Ashford Hospitality Trust Inc (AHT) 2004 Q3 法說會逐字稿

Good day, everyone, and 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. Mr. Sullivan, please go ahead, sir.

Good morning, and welcome to this Ashford Hospitality Trust conference call to review the Company's results for the third quarter of 2004. On the call this morning will be Monty Bennett, President and Chief Executive Officer; Doug Kessler, Chief Operating Officer and Head of Acquisitions; and David Kimichik, Chief Financial Officer and Head of Asset Management.

The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were released yesterday evening in a press release that's been covered by the financial media.

As we start, let me express that certain statements and assumptions in this conference call are based upon forward-looking information, and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. When we use the words will likely result, may, anticipate, estimate, should, expect, believe, intend or similar expressions, we intend to identify forward-looking statements. Such statements are subject to numerous assumptions and uncertainties, many of which are outside Ashford's control. These forward-looking statements are subject to known and unknown risks and uncertainties which could cause actual results to differ materially from those anticipated, including without limitation general volatility of the capital markets and the market price of our common stock; changes in our business or investment strategy; availability, terms and deployment of capital; availability of qualified personnel; changes in our industry and the market in which we operate; interest rates or the general economy; and the degree and nature of our competition. These and other risk factors are more fully discussed in the section entitled "Risk Factors" in Ashford's registration statement on Form S-3, and from time to time in Ashford's 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. Investors should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or circumstances, changes in expectations or otherwise.

I will now turn the call over to Monty Bennett. Please go ahead, Monty.

Good morning. Today, we would like to discuss our operating performance for the quarter, update you on our investment activity, provide an assessment on the current state of the lodging market and share with you our investments pipeline.

We had a very busy and successful quarter. During the quarter, we increased our asset base substantially, while securing some very favorable financing. As we have assembled our portfolio, there have been and probably will continue to be a bit of noise in our numbers. However, once you look past the surface, RevPAR growth and hotel operating profits showed some very favorable trends.

While David Kimichik will provide the details, I would like to highlight a few items regarding our third-quarter operating performance. Our reported FFO of 3 cents per share and CAD of 10 cents per share are both deceptively low, in my opinion. After adjusting for the expensing of loan costs and the effect of casualty losses, FFO and CAD would rise to 12 cents and 13 cents, respectively.

In comparing our numbers to street forecasts, seasonality had a major impact. As far as we can tell, the street estimated that approximately 32 percent of the income from our direct hotel investments would be produced in the third quarter, which is not an unreasonable assumption. However, now that we have completed our initial investment acquisition targets of $500 to $600 million worth of assets, we can say that historically, these assets produced only 25 percent of their annual income in the third quarter. This difference accounts for 5 cents of FFO and 5 cents of CAD. For your future reference, these assets historically have produced 20 percent of their annual income in the fourth quarter, which I believe is closer to the street's estimates.

Regarding the assets themselves, RevPAR for our hotels not under renovation was up 6.7 percent for the quarter year over year. Including those hotels under renovation, RevPAR was up 3.3 percent. Further, hotel level operating profit for all hotels rose by 2 percent on a pro forma basis. And if it were not for the hurricanes and the fire we experienced at one asset, hotel profit would have been up over 13 percent year over year, despite the ownership changes, management changes and renovations, which all can be very disruptive. These fundamental metrics of RevPAR and hotel level operating profit show that our asset base is solid. Also, our first mortgage and mezzanine loan portfolio currently yields over 11 percent, unleveraged.

Significantly, we reached our target of $500 million to $600 million in invested capital by our one-year anniversary. Transactions closed or announced in the quarter include a 17 million full-service share to the North Philadelphia, a $62 million portfolio of select service hotels in the Midwest, a $26 million portfolio of select service hotels in the Greater Atlanta area and the $81 million, 654-room full-service Hyatt Orange County. We also added to our loan portfolio, with the $11 million mezzanine loan on the Westin Westminster and the $15 million first mortgage and mezzanine loan on the hotel Teatro in Denver.

We paid a dividend of 14 cents per share in the third quarter. Based upon our closing price as of yesterday, this equates to a 5.7 percent annual yield, which is one of the highest in the hotel REIT industry, and doubly significant for a growth platforms such as Ashford.

In short, Ashford remains on plan and on target, building its solid, diversified lodging portfolio.

I will now turn the call over to David Kimichik.

Good morning. I will discuss some of our financial highlights for the quarter. During the quarter, we reported a net loss of $1,390,000 or 6 cents per share, FFO of $1,025,000 or 3 cents per share and EBITDA of $5,014,000.

Included in these results are a couple of one-time events worthy of noting. First, the numbers include an expense of $1.6 million or 5 cents per share for the write-off of deferred loan costs, in connection with the $210 million term loan refinancing completed in the quarter. Additionally, for the quarter, the Company expensed $570,000 or 2 cents per share for the amortization of deferred loan costs. On a go-forward basis, assuming no further financings, the run rate for these costs should be approximately $1 million per quarter. This is a bit larger than typical, due to the short initial period on the $210 million loan.

Second, as a result of hurricanes in Florida and a small fire at the Covington hotel, we estimate there was $1 million or 3 cents per share impact to operating profit during the quarter. These expenses are isolated to the third quarter, and are comprised of uninsured losses or deductibles on insurance coverage, as well as lost revenue. All rooms affected by these events have been returned to service. Although not included in our numbers, we anticipate that we should be able to recoup some of the lost revenue through a business interruption settlement under our insurance coverage, but we can't predict when that settlement will take place.

Additionally, one of the more significant impacts to forecasting our results is estimating the seasonality of our annual yields. I believe the street forecast of between 30 and 32 percent of our annual income would occur in the third quarter. Now that we have reached our initial investment target and have analyzed the historical performance of our portfolio, we estimate that the third quarter will attribute approximately 25 percent of our annual yield. The impact of the actual 25 percent versus 32 percent is more than 5 cents per share difference for the quarter.

Based upon historical results, the combined direct hotel portfolio has operated seasonally as follows -- 25 percent of the income in the first quarter, 30 percent in the second quarter, 25 percent in the third quarter and 20 percent in the fourth quarter.

As of September 30, the Company had total assets of $571 million, including $113 million of cash. This is up from total assets of $358 million at the end of the second quarter. We are very pleased to report that we increased total assets by $213 million during the third quarter. This increase is the result of an increase in investments in direct hotel ownership of $107 million, a net increase of $19 million in loan investments and an increase in cash of $81 million from our preferred stock sale and the refinancing activities that occurred in September. Currently, we have a total cash balance including restricted cash of approximately $40 million.

As of September 30, we had $286 million of mortgage debt, leaving the debt-to-total-assets ratio at 50 percent at the end of the quarter. Of our debt, 44 percent is fixed-rate and 56 percent is floating-rate. Our blended interest cost is approximately 4.8 percent. 105 million of our 160 million of floating debt contains an interest rate cap, and 33 million of our floating debt is naturally hedged by virtue of being secured by a portion of our floating-rate mezzanine loan portfolio. It is important to note that 93 percent of our debt as of quarter end is either fixed, capped or hedged.

Currently, we have 25.8 million common shares outstanding, 2.3 million preferred shares outstanding and 6.1 million common OP units issued. Fully-diluted shares totaled 31.9 million.

As of September 30, we owned 32 hotels, comprised of 4,441 guest rooms. Additionally, in the month of October, we purchased the 654-room Hyatt Orange County hotel. We currently have agreements for property management with six different companies. Remington Hospitality and Lodging manages 14 of our properties, Noble manages 4 of our properties, Day Hospitality manages 4 of our properties, Dunn Hospitality manages 9 of our properties, and Buccini/Pollin and Hyatt Hotel Corp each manage 1 of our properties.

As of September 30, we owned a position in seven mezzanine and first mortgage loans, with total principal outstanding of $90 million. The total loan portfolio produces an average yield of 11.4 percent, and following the anticipated sale of the Teatro first mortgage, the mezzanine loans will produce an average unleveraged yield of approximately 12.2 percent. Our loan balances reflect a $7.2 million repayment received during the quarter, when 2 of the 17 assets in our $25 million portfolio mezzanine loan were sold.

RevPAR for the entire portfolio was up 3.3 percent during the third quarter, as compared to the third quarter '03, and for the hotels not under renovation, which is all but five hotels, the RevPAR was up 6.7 percent. The majority of this increase is due to a 5.4 percent growth in our average daily rate.

Hotel operating profit for the entire portfolio was up approximately $180,000 for the quarter, when compared to the third quarter '03, which includes the results of the previously mentioned insurance impact, as well as the impact from disruption related to renovation activities. After giving effect to that $1 million impact from the hurricanes and fire, hotel operating profit would have been up 13 percent, which is in excess of the 10 percent increase in hotel operating profit we reported in the second quarter.

Finally, for the third quarter, we reported CAD of $3,142,000 or 10 cents per share, and announced a dividend of 14 cents per share. Dividends year to date for the first three quarters of the year equal 30 cents per share, and represent a 93 percent payout rate on our year-to-date CAD. Without the impact of the insurance effect, our dividend payout rate would have been 85 percent of CAD.

I'd now like to turn it over to Doug Kessler to discuss our ongoing investment plan.

Thank you, David, and good morning. From our vantage point, we see hotel investment and financing activity at one of the highest levels in recent memory. With this high transaction volume, we would like to share with you our views on the following topics. Is Ashford getting its fair share of these deals? Are Ashford deals still achievable? Will this investment opportunity continue well into next year? And, finally, will this mean continued growth of Ashford, given its diverse investment platform?

The answer for each of these questions is yes. We are clearly getting our share of the transactions we want, at the terms we believe make sense, and that are consistent with our overall investment philosophy. We believe we see virtually every deal in the market; and, given our diverse investment objectives, we are frequently able to consider either debt or equity investment alternatives on the same deal. Our strategy remains disciplined and selective into what we invest our shareholders' capital. Our transaction pace has been high, our yields even higher and our pipeline strong.

The third quarter was our most active, with 585 million invested to date. Since the end of the second quarter, we have closed or announced $202 million of direct investments and $26 million of mezzanine or first mortgage investments. The diversity of our investment since our last call clearly indicates our conscientious strategy to find for our shareholders the best yielding, long-term opportunities in lodging across a wide spectrum of investments.

Here are just a couple of recent examples of our unique sourcing and structuring efforts. We preempted a full marketing effort of the 654-room Hyatt Orange County, and closed on this hotel with a seller we had done business with in the past. We acquired this $81 million hotel at a favorable valuation per key of $125,000, and at an unleveraged first-year EBITDA yield of 9.8 percent and an NOI capitalization rate of 8.2 percent. We expect this asset to be a significant contributor to 2005 earnings following the room renovation that is underway.

The $15 million loan on the boutique Hotel Teatro originally started as a request by the borrower for development financing, but evolved into refinancing an existing property, once the borrower gained an appreciation for our competitive terms, flexibility and timing. We provided a loan at LIBOR plus 565 basis points. The unique feature for Ashford on this transaction is that we originated a whole loan inclusive of the first mortgage and the mezzanine. The strategy is to sell off the first mortgage, enabling Ashford to keep a higher-yielding mezzanine loan at a rate in excess of 1,100 basis points over LIBOR. We will continue to be creative in ways to maximize opportunities for returns on our shareholders' capital.

Our targeted allocation for direct hotel investments has increased to 70 to 90 percent, based upon opportunities we are seeing in the market, and where we believe the lodging cycle is currently. Direct hotels comprised 85 percent of the portfolio.

We remained committed to diversifying the portfolio with mezzanine loan investments. To that end, we will continue to target mezzanine loans in the range of 10 percent to 30 percent of our overall asset base.

We are extremely pleased with the yields we have obtained on investment since the IPO. In terms of direct hotel investments, our investment yields are at the high end of our stated range, with trailing 12-month EBITDA yields averaging 10.5 percent on acquisitions since the IPO. The original target for direct hotel investments was a range of 9.5 to 10.5 percent. The mezzanine investments, with a 12.2 percent average unleveraged yield, exceed our target range of 11 to 12 percent.

Our investment strategy remains on track with having a diversified platform. We overweight capital and those investments with the best returns, and underweight in other parts of the capital structure or hotel segment for balance.

We now have 33 direct hotel investments containing over 5,000 rooms across 12 brands and one independent. Over 59 percent of the portfolio is in the full-service segment, 33 percent in the select-service segment and 7 percent in the extended-stay segment. Approximately 45 percent of our rooms are Hilton-branded, 26 percent are Marriott-branded and 13 percent are Hyatt-branded, with the rest being a variety of other brands.

Our portfolio consists of some of the highest forecast RevPAR growth segments, with 51 percent of our portfolio upper upscale and 33 percent upscale. Our direct hotels are diversified by geography, market location and demand generators. In terms of total rooms, 27 percent are in the South Atlantic region, 21 percent in the Midwest, 13 percent in the Pacific region, 12 percent in the Northeast, 11 percent in the Southeast, 11 percent in the Mountain region and 6 percent in the West/South Central region.

We have also diversified our property management, by keeping six different existing management companies in place under performance contracts. We believe that this diversification, which is different from many of our peers, optimizes shareholder returns and enables our management team to avoid being boxed in when it comes to finding the best investments for our capital.

Now, let's turn to our mezzanine strategy. Our closed mezzanine loans have initial unleveraged yields that average 11 to 15 percent. We continue to see financing opportunities consistent with our targeted range. To date, our pricing is based upon a grid, with the minimum spread above LIBOR of 900 basis points for mezzanine loans. The loan portfolio consists of 21 different hotels, containing over 7,000 rooms across seven different brands and two independents. The portfolio consists of 100 percent full-service upper upscale hotels that are geographically dispersed, mainly throughout the New England, Midlantic and Mountain regions.

Clearly, the level of transaction volume and competitive nature of the market today have not hampered our ability to achieve our targeted returns. As demonstrated by the volume of loans completed to date, we are rapidly becoming a recognized mezz lender in the industry, and are contacted directly by brokers, borrowers and first mortgage providers. We have established relationships with leading real estate lenders who experience the benefits of teaming up with Ashford. We are also able to source a growing number of transactions without having to bid on them in the open market. This is an advantage we have enjoyed, and will remain a priority for us as we move forward to 2005.

It is worth noting that we have been and should continue to be active in financing our assets in ways that find the most cost-effective source of debt capital. For example, during the third quarter, we completed a $210 million financing of a pool of 25 hotels that we owned or just acquired. After having run a very competitive bid process and persistent negotiations on our part, we obtained very favorable pricing at 195 basis points over LIBOR. We believe that this pricing, for the amount of leverage and asset types, set a new benchmark for the industry, and have not seen such a deal quite like this among our peers. We also negotiated very flexible terms on items such as extension rights and prepayment.

Lastly, we also worked with our existing lenders to revise our credit facility, having recognized a more competitive marketplace. Even though our facility was relatively new, we negotiated a reduction in spread from 325 basis points over LIBOR to a range of 200 to 230 basis points over LIBOR, depending upon coverage. Our management team has diverse lender relations, and our shareholders should benefit from this.

All indicators show that we should continue to benefit from our strategy into 2005. Given our diversified platform, we do not have to time the markets exactly, although we have proven adept at that in the past, in order to generate strong returns. We have the capability of moving in and out of all four investment types in the lodging cycle -- direct investment, mezzanine, first mortgage and sale leasebacks. We have already proven we can accretively invest in the first three investment types, and have the flexibility within our capital structure to facilitate these transitions, something that not many of our competitors can claim.

I will now turn the call back to Monty for some brief concluding remarks.

Thank you, Doug. After the first quarter of this year, we paid a 6 cent dividend; after the second quarter, a 10 cent dividend; and most recently, a 14 cent dividend after the end of the third quarter. We have been asked what our dividend will look like for the fourth quarter and beyond. Thus far, we have indicated that we intend to increase the dividends further, and we still have that intention over the next few quarters. We have also indicated that it has been our objective to pay out between 80 to 85 percent of CAD in the form of dividends. For the first three quarters, our dividends have totaled 30 cents, while CAD has totaled 32 cents. This has put our payout ratio to 93 percent year to date. Seasonally, the fourth quarter produces lower earnings, and therefore lower CAD, than some of the other quarters. Regardless, for the fourth quarter, we intend to pay a dividend of 14 cents and possibly higher.

Our investment pipeline remains at approximately $200 million, which includes assets under contract, letter of intent or under negotiation. Historically, some of these opportunities have moved forward, while others have fallen out, although replaced by new opportunities. Last quarter at this time, with a pipeline of approximately the same size, we ultimately closed approximately $100 million worth of acquisitions. Without raising further common or preferred equity, we still have $130 million of dry powder for these future acquisitions. Because of our newness to some of these assets and the continued noise in our numbers, we are not in a position to provide earnings guidance at this time. As time moves forward, we will reevaluate our position.

Investing in Ashford is one of the best opportunities in the marketplace to take advantage of what many pundits believe is one of the most attractive investment areas in real estate, hospitality. Our experience, our track record and our diversified platform will continue to set us apart.

That covers our prepared remarks. We will now be happy to answer any questions that you may have.

(OPERATOR INSTRUCTIONS). David Loeb, FBR.

I've got a couple of little questions. On the margins, Kimo (ph), you talked a little bit about how much operating profit would have been up without the hurricane. Have you got the operating margin percent number without the hurricane and fire impact and, even more important, without the renovation, for the hotels not under renovation?

I've got some of those numbers, Kimo, if you don't mind me jumping in here. The operating margin for all the hotels year over year, compared to -- well, let's just say for 2003 for EBITDA operating margin was 26.7 percent, and now it's 26.9 percent -- so up 0.2 points or approximately a few percent, 1 or 2 percent. That's with everything loaded in.

If you pull out the effect of the hurricanes, our margin in 2003 was, again, 26.7 and would have been 29.9 or a 3.2 point increase in margin for EBITDA year over year. Again, that equated to about a 13 percent movement. Regarding just breaking out those assets under renovation --

Not under renovation is actually what I was asking.

Okay. Not under renovation -- the margins are almost exactly the same. But that includes the effect of the hurricanes, because the hurricanes hit those assets that are not under renovation. So it's 29.9 versus 29.9, and you could probably soundly (ph) say, if you just applied the effect of the hurricanes to those assets -- again, those are where it's affected -- it was probably about a 3 point difference. So it would have been 3 points higher.

So, apples-to-apples, no hurricanes, just the hotels not under renovation, it would have been in the range of a 6 point margin improvement?

No. I'd say it's a 3 point margin improvement, approximately 30 percent to 33 percent.

Oh, I see. Okay. Those were already higher. And this is just for the quarter, right? Not for the year to date?

That's right.

Is that coming primarily -- the improvement in the margins coming primarily because of the fact that you are raising ADR, or are there differences in the management style, the asset management style, in these hotels that are driving that great (ph) increase in margins?

It's really a little bit from everywhere, David. As we looked at and examined all the numbers, you have got some costs that are working a little bit against us because, as we take over an asset, many times there are some transition costs that are kind of one-time; that hurts us. But generally, when Remington takes over the management of an asset, the costs are reduced, usually fairly substantially. So that works to our benefit. A lot of these assets have the same manager as they did the year before, because they are part of the Dunn portfolio or the Bay portfolio or Buccini/Pollin or what have you. And the differences there is primarily due to ADR changes, broadly, although again they are kind of all over the board.

I guess I was going to ask about the dividend. You did give a pretty good answer in your prepared remarks. It sounds like, in the absence of guidance, you are not really going to be able to tell us about when that might move up again. Any idea, just given the seasonality of the portfolio? Does that mean it's more likely that, second quarter dividend, we might see another increase? Or would that be third quarter, or might it be even earlier?

It's really hard to say, David. And I know that you guys would probably like some kind of guidance on the dividend, and so we try to give as much as we can here. If I had to handicap it, I'd say that the dividend next quarter would go anywhere from 0 cents to a few cents. It's just hard to say. It's hard to say whether we would want to kind of jump up next quarter and try to essentially set the dividend for the year, or to continue to gradually raise it. And I think that's going to depend upon how our numbers look as we get towards the end of the quarter, as well as what kind of acquisitions that we see in our pipeline, what we think we are likely going to close on. And it's just very fluid, and so unfortunately, that's just the best we can give right now.

Just to be clear, 0 to a few cents more?

That's right.

That's what I thought you meant. And finally, on the Hotel Teatro transaction, where are you in the process of selling that first mortgage? It looks like a very creative transaction. I guess what I'm wondering is, what is the risk that you end up with the whole thing? Is that a risk, or is that still a good piece of paper to hold? And how soon might we know that?

The effort to sell the first mortgage was conducted on a parallel path with the origination of the loan, and we would expect that to be completed in the very near term. We would handicap the risk of not selling it to be very low.

It's a very competitive market out there for first mortgages. That's why we are generally not to much in that business. Like Doug said, we lined up a few possible takeouts for it when we were originating the whole loan. We selected a group that we thought would be the best person to do that, and we are pretty far along with them on making that transaction.

So, given the competitiveness of the first mortgage market, might you do more of these whole loans?

Yes, very much so, very, very possibly.

(OPERATOR INSTRUCTIONS). Ray Guerera (ph), Actia Capital (ph).

A couple of questions. One, can you give us a little color on the number of properties that you have under renovation, which, if I read this one piece right, it looks like five. But if you would verify that, and talk a little bit about what the revenue impact has been? And can you tell us what the target date would be for the completion of each of those, and what in fact sort of the revenue is, in those properties that are under renovation on a latest 12-month basis?

Sure. I'll take a stab at this --

That's one question. And then I have like another sort of group of questions that go together, too.

On your first question there, regarding those assets that are under renovation -- or under heavy renovation, I should say -- there are five of them. And of those five, the difference in RevPAR year over year is that they are down about 7.5 percent, combined. Kimo, if you could look up what the revenue number is while I'm talking here, that would be helpful. And the remaining of the 32 assets at the end of the quarter, now 33 assets with the Hyatt Orange County, are under less renovation, generally.

Let me kind of qualify that a little bit. The Hyatt Orange County, which we bought subsequent to the end of the third quarter, is under renovation and should be completed by end of November, is what they are telling us -- probably, just to be safe, maybe end of the quarter. And that's under a fairly significant renovation, and will be impacting our fourth-quarter results but not our third-quarter results.

Of these five assets that I have mentioned to you, four of the five might have some impact in the fourth quarter, but certainly by the first quarter will not have impact on our numbers, except for one of the assets, the Sheraton Bucks County -- will be some impact on it, probably through the first quarter, and by the second quarter it should be all cleared up, maybe a little bit of residual effect on that asset.

Of the remaining assets that we have purchased -- for example, the Dunn portfolio, which is a group of limited service assets -- we anticipate about $7 million-ish worth of renovation on those assets that has not begun yet. We are very much trying to get those renovations done here in the fourth and first quarter, where it won't have too much of impact. We are also hopeful that there won't be as much of an impact on operations from those renovations, because they are select-service and because the renovations don't occur in the public areas; they are mainly soft good type renovations. We think that, and are hopeful that there won't be as much disruption compared to, say, the Sheraton Bucks County, which is a full-service hotel. All the public areas are being renovated, so that's very disruptive. And also, in the rooms themselves, we have a heavier type of work. It's not just soft goods, but its case goods, also some minor construction in the bathrooms and those kinds of things. So generally, our experience is that less-service hotel renovations are less disruptive than full-service hotel renovations.

Of all the deals that we bought, I think we have got about $30 million worth of renovations that are underway thus far. About $15 million of that has been completed, with another $15 million to go. Of that $15 million to go, 7 of it is with this Dunn Hospitality select-service portfolio I just talked about, and about 4 million of it is in this Bucks County asset, so that's most of it. And again, we'll see disruption in the Bucks County asset, but hopefully not too much in those select-service assets.

The raw numbers, in terms of impact to revenue for the renovation assets, is about 800,000 in revenue for the quarter and about 2 million on a year-to-date basis.

And just to be clear, that's what we are down from last year --

That's correct.

So ideally, hopefully, we would have been up over the prior year. And of course, it depends upon how much you think you might have been up. But that's a number just compared to the prior year.

So, just to finish up this point, as you move forward from here, is it your expectation that you recapture that revenue next year, plus you get some sort of growth in RevPAR that would be consistent with the rest, so that you get a big snap-back?

We should get a good snap-back. But we find that those snap-backs usually take over time. Limited-service, they typically happen a little quicker than full-service. So I imagine that next year, again, generally, if I had to predict or estimate, that the full-service hotels that are in renovation would probably stop having negative year-over-year performance, or maybe modest year-over-year performance, and in the following year even stronger performance. So they kind of come back gradually, while limited-service hotels pop back a little bit more quickly.

And then the other question or group of questions I had -- in your listing in the release of third-quarter investment activity, where you use the word "acquired" -- is that the closing date of those acquisitions, or is that just you have announced that acquisition in July, and they have yet to close?

We don't have any investments that are announced but unclosed, I believe. So everything that we have got in that release, Ray, has been closed.

But beyond that, when you say in July, the Company acquired, does that mean that deal closed in July?

Yes. Yes, that's right.

So that would have been partially in the quarter, although that one -- is that one the one under renovation?

Which one are you talking about? (multiple speakers).

Are you talking about (multiple speakers) asset in July that we listed in our press release?

Yes.

Yes, that's correct. That's the one that Monty mentioned is currently under renovation.

That one was a little unique in the brand, Sheraton, was really putting a lot of pressure on the prior owner to get the renovations going. So they had started it before we purchased it, and we bought that as a renovation in progress. And so, although we try to hold it back a little bit during the summer, some of the renovation, because it's such a strong summer up there, and we try to minimize the impact and did a decent job of doing that -- but now we are pushing it harder and getting more heavy into the renovation as the year goes on.

You could probably say, I can't answer the next question because it's impossible, but I wish you would try. Can you give me a sense of -- you talked about you had 130 million of cash available that you could use for acquisitions. And obviously, you are looking at different things. Would you expect that the proportion of what you spend that on will be higher in the mezz space than what your experience so far has been, or not?

Sure, I'll take a stab at it. Just to be clear, we have got $130 million of dry powder, meaning that we've got $40 million in cash, and then we have leverageability on our credit facility and otherwise.

Regarding what we see in the marketplace, we still see a lot of direct hotel investments. The mezz type of deals that we're seeing out there -- a number of them are kind of chunky and kind of big. So it just depends upon whether we get something that's the right size for us because, while we all have an appetite to jump out there and do bigger mezz loans, we want to be mindful of how big of a bite we take, considering the size of our platform. Because the way we underwrite these deals and debt (ph), in the event that something happens, we want to be able to take over the asset, keep the first mortgage current, and then own the asset, and then figure out the right time to sell it. Maybe we reposition it along the way. And so we like to remain that flexibility, where, if we jump out there and buy too big of a mezz loan that sits on top of too big of a first mortgage loan, then it might inhibit our ability to carry that first mortgage loan as we work through the asset's troubles.

We have always looked at the mezz portfolio as -- the worst-case scenario is if the borrower performs; and the best case, arguably, for us could be that if they don't perform and we get our hands on the asset, although there would be some short-term disruption, we make, essentially, asset plays in the mezz loans that we make because we are very happy about the asset we're loaning against.

Doug, you might have something to add.

Ray, just a couple of other points. One is that, as you know, in the past, we only make announcements on our mezz loans after they close, as opposed to our direct hotel investments, which typically have a little bit of leadtime because, on our direct hotel investments, we announce when they are under hard contract, and then we announce it when it closes. Conversely, on the mezz loans, since there really is no hard contract, they are announced as they close.

The other point I wanted to make, which is more of just a macro response to your question -- and that is that, when you look at our percentages of investment, we have done a little bit more on the direct hotel investment side, sort of at the higher end of our range as a relative proportion of our portfolio. We are now at about 85 percent of our portfolio in direct hotels and 15 percent in loans. And I think that generally, going forward, we're going to stay consistent with the ranges that we have mapped out, although at the higher end when it comes to the proportion of direct hotels versus mezzanine as we look ahead in our portfolio opportunities.

Sean Smith, Stifel Nicolaus.

Regarding the existing pipeline on the direct hotel assets, are you guys currently more inclined to be acquiring assets in the full-service or limited-service segment? Really, what I'm trying to get at here is a matter of pricing going forward, just looking at that Hyatt Orange County asset -- I think you said it had a post-renovation cap rate of 8.2 percent -- and then comparing that to some of the previous limited-service deals, in more the 10 to 11 percent range?

Sure, good question. We are looking at it opportunistically. We want to make sure we have a balance kind of internally. We don't want to have more than 50 percent of our direct portfolio in select-service hotels, and right now I think we are closer to 60 percent which are full-service hotels.

As far as what we will target, we definitely look at the market as -- if it is a select-service, we demand a higher initial yield than if it's full-service, with the idea that full-service hotels should come back stronger as this economy improves.

Looking at our pipeline, I would say that at least what we're seeing out there and kind of focusing on is relatively more full-service hotels. But again, that doesn't mean that we are necessarily targeting it; that just happens to be what is on our radar screen right now. And those could fall out, and some select-service could jump up. But as far as what we are seeing, that's what we are kind of zeroing in on right now.

So we could expect some lower initial cap rates on those, but, like you said, with the full-service growing into it with the recovery?

As far as expect, I don't know if that's the right word. Like I said, that's just what we're seeing right now. But generally, when you buy full-service hotels, the initial cap rate is lower than select service; that's generally the case.

Will Marks, JMP Securities.

It's actually Quentin Yar (ph) for Will Marks. Could you comment on the Hyatt Orange County property, and maybe on the convention business and how the group business is picking up? And if you could also comment on the type of rate increases you're seeing, given the extensiveness of the renovation?

Sure. I'll comment on that. And realize that we just closed on it here very recently, and the renovation is still underway. So we are not seeing very much changed yet, but I continue what we anticipate seeing.

The Hyatt Orange County market is kind of like the Orlando market or, in some respects, kind of like the Vegas market, in that you have a big group of leisure business that comes through there. You have regular corporate business, although not a lot, and then you have a lot of group business that is available in the marketplace, anywhere from what we call Smurf (ph) business, which is religious groups or fraternal groups or social groups which pay lower rates, all the way up to corporate groups or national association groups, which tend to pay some of the highest rates.

When that hotel was purchased by the previous owner, it had 25,000 square feet of meeting space, 400 rooms, and then an office building was part of the complex, and it all looked into an atrium that was shared. The prior owner added 40,000 square feet of meeting space, and it is beautiful meeting space -- it's a huge ballroom with 25-foot ceilings -- and then converted the office space to 250 suites, which are all brand-new. And all that was completed in March of '02.

But what they didn't do is they didn't renovate the original 400 rooms, and those friends had been in very, very poor conditions. And I've seen a lot of rooms in my day, and they are very, very tough -- which, of course, is tough to sell to any traveler, but especially groups that comes through. What they all want to know is, can you guarantee that I'm going to get one of these nice, new suite rooms, instead of these older regular rooms? And that's tough to guarantee, when you have groups that come in, especially when they are assigned (ph). So as this renovation is completed -- and all the public areas have been done, and look great -- as this is done, it's a process of usually people won't book with you until they actually see the renovation with their own eyes. So that process is under way as these rooms are being completed and coming online.

So we expect the group component of this hotel, which historically had been about 40 percent of the business, to jump up ultimately, hopefully, to around a 60 percent. And in most markets, the transient customer is the highest-rated customer, in about 80 percent of the markets out there. But in a few markets like Orlando, like this market, group is a higher-rated business generally, because you have so much leisure business that comes in, and leisure business is lower-rated. So we expect the leisure component to start to net down and the group component to start to net up. The real big increases in ADR, though, will come not only from the shift from individual leisure travelers to groups who are changing the mix, but also in the types of business that you can get, as well, because you are able to book some of the larger association, national association, maybe, and then corporate group business. But those have a pretty good leadtime on them, of a number of months. Especially the association business can be over a year or even longer.

So we expect the increases in average daily rates at this property next year and then in the next, I'd say, probably couple of years after that, as it restabilizes in the market. In my opinion, this is the nicest full-service hotel in the marketplace. I don't know if you guys here disagree with that, but we are very excited about it. And the price per key is just phenomenal -- $125,000 price per room, improved, is just a great spot to be.

And, ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Bennett, I'll turn the conference back over to you for any closing remarks.

I just went to say thank you, and thanks for your participation today and your interest in Ashford. We look forward to speaking to you guys again on our fourth-quarter conference call. Thank you.

And, ladies and gentlemen, this does include today's Ashford Hospitality Trust conference call. We do appreciate your participation, and you may disconnect at this time.