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Executives

Stephan A. Schafer – Vice President Strategic Planning & Investor Relations

Richard A. Smith – President, Chief Executive Officer & Director

Andy Welch – Chief Financial Officer, Executive Vice President & Treasurer

Analysts

Jeffrey J. Donnelly – Wachovia Securities

William B. Truelove – UBS (US)

Felicia Kantor Hendrix – Lehman Brothers

Dennis Forst – KeyBanc Capital Markets, Inc.

Kevin [Mylotto] – JP Morgan

Nap Overton – Morgan Keegan

[Smeeds Rose] – Keefe, Bruyette & Woods

Jeff Cross – Cross Capital

[Eric Rothman – You Gain Securities]

Felcor Lodging Trust Incorporated (FCH) Q2 2008 Earnings Call August 6, 2008 11:00 AM ET

Operator

Welcome to the Felcor second quarter earnings conference call (Operator Instructions) Mr. Schafer you may begin your conference.

Stephan A. Schafer

With me this morning are Rick Smith, President and CEO and Andy Welch, Executive Vice President and Chief Financial Officer. Rick will begin his remarks with some color on operations and the dividend. Andy will then discuss the results for the quarter and our outlook followed by your questions. I assume you have had the opportunity to review our earnings release issued last night. We did integrate the supplement in to the press release.

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 of 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 & Exchange Commission. Although we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be obtained or that actual results will not differ materially.

With that, I will turn it over to Rick.

Richard A. Smith

This morning I want to give you some color on the trends we are seeing, the continued progress we are making, the dividend and what our focus is going forward this year. Then, I’ll turn the call over to Andy who will give you some further detail.

Notwithstanding the trends that began to worsen in May, and have continued, there is some good news for Felcor relative to the industry as a whole and in particular with our comp sets. During the quarter we grew RevPAR 4.7% across the portfolio and 8.7% for the 53 hotels where renovations were complete coming in to the year. More importantly, market share for the quarter improved by approximately 4% and by approximately 7% on the 53 renovated hotels. It should also be noted that in May, June and July, using the July Day star or after the trends began to weaken more dramatically, our 85 hotels increased market share by an average of 5.5% over our comp sets and 4.5% over the US average. This clearly indicates that our market share improvement continues to grow notwithstanding the current trends and we expect that to continue. The bottom line is we are getting our returns on the renovations.

Additionally, given the deteriorating marketing environment and the quality of our portfolio pre renovation, it is very likely that we would have fallen behind our comp sets if we had not completed the renovations. The renovation program has put us in the best position to compete in an increasingly difficult market.

Operationally, our biggest focus this year continues to be on market share and flow through. While we can’t control the economy or travel decisions, we can continue to push hard on the things that we can control. This is why market share is the most important metric we can look at versus what absolutely RevPAR growth or decline is which is driven by the economy. We continually go through each property internally addressing demand dynamics and optimization of mix on the revenue side as well as cost containment to ensure maximum flow through. We discuss every opportunity with our managers and make adjustments quickly. This process led to the necessary adjustments in June after seeing the trends in May which allowed us to improve margins more than expected and hit our guidance for the quarter.

We continue to see the same trends as we saw in the first quarter only they are intensified. We were experiencing short length of stay from a corporate transient perspective particularly on Sundays and Mondays and we continue to open up other channels of business to fill those holes albeit at slightly lower rates. While bar and consortia were down year-over-year, all other segments were up. Of our major markets, LA, San Francisco, New Orleans, San Antonio and San Diego had the largest RevPAR growth to prior year. South Florida, Philly, Tampa and Chicago had the largest declines. Despite the decline in these markets, we still experienced double digit market share improvements in all of them.

During the quarter we continued to make progress on the remainder of the renovations as well as the redevelopment of the Marriot Union Square. That project remains on track to be complete in early 2009. The first three floors of room are back online and look fantastic. We are also on track to get our six disposition hotels on the market in the near term. As we stated before, we will be very patient with this process and if we can’t obtain the pricing we desire we’ll simply wait until we can.

Now, let’s talk about the dividend. As you saw in our release, we intend to reduce the common dividend effective in the third quarter. Coming in to 2008 while our payout ratios were slightly outside of our target range, we fully expected to get back within our target ratios by 2009 considering the 08 displacement and the Marriot Union Square coming on line. That is no longer the case given the current trends in the industry. Continuing the dividend at the current level would put us above a 100% payout for 2008 and as we have said before we will not lever up the company to pay a discretionary dividend particularly at a 17% yield. In addition to the reforecast for the remainder of 08, there is very little visibility of 09. In light of this uncertainty, we have decided to take a more conservative approach in the near term. We intend to set the dividend at a point that approximates our required dividend distribution based on taxable net income and will adjust the dividend accordingly to meet our expected payout ratios. This is important, we are not changing our long term dividend policy and expect to continue to pay out between 75% and 85% of [FAD]. However, given the current environment, this is simply the most prudent approach and would equate to approximately $50 million of increased liquidity in the event that trends continue.

This short term change on the dividend does not reflect a change in strategy at Felcor. We have accomplished everything that we said we would over the past three years and are very confident in our ability to continue to drive market share and flow through and the overall plan that we continue to execute. We have better growth than our peers in 08 and expect that to continue. Again, it is simply being prudent given the lack of visibility.

With that, I’ll turn the call over to Andy.

Andy Welch

We are pleased with our second quarter results especially given the current trends in the industry. Adjusted FFO per share was $0.76 for the quarter compared to our guidance of $0.76 to $0.80. On a same store basis, adjusted FFO increased 32% compared to the same period last year. Our adjusted EBITDA was $87 million which also met the low end of guidance. Operating margins were better than forecasted due to controlled labor expenses and the continued implementation of contingency plans across our portfolio resulting in a lower cost per occupied room.

We continue to see positive ramp up trends for the hotels that have completed the renovations. As Rick mentioned, for the 53 hotels where we completed renovations during 2007, RevPAR increased 8.7% during the second quarter and market share increased 7%. Hotel EBITDA for these 53 hotels increased 18% compared to the same period last year. Our portfolio of 85 hotels grew RevPAR by 4.7% and grew market share by approximately 4% during the second quarter. Our RevPAR for our comp sets grew 1.2% which was similar to the US average.

We have completed renovations at an additional three hotels, bringing our total completed renovation to 78 hotels or 94%. Going forward, rooms out of service and disruption related to our renovation program will be limited to the few remaining renovations. Disruptions for the rest of this year will be concentrated at our San Francisco Union Square project. During the quarter we spent approximately $35 million on renovation and redevelopment projects which is down significantly from the $48 million spent in the first quarter.

Our weighted average cost of debt at June 30 was 6.25% and approximately 100 basis points lower than at the beginning of the year. Approximately 45% of our debt is at floating rate which we continue to view as a natural hedge given the cyclical nature of the lodging industry. We have no debt maturities for the remainder of this year. In July we repaid a $15 million single property mortgage and exercised the first of three one year extension options on our $250 million CMBS loan that was initially scheduled to mature this November. To add a bit more clarity, these extensions are at our option, there are no renewal covenants or minimum debt service requirements and no fees. The only requirement is to extend the existing interest rate cap for an additional year. The interest rate on the loan remains at LIBOR plus 93 basis points. Our next debt maturity is April of 09, a seasoned low loan-to-value mortgage facility. We have already begun discussions with potential providers and are very comfortable with our options to refinance this facility. We will continue to focus on maintaining liquidity and maximizing our capacity. We have access to our $250 million line of credit and significant cushions prior to hitting any of our covenant thresholds. In fact, under our most restrictive covenant EBTIDA would have to drop by approximately $35 million from our new guidance prior to reaching this covenant threshold.

There is no denying the current economic trends and potential for further deterioration and demand which has turned negative to prior year for the industry. Demand is being negatively impacted by reductions in airline capacity and corporate spending, higher fuel costs and moderating GDP and negative sentiment towards the economy. As a result, our new guidance anticipates RevPAR growth of 4% to 5% for the full year. This is based on RevPAR for our comp sets declining 1% to remaining flat. For the third quarter we anticipate RevPAR to grow between 4.5% and 6% over prior year. We expect that our market share growth will continue to accelerate in the third quarter which represents the peak return period based on the timing of our renovations. For the second half of the year, our guidance assumes that RevPAR growth for our portfolio will be between 4% and 5.5% and we assume RevPAR in our comp set will decline between 1% and 2%.

For the year we expect property margins to grow approximately 40 basis points over prior year. For the second half of the year we expect margins to be flat to slightly down to prior year. In addition to the contingency plans in place at our hotels, second half margins are being positively impacted by two items: first, maintenance and repairs are expected to decline as our portfolio is coming off a major renovation program; and second, property insurance expense will decline as we successfully renewed our policy in May. Items that are negatively impacting margins in the second half are utility cost increases and property taxes. Also, we have taken over food and beverage operations at three leased operations where we can increase profitability. While the additional food and beverage income enhances EBTIDA, it does have a slight negative impact to margins.

Our adjusted EBITDA guidance for the year is now between $283 and $289 million. Adjusted FFO per share is now between $2.08 and $2.18. The variance between FFO per share and EBITDA guidance is being caused by higher expected interest expense of approximately $2 million due to the upwards shift in the forward interest rate curve and finally, guidance does not assume any hotel or condominium sales.

Thank you and we’re now ready to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey J. Donnelly – Wachovia Securities.

Jeffrey J. Donnelly – Wachovia Securities

Andy, maybe you can talk a little bit more in detail on the thinking behind the $0.15 quarterly dividend. I know you touched on it in your remarks but I guess what conclusions should or should not been drawn when we’re thinking about 2009 earnings? Because frankly, from whatever its worth, we’re finding that folks are trying to take that $0.60 dividend, look at your FAD payout target ratio and back in to potentially what your FFO expectations are for next year. Was that your intention?

Richard A. Smith

No, it was not our intention. The idea is that visibility is murky at best. I mean we really have no visibility on 09, we do not have assumptions on 09. The way we looked at this thing was a couple of different ways. We first off started looking at 08 and when we looked at 08, we looked at continuing the current dividend putting us between 107% and 110% of payout ratio and given that we were taking numbers down, we felt like that was irresponsible to increase leverage in order to pay discretionary dividend that was yielding 17%. Now, beyond that what we did was we took a look at 09 and we ran multiple sensitivities on 09. We don’t have any visibility, this is not meant to be any kind of statement as to where we feel 09 will be.

What we did was we wanted to take a conservative approach to be prudent from a cash management standpoint in case trends continued to worsen. What we did after running those sensitivities and getting an idea of in a bad case scenario, maybe not the worst case scenario or end of world scenario so to speak but in a bad case scenario where would our taxable net income be and what would we be required to pay out. The way that we approached it was once we kind of figured that out then we can always adjust this dividend up if trends do not continue to worsen and we have upside to that level of payout. We would fully expect in 09, to the extent that we came in below our payout ratio with the $0.60 dividend that there would be a special dividend at the end of the year. If we don’t and trends do stay the same or get slightly worse, and we’re within our payout ratio then we won’t. But, we feel very good that we will be able to maintain that in any event.

That was kind of our thinking on all of that. It wasn’t meant to say anything related to guidance for 09 in any way, shape or form. It was a different more conservative approach taking it back to taxable net income. Does that help?

Jeffrey J. Donnelly – Wachovia Securities

I guess maybe just a follow up or two on that, can you tell us maybe under what sort of scenario, I guess when you were stressing testing it the new dividend would actually be sustainable? Did you actually look at scenarios where RevPAR was down?

Richard A. Smith

Yes, we looked at it down, as far as market RevPAR down as far as 2% and 4% down next year.

Jeffrey J. Donnelly – Wachovia Securities

And I guess I’m curious going forward in future periods do you think you’ll try and keep a structure that I guess for lack of a better explanation that sort of like Host Hotels where they have sort of a based fixed dividend and growth will be paid through a special?

Richard A. Smith

Well, that was always the plan Jeff. The issue that happened with us is when we took it up the last time, we had gotten to a point where our models at that time given the knowledge that we had was stable at that level and you could withstand a downturn that was similar to the 91 through 93 downturn. The problem was you loss two years of base on that analysis. We didn’t have 08 and 09 going down, we had it going down after that in our modeling and so when the trend turned pretty hard south in May, it changed the base. And, when we looked at it, our stabilization point was a little at a slightly different place. Now, this is not necessarily meant to be the base, that will be decided as we go through 09. As we go through 09 and we see where we’re coming out, whether or not we’re having a special dividend, how 2010 is looking, that’s when we will determine where the base will be. Again, this is more akin to taking it down to our minimum payout and then adjusting upwards from there.

Jeffrey J. Donnelly – Wachovia Securities

Just last question, I think in past quarters you guys have helped us I guess think about sort of run rates if you will for your EBITDA, specifically with sort of what a base year was and then adjust for market growth disruptions and returns on renovation to calculate what I guess you’d call a new run rate. Are you able to do that again for us I guess for 08 as we go in to 09?

Richard A. Smith

We will certainly attempt to do that as we go in to 09 and hopefully as we get in to the first part of 09 when we’re having our call relating to 09 guidance, hopefully we’ll have a lot more visibility versus where we are today and we would certainly anticipate doing that at that time.

Jeffrey J. Donnelly – Wachovia Securities

But you’re not able to do it today?

Richard A. Smith

No.

Operator

Our next question comes from William B. Truelove – UBS (US).

William B. Truelove – UBS (US)

In terms of cap ex, once you finish off the San Francisco Marriot conversion, what would you assume to be a sort of annualized cash cap ex during this down turn? Obviously, as you know last time you guys really cut it down to almost – because it was a life safety issue you did it, otherwise you didn’t. So, how can we think about now that you renovated everything what the cash outflow will be post your conversion at the Marriott?

Richard A. Smith

Let me talk kind of a little more broadly and then I’ll bring it back to how we’ll look at it during the downturn in 09 and potentially 010 depending on where we are. As we’ve stated before, by the end of this year we’ll have 20 year plans done. What we anticipate being in 09 will be if there are any engineering issues that really need to be addressed and can’t wait, if there are grand standards or PIP items related to renewals or previously agreed to PIP items. Basically, the things we have to do next year will be kind of our normal course renovation. We’ll have to access any ROI projects on a case-by-case basis and liquidity and the environment will certainly be a part of those considerations. What we would expect in 09 is that from a normal course renovation standpoint that we’ll be below that 6% level that we talk about. Our FAD will be calculated based on 6% going forward in 09 because you’re not going to spend less than that in a capital plan long term so it makes no sense to use it in your calculations, it’s just cheating.

But, we will access that and finalize the plan probably during the third quarter of this year, certainly if we’re still tweaking it we’ll finalize it before the end of the year. But, we would anticipate that next year’s numbers would be below that 6% to some degree and we’ll address that later. As far as the rest of the plan is concerned, it will be when projects need to roll over. Whether it’s six years, seven years, eight years on soft goods or public space and meeting space and restaurant and lounges and things of that nature. Or whether it’s further out on the second row for case goods. But, it will be a long term approach trying to maintain a 6% reserve through that period of time and banking it every year whether your spending it or not. But, the cash spend will be a little less next year.

William B. Truelove – UBS (US)

A little less next year or are you talking percentages?

Richard A. Smith

A little less than the 6%. I don’t know exactly where it will come in but we’re not done with it.

William B. Truelove – UBS (US)

But not a little less in terms of actual dollar amount, right?

Richard A. Smith

No, no, no, not relative to the three year plan Will.

William B. Truelove – UBS (US)

Then the second thing would be give that you’re going to save money on the dividend and apparently cap ex, do you have any restrictions on your ability to reduce debt levels as one way of increasing your flexibility?

Richard A. Smith

Well, I think that the debt levels will come down by virtue of a few things. As we talked about a little bit, the asset sales that are hitting the market in August and certainly in the near term those proceeds will be used to pay down debt. We also talked about the dividend, we talked about $50 million annually if you assume that $0.15 stays in place throughout 09 it’s closer to $75 million of lesser debt we’ll call it by virtue of that dividend reduction. We certainly are spending less capital next year than we have been in the past three years per the three year plan and so all of that kind of leads to those are all ways that you can potentially pay down the debt. There is one other way, it doesn’t really take down your debt it does alleviate some of your cushion issue and that’s what Andy spoke to with regards to the refinancing.

William B. Truelove – UBS (US)

So getting back to my questions, do you have any restrictions on being able to rep-pay some of that debt or just paying off the mortgages?

Richard A. Smith

Some of it is pre-payable. Andy, why don’t you take that?

Andy Welch

Will, all of our floating rate debt is pre-payable and the fixed rate debt, the secured debt has very few maintenance provisions. We have several hundred million that has no pre-payment penalties and no restriction on prepayment.

Operator

Our next question comes from Felicia Kantor Hendrix – Lehman Brothers.

Felicia Kantor Hendrix – Lehman Brothers

Just getting to business in the quarter, I was looking at the granular RevPAR data that you provided, just surprised to still see the underperformance of the Sheraton and the Westin in the quarter following the first quarter. Also, the Hilton underperformed, I was wondering if you could address what’s going on there and do you think we’ll see improvements?

Richard A. Smith

Yes, I do. I think we had and I’ll start with Starwood, there have been some changes kind of at the top and our contact person and so forth and once those changes occurred in March with kind of a month to ramp that up and we had meetings with them, Troy had a lot of meetings with the new guys at Starwood that came in and we’ve seen a lot of improvement on the cost containment side and on the flow through side. We’ve still got some room on the revenue side but they’re addressing that. We like the focus of the new team and they are addressing that. Well, [inaudible] on the Westin, it was also under renovation and it finished just recently with the public space, it looks great. That was one that we just finished. On the Hilton side we were having some issues on the flow through side on that but that turned around dramatically. We had a lot of good conversation with the Embassy folks in May, made some adjustments and had really stellar flow through in June. So, we have seen both of those turnaround, [inaudible] continues to do a good job and the Doubletree guys and Marriot is kind of mixed bag but it’s more of a market issue. We’ve got one of the Renaissance doing above expectation, one doing a little bit below so we’re kind of right on expectations going forward but from a brand perspective that kind of lays it out.

I will add one other thing on the Marriott, the guys at the Hotel 480 who were running that hotel unencumbered, Oscar who’s the GM out there, are doing a great job for us.

Felicia Kantor Hendrix – Lehman Brothers

Also wondering, the last call you talked about at portfolio of assets that you had for sale, there was no update this quarter I was just wondering if you could bring us up to speed with where you are there?

Richard A. Smith

It’s a slow process. We’ve been spending a lot of time kind of bidding brokers and exactly how we wanted to put these things on the market. The packages are pretty close and we’re pretty closer to a decision from a broker standpoint so we expect them to hit the markets in August.

Felicia Kantor Hendrix – Lehman Brothers

Can you talk at all about cap rates you might be seeing on those?

Richard A. Smith

Well, we don’t really have any view currently on cap rates for those particular assets. I can tell you that cap rates have increased generally speaking on the handful of transactions that we’ve seen and so we’ll have to kind of see how this goes. But again, it’s a patient process. We will take our time with this process and if we get the pricing we expect we’ll move on it and if we don’t, we simply won’t. It’s not a fire sell.

Felicia Kantor Hendrix – Lehman Brothers

Then just finally, you do have a number of redevelopment projects in the pipeline, wondering if you’re close to announcing any of those?

Richard A. Smith

Not currently. Not anything more than we had before. We’re still working on entitlements and things of that nature. It’s kind of a slow process when you have to go through a large entitlement process so we’re not close to announcing anything else yet but we’ll keep pushing forward on those and we’ll announce on those when it makes sense.

Felicia Kantor Hendrix – Lehman Brothers

Then finally, on your RevPAR guidance for the remainder of the year, clearly it’s just the visibility is tough, the market is tough, you’ve outlined for us in a very detailed manner how you’re gaining market share in your different markets relative to both the US average and the comp set and I am sure all of that went in to your analysis for providing RevPAR growth guidance for the second half but, I’m wondering what’s stopped you from being even more conservative just given the lack of visibility and also given that this guidance is significantly higher than what a lot of your peers are talking about.

Richard A. Smith

Right, it is significantly higher as it has been the whole year and as we have been producing I think relative to them the whole year. We just expect that to continue. One thing that I pointed out in the earlier comments that I think is really key is that we had 4% growth over our comp sets in the market and the quarter. But when you look at May, June and July, that actually stepped up to 5.5% over our comp sets and 4.5% over the industry so we made strides in both of those. We think that the third quarter is, as Andy pointed out, the earnings peak giving the timing on the renovations and we do continue to gain that market share so we feel comfortable that we will be able to continue with that gap and maintain that market share premium. I think that with the news of the dividend and the thoughts on the dividend today, I think what I hope doesn’t get lost is that we are vastly outperforming everybody else in North America from a growth standpoint this year. I think we still feel good with that premium, we still feel good that we are able to accomplish the things that we have been accomplishing and we’ve seen nothing in May, June and July since the trends worsened that would indicate anything different; quite the contrary in fact.

Operator

Our next question comes from Dennis Forst – KeyBanc Capital Markets, Inc.

Dennis Forst – KeyBanc Capital Markets, Inc.

A couple of questions, I think the very first thing you said Rick was that July trends were weakening, did I hear that right?

Richard A. Smith

No. July trends, and let me lay out July for you, what I said was we picked up greater market share in May, June and July so after the trends started weakening in May – so they got worse in May and during that three month period since they’ve gotten worse, our market share has picked up. I want to make sure that we’ve got that distinction right. Things did start worsening in May but actually, if you look at July, if we look at July just from a pure revenue mix and I’m not going to give you absolute numbers but what I can tell you is that through our original budget that we came in to the year with, May and June were pretty similar, July was a little better. Now, it wasn’t vastly better or anything but it was better and so whether that means July – it certainly looked a little better relative to our original budget than May and June did, whether that indicates any kind of trending certainly it is way too early to tell.

Dennis Forst – KeyBanc Capital Markets, Inc.

I think in the press release you said RevPAR was up 5%?

Richard A. Smith

Yes.

Dennis Forst – KeyBanc Capital Markets, Inc.

The $50 million of additional cash flow or maybe even more than that, I know historically you have had an aversion to buying back stock but could that be in the equation now given what’s going on with the stock and what’s going on in the market and that you don’t need the cash for the business after this year or is that still off the table?

Andy Welch

I’ll answer that two ways, our current leverage levels in our buying covenants prohibit us from buying back stock. Having said that, we have always discussed on our prior calls how we’re looking at a buy back. The view is that it would be with proceeds from asset sales not to further level the company up. When you look at the time frame of selling assets, it could be a similar position with where our leverage would be to reconsider a share repurchase.

Dennis Forst – KeyBanc Capital Markets, Inc.

Then the last, just a clarification on your guidance. When you talk about adjusted EBTIDA for the year being $238 to $289, I’m never sure whether that is same store adjusted EBITDA or hotel EBITDA?

Richard A. Smith

That’s same store adjusted EBTIDA.

Operator

Our next question comes from Kevin [Mylotto] – JP Morgan.

Kevin [Mylotto] – JP Morgan

I was just hoping to get comments on which markets or locations you’re most concerned about or have the least visibility in to for the second half of the year and if you think the airline capacity reductions, the more meaningful ones in the fall will impact your LA or Orlando properties?

Richard A. Smith

Well, Orlando has been down certainly. Globally the market is down in four of five of our comp sets. The good thing for us is that we’ve got double digit market share improvements in those markets. But yes, we’ve seen the Orlando market down certainly, we’ve think gas prices as well as airline prices have something to do with that. The general fear or negative sentiment as Andy said earlier in the economy certainly have something to do with that discretionary spending given where fundamentals are. The South Florida market has been down but it is showing some better signs so we’ll have to see where that goes. There’s another one, the Atlanta market has been down and we’re very focused on the assets in that. We’re getting some help starting in May and in June we started trending well from a market share perspective in Atlanta but the market is down so that’s one that we are looking at.

The New Jersey market is down but we’re making good progress in those markets with our hotels but that’s another market that is down and I think it’s a little bit of a compression issue from New York has something to do with that. And, the Chicago market has been down and again, we had double digit market share improvement. We’re seeing good signs in some markets, those are the signs that we’ve seen and we’re seeing pretty much the same trending with regard to where the travel is slowing and it unfortunately, it’s in the higher rated business, it’s in the corporate transient and corporate group business, Sundays and Monday nights falling off with shorter length of stays and things of that nature. We have made adjustments to that both on the revenue side as well as the cost containment side so we feel pretty good about the position we’re in and the changes we’ve made but yes, we’re seeing a flurry of activity and it doesn’t seem to be particularly rated to one region or the other, although the west does look better than the southeast.

Operator

Our next question comes from Nap Overton – Morgan Keegan.

Nap Overton – Morgan Keegan

Are you at 100% implementation of the contingency plans or where are you on that?

Richard A. Smith

Yes we are. We’ve added to the contingency plans. One of the things we did in May is we went through, not so much to turn on for June because you can’t really turn the ship that quickly, we did some other things for June. But, for the second half of the year one thing that we did during May and early June was spend time going through every single hotel here at the corporate office and looking at it from a flow through standpoint but also from a market share standpoint to see where we could see further opportunities on top of the contingency plans and we came up with some ideas, we took it out to the hotels, they felt like they were good ideas, we’re implementing them as we go so hopefully that will bear fruit in the second half of the year.

Nap Overton – Morgan Keegan

Then two, just maybe a point of clarification but you said the $0.60 dividend distribution was based on an estimate of what you’re taxable income would be – you said the dividend reduction estimate was based on the minimum distribution requirements of taxable income. Is that the dollar per share you’ll end up distributing for calendar year 08? Or, is that $0.60 an estimate of kind of poor case 09 taxable income level?

Richard A. Smith

Well, right now it is where we’re setting it at a level based on multiple sensitivities as we said before without a real understanding or visibility on where 09 will be but running various sensitivities and looking at a down side case it is taking that and based on those assumptions working through and getting through our taxable net income and setting it at a level that approximates that amount so that what we have going forward in 09 is upside. What I mean by that is let’s say that things got a lot better in 09 and the $0.60 ended up being 40% of FAD, we’d have a special dividend at the end of 09. So we’re not changing the policy and I want to reiterate this, the policy is 75% to 85% of FAD and regardless of what the stated dividend is for any quarter, that’s where we’re going to end up paying going forward all the time. The policy is not changing. We’re taking a different approach, a more conservative approach to conserve liquidity in case things continue to worsen. But, if FFO and FAD at the 75% to 85% range support a better dividend than that then a better one will be paid.

Nap Overton – Morgan Keegan

But that evaluation was done based on the scenarios you ran on 2009 not based on 2008 estimated taxable income?

Richard A. Smith

It was based on sensitivities off the guidance of 2008 and then coupled with various sensitivities from a downside basis with 09.

Nap Overton – Morgan Keegan

Then to consolidating the supplemental information in the press release, one of the schedules slipped out which was the debt maturities by year but the previous quarters, that maturity showed $319 million in 2009 of which $170 million had extensions leaving $140 million in total debt maturities in 2009. What portion of that is the April debt maturities?

Andy Welch

$120 and the other $20 are to single mortgages. Just as a side map, the Q gets issued later today and that maturity profile is in the Q.

Nap Overton – Morgan Keegan

Then one other thing is your stock is all the way back to where it was post 9/11 in the 2001 to 2003 downturn and it seems to me you’re considerably better positioned now than you were then. I didn’t know if you wanted to – that’s an open ended question.

Richard A. Smith

I’d love to attack that Nap. We are in extremely better position and I mean there’s not even words to describe in my view. From a standpoint of the quality of the portfolio and where it sits and how we’re positioned to do things going forward both kind of on the op ex and being able to ride out a storm such as what we’re going through right now. I can’t account for the changes that have occurred in the market, we have accomplished everything that we said we would. People generally seem to like the story and where we are heading and what the plan is but I can’t account for the irrationality of the market.

Operator

Our next question comes from Dennis Forst – KeyBanc Capital Markets, Inc.

Dennis Forst – KeyBanc Capital Markets, Inc.

I had a follow up, I forgot to ask about the last five properties that are going through renovation, they will be completed this year?

Richard A. Smith

Well, there’s a couple that we’re looking at business trends and we’ll make a decision. They’re expected to be completed by the end of this year, there may be some roll over in to 09 but it will be become it helps from a business level perspective if that happens. Let me just say one other thing, they’re kind of lesser scope on those assets so the displacement is not nearly as bad and so we want to make sure we’re doing it in more of a downturn and more of a down time relative to business levels.

Dennis Forst – KeyBanc Capital Markets, Inc.

And the San Francisco Marriot rebranding is not included in those five?

Richard A. Smith

No, that’s a separate redevelopment project. It’s still scheduled to come on line in early 09.

Dennis Forst – KeyBanc Capital Markets, Inc.

And how many rooms were out of service in the second quarter? Was it significant at all? I think it was 35,000 in the first quarter?

Richard A. Smith

It’s significant less than that. You know what, Dennis I’d have to get back to you with that. Steve can get back to you with that, it’s just not something I’ve focused on. It’s a far [inaudible] number.

Dennis Forst – KeyBanc Capital Markets, Inc.

Going forward we should just assume it’s the full 25,000 rooms available each night?

Richard A. Smith

Pretty much. I mean, we have a little bit out here and there through the second and third quarter, it’s not an overly material number. The biggest disruption is the Marriot in Union Square so that certainly – there is a number of floors out at any given time and once – we’re just getting started on the public space and once that gets fully going then the disruption will be even greater than the effect of the stores being out of service.

Operator

Our next question comes from [Smeeds Rose] – Keefe, Bruyette & Woods

[Smeeds Rose] – Keefe, Bruyette & Woods

I just wanted to ask for your airport hotels which I think is around 25% of your portfolio, how much, if any, of the business at those hotels is contract business with the airlines?

Richard A. Smith

I don’t have that number off the top of my head as far as how much on a collective basis with all the airports, how much is contract work with the airlines. Certainly, there is a decent amount of that but, I’d have to get back to you on that.

Andy Welch

[Smeed] it’s less than 5% of that entire business is crew business.

[Smeeds Rose] – Keefe, Bruyette & Woods

Less than 5% of your airport hotels or less than 5% of the company’s business?

Andy Welch

Of the portfolio.

Richard A. Smith

I don’t think we’ve ever broken it out just of the airport locations how much of that total business is contract.

Operator

Our next question comes from Jeff Cross – Cross Capital.Jeff Cross – Cross Capital

I have a few questions, the one I need to get out of the way, don’t take offense at it, I had to ask because it came up in internal discussions and it’s to what extent, if any, was the dividend reduction based on or driven by discussions with your lenders or any pressure from lenders.

Richard A. Smith

Absolutely none whatsoever.

Jeff Cross – Cross Capital

Let me move on to the other questions. When you did your conservative forecast, could you tell me the date or about the time of the forward LIBOR curve that you used?

Richard A. Smith

It was in June for part of the forecasting, as far as setting guidance for this call it was July.

Jeff Cross – Cross Capital

Late July?

Richard A. Smith

Yes so the most recent changes would be in effect.

Jeff Cross – Cross Capital

This is almost a suggestion, if you do look at share repurchase you might consider going after the preferred rather than the common simply because of not only cash saved but preferred would be a little easier sale to the lenders if you went back and said, “Well, can we buy a limited amount, a specifically limited amount of equity.”

Richard A. Smith

Well, we certainly consider all aspects when we look at that analysis. Given that the bonds and Andy can comment on this, but given that the bonds are pretty widely held, I’m not sure going to the bond holders for an amendment is very realistic particularly given the environment. But, we certainly consider all aspects and all opportunities, we definitely look at common and preferred as well as everything else as a use of proceeds to determine what is most effective use of proceeds for our shareholders going forward when we make that decision.

Operator

Our next question comes from [Eric Rothman – You Gain Securities].

[Eric Rothman – You Gain Securities]

I wanted to just circle back a little bit more with respect how you set the floor so to speak dividend of $0.60 in anticipation of what your taxable income might be in kind of a worst case scenario. Is it correct that is what you believe to be worst case scenario? And if so, what RevPAR assumption did you use? I thought you said 2% to 4% in response to an earlier questions.

Richard A. Smith

No, we ran multiple sensitivities. First of all, I wouldn’t say it’s a worst case scenario, I would say it’s a bad case scenario and that’s what I had said earlier. I think that we looked at our current guidance and ran sensitivities off of that and we looked at 09 with multiple sensitivities. Not outside of the range of what you have heard other analysts saying that they expect for 09. But other than that I can’t really give you any more detail than that. I don’t want this to start looking like we’re setting expectations for 09 because we’re not. This has nothing to do with setting expectations for 09. We needed a base line and we needed to look at what we felt was a bad case scenario and run the numbers and get to a point that approximated the taxable net income so that we could then have the opportunity to adjust upwards if things were better than that.

[Eric Rothman – You Gain Securities]

I guess maybe let me attack it in a different way. What sort of RevPAR decline would put the current $0.15 per quarter dividend in jeopardy?

Richard A. Smith

I can’t get in to that.

[Eric Rothman – You Gain Securities]

Then just lastly, have you contemplated cutting back on cap ex? It looked at though your cap ex spending under $54 2008 guidance remain the same. Is that something that’s kind of [inaudible]?

Richard A. Smith

Well, for the projects that are on line for this year, they will be completed. The cap ex in 09 will be far south of that number but we’re not giving specific guidance on anything in 09 capital or otherwise.

[Eric Rothman – You Gain Securities]

Then just one last one, I know a couple of months ago maybe it was back earlier in the first quarter you acquired an asset in Palm Desert as well as St. Petersburg, how have those performed and do you expect the airline capacity cuts, I think those two were at the top of the list for cuts, kind of going forward how is that compared to your [underwriting].

Richard A. Smith

We haven’t seen any issues relating to airline capacity yet. Those assets were above expectations in the first quarter. On a combined basis, they were right around expectations for the second quarter so we feel good about them. We feel good about how they’re doing. It was a little bit of a mixed bag in the second quarter, one market got hit a little bit harder than another but on a combined basis they did about the level of expectation. Going forward, it depends on what happens. Will gas prices and airline prices have an effect? I think they will have an effect but it also goes along with the general negative sentiment toward the economy and if that improves then those other things won’t hold those properties back. If that stays the same then we’ll stay about the same as we’re currently forecasted we believe.

Operator

At this time I’m showing there are no further questions.

Richard A. Smith

Thank you for joining us today and we’ll talk to you next quarter.

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Source: Felcor Lodging Trust Incorporated Q2 2008 Earnings Call Transcript
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