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Ashford Hospitality Trust, Inc. (AHT)

Q1 2008 Earnings Call

May 1, 2008 11:00 am ET

Executives

Tripp Sullivan – Senior Vice President & Principal

Montgomery Bennett – Chief Executive Officer, President

David Kimichik – Chief Financial Officer, Head of Asset Management

Douglas Kessler – Chief Operating Officer, Head of Acquisitions

Analysts

William Truelove – UBS

William Marks – JMP Securities

Napoleon Overton – Morgan, Keegan & Co.

Mark [Roth] – Black Creek Capital

David Loeb – Robert W. Baird

Smedes Rose – Keefe, Bruyette & Woods

Operator

Good day everyone. Welcome to the Ashford Hospitality Trust conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan. Please go ahead, sir.

Tripp Sullivan

Welcome to this Ashford Hospitality Trust conference call to review the company’s results for the first quarter of 2008. On the call today will be Monty Bennett, President & Chief Executive Officer, Doug Kessler, Chief Operating Officer and Head of Acquisitions, and David Kimichik, Chief Financial Officer.

The results as well as notice to the accessibility of this conference on a listen-only basis over the internet were released yesterday afternoon, and the press release has been covered by the financial media. As we start, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information that are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Thus, forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risk, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled, Risk Factors, in the Ashford registration statement on Form S3 and other filings with the Securities and Exchange Commission.

The forward-looking statements included in this conference call are only made as of the date of this call, and the company’s not obligated to post an update or revise them. In addition, certain terms used in this call are non-GAAP financial measures. Reconciliations of which are provided in the company’s earnings release and accompanying tables or schedules, which has been filed on Form 8K with the SEC on April 30, 2008, and may also be accessed through the company’s website at www.ahtreit.com.

Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Monty Bennett. Please go ahead.

Monty Bennett

Good morning, and thank you for joining us. The U.S. economic slowdown presents challenges for the industry. Despite this environment, we reported a pro forma RevPAR increase of 2.6% for the hotels not under renovation and an 80 basis point improvement in operating margin.

Our RevPAR yield for the quarter increased from 115.2% to 120.0% for the hotels not under renovation, and from 115.5% to 118.8% for all hotels. ASFO per diluted share for the quarter was $0.29. [Add] per diluted share was $0.22, which resulted in a dividend coverage ratio of 105% and an ASFO dividend coverage ratio of 136% for the quarter.

Based upon the seasonality of our portfolio, the first quarter is typically weaker in terms of operating performance. Overall, ADR improved 3.3% and occupancy declined 116 basis points.

As we noted last quarter, in a slower economy we would occupancy to decline that we should maintain pricing power due to our concentration in urban and large hotels. The contribution from our select service portfolio hotels comprising about 1/3 of our EBITDA along with our mezzanine loan portfolio, it adds stability in a softening market.

As company, we continue to focus on two main strategies. First is a balance sheet or capital-based strategy, second is an operating cash flow strategy. Our capital strategy seeks to lower our net debt to gross access ratio by year-end to 60% or less. Currently, it is 61.5%. It also seeks to raise capital through joint ventures and direct hotel asset sales, and in then deploy capital into mezzanine loans, share buy backs, ROI projects, and debt paydown.

Our operating cash flow strategy seeks to increase our dividend coverage by swapping our fixed rate debt to floating rate and by implementing cost containment continues to plans at our hotels, including locking in a two-year insurance program, appealing all property tax assessments, and locking in energy contracts where possible.

You’ll find that almost all of our activity focuses on moving forward with these two strategies. Doug and Kimo will provide more details regarding our progress on these.

As we discussed last quarter, our $190 million capital investment plan for the portfolio remains heavily weighted to the second half of the year, and will roll over into 2009. Of this amount, $80 million constitutes what we are obligated to spend or is under way. Sixty million can be deferred, and $50 million would be for ROI projects.

They’ve spent $32.6 million in cap-ex so far in 2008, much of which is related to the conversion of the former Sea Turtle Inn that is anticipated to be completed in early May. As a major repositioning, the Sea Turtle Inn, which we will be renamed One Ocean shortly, has had a downward impact on our overall results. After the second quarter, we expect this difference to moderate, and then start to move in our favor as the property ramps up.

We remain confident in our ability to respond to marketing positions and to be optimistic. As tough as the environment has become, we believe we are positioned to outperform the industry over the long term.

To speak in greater detail about our first quarter results, I would now like to turn the call over the David Kimichik to take you through the numbers.

David Kimichik

For the first quarter, we reported a net loss to common shareholders of $833,000, EBITDA of $93,596,000, and ASFO of $39,860,000, or $0.29 per diluted share. At quarter end, Ashford had total assets of $4.4 billion, including $141 million in cash. We had $2.7 billion of mortgage debit with a blended average interest rate of 5.2% leaving net debt to total gross assets at 61.5%.

Following the $1.8 billion interest rate swap, 89% of our debit is now floating. The other income line below operating income on the face of our P&L will reflect the amount of interest savings we realize each quarter from the swap. The 19-day period the swap was in effect during the first quarter, we realized $296,000 of interest savings.

Since the length of the swap does not match the term of the swap fixed-rate debt for GAAP purposes, swap is not considered an effective hedge. The result of this is that the changes in market value of these instruments must be run through our P&L each quarter. These are non-cash entries that will affect our net income, but will be added back for purposes of calculating our ASFO and our CAD.

During the first quarter, the company sold three assets for a total of $81 million in proceeds. At quarter end, our portfolio consisted of 109 hotels in continuing operation netting 25,165 rooms plus one hotel listed as held for sale.

Quarter end, we owned a position in 11 mezzanine loans with total principal outstanding of $136 million with an average annual unleveraged yield of 12.4%. Two of the net investments are held in a joint venture with Prudential, and are recorded in the unconsolidated joint venture line of our financials.

For the quarter, pro forma RevPAR for all hotels was up 0.8% as compared to the first quarter ’07. For the hotels not under renovation, which is all but 13 hotels, pro forma RevPAR up 2.6% driven by a 3% increase in ADR and a 26 basis point decrease in occupancy.

Pro forma hotel operating profits for the entire portfolio was up by $392,000 or 0.4% for the quarter. The 96 hotels not under renovation, pro forma hotel operating profit increased 6.5%. Our pro forma hotel operating profit margin improved 80 basis points for the hotels not under renovation and decreased 37 basis points for all hotels.

Another strategic decision we made in the first quarter to enhance our dividend coverage was the execution of our debt swap. We based this decision on the high historical correlation of RevPAR and interest rates. This transaction swapped $1.8 billion of our existing fixed rate debt for floating rate debt. The day we executed this swap, the favorable interest rate difference on the $1.8 billion of debt was 34 basis points. For every 25 basis point drop in from the date of execution, we’d realized an additional annual interest expense savings of approximately $4.5 million based solely on the swap.

At the time of the swap, our interest rate on this debt was 5.84%. Our effective floating rate for the swap to $1.8 billion, is now based upon a spread of 264 basis points above LIBOR. The former LIBOR yield curve held true for the next 12 months, that would equate to an approximately $8.8 million in annual interest savings.

The end of the quarter there was 119.7 million common shares outstanding, 7.4 million Series D, convertible preferred shares outstanding, and 14.4 million OP units issued for a total share count of 141.5 million.

During the quarter, we purchased in the open market 7,800 shares of our common stock at an average price of $6.54. We’ve completed a total of $23 million in our buy back since inception, and have approximately $27 million left under our current share buy back authorization.

For the first quarter, we reported CAD of $30,608,000 or $0.22 per diluted share, and announced and paid a dividend of $0.21 per share. I would now like to turn it over the Douglas to discuss our capital allocation strategy.

Douglas Kessler

We continue to execute our capital allocation strategy during the first quarter, recycle of capital through asset sales, generated internal growth, reinvested in mezzanine loans, and repurchased shares. We sold two hotels during the quarter for a total proceeds of $77 million. JW Marriott in New Orleans was sold for $67.5 million. The Sheraton, Iowa City, sold for $9.5 million.

We also completed the sale of the vacant Fort Worth office tower for an additional $4.1 million. During the quarter, we placed the Hyatt Dulles airport under contract for $78 million. We acquired the Hyatt Dulles asset in October 2005 for $72.5 million. A $78 million sale, which is expected to close in June represents a purchase price of $247,000 per key and a trailing 12-month annual-wide cap. rate of 7.2%. This hotel was included in the $2 billion of asset sales we listed on the market earlier this year, and we are very pleased with the cap. rate as well as the profit we should realize.

As we indicated before, we don’t anticipate selling the total $2 billion of assets we put on the market. Our targeted level is closer to $600 million. Additional contract negotiations are under way, and offers are being reviewed, but none are at a stage where we can comment. Virtually any type of transaction, whether debt or equity, is taking longer to complete and bid/ask spreads between buyers and sellers have widened.

With our recycled capital, we have several accretive investment opportunities. Our Mezzanine and lending was particularly active during the quarter. We closed on three Mezzanine loans in the first quarter.

The most recent was the acquisition of a senior Mezzanine loan secured by a 29-hotel portfolio, of full and select service hotels owned by JER Partners. This loan was acquired in conjunction with our Prudential joint venture, which resulted in an Ashford investment of $17.5 million. Including the promote, the discounted purchase and the forward curve, the loan is expected to yield 18.3% unleveraged to us.

We also acquired at a discount one B-note mortgage loan and a Mezzanine loan with a total face value of $45 million. The first loan purchased at a $5 million discount, which is secured by the Ritz-Carlton Key Biscayne, has a projected yield to maturity of 12.5%. The second loan, which is secured by the Hotel La Jolla, bears interest at 900 basis points over LIBOR. Both loans were purchased outside our Prudential joint venture.

The Mezzanine loan market remains very active to us. Most of the current opportunities or acquisitions of existing hotel paper on the books that lenders are looking to sell at a discount, sometimes with seller financing. There is very little new origination in the marketplace. Rest assured that our underwriting criteria remains very tight. Spreads available in the market are consistent with our guidelines, and there are opportunities to capture these returns at lower loan-to-value ratios.

In summary, we continue to believe our diversified platform and the ability to recycle capital should position us well, even during these difficult market conditions. We are doing all the right things in this market and respect our capital and operating cash flow strategies, including: One, being proactive to protect the safety of our dividend with a debt slump; Two, taking steps to fix our cost through lower insurance premiums and contingency plans; Three, forming a joint venture to enhance our returns on capital; and four, allocating capital through accretive opportunities such as Mezzanine lending and stock repurchases.

We expect 2008 to present additional opportunities to put these strategies to work. That concludes our prepared remarks, and we’ll open it up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) You first question comes from William Truelove – UBS.

William Truelove – UBS

The question off the dividend coverage, are you happy with where the dividend coverage stands now, and B, what additional leverage do you think you could pull the chart and improve the dividend coverage, especially as it relates to going forward, and the ROI cap-ex?

Monty Bennett

This is Monty, I’ll take a stab at it, and if you want to take a stab at it as well.

We always want the dividend coverage to be more, and so I don’t think we can ever say that we’re happy with where it is, because we want it to continue to increase. Generally, we like, as our dividend increases over the years, we’d like our coverage to increase beyond that. So, we’re going to continue to look at ways to increase coverage just because, and why not. We think it’s good for our shareholders.

As far as additional things that we can do, we think that we’re good on the swap side, the financial side. On the income side, as we take assets and we sell them, direct hotel investments and put more money into Mezzanine loans that has a couple of effects. Number one, it will typically immediately increase our coverage, because the cap. rates we sell assets for compared to where we can put Mezz money out.

That creates an imbalance of interest there, a spread increase, which will increase the dividend, and then the volatility of that income stream going forward over the next 12 months will be lower with a Mezz loan than it will be with owning an asset. So that’s something that we can continue to do, and our continuing to do.

Then over on the asset side with the hotels themselves, we’ve got three levels of contingency plans per asset, about what we can do to enhance incremental revenues, but mostly contain costs, and each one of our hotels is at a different stage of that plan based upon their individual revenue levels. And, we’re constantly adjusting those, and in almost every case, I think in every case, we’re moving deeper into contingency plans.

We haven’t gotten to a point where if we’ve reached, say, level two, we’re ready to pull it back to level one or not enter the contingency plan at all as we just want to be cautious [inaudible], and we continue to do some of these other things that these guys mentioned about locking in insurance for two years.

We’ve got some very favorable pricing for two years that we want to lock in here soon, energy contracts [we think we] can in those markets, property tax appeals, you name it, continuing to, at a lock down, lower our expenses from the hotel operating side.

William Truelove – UBS

One thing that confuses me, though, and maybe you can help clear this up is that if you’re going to swap money into, say Mezz lending and get, oh roughly, 13% or so interest rates versus your dividend currently, your common dividend at 14%, wouldn’t you be able to increase the dividend coverage more faster if you just swapped money out and repurchased the common shares, right? I mean, that would be a better return on the investment, wouldn’t it?

Monty Bennett

You know, in some cases… We sit down and we have kind of a constant updated sheet of where we can employ capital and where it’s most accretive, and in almost every sense when something’s more accretive, it’s going to increase your dividend coverage, and here repurchases is something that we have done, we are interested in, but buy and large, the Mezz deployment works out slightly better than share repurchase for us, but it depends upon the pricing we put that Mezz out at.

So there is a break point where it becomes better for us to buy back shares, and indeed, we’ve done that. What’s happened in the marketplace over the next… I’m sorry, over the last quarter or so is a pipeline of potential Mezz opportunities has grown from something like $200 million to maybe, you know, average a pricing on those of average assets, say of L plus 650. That’s just kind of a broad brush number. Who today may be a pipeline out there of deals we’re looking at totaling something like $600 million with the pricing in the L plus 800 range plus.

So as that Mezz moves up, our ability to deploy capital in that area starts to outstrip the accretion in the coverage that is affected when we do share buybacks. And some of that has to do with the, you know, your earnings and your accretion versus what you’re actually paying out in dividends.

Also, one other point is that the difference in Mezz and share buy backs is that if you do Mezz then you can always redeploy that capital later as those Mezz loans come due, or in a pinch, sell those. While if you were to buy back shares, then you’re capital is gone until you do a new reissue, which is a lot more cumbersome. But again, generally where we see Mezz pricing today, it is more attractive than share buybacks.

Operator

Your next question comes from William Marks – JMP Securities.

William Marks – JMP Securities

I guess, first of all for Doug on dispositions, what are you seeing in terms of number of parties coming to the table, and how are people getting financing?

Douglas Kessler

The number of parties that are coming to the table are slightly down I would say from this time last year, but the diversity of the parties is high. I think we’re seeing everyone from, you know, local players to funds that then capitalize with the pension capital, even some of, you know, [re] peers are looking. You’ve got the opportunity funds that are still snooping around as well.

So, typically we’re seeing about half a dozen bidders per property that are, you know, legitimate enough that are submitting, and I think that that’s just kind of a rough average of who we see bids from for each opportunity.

In terms of the financing, again, some of our assets have existing financing that, you know, with approvals from the lenders can be assumed. Some of them are being financed with outside capital, and there is, actually, liquidity in the market. As a matter of fact, we’re seeing probably a shift among some banks to pursue assets with hotel companies provided it’s secured financing as opposed to, you know, more credit-type financing.

We’re also… I failed to mention that we’re seeing more of an influx today, actually, of foreign buyers as well, and some of those buyers are already coming with sort of their bank lines established. So there is liquidity in the market. I think the good news is that there are, you know, fewer transactions being chased after in the market today, so I think that gives us a bit of an edge given some of the financing that we have and the high quality of assets that we’ve brought to market. It seemed to be appealing to buyers today.

William Marks – JMP Securities

I have a question on RevPAR as well. I see that the hotels not under renovation are up 2.6%. Any indication if some companies are seeing a little bit better second quarter growth than first quarter partially due to Easter? Do you expect second quarter to be above that, or any indication… is this a run rate for the year?

Monty Bennett

We’re pretty hesitant to provide core guidance like that, but there’s no question what you mentioned about the Easter, it did depress March and is enhancing April on year-over-year guidance. But as far as what the future holds, we’d probably rather just not comment on that at this time.

Operator

Your next question comes from Napoleon Overton – Morgan, Keegan & Co.

Napoleon Overton – Morgan, Keegan & Co.

What would you say your… How would you characterize your level of confidence in being able to accomplish the $600 million disposition target this year?

Monty Bennett?

I’d say high.

Napoleon Overton – Morgan, Keegan & Co.

And would you say that the 7.2% capitalization rate on the recent transaction is indicative of what you expect to be able to accomplish on a large volume of sales.

Monty Bennett

It’s hard to say, and here’s the reason. We’re marketing or have marketed something like $2 billion worth of assets. Some of the assets would sell if sold them at cap. rates at the 2% level, maybe because they’re cash flow is really low or types of assets they are, just maybe in low single digits or low double digits because of the markets they’re in or if they require a whole lot of cap-ex.

So we’ve given guidance that we are looking to dispose of $600 million, maybe a little bit more than that, certainly between $600 million and $1 billion worth of assets this year. So, it just depends upon which assets we actually sell. That depends upon the buyers and what price we can get from them, and how aggressive they are, and that’s just something that we just don’t know yet.

We’ve been working with a number of buyers and feel confident about our ability to dispose of the assets. Again, it’s just hard to say without knowing which assets we’re going to pull the trigger on. If any of you guys here have got more color or feel like, we can get more specific on that, I’d love to, I just don’t want to… I got a couple of head shakings here, we just… It’s just hard for us to know that.

Napoleon Overton – Morgan, Keegan & Co.

And then the capital spending you went through in your initial remarks, but you did it so quickly I didn’t catch it. I think you’re obligated on $80 million, and then there were two other pieces?

Monty Bennett

Yes, let me give you those numbers. We’re obligated on the $80 million, $60 million can be deferred, and $50 million would be for ROI projects, which is more discretionary, of which at this point we’ve decided to move forward with about $12 million of that $50 million, so I’d say that $38 million of that $50 million is really discretionary at this point.

Let me give you another of a clarifying point, Nap, that I probably should have included in the script. That is that gross amount of $191 million assumes that we move forward with the capital plans on all the assets that we are currently marketing. So we plan on selling $1 billion worth of assets. [Through] those assets, cap-ex requirements will drop out.

We would love to give you color on how much that would be approximately, but we’ve got the same problems as the cap. breaks. Some assets we’re selling don’t need much capital, and some need a lot of capital, so it just depends upon which assets we end up selling based upon the monies we get… the offers we get back from the buyers.

Clearly, it’s more advantageous for us to sell those assets that have a lot of cap-ex requirements to them for all the logical reasons. Again, it dependsoverall pricing, and so that’s how that’s going to shake out, so we see it as really a max, worst-case number.

Also, what I think is important is that a good amount of that $190 million is in the existing FX main reserves which total about $70 million. If you’re looking at dollars out of pocket or owner’s funded, then it’s a difference between that theoretical $190/$70. So I think what we’ve laid out here is kind of a worst-worst case, and there’s two or three factors that have mitigated potentially, even substantially.

Napoleon Overton – Morgan, Keegan & Co.

The stock market does not appear to believe that the dividend you are distributing now is sustainable given your yield versus other similar companies. What is your intention with the dividend, and could you share with us what the decision process would be to consider that dividend and whether it should be reduced.

Monty Bennett

Our dividend policy, which stated in December of this past year, was to pay $0.21 per diluted share per quarter. That is a policy that is still in place, and that we have not changed. And then towards the end of each quarter is when we actually decide when to give the exact amount of the dividends, and we’ve always been consistent with our guidance in that regard.

The process of whether we should change that dividend would be a situation where either our performance for the quarter was substantially off, or where we saw the future to be substantially off. We don’t see ourselves in a position of having to use capital sales, capital dollars, in order to support the dividend. In other words, we want our operating income to be short of that dividend.

I’m not saying that we wouldn’t do that the for a little while or do it in a modest amount, but as a company, we just don’t have much of an appetite to come out of pocket in order to pay that. So, that would be the conditions under which we would reconsider and, again, we haven’t altered our policy, because we don’t see that.

Operator

Your next question comes from Mark [Roth] – Black Creek Capital.

Mark [Roth] – Black Creek Capital

Can you give me some color on where you stand in your debt covenants relative to their minimum requirement?

David Kimichik

We have two main debt covenants in two facilities that we have. One is a EBITDA at fixed charge ratio that has to be at 1.25x, and we’re currently around 2x or slightly in excess of 2. Another is a leverage test, net debt to gross assets can’t exceed 75%, and we’re currently at 61.5%.

Mark [Roth] – Black Creek Capital

Can you give me a timeline, and I saw the February 14 transaction, but can you give me a timeline on where you have to fund of $100 million contribution to the Prudential JV?

David Kimichik

The timeline on that is based upon when… as we source Mezz loans, present them to Prudential, and they approve them. We’ve got a couple of years in order to do that with them and hope to be able to do that sooner with the volume of transactions that we see out there, but it’s dependent upon how fast we want to move it. If I understand where your question is coming from, we essentially control that. How much capital is pushed in that direction.

Operator

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

David Loeb – Robert W. Baird

Back to the asset sales, as you look at where you’re targeting to sell, can you give us an idea about your expectations of how much of that will be brand managed versus non-brand managed? I’m guessing that two of the portfolios you’re looking at are the Marriott managed limited service pools for the C&L and the pre C&L. Is it fair to think that most of what you’re selling will be the brand managed stuff?

David Kimichik

Yes. I say of the assets that we’re marketing and the one’s we’re kind of zeroing in on, if you look at a on a total value standpoint, maybe 80%, 90% are brand managed assets.

David Loeb – Robert W. Baird

Is that affecting the appetite of particular pools of borrowers or the pricing?

David Kimichik

For some buyers it does, and therefore, it affects pricing. For some other buyers it doesn’t. It just depends upon the buyer.

David Loeb – Robert W. Baird

And on the Mezz pipeline, I guess I was a little surprised to hear that the origination… There really are not a lot of originations. Are you expecting a wave of refinancings to come up where owners will have a financing gap and will look to Mezz?

David Kimichik

We do. Right now, what we’re seeing is a greater willingness for the banks and the holders of that Mezz.. who’ve kept it on their balance sheets, they start to discount it and move it. So that’s why we’re seeing our own Mezz pipeline grow. But there’s not a lot of originations, again, because no one’s really in distress yet.

But we anticipate that to pick up, nothing like it did after 911 where, at first, everybody kind of hung in there for a while, but as people really needed debt proceeds, especially if they needed Mezz because of refinancing at higher debt levels, there was a strong demand for Mezz financing just not much of a supply. And that [the advantage] with it. We think it’s going to start to take place… probably start to pick up in the second half of this year, but really start to pick up next year.

Douglas Kessler

The only thing I’d to that, David, is that the underwriting criteria for loans today has become more strict, which will create an enhanced opportunity for us with Mezz once the origination programs kick in. And most of that will come from refinancing as soon as the transaction volume in general in the market is off about the levels, oh 75% off of what they used to be this time a year ago

So our view is that it’ll make our platform even more appealing to borrowers and lending partners. We’re keeping track of how much CMBS is rolling as well as we’re trying to get our arms around how much non-CMBS sort of balance sheet hotel debt is rolling as well. And so we’re keeping our eye on that, and I think this will be an opportunity for our platform… As Monty said, the latter part of this year and rolling into 2009.

David Loeb – Robert W. Baird

Do you expect that you’re going to provide seller financing, you’re going to take back some Mezz on asset sale pools that you’re looking to sell?

David Kimichik

We offer that to every buyer out there, and so far, at least with the assets that we’re looking at to sell and kind of zeroing in on, none of the buyers are taking us up on it. So that’s a bit of a surprise to us, but it also is good news in that buyers are able to get financing.

David Loeb – Robert W. Baird

And given that, what do you think is an achievable amount of Mezz that you can deploy, assuming you sell $600 million to $1 billion of assets this year? What’s kind of a number that you might be able to put into Mezz this year or over the next, call it 18 months?

David Kimichik

Well, we’re going to be disciplined in how we do that, David. Obviously we’ve talked about asset sales and lining them up with opportunities to redeploy, and we’ll weigh that in light of, you know, sort of our three-legged stool here. Either sharing purchase, which Monty, I think, has highlighted how we make that decision relative to Mezz yields and relative to ROI projects. I think, you know, we clearly identify with the ROI opportunities.

The trade off between Mezz and share repurchase is contingent upon, one, where our share price, and two, where Mezz spreads are. So we really don’t want to give too much guidance on how much we would deploy. You know, as we’ve demonstrated with the Prudential transaction, we’ve been able to access external capital, which clearly enhances the yield.

So I’d rather not, kind of, draw a line in the sand and say this is approximately how much we’re going to target this year, but the pipeline is plentiful. We’re going to be disciplined about how we deploy.

Douglas Kessler

You know, just to add on to that, which makes it even harder is that if see a $100 million Mezz piece, and we’re interested in it, but for some reason Prudential is not because either they’re full with hotel Mezz, or what have you, then that’s a swing right there about how much we deploy. Either $100 million directly in doing it ourselves, or $25 million through the joint venture. So that just creates some pretty decent spreads.

I think a way to kind of back into it, David, is to look at our target of where we want to get to on a net debt to gross assets basis and selling somewhere between $600 to $800 million worth of assets, and if that’s available proceeds that we’ve really got to deploy one way or another.

I would guess that most of that is going to go into Mezz over time, and I would hope that it’d be done for the rest of the year, because the faster we get it deployed, the more accretive it is. It’s hard to say.

Operator

Your final question comes from Smedes Rose – Keefe, Bruyette & Woods.

Smedes Rose – Keefe, Bruyette & Woods

Monty, could you just go over again, and I’m sorry to ask this again, but you’re capital spending… You’re saying for the calendar year 2008, you have $80 million committed and $12 million of ROI and then we have another 4% of gross revenues. That would be a reasonable calculation for cap-ex in 2008?

David Kimichick

Actually the 4% isn’t an add to what Monty described, it’s included in those gross numbers, and so, you know, that’s a resource that’s available to help pay for the program that Monty was describing.

Smedes Rose – Keefe, Bruyette & Woods

So total cap. spending for 2008 would be around $92 million?

Monty Bennett

Total cap-ex above the reserves?

Smedes Rose – Keefe, Bruyette & Woods

Just total cap-ex spending, I’m just trying to get a sense of what you’re spending on the hotels this year, including or excluding the hotels, you know, the basic 4% reserve.

David Kimichik

I think your number is right based on what Monty indicated we’re committed to and the $80 million we’re committed to plus the $12 million of ROI. We have a plan that is significantly higher than that that we back-end loaded in this year. So we may make some decisions later on in the year to move forward on some of those other plans, but what we’re essentially committed to at this point is the $92 million.

Smedes Rose – Keefe, Bruyette & Woods

And that includes basic maintenance cap-ex?

David Kimichik

That’s correct.

Smedes Rose – Keefe, Bruyette & Woods

So you’re going spend at least that, and I think $140 was your initial guidance. So it’s be somewhere in that range, or are you bringing down that $140?

David Kimichik

Well the guidance was $190, which included $50 million of ROI, so it’s, you know, $140 of normal cap-ex.

Smedes Rose – Keefe, Bruyette & Woods

When you look at your RevPAR for properties not under renovation versus portfolio wide, would you… That sort of discrepancy between them, would you expect that to kind of continue into the second quarter? Would you look for that same, sort of, level of disruption, I guess, for the number of hotels that are currently, you know, continue under renovation?

David Kimichik

I would say the second quarter the gap isn’t going to be as wide as the first quarter. The first quarter numbers were skewed a little bit by the large renovation we’re doing at Sea Turtle. While the property was open, it ran very low occupancy just because of the amount of repositioning that’s going on there. We expect that asset to be fully open and operational here shortly, so I think the gap will close a little bit.

Historically, it’s been, you know, 100-150 basis point difference between the total portfolio and those not under renovation. I think we probably move closer to that in the future.

Operator

There appear to be no further questions, Mr. Bennett. I’ll turn it back to you for closing comments.

Monty Bennett

Thank you for your participation on today’s call, and we look forward to speaking with you again on our next call.

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