans. We feel really good about everything. We were very aggressive. When we set our guidance for the second quarter I mean after the first quarter in May, what we did was we were very aggressive on the timeline so that with the low and then less aggressive on the high both of those move back a little bit. But we always knew that there was likely movement and that it would move in all with that direction.

So we have no issues with the assets or process. Things are moving along, we are having discussions with everyone. I mean on every asset and those for the most part have been productive. We still feel like there is a very good chance and all of them will sell during the course of this year, and we have seen nothing to deter that.

We have you know we got three under contract now. So we feel good about the remainder going on, some of the conversations are there may be one or two that lag for the remainder of the year but we feel pretty good about the process anyway and as far as the first commentary, corporate REITs were up at Morgans 10%; we feel very good about the plan that has been put in place, we've been increasing share, we have been changing the mix, taking a lot of discounts, starting to move the discount business that we had built up way too high at these hotels or that have been built up way too high at these hotels.

And so we feel great about the plans, we feel good about the personnel that has been added there both from a corporate standpoint and from a property level standpoint, on the revenue management and sales side and so everything is clicking and since we can get the redevelopment done, but once we get the city permit that we are waiting on, we feel very good about the hotels moving forward.

Operator

Your next question comes from the line of Nikhil Bhalla with FBR. Your line is open.

Nikhil Bhalla - FBR

Yeah, thank you, just a question on the brand makeup of your portfolio after all the sales are done; it seems like your portfolio is quite unique and that you have a lot of Hilton branded hotels in there. Rick if you could just comment on how that portfolio would react with the ups and downs of the market if you see a soft batch going forward; how do we expect the portfolio to react with that brand composition that you have? Thank you.

Rick Smith

Yeah, I don't think the ups and downs of the markets are driven by brand too much, I mean if you look at the two independents in New York and we will have three at the end of the day, you know they ran great occupancy, they just made a mistake and now they were making some business and in a little bit of panic on trying not to take too much discounted business.

So the fact that there was a downturn, if there has been a solid strategy in place it wouldn't have affected those hotels. And when we look at brands, we really look at the real estate first and look at the various entry, look at the brand generators in those areas and look at what we think we can do with those hotels and then secondarily we look at what brand we think makes sense all things considered; how much distribution do all brands have within the markets and the sub-markets etcetera.

And so, we don’t really base it, it’s not a primary concern. I mean it is an issue and it’s not an issue, it’s an opportunity and it’s something that we look very hard at and it’s certainly an important decision, but it is not important as some of the other factors that I was mentioning. So I think we feel good about the diversity of our portfolio. As you know, some of the ISG assets, some of the Starwood assets, and some of the Hilton assets are being sold through the second phase of asset sales. And I think that’s going to give us a pretty good mix across the board once we’re done with that, and I think we’ll be protected both through up cycles and down cycles.

Nikhil Bhalla - FBR

Just wondering a little bit on that, you have a lot of Embassy Suites exposure in your portfolio. Do these hotels perform slightly differently than some of the other ones, some of the other brands out there, you know during ups and downs?

Rick Smith

Yeah, I mean they have turned a little a bit, they always get through the downturn which gives us some really good kind of diversification, when you’re going through the downturn, it makes you less volatile. There maybe some other portfolios out there and that’s always a very good thing and I think it’s a strength of our portfolio on a post FFO basis we will still have a decent number of Embassy and I think we’re selling some and so that will give us some protection on the diversification side of the (inaudible).

Now what comes with diversification on the downside is you know, when you do start backup the upside other people have more room to makeup. So you can lose a little bit of this, but you’re still less volatile; with a new asset growth to build along with that, it’s a very nice mix and it’s a very stabilizing mix.

Nikhil Bhalla - FBR

Great; and then one last question on just the profile of the buyer who is buying your hotels at the moment. We saw last year, just with the volatility in the equity market, each time there is a bit of a gyration, the investors tend to drop off. How are these investors different from what you would expect and just given the volatility in the current environment? Thank you.

Rick Smith

Thanks Nikhil and well from asset sales standpoint most of the buyers, you know, they are mostly private equity teamed up with management companies and that really hasn’t changed. We’ve got a market or two like the Deerfield and Jacksonville that are more local owner-operator kind of buyers potentially, but mostly private equity teamed with management companies and the things that have happened in the market or the fears in the market have not really changed any of the pricing or how they’re approaching or anything of that nature.

Where we have seen a couple of things is in a couple of instances, we had one hotel that was an account had temporary trouble free and a buyer came in tried to kind of on a fairly extreme and ridiculous basis re-trade the price of the asset for that we just said no.

In another case, we had a situation where we were preparing asset for sale, it created a little displacement and the buyer tried to price that in to re-trade and so forth and we’re just not going to do that; I mean it’s kind of nonsensical and I guess they assumed that we are desperate to sell them, which we’re not; we’re going to sell where they make sense.

We will get them sold those processes on both of those hotels are continuing with other buyers who are not looking at it that way. So we’re just not going to take that and that’s the only pushback we’ve seen Nikhil from anybody and they took a shot, they took a shot on trying to reprise something thinking that maybe with some of the worries in the market that we would buy that now, but we’re just not going to do that.

Operator

Your next question comes from the line of Patrick Scholes with SunTrust. Your line is open.

Patrick Scholes - SunTrust

Hi good morning. I just got a couple of questions of clarification, clarification on your earnings release and hopefully you have not already addressed these, I apologize in advance, if that’s the case. First question concerns the RevPAR growth at your newly acquired and redeveloped hotels you said was 16.4, can you break that out between what the RevPAR was between those two buckets? And then secondly though aren’t clear here if those reacquired and redeveloped hotels are included in same store are those going to be different? That’s my first question.

Rick Smith

Well I mean on the first one Patrick, we have looked at this as one bucket so we would have to break that for you offline; because I don’t have those numbers at my fingertips and as the 16.4, Q2 was 7.8 and Q3 will be double digit, Q4 on all six will be double digits. So probably Union Square, Morgans/Royalton and the [Fairmont] hotels are all projected to do very, very well and when we look at those together, so we haven’t broken it out, but we certainly can do that for you. On a go forward basis in ‘13 and ‘14 we certainly expect above market growth on all those as everything is ramped up and brought to stabilization where it should be. Can you remind me what the second question was?

Patrick Scholes - SunTrust

Were those the newly acquired and redeveloped hotel bucket is that included in that 69 same store hotel results?

Rick Smith

Yes.

Patrick Scholes - SunTrust

That’s in there, okay. Then just second question here, you also mentioned you completed work at nine of 10 hotels; is that it for this year or do you expect any more to be renovated in the back half of the year?

Rick Smith

Well, we have some additional renovations going on. They are really kind of 12 flash (inaudible) projects that we will be starting in the fall based on levels of business and one of the best time to do that. There is going to be five of those, but all of that is factored into our current numbers. We don’t see – we’re not really looking at any kind of giving past the city permit on the mortgage, not really looking at any major permitting issues or anything of that nature that is going to hold us up or create we believe right now additional displacement of what has been factored in. We will have displacement taken.

Patrick Scholes - SunTrust

Are you able to tell me how much in EBITDA you do have baked in?

Rick Smith

How much displacement, you were asking -- you mean for the second half or for the full year?

Patrick Scholes - SunTrust

Lets say for the second half?

Rick Smith

$2 million.

Patrick Scholes - SunTrust

$2 million okay. And then lastly on your outlook you talked about higher RevPAR growth for the second half of the year; that simply from hotels coming off of renovation versus the first half of the year or was that higher RevPAR sort of same store versus what you expected three months ago?

Rick Smith

It is a little bit of both Patrick, I mean we certainly expect, we are just getting ramped up in Boston for example as you said getting back to and having a strong summer after getting done with the work that we did there. And we are finishing out some other major renovations and so as we come off those we are certainly going to have good growth. In the case of Boston, where we are expecting 20% plus in the fourth quarter.

It's because we started working on the hotel a bit last year plus the positive effects of the renovation which are just phenomenal. I mean it's like a new building and so we are getting a lot of bang for that. So that's a big part of it, but we do given the trends that we are seeing from our rate and the success of the remixing program that we have been continuing, part of that is absolute RevPAR growth, but yeah, big part of it is those renovation hotels coming off.

Operator

Your next question comes from the line of Tim Wengerd with Deutsche Bank.

Tim Wengerd - Deutsche Bank

One of the major hurdles that need to be crossed to [solve], the nine hotels that are being marketed right now and how much variance is there and when you expect to solve them?

Rick Smith

Well, I mean the biggest hurdle is the answer to the [little] questions and the biggest hurdle being the general economy. I mean if fears continue I think we will get them sold on the timing that were expected. If A, real versus proceeds possible, liquidity issue arises, then that could derail things for a while. I mean it's not derailing, it's deferring things for a while until that stabilizes, but that is the biggest hurdle.

Otherwise they will get sold and they will get sold at prices that make sense for us and the shareholders and we will move forward accordingly. But that's really kind of the one hurdle. I mean we are not going to give the assets away, we are going to hold firm for our pricing expectations. We know we can get them and we will get them. And so as long as there's no real liquidity issue created in the marketplace, whereas debt financing is not available, et cetera, then we are going to get these assets sold.

Tim Wengerd - Deutsche Bank

Okay, and then on the interest expense guidance, I guess how much of that was changed by a slightly later sale date expectation?

Andy Welch

Almost all of it, there's a little impact on capitalized interest in the mix with the closing of the line a little later than anticipated, primarily assets sold.

Operator

Your next question comes from the line of Josh Attie with Citigroup.

Josh Attie - Citigroup

Just following up on Patrick’s question earlier, the 6% to 9% RevPAR guidance for the second half of the year, is it possible to breakout what the growth rate would be on your stabilized assets versus the growth rate on the assets that are ramping, coming out of a redevelopment?

Rick Smith

Yeah, we can do that Josh, we need to probably do that for you offline.

Andy Welch

Or may be these numbers (inaudible) Josh, I am sorry.

Josh Attie - Citigroup

Or maybe just if you could bracket what the range of outcomes is?

Rick Smith

Yeah, when you look at it because of the number of hotels you are talking about on one side versus the other, it's probably a 10% to 15% for the six. And then whatever mathematically that equates to on the others (inaudible) that number probably.

Josh Attie - Citigroup

10% to 15% in RevPAR growth for the six that are coming off renovation?

Rick Smith

Right.

Josh Attie - Citigroup

And actually I know that you are not giving quarterly guidance, but how should we think about the third quarter versus the fourth quarter, is there anything you see in the bookings or in seasonality that would make one quarter stronger than the other from a RevPAR growth perspective?

Rick Smith

No, I think it's pretty even, pretty standard. I mean there's nothing, there's no anomalies out there that are going to drive that.

Josh Attie - Citigroup

And then just lastly can you update us on what the-- has there been any change in the size or scope of the Knickerbocker redevelopment and can you remind us what your total cost basis would be including the carry cost through the development process?

Rick Smith

There’s been no change in scope. We have [cleaned] the rooms a little bit to make them better. We got the ballrooms done and we went through, we looked at all things, took a lot of feedbacks and we’re on budget that number hasn’t changed so much. So everything still looks good. We’re making good progress on identifying the [GM] deal with them and good progress on the core and shell and finalizing design on the rooms. So we look forward to getting into building out the rooms starting later this year and getting it done on time. 230 was the project cost, 240 with carry. But everything is on budget.

Also on that, if we do have changes to that on a go-forward basis, once we know them, we will certainly proactively be updating the market.

Operator

(Operator Instructions) Your next question comes from the line of Susan Berliner of JPMorgan. Your line is open.

Susan Berliner - JPMorgan

Just a few questions. I guess, I know you’re not giving any sort of guidance. I guess with the economy slowing, I am not talking about assets sales, just talking about the performance of the hotels. Any indication or any concern about potential slowing just with the recent more negative headlines in a more volatile equity markets?

Andy Welch

No, none. I mean I'll elaborate on that a little bit. We’ve seen nothing whatsoever that indicate any slowing from any perspective like that. There is a huge disconnect between the public markets right now and what’s going on in real life, and what I mean is the proceed concern is driving the public markets as far as stock price and things of that nature but fundamentals are still very, very strong, corporate profits are up significantly, corporate financing is growing significantly, people are still traveling driving out there time to drive additional revenue, demand is doing great and supply is staying low.

And I think we are a leading indicator for and in many ways from just seeing any softness because the first thing that these (inaudible) back on when CEOs want to start saving money and want to start cutting cost is going to be cutting travel before they start laying off and other things they are going to start cutting to easy step first. We tend to be a leader, we are not seeing anything related to that whatsoever, so we feel very good about things, group is holding we would like to see it improving a little more but it’s holding and so but that’s the only thing that’s even stable everything else is moving upward, there is no downward trending whatsoever.

Susan Berliner - JPMorgan

And then I guess on the two, not the one asset sale for August but two in September, you guys haven’t disclosed these two properties is that correct?

Andy Welch

That is correct, we will not disclose I mean we wanted to update you guys so we wanted to let you know what’s under contract but we won’t give any detailed disclosure on that until we go hard.

Susan Berliner - JPMorgan

Okay and I think last quarter you had kind of stated that it was in the $75 million range for the two properties is that still accurate?

Andy Welch

That’s a different two properties. That was an unsolicited bid on two other properties and while those conversations are continuing, it’s still out there. These are two separate properties.

Susan Berliner - JPMorgan

And just with regards to the unencumbered properties, I think you had five unencumbered I know you’re going to unencumbered cue with the prudential loans; with the future asset sales any estimate for what are the number of unencumbered stand at the end of the year?

Rick Smith

Well it depends on a couple of things as far as where we stand; we have seven right now, I mean that number is going to continue to grow and as we report some assets pay out other debt with those assets so it’s panning at a seven now, but we anticipate some growth in that as we’ll move forward.

Susan Berliner - JPMorgan

And Rick is that seven now or is it seven include the two additional when you refinance the [pre-loans]?

Rick Smith

Seven now.

Susan Berliner - JPMorgan

Okay perfect and then one final question, I know you stipulated in the press release your target for leverage for mid ‘15 at 4.5, does that assume that you won’t initiate a common dividend any earlier than that or am I reading too much into that?

Rick Smith

No that does not mean that; we anticipate being in transition to pay a common dividend by the end of ‘13 and so that’s when we’ll take a look at that then. And on your previous question, we anticipate depending on which way we go with some of the refinancing opportunities on the last two pieces of debt that you know about half the portfolio could be unencumbered by the time we get to stabilization.

And operator, we will take no more question.

Operator

And your final question comes from the line of Smedes Rose with Keefe, Bruyette & Woods. Your line is open

Smedes Rose - Keefe, Bruyette & Woods

Hi thanks, you’ve kind of answered this, but I am just trying to make sure do you in the past have kind of made the point that smaller loans under $100 million or so have been easier access and more participation from regional banks I believe; so are you seeing any change on that level as you are talking to potential buyers who are looking to get financing?

Rick Smith

Not a lot I mean we've seen some improvement actually and I think people are talking in the $100 million to $200 million range is more doable than the $300 million to $400 million range as was always the case. But we certainly haven't seen any back up on it. We've seen bigger players become more interested and as Andy was commenting on, even as we go through the process on refinancing the PRU mortgage; things are only getting better and more and more players are wanting to play. So there is a lot of appetite out there on the lending side and I think its only improved in the last 90 days as evidenced by the improved terms versus what we got, we get on the refinancing and we think buyers are seeing pretty much the same thing. Certainly, stabilized buyers are.

Smedes Rose - Keefe, Bruyette & Woods

Okay and then I am sorry if I missed this, but did you, have you, can you or have you already given any kind of early REIT on the group for 2013?

Rick Smith

We have paces holding. We’re still, our pace this year to last year is still up 4% and we are, its holding, we would like to see that improving Smedes, but its kind of bump along; right now, hopefully we will see some pick up in the second half.

Smedes Rose - Keefe, Bruyette & Woods

Okay, thank you.

Rick Smith

Thanks Smedes and operator that will be it. Thank you all for joining us today and we will talk to you next quarter.

Operator

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

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