Hospitality Properties Trust Q1 2009 Earnings Call Transcript

| About: Hospitality Properties (HPT)
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Hospitality Properties Trust (NYSE:HPT) Q1 2009 Earnings Call May 12, 2009 11:00 AM ET


John Murray - President

Mark Kleifges - Chief Financial Officer

Tim Bonang - Director of Investor Relations


Michael Salinsky - RBC Capital Market

Andrew Wittmann - Robert W. Baird

Will Truelove - UBS

Ryan Melcher - Morgan Stanley

Michael Aroian - Sun Capital Advisers

Michael Salinsky - RBC Capital Markets


Good day and welcome to the Hospitality Properties Trust first quarter financial results conference call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Director of Investor Relations, Mr. Tim Bonang.

Tim Bonang

Thank you and good morning. Joining me on today’s call is John Murray, President and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation which will be followed by a question-and-answer session.

Before we begin today’s call, I’d like to read our Safe Harbor statement. Today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Laws.

These forward looking statements are based on HPTs present beliefs and expectations as of today, May 12, 2009. The company undertakes no obligation to revise or publicly release the results of any revision for the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available on our supplemental package found in the Investor Relations section of the company’s website. Actual results may differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Form 10-Q and 10-K filed with the Securities and Exchange Commission, and in our Q1 supplemental operating and financial data found on our website at Investors are cautioned to not place undue reliance upon any forward-looking statements.

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

John Murray

Thank you, Tim. Good morning and welcome to our first quarter 2009 earnings call. Yesterday HPT reported FFO per share for the 2009 first quarter of $0.95, which again reflects TA rent deferral and non-accruals of straight-line rent, which together reduced FFO $0.19 per share versus the first quarter of 2008.

Yesterday TA reported a respectable and much improved first quarter 2009 financial performance considering the significant decline in the U.S. economy during the quarter coupled with the seasonal first quarter weakness in trucking demands.

Despite fuel volumes which were down about 15% quarter-over-quarter across the 185 HPT-owned sites, fuel gross profit increased 42% on higher per gallon margins. Non-fuel revenues and gross profit declined 8.8% and 8.4% respectively, much less than fuel volumes dropped.

We believe that this is an indication of relative preference by professional truck drivers TA’s have raised there goods and services, and the availability of substantial parking. TA’s other property level operating expenses were down 8% compared to the 2008 quarter reflecting the cost-cutting efforts undertaken during 2008. As a result, in the 2009 first quarter, TA covered the rent due under its leases with HPT at the property level without deducting any rent deferrals.

On March 31, TA had approximately $168 million of cash on hand availability under its line of credit, access to additional CapEx reimbursement from HPT of about $14 million and the ability to defer up to $5 million of rent per month through December 2010.

We believe the actions taken by TA to improve their business, combined with their current liquidity and flexibility provided by the rent deferral agreement enhances TA’s ability to address liquidity risks that may arise during this session.

Turning to our hotel investment, first quarter 2009 RevPAR declined 20%, across those 289 hotels, driven by an 8.4 percentage point decline in the average occupancy, 59.9% and a decline in the average daily rate of 8.8%. RevPAR was weak across all regions, all brands and all price points compared with the 2008 first quarter.

Although, we are concerned about reduced demand and poor rate integrity, HPT’s hotels are well positioned to compete in this period of economic weakness. In past downturns our hotels have generally performed well versus their direct competitors and they continue to outperform in their markets today, with an average 20% RevPAR premium to their competitive set.

The first quarter is generally one of the seasonally weaker periods of the year for lodging, and improving performance later in 2009 may offset some of the first quarter weakness we are reporting today. The American consumer has been de-leveraging and the fed and treasury have been pouring stimulus into the economy. So there is hope that the second half of 2009 may begin to turnaround.

However, based on industry performance in April as reported by Smith Travel and considering the guidance from some of the large brand operators in the latest projections from PKF and Smith Travel, it’s still too early to call the bottom or be optimistic about later in 2009. It does appear that results won’t get worse, but it’s not clear how soon performance will start to improve or at what pace that improvement will come.

All of HPT’s hotel management agreements and leases require that we be paid rents or returns monthly and there are corporate guarantees, security deposits and other features which are intended to secure the performance obligations of our tenants and operators.

We believe the structure of our agreements aligns with HPTs interests with those of our tenants and operators, and our properties are operated by large well known managers like Marriott, IHG, Hyatt, and Carlson. However, the severity of the current recession has caused the effectiveness of our security features to be tested in two portfolios.

Under the Marriott No. 3 agreement of 34 hotels, which has a deposit of $36.2 million and the Marriott No. 4 agreement for 19 hotels, which has a deposit of $28.5 million, we have been paid less in this period and required periodic minimum return on rent amounts. During the second quarter, following the required notice and cure periods we drew on the related security deposits for the deficient amounts.

For all of 2009, we expect to draw between $6 million and $7 million on the Marriott No. 3 deposit and between $5 million and $6 million on the Marriott No. 4 deposit based on our current projections. Even if this recession continues for a substantial period of time, we believe the security deposits will be adequate to offset the cash flow shortfalls from these portfolios.

Although, this is an important issue for us, it’s important to keep it in perspective within HPT. The amounts we expect to draw on the deposits represent approximately only 2% of HPT’s 2009 total minimum rents and returns, assuming full deferral by TA.

HPT remains one of the most secure hotel REITs in the industry and we have maintained our investment grade rating throughout this difficult economic environment. Also HPT has one of the strongest balance sheets in the industry, with 6.4 billion of unencumbered property and no significant debt maturities until 2011.

Nevertheless this is the most challenging economic environment we have faced since HPT was formed. Management and our Board of Trustees intend to aggressively after manage our real estate portfolio and maintain our strong capital base and liquidity.

I will now turn the presentation over to Mark Kleifges our CFO.

Mark Kleifges

Thanks, John. The performance of our hotel portfolio in the 2009 first quarter was weak, as you would expect given the state of the U.S. economy. RevPAR decreased 20% with declines across all brands and all portfolios, all in excess of 15%. Gross margins declined 5.6 percentage points from the 2008 first quarter to 37.6%, and cash flow available to pay our minimum returns and rents declined 43% quarter-over-quarter.

As a result of this property level performance, all 11 of our hotel operating agreements had returned rent coverage ratios below one times for the first quarter. Despite the poor property level performance, and because of the unique structure of our hotel operating agreements, hotel minimum returns and rents included in FFO in the 2009 first quarter were $86.9 million, up slightly from $86.1 million in the 2008 quarter.

As one would expect, additional returns in rents or the amount HPT earns above the minimum payments due to us under our operating agreements declined from $5 million or $0.05 per share in the 2008 first quarter to $700,000 or $0.01 per share in the 2009 first quarter.

Turning to our travel centers portfolio. Yesterday, TA reported significant year-over-year growth in corporate level adjusted EBITDA for the fourth consecutive quarter. TA’s first quarter 2009 corporate level adjusted EBITDA was $53.3 million, a 78% increase over the 2008 first quarter.

Cash flow available to pay rent at our 185 travel centers, increased $15.6 million or approximately 32% over the 2008 first quarter. For the last 12 months, cash flow available to pay rent at our travel centers increased $87.9 million or approximately 35%.

Property level coverage for the last 12 months was 1.48 times for our 145 property lease and 1.57 times for our 40 property lease. Both of these coverage amounts have been contracted based on contractual cash rents and exclude the impact of the rent deferral agreement. TA’s adjusted EBITDA coverage of rent at the corporate level for the quarter was 0.9 times, adding back to $15 million rent deferral during the quarter, coverage of cash rent was 1.2 times.

Turning to HPT’s operating results for the first quarter; yesterday we reported FFO of $0.95 per share, down $0.21 or 18% from 2008. The TA rent deferral in non-accrual of straight-line rent resulted in a $0.19 per share decline in FFO and as I previously mentioned, additional returns in percentage rents were done $0.04 per share quarter-over-quarter. These declines were partially offset by lower G&A and interest costs in the 2009 quarter.

Turning to our balance sheet and liquidity; cash and cash equivalents totaled $36.8 million at March 31, which includes $25 million of cash escrowed for future improvements to our hotels. HPT’s debt to total capital on a book basis was approximately 51% at March 31.

EBITDA was $134 million in the first quarter and our EBITDA to total fixed charges coverage ratio remains strong at three times. At March 31, we had $204 million available under our revolving credit agreement and only one debt maturity of $50 million between now and 2011.

During the first quarter, we funded $49 million of capital improvements to our hotels and travel centers, including $37 million related to the renovation of our Kauai Marriott hotel. We currently expect to fund $20 million to $25 million of additional capital improvements in 2009, although some of this funding may get pushed out to 2010. These findings are in excess of amounts contributed to our FF&E reserve escrow accounts under our hotel operating agreements.

Before opening the call up for questions, I would like to touch on our common dividend in the current state of the debt capital markets. As I’m sure everyone listening to this call knows, on April 8 we suspended our regular quarterly common dividend. We disclosed then, that we expected to realize substantial net income in 2009.

As you can see, our reported operating results and cash flow for the first quarter remains strong, despite the significant weakness in the economy generally and the lodging and travel center industry specifically. We do not have in earnings or near term liquidity problem confronting us.

Instead, the issue our board and management are most focused on is H PT’s substantial debt maturities in 2011 and 2012. In light of the currently economic and capital markets landscape, our board of trustees took the prudent course of suspending the common dividend until December, when we will have a better estimate of our taxable income for the year and a currently view of the capital markets and the state of the economy.

Based on that information, our board will determine the amount of our 2009 common dividend and decide what portion if any, will be paid in common shares. At a minimum, our 2009 dividends will be equal to the amount required for HPT to maintain its REIT status for federal tax purposes.

In the meantime, we are monitoring the equity in secured and unsecured debt markets closely and are encouraged by the significant improvement in REIT credit spreads over the past two weeks. We have also taken other action to improve HPT’s capital position.

During the first quarter, we repurchased approximately $121 million of our 3.8% convertible senior notes for approximately $88 million, representing 28% discount to face value. Our convertible notes are equitable to HPT in March 2012. In addition, in April and May, we repurchased an aggregate of $57 million of various issues of our senior notes for approximately $45 million, a 21% discount to face value.

Operator, that concludes our prepared remarks, and we are ready to open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Michael Salinsky - RBC Capital Market.

Michael Salinsky - RBC Capital Market

John, you gave a sense of that performance during the quarter. Can you give us a sense of how April trends were relative to the quarter and also are you seeing any kind of improvement in May this far?

John Murray

We try not to give guidance. I can tell you that, if you look back historically at the industry averages, we tend to track along with industry average reasonably closely and I think that Smith Travel last week reported that their preliminary estimate for April was a decline in RevPAR of 18% to 20% in that ballpark.

I think that, we are not expecting our portfolio to be much different from that, much as we’d like to tell you that, as I said in my comments we would love to tell you the things are that we could call a bottom and things are getting better, but we don’t really see things getting any worse than they’ve gotten, but we don’t really see any light at the end of the tunnel, if you will.

Michael Salinsky - RBC Capital Market

Okay. Looking at the Marriott and Barcelo Management contracts that are behind there, it looks almost like the Marriott didn’t pay at all in April. Did they pay any amount to you in April on that contract, and also can you give us a sense of how discussions are going with them, whether they are looking possibly to try to renegotiate the contracts or anything like that?

John Murray

I apologize in advance if this gets too detailed, but the contracts required that we repaid it monthly in advance and when the properties began having cash flow deficiencies for a period of time, Marriott was paying the estimated cash flow and was short whatever the deficiency was.

Once they had defaulted in period four and we had sent a default notice tat they didn’t cure, they made a decision at that point that rather than estimating in advance with the cash flow would be and paying us that, and then truing it up later, that they would instead wait until roughly 20 days after their period ends and the accounting was complete and they would send us the full amount will be wired.

So you are correct, in period five initially, in advance we haven’t received any of the payment. We expect to get the full cash flow once they finish their accounting.

Michael Salinsky - RBC Capital Market

Any change in discussions with them in terms of like, they desire to cover going forward or their desire to hold-off maybe to renegotiate the contracts or anything like that?

John Murray

Well, I think that they were asked similar questions on their call and they’ve put forth their position. We think that based on our projections, we believe that our security deposits are sufficient and we’re currently evaluating next steps. We have a variety of options available to us, which range from drawing on the security deposits, any amount that there is, is a deficiency.

As you know, the first quarter is typically one of the weaker quarters. The second and third quarters typically improved. So, there are months coming up where we would be expecting that there would be positive of coverage.

So, there maybe period where this becomes less of an issue, but many case we believe our security deposit are sufficient. We also do have the right to terminate the management agreements and we believe that we may also have the right to terminate the franchise agreements and so we have a number of options available to us.

At the same time, Marriott’s a very well respected brand-management company and these are very difficult economic times, and so there’s a lot of consideration that we have to weigh as we move forward. So, I wouldn’t say that discussions have changed materially since the last conference call. We are still in reasonably constant dialog.

Michael Salinsky – RBC Capital Markets

Finally two questions for Mark. First can you talk a little bit about your plans, if you have any plans thereof to address the line of credit at this point, maybe term out some of that with mortgage debt or new unsecured debt to given the pullback we’ve seen in the unsecured markets as of late?

Mark Kleifges

Well, Mike as you probably know our line initially matures in October of 2010. We have the right to extend that for a one year period to October of 2011. So, in terms of terming out what we have outstanding on, I guess my first point is we don’t feel any urgency in doing that.

We think there is momentum in the debt capital markets and we think there is probably further tightening to come on spreads, particularly REITs spreads even more specifically spreads on our bonds. So, I think we’re more or less in the wait and monitor mode right now in terms of a reaching out to the debt capital markets.


Your next question comes from Andrew Wittmann - Robert W. Baird.

Andrew Wittmann - Robert W. Baird

I just had a couple of questions specifically on some of the operating agreements. Looking at IHG, they suggested in their conference call that in shortfalls that they are funding a shortfall obviously for first quarter, mostly due to seasonality.

I guess my question is what’s your expectation for some of the IHG leases for the rest of the year, whether or not there will be a full year draw on their guarantee and then just kind of a technical issue related to that guarantee, because there was a draw in the first quarter for the guarantee, does that get replenished based on the full year results?

Mark Kleifges

Yes. This is Mark. There seem to be a few questions in there. First off, you’re correct. IHG did fund under both back up, we have $125 million guarantee from IHG that covers all four of our contracts with them. The remaining balance on that guarantee coming into 2009 was about $116 million and they funded about $14 million under the four contracts on a combined basis during the first quarter, so it leaves us with a guaranteed balance of roughly $102 million.

The calculations under each of our contracts are annual calculations of deficits or deficits in cash flow. So, yes to the extent in the second, third or fourth quarters, there’s positive cash flow, that money will flow back to replenish, if you will, to guarantee under those four contracts.

Andrew Wittmann - Robert W. Baird

And then I guess, on two other agreements looking at the Hyatt place transformation seems continue to take hold. As I look at the numbers year-over-year for the first quarter down somewhat less than the rest of the hotel agreements.

Can you just talk about how more expected ramp you see even in this difficult environment and then I guess conversely in the other private company that you’ve got an agreement with, Carlson seems to be one of the weaker performing portfolios, obviously pretty small in the grand scheme to HPT, but can you just talk about your thoughts about how Carlton did in the quarter and if there’s more opportunity for reductions or cost-cutting there?

John Murray

Well, it’s a tough environment to be ramping up a new brand. I guess, I’d rather choose the Hyatt Place than install and choose with a lot of some of those other newer brands that have less units out there in the marketplace.

I think they’ll continue to ramp up, but with the most respect, it’s likely that [famine] is swimming upstream. The current is pretty strong going in the other direction. So we expect that when the economy starts to improve, that ultimately we’ll see Hyatt Place, occupancy and rates that are very similar to the brand occupancy and rates that you see for courtyards and Hilton Garden Inns and upscale hotels like in suburban markets. So I think there’s room to run, but when it will start running again is certainly a question mark.

In terms of Carlson, I think they’re working very hard without trying to slight them. They’re probably among the managers and brand owners in our portfolio, maybe the smaller and a couple of the brands, Country Inns & Suites, Park Inns may be the less well known of the brands in our portfolio and in a downturn I think that that has not helped them.

Prior to this recession really taking hold, they had pretty good coverage and we expect them to get through this time period. It’s a large well capitalized privately held company that owns a lot of different brands and they’ve got mostly a fee income type company like a lot of the large hotel brand owners and so we’re not worried about that brand. We think they’ll come back nicely when the economy comes back.

Andrew Wittmann - Robert W. Baird

So in terms of just operationally there, you feel like they’re doing what they need to be doing, especially compared to what their peers are doing?

John Murray

I think all of our operators are doing the same thing. Our asset managers have weekly and monthly calls with all of our operators and they focus on the particular hotels that have the most challenges and we cross pollinate the different cost cutting ideas that we see from one brand; we suggest to other brands if they haven’t made use of it.

I think all of our operators are doing a very good job of cost cutting, but at the same time trying to balance that with not significantly impacting the guest experience. I think if performance was to get worse, further cost cutting would come at the expense of the guest experience. So, most of the operators are trying to avoid that.


Your next question comes from Will Truelove - UBS.

Will Truelove - UBS

Maybe Mark, if you can help me with this one. Where in the cash flow statement you see the transition of the payments from the security deposit to much of the revenues; where would we see that?

Mark Kleifges

Well, you won’t see any this quarter, because we drew on the security deposits in the second quarter, but it will show up in the cash flow statement. In the cash flow from operating activities, you’ll see it flow through as non-cash revenues starting in the second quarter.

Will Truelove - UBS

Then secondly, maybe John, you’ve got the Marriott 2 portfolio coming due in 2010; it’s going to transition from the old fashion leased TRS agreement. Is there are any risk to that transition in 2010 given what’s going on with the Marriott and you?

John Murray

We don’t think there’s any risk there. That portfolio has been a strong performer. They’re important hotels. We think that the Residence Inn by Marriott among some of the earlier hotels to the brand.

So, I think that although the lease expires at the end of 2010, the management contract continues through, I believe its 2020 or 2019, I forget exactly, and the owness priority payment in that management contract tracks identically with the rent in the lease, so we expect that things will be largely unchanged.

The thing that would be different, assuming there’s no default between now and the end of next year that we’ll return a security deposit to host Marriott. So, we would have a transaction that didn’t have a guarantee or a security deposit at that point, but otherwise we haven’t talked about or had any sort of issues with that portfolio with Marriott and up to this point we don’t expect to.

Will Truelove - UBS

Okay and then my final question again goes back to the Marriott. Using the security deposit starting in the second quarter, is there any thought about perhaps charging Marriott interest, like an interest expense for use of the security deposit? So that when things do recover and the security deposit fills backup again, that maybe the future security deposit becomes larger or somehow you report interest income, very similar to the way you’re dealing with travel service of America, right? Can you comment on that?

John Murray

We haven’t amended any agreements, so we have the terms that we have. The Marriott 3 portfolio, there is a provision for us to charge some interest in the security deposit. In the Marriott 4 portfolio, where Crestline is the tenant and Marriott is the manager, there are provisions there. If we have to draw in the deposit there is a penalty interest that gets charged on draws outstanding on that deposit. So, there is a penalty added on there.


(Operator Instructions) Your next question comes from Ryan Melcher - Morgan Stanley.

Ryan Melcher - Morgan Stanley

Just a quick question for you; in your prepared remarks and then one of your responses to questions, you talked about the fact that you’re not really seeing things get worse, so you don’t want to call it a bottom.

I’m not asking for guidance here, I’m just asking a little clarification on what you’re referring to. Marriott in their guidance for the second quarter issued RevPar down 22% to 25% in the second quarter, which was four to seven points worst than in the first quarter. IHG this morning said that while demand seems to be stabilizing, rates are going to continue to be under pressure. Are you talking specifically about demand or are you being told something different than what we’re hearing from these public operators?

John Murray

I think its demand. We’re not seeing occupancy go through a freefall like it seemed like it might be doing in the fourth quarter and first quarter, but all of these companies, IHG, Marriott, HPT are all discussing averages of very large groups of hotels.

Marriott’s numbers are including international and North American hotels and they are including everything from a Fairfield to a Ritz-Carlton, similarly for IHG. So, when I’m talking about our portfolio, I’m talking about the average for our hotels; but it’s for the most part maybe a smaller spectrum than what they’re considering.

Ryan Melcher - Morgan Stanley

You’re talking demand specific, not necessarily relevant to rate, correct?

John Murray



Your next question comes from Michael Aroian - Sun Capital Advisers.

Michael Aroian - Sun Capital Advisers

Just a few questions here; first of all, is this the first time that rent coverage has been below one time as for all your hotel leases? I imagine it is just given the statements you said earlier, about this being kind of the toughest period for you guys and I’m just curious, what was rent coverage for the hotel portfolio last quarter and then I just have a couple of other questions?

John Murray

In front of me I only have a certain amount of data, so I can’t tell you honestly, whether we’ve ever had a quarter where each portfolio had less than one times coverage. I know after 9/11, that first couples of quarters were pretty rough.

We thought it was important that we say on the call today that, each of the portfolios had less than one times coverage this quarter, but we do typically focus here on the full-year and avoid sort of timing differences and it takes into account CapEx fundings that we may have made and things like that.

When you look at for the rolling 12 month through the first quarter, there are only three portfolios that had less than one times coverage; and with the exception of the Marriott, hotel in Kauai, that declined below one times, but it wasn’t that dramatic.

So InterContinental was down, probably number four was down probably the most and I think that’s our reflection of our Congress and the media making some business meetings of that word, but looking back last quarter, just for the quarter there was six of the portfolios that had less than one times coverage. Again, that was the fourth quarter, which is the fourth quarter and the first quarter are the two weakest quarters.

Michael Aroian - Sun Capital Advisers

Yes. Okay and then, in terms of the security deposit for those leases, just refresh my memory, is that like you got a year’s equivalent of rent?

John Murray

No, in some leases and management contracts we have security deposits and in others we have guarantees, but typically when we entered into those transactions, the amount of that credit support was typically a year’s rent or a year’s minimum return. These were in the form of a deposit or in the form of a guarantee or a combination.

Michael Aroian - Sun Capital Advisers

Okay and then the rent deferral agreement with TA, just refresh my memory, that goes through ‘09, correct and then in 2010 it goes back to normal?

John Murray

No, it goes through 2010.

Michael Aroian - Sun Capital Advisers

Okay. Sorry.

John Murray

Starting in the beginning of 2010, there’s a 12% annual interest rate of amounts outstanding.

Michael Aroian - Sun Capital Advisers

Okay and there’s no option that you would have to be able to; I’m just kind of thinking out loud here besides the TA’s, I think outperforming compared to what you guys expected and versus the hotel portfolio, there’s no way you could say “hey guys, come in 2010” I mean you guys are doing better…?

John Murray

No. We think the combination of their ability to potentially callback some of the shares that they gave us if they don’t defer and the cost of the interest, those are the only incentives that have built into the agreement, but we don’t have any other rights to tell them that we’re not going to live up to the agreement, they have that right.

Michael Aroian - Sun Capital Advisers

Alright, and then lastly, the ratings agencies sort of dialogue recently, have you guys talked to them at all and is there a concern that with the hotel portfolio, with rents kind of deteriorating more than expected that this could be kind of native implications. I know in the past they were really more focused on TA.

Mark Kleifges

Yes, as you would expect, we’re in regular dialogue with the rating agencies and both agencies were aware of the issues we have with the two Marriott contracts, because they really came up subsequent to year end and so we’re not anticipating any issues on that front.


Your next question comes from Michael Salinsky - RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Real quickly in terms of the acquisition market, I know it’s probably a little bit early, but can you talk about what you’re seeing; whether the stress levels are rising, whether you’re seeing a significant amount of portfolios coming back to the market and where your pricing would need to be right now for you guys to become more interested?

John Murray

We’re hearing a lot about an increasing amount of distress. We’re hearing about a lot of borrowers who have acquired hotels or refinanced hotels in the last couple of years; who took advantage of lower interest rates and are not having any problems paying the debt service, but now see that based on their cash flows, that the value of their hotel maybe less than the value of the debt.

There are some other owners who are having trouble paying the debt service and there are some owners who are even having trouble paying operating costs. So, we know that there’s a lot of distress out there.

For the most part I think a lot of the hotel financing that takes place is done on a secured basis and so there’s quite a process that has to be worked through if you’ve got CMBS debt on property that has been sold off and gone through CDOs and the like. Just trying to figure out who your lender is a challenge these days, when you get into distressed situations.

So, we haven’t seen that much actually come to market, but it’s a little early and we expect probably quite a bit starting sort of late this year and during next year. That we’re going to see quite a bit of activity. Whether those appeal to us remains to be seen.

The transaction flow that we have seen, we’ve been offered large urban hotels and reasonably good condition at 10 caps. Thus far, we haven’t seen any hotel returns that look like they’re better than what we could achieve, taking advantage of dislocation in the debt markets. So, that’s why we’ve bought back some debt in the second quarter, but have not bought any hotels yet.

Michael Salinsky - RBC Capital Markets

Mark, a question for you; if you look at the ordinary payout from last year’s dividend, it was well over $2. Given the two additional quarters of the deferrals from TA, as well as the pullback in lower deferred, what kind of range do you expect that the ordinary income component of the dividend to be for 2009?

Mark Kleifges

Well Mike, I don’t give GAAP guidance. So, I think we’re going to give taxable income guidance. I mean the question I think that’s on everyone’s mind, there’s a lot moving pieces to taxable income this year. The deferral, just to be clear on that, I think I’ve mentioned this on prior calls.

The deferral itself does not lower our taxable income under the Internal Revenue Code, unless it meets the definition of a bad debt if you will, that we can write-off for tax purposes and since our position continues to be that if this is simply a deferral of rent, not forgiveness of rent, I think we’d have a tough time making the position for tax that we had bad debt.

We’ve got the gains that have come about from the debt repurchases. There is a new provision this year that allows us to defer those gains for a five year period and then amortize them into income over five years, we’re evaluating that. There’s some bonus depreciation provisions in the stimulus bill, so there’s a number of things that could have an impact year-over-year on taxable income.

So, I think until we get close to the year end and have a better figure feel for where taxable income is going to fall out, that’s about all we’re saying on that subject for now.


We have no further question at this time. I would like to turn the call back over to John Murray for any additional or closing comments.

John Murray

Well, we’d just like to thank everybody for joining us on the call today and look forward to hopefully seeing some of you at the NYU or NAREIT conferences coming up at the beginning of June. Thanks a lot. Have a good day.


Once again, that does conclude our conference call today. We thank you for your participation.

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