Ashford Hospitality Trust Inc (AHT) 2005 Q4 法說會逐字稿

Good day 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. Please go ahead sir.

Good morning and welcome to this Ashford Hospitality Trust conference call to review the Company's results for the fourth quarter of 2005. On the call today 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 has been covered by the financial media.

As we start, let me express that certain statements and assumptions in this conference call contain or 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 for 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. In addition, certain terms used in this call such as adjusted funds from operations, funds from operations, earnings before interest, taxes, depreciation and amortization, hotel EBITDA, or hotel operating profit and cash available for distribution are non-GAAP financial measures within the meaning of the Securities and Exchange Commission rules. Reconciliation of such non-GAAP financial measures to GAAP measures is provided in the Company's earnings release and accompanying tables or schedules, which has been filed on Form 8-K with the SEC on March 8, 2006, and may also be accessed at the Company's Website, at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release. The Company's management believes that AFFO, FFO, EBITDA, hotel EBITDA, or hotel operating profit and CAD are meaningful measures of a REIT's performance, and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's operating performance.

Lastly, as the Company has indicated in its earnings release, the Company's management believes reporting its operating metrics for continuing operations on a pro forma consolidated and pro forma not under renovation basis, are measures that reflect a meaningful and more focused comparison of the operating improvement in the Company's direct hotel portfolio.

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

Thank you, Tripp. Good morning and welcome. The agenda on the call will be for me to provide a broad overview of the Company, highlighting our internal growth successes, to hear from David Kimichik, our CFO, on the financial results, and to have Doug Kessler, our COO, report on our acquisition and financing activities. I will then wrap up with some concluding remarks.

As we discussed at length last quarter, we have remained focused on balancing our internal and external growth, together with effective deployment and recycling of capital to generate higher returns on equity, increases in CAD per share, and enhance the safety and growth of our dividend.

Internal growth was certainly center stage once again in the fourth quarter. Pro forma RevPAR for all hotels and continuing operations gained 9.5%. The more meaningful statistic is for those hotels not under renovation. For these hotels, we reported a pro forma RevPAR increase of 12.7% on a 9.2% increase in ADR and a 224 basis point gain in occupancy. That's the fourth consecutive quarter we have reported a double-digit RevPAR increase for the hotels not under renovation.

Hotel operating profit for those hotels not under renovation increased 10% for the quarter and 17.6% for the year. Including the 13 hotels under renovation, hotel operating profit was down 1.2% in the quarter and up 12.4% for the year. Hotel operating profit margin, or hotel-level EBITDA margin, dropped slightly for those assets in continuing operations that are not under renovation by 70 basis points for the fourth quarter year-over-year.

On a solid RevPAR increase of 12.7%, we would have liked to have seen a modest increase in margin. Indeed, year-to-date, including the fourth quarter, the hotel operating profit margin has increased by 140 basis points. The reasons for the slight decline in the fourth quarter are many. They include -- a disproportionate energy expense increase; increased food and beverage expenses in order to increase service levels as assets are repositioned; unfavorable insurance expense comparisons due to a large reversal last year; increased repair and maintenance expenses due to planned increases in service levels and post and pre-renovation work; disproportionate franchise or expense increases; disproportionate base management fee increases due to a restructured agreement with Marriott immediately prior to acquisition of these assets from CNL.

We know that some of you would like to know what is to be expected regarding margins going forward. However, we remain reluctant to provide guidance other than dividend guidance going forward. We continue to work to improve margins; however, this effort can be nullified by forces largely out of our control, such as management fee changes, franchise or cost increases, energy expense, property taxes and insurance, as well as by forces largely within our control, such as implementing long-term strategies and increasing service levels in some assets. In addition, our RevPAR yield index for 2005 increased from 111.3% to 113% for all hotels in continuing operations, and from 113.6% to 116% for those hotels not under renovation.

The primary reason for this continued growth in RevPAR and operating profit is our value-added renovation program. A table in the press release outlines the timing of historical and planned capital improvements to assets in our portfolio. You will note that of the 13 hotels under renovation this past quarter, 10 of these were commenced in the quarter and another three will join this group in the first quarter.

For 2005, we have invested a total of 38.3 million in CapEx across our portfolio. Capital expenditure plans currently in place provide for an additional 75 million of improvements to our properties, an increase of $15 million over prior forecasts, due to the Marriott RTP and Pan Pacific acquisitions, although we currently estimate only 50 to 60 million of this will actually be put in place this year.

Looking at the schedule, you can see the internal growth that is embedded in our portfolio as these renovations are completed. We have a total of 14 renovations expected to be completed in the first half of 2006 alone, with an additional 15 expected to commence in the second half of the year.

I would like to highlight one of these renovations in particular. This project involves renovating, rebranding and repositioning the Radisson Plaza hotel in Fort Worth to the Hilton Fort Worth. With a $10.5 million renovation budget, we have completed work to the guest rooms, the food and beverage facilities, and all public areas. We will be adding a 24-hour business center as well as restoring the historic exterior. The entire project is expected to be completed in April. Part of our strategy to create value is to trim the size of the hotel from its current configuration of 517 rooms down to 294 rooms, and split the east tower of the hotel up for sale as office conversion. Given its prime location in downtown Fort Worth and the improving office market, we believe this strategy helps us capture even greater value from the asset by repositioning it from a modestly priced group house to one that will attract a high rated transient and corporate customer. The hotel should have a much higher RevPAR and yield following the conversion.

We have shared with you before our view that we expect interest rates to continue to increase, along with the likelihood of an inflationary environment. We have already seen inflation strongly affect construction prices. Therefore, we have been very aggressive in locking up long-term, low-cost fixed-rate debt. As of year end, 87% of our debt is fixed, with an average maturity of 8.6 years and a weighted average interest rate of 5.6%. We were also active on the investment front during the fourth quarter, as well as the beginning of this year, with more than $214 million in deal volume. We are making good use of the capital we raised in our very successful January marketed equity offering.

To speak in greater detail about our results and activity during the quarter and to [date] in the first quarter, I would now like to turn the call over to David Kimichik.

Good morning. For the fourth quarter we reported net income of -$7,719,000, and EBITDA of $16,369,000. These numbers include total onetime charges of $13.4 million associated with the $422 million of refinancing activities closed in the quarter.

There is also a $1.2 million, or $0.02 per-share, income tax benefit in the quarter. This benefit is comprised of a $2.2 million reversal from an over-accrual from previous periods in continuing operations, offset by a $1 million income tax liability in discontinued operations.

After these adjustments, we reported AFFO of $16,957,000, or $0.27 per share, which beat estimates by $0.05 per-share, or 23%.

As of December 31st the Company had total assets of $1.5 billion, including $86 million of cash. At the end of the quarter we owned 80 direct hotel investments. Of these assets, 17 are held for sale and classified as discontinued operations. These 17 hotels and the East Tower of the Fort Worth asset are recorded as assets held for sale in the amount of $158 million on our balance sheet. As of December 31st, we had $909 million of mortgage debt outstanding, leaving net debt to total enterprise value at 53.6% at the end of the year.

At year end we had 44 million common shares outstanding, 2.3 million Series A perpetual preferred shares outstanding, 7.5 million Series B convertible preferred shares outstanding, and 11.1 million OP units issued. In January we completed a follow-on common stock offering, issuing 12.1 million new common shares at a price of $11.15.

Not including the assets held for sale at quarter's end, we own 63 core hotels containing 11,229 rooms. We have agreements for management with seven different companies. The most significant managers are Remington Hospitality and Lodging, which manages 28 of our core properties, and Marriott International, which manages 15 of our core hotels.

Subsequent to year end, we have closed on the acquisition of the 225-room Marriott Research Triangle Park in Raleigh-Durham, and announced the acquisition of the 338-room Pan Pacific Hotel in San Francisco. As of December 31st we owned a position in 12 mezzanine and first mortgage loans, with total principal outstanding of $108 million and an average annual unleveraged yield of 14.2%.

As Monty mentioned, for the quarter we had excellent news from the operating results of the 63 core hotels. Pro forma RevPAR for the core portfolio was up 9.5% during the fourth quarter as compared to the fourth quarter '04, and for the hotels not under renovation, which is all but 13 hotels, RevPAR was up 12.7%. The increase was primarily attributable to a 9.2% increase in average rate. Pro forma hotel operating profit for the entire portfolio, which includes the 13 hotels under renovation, was down 1.2% for the quarter, but was up $2 million in the quarter for the 50 hotels not under renovation.

Finally, for the fourth quarter we reported CAD of $14,499,000, or $0.23 per share, and announced and paid a dividend of $0.20 per share. For the year, our dividend payout ratio was 80.7% of CAD and 74% of AFFO.

Doug will now provide us with an update on our investment and financing activities.

Good morning. I would like to talk about our investment, financing and capital recycling activity during the quarter, and discuss our outlook for all three areas in 2006. We were very active in the fourth quarter with the acquisition of the Hyatt Dulles Airport for $72.5 million and the placement of an $18.2 million mezzanine loan on the Four Seasons Nevis.

We've been very pleased with the performance of the Hyatt Dulles since acquiring it in late October. With its recently completed renovation, the ongoing major expansion at Dulles Airport, and the exceptional growth in the Dulles corridor, we believe we timed the acquisition of this asset just right. This has been a strategy of ours, to acquire assets to coincide with renovations and expected upturns in the individual markets. By doing so, we've been able to generate above market growth in RevPAR.

One recent example of this successful strategy is the Hyatt Regency Orange County, which we acquired in October 2004, while the renovation of this asset was still underway. Located close to Disneyland and the Anaheim Convention Center, the hotel had generated a trailing 12 month EBITDA yield of 8%, and an NOI cap rate of 6.5% at acquisition just over a year and a half ago.

Today, the hotel is producing a trailing 12 month EBITDA yield of 10.7%, and a trailing 12 month NOI cap rate of 9%, and increased its total revenue year-over-year by 26%.

Currently we are in the process of closing on a similar opportunity, the $95 million Pan Pacific Hotel, a AAA four-diamond hotel located in San Francisco. We believe San Francisco is poised to experience a turnaround similar to what New York has seen over the last couple of years. Based on this analysis, we've been actively seeking the right hotel investment in San Francisco. This acquisition is perfectly suited to benefit from market growth, brand repositioning, and capital improvements.

We intend to replace a brand that generated far less nights than would normally be expected with another luxury brand that can make a much greater contribution from its reservation system. With this rebranding and the $10 million renovation, we expect this asset to outpace its competitive set. This is a competitive set that posted RevPAR increases of nearly 25% over the last six months. This asset, on the other hand, only generated an increase of almost 13%.

Our expectations are to significantly improve the performance of the hotel. The forward 12 month projection is for an EBITDA yield of 8.2% and an NOI cap rate of 6.5%, an improvement of nearly 300 basis points on each metric in the first year alone. There is no question that the market is very competitive today, but we have yet to see any slowdown in deal activity so far in 2006. There are portfolio as well as one-off transactions available. We are selectively participating in some marketed transactions, but our primary source of deals will continue to be one-off -- will continue to be off-market transactions. We have built up an extensive network of sourcing relationships with owners, brokers and lenders, and expect these relationships to yield additional opportunities during 2006.

One area benefiting from this network is our mezzanine lending. During the quarter we acquired the Four Seasons Nevis mezzanine loan from Calyon, who was involved in our IPO and currently leads our secured property revolver line of credit. Although it was our first international investment, this loan is to a U.S. borrower and is dollar denominated. Our current loan portfolio totals 108 million and yields 14.2%, up from 13.9% last quarter. We expect continued growth in our loan portfolio during 2006, as we have increasingly become well known to first mortgage providers and have recently expanded our lending program to include construction loans.

We were also active on the capital recycling front this quarter. We announced that eight of the Gen One Residence Inns we acquired from CNL were under contract for $102 million, and we announced the completion of the last two asset sales from the 21 hotel portfolio we acquired last March. Proceeds from these sales are being reinvested as CapEx dollars or funds for new investments.

Together with this recycled capital, we have also put in place financing that has given us dry powder to continue sourcing new opportunities, while at the same time lowering our overall cost of debt and extending our maturities.

In November we refinanced a 25 property $210 million floating rate loan with a 16 property $212 million refinancing, split into a $111 million loan at 5.75% for nine years with four years interest-only, and $101 million loan at 5.7% for 10 years with five years interest-only.

In December we replaced our mezz warehouse facility, which had a rate of LIBOR plus 625, with a new $100 million secured revolving credit facility that will be floating with a spread that is based upon a grid depending upon the advanced rate of the borrowing and the loan collateral type, and the first mortgage B note in mezzanine. The grid pricing ranges from 150 to 275 over LIBOR. This reduced cost will increase our competitiveness on the loan side of our business.

As Monty mentioned, these financings contributed to our very favorable debt capital structure by substantially reducing our borrowing costs and extending our loan maturities.

When compared with our peers, we believe our overall debt structure places us with the second highest percentage of debt with fixed interest rates, one of the highest in terms of average years to maturity, and one of the lowest in terms of weighted average cost of debt. We expect our investment strategy, combined with proactive capital structuring and organic growth in our assets, to continue and be the drivers of our growth this coming year. Monty, I will turn it back to you.

Thank you, Doug. Looking ahead to 2006, we have made a very strong start to the year with a core strategy of sourcing attractive opportunities and accessing and reallocating capital at the appropriate times.

We continue to have one of the most attractive balance sheets in the industry. We have been very aggressive in taking advantage of low long-term interest rates and the improving fundamentals in our portfolio to lock up attractive, fixed-rate financing, while leaving a great percentage of our assets unencumbered. This capital structure provides tremendous flexibility and capital recycling, and we intend to put it to use again in 2006.

For the last couple of years I have shared with you that the supply demand outlook is very favorable for the hotel industry. Today is no exception. Net new hotel supply, particularly in our markets and in those we have targeted, continues to be muted. Demand, on the other hand, shows no sign of letting up. Corporate, leisure and group business is being driven by an improving economic outlook and increased travel budgets.

Consistent with our discussion on last quarter's call, the Board approved a change to our dividend policy for 2006. The new dividend policy is a change from the prior policy of targeting a payout of 85% of cash available for distribution, to a goal of growing CAD and funds from operations to a greater rate than the dividend. Under the new policy, we expect to pay a quarterly cash dividend of $0.20 per diluted common share for 2006, or $0.80 per diluted common share on an annualized basis. We believe this policy, together with capital recycling and an active investment strategy, should provide our shareholders with solid dividends while gradually reducing our payout ratio. Later this month we will be declaring the dividend for the first quarter.

Our pipeline remains strong at over $250 million. As long as we see accretive investments and can source debt and equity at the right price, we continue to consider acquiring properties. Starting our third full year as a public company, Ashford is in its best shape from a financial, organizational and portfolio perspective. We look forward to reporting our progress to you during the year.

That covers our prepared remarks. We will now answer any questions you may have.

(OPERATOR INSTRUCTIONS). Jeff Donnelly, Wachovia Securities.

Monty, I was just curious if you could elaborate maybe on the reluctance to give guidance, just because some of your peers have, I guess you could say, some more complexity to their portfolios or moving parts. I guess, why the reluctance to give some investors the tools to look at your '06? Is it that maybe you guys are working on something in specific that could have a material impact on your outlook?

We've had that policy of no guidance since we went public, and I can't comment about the complexity of some of our peers. You follow it closer than I do. But as far as our numbers go, we do have a lot of complexity. And you can see even from the fourth quarter, when margins weren't as strong as we would have liked because of the convergence of these items. It's interesting, in every quarter, just about on every issue, when you look at all the factors, you usually have some things kind of break your way and some things kind of break against you. And then what we've pulled out for the analysts and investors is those two or three large kind of most salient items.

Well, this past quarter, the fourth quarter, we had most things break against us. And there's not one large item, they're kind of sprinkled all the way through. So because of our rapid acquisition pace, at least historically, and because of all the reservations we're putting in, and in some cases brand changes, in some cases management changes, we just think it's wiser to hold back. As far as the future activity, we just continue to try to source good opportunities. And with no leaning to try to grow necessarily or not grow, as long as we see good opportunities, we will pursue them. And if we don't, then we won't.

I guess sticking with your comment there, indirect expenses, for example, were a lot higher than we had expected. It offset a lot of the upside that we saw versus our expectation on the revenue side. Was there anything in that line item in particular that was maybe you can call out for us that was higher than you guys were expecting, or maybe we should think of it as maybe will continue going forward for your portfolio?

I can't comment on whether it's going forward or not, but I can comment on the historical. And historically in this indirect expense line, energy was a big bump. Insurance comparisons -- that's a separate line item, I believe; no, it's in the indirect expenses -- was a big increase because of a reversal we had last year in the fourth quarter that we didn't have this year. Also in the indirect expenses were increased franchisor (technical difficulty) expenses, and that's due to increased usage of all the point systems and all the point clubs, which get coded to that line item, and some increased repair and maintenance expenses due to some of the pre-renovation work we do, post-renovation work we do, and also just in some specific assets, trying to increase the service levels as part of the re-positioning strategy.

Okay. I was curious on the Radisson had this in particular, their RevPAR results recently were fairly weak. Is that just a result of maybe the geography of those assets, or is that something brand-specific?

Mostly what you find, the results are more renovation-specific. That's mostly the case. So, that's the largest driving factor. The Milford Radisson, the Fort Worth Radisson, the Indy Radissons were all under renovation. So, that drove most of it. Secondarily, I'd say that probably somewhat market-driven. But typically, as you well know, the Hilton and the Marriott brands assets are stronger, more resilient, and faster growth than some of the other brands. But to answer your question, it's mainly renovation-driven.

So those were in those numbers, the renovation assets. If you feel comfortable, are you able to walk through maybe some of your operators, and maybe classify sort of where their strengths are? Is it sort of topline revenue side or is it expense management? Is there -- does somebody do a better job than other, or where their focus is right now?

I'd probably rather defer on that, Jeff. It kind of even -- it kind of goes from quarter-to-quarter of how the differences line up. So, I'd rather not opine too much on the differences between each manager. We do have seven different managers, and I can say that generally we're pretty pleased with them all. So, we're rocking along.

One last question and I'll let you guys go. Can you talk a little bit more in detail about your plans for the Pan Pacific Hotel? It's kind of a big acquisition for you guys, and from what I can intuit, kind of the multiple there was kind of high. I was curious what's on tap for that property in '06, and what do you maybe expect in just general terms from that asset, maybe in '07 and '08 that will make the returns there seem much more attractive to folks?

Sure. We're very excited about the asset. Let me ask Doug to comment on that.

This is just a great opportunity in a market that we have, as we said, been looking to acquire something. The benefit we see of this asset is the following. San Francisco really didn't have the price escalation for high-quality assets that we saw, for example, in New York. But it certainly had a big drop-off in terms of its performance when the market turned down. By every indication, we believe, and most experts in the market that are opining upon which markets are apparently going to be hot in the next couple of years, have San Francisco on that top of the list.

So, we think, number one, there's the opportunity to benefit just from the general market recovery, which is going to be pretty strong in San Francisco. There's virtually no new supply to speak of. And so because of that, it's a very positive supply/demand fundamental. I think with respect to just this asset alone, as we mentioned, the comp set for this asset increased 25% in terms of RevPAR growth over the past six months. However, this asset lagged. And if you've seen the asset, it's absolutely gorgeous. It was originally built as a peninsula. So it's spectacular inside, and it's got a great location just off of Union Square. We believe that the brand, which really only delivered less than 1000 room nights through its res system, detracted from the overall performance. So our strategy is to flag it with a well-known luxury brand, which will certainly add to the res system distribution that we'll get from the brand. And in addition, we will be spending some CapEx dollars. Now, it doesn't need a lot, but what we will be doing is to freshen it up a little bit. And we think those three factors will certainly position this asset to have a very significant recovery along with the rest of the market.

And when you look at the numbers, it's a little bit consistent when you think about what we did with the Hyatt Regency in Anaheim, which had a big recovery once some renovation work was done, as well as somewhat consistent with some market recovery bets that we've made in other areas, like Dulles, even though Dulles didn't really drop off that much, but it certainly has gotten pistol-hot in terms of activity out in that market. So, we think this is going to benefit in three or four different ways. And we're very, very excited about this, and we're excited about where we bought it.

When you look at relative purchase prices for this asset, compared to some of the other deals that have traded in the market, and for the quality of this asset, we think we got a very good buy on a replacement cost basis which would be substantially below replacement costs for this asset.

Do you have that, and I know you probably can't reveal it today, but do you have that brand identified? And do you have a rough sense of maybe what their -- for example, their ADR might be versus where the Pan Pacific is today, to give us kind of a sense as saying you could go from A to B eventually?

We haven't finalized negotiations, so we want to kind of hold off about whether we've got something done or not, just because we don't want to lose leverage with that person or persons we may be talking to. And as far as rate increases and occupancy increases, just to comment on that specifically, not only do we see some increases potentially period, but that the existing property has been having to fill up on some lower-rated wholesale-type of business, tour-type business. And I think that the existing property could benefit just by starting to trade that out as the transient market starts to come back to begin with. But also, with a brand that can bring a strong reservation system, I think that they will be able to do that even more. So, just as much as rate increase as being able to trade out wholesale business for transient business.

(OPERATOR INSTRUCTIONS). Gustavo Sarago, FBR.

Just kind of touching on the margins again, if we saw the impact from some of these line items in this quarter, is it fair to assume that this will likely carry forward at least with certain line items over the next four quarters until they're -- we've got it for a full year?

You know, we are just going to step back from applying too much guidance on that. Of the factors -- and it's not one or two, there are several of them that I named. Frankly, some of them are potentially burned through, and some of them potentially will last a quarter or two, and some look like they may last three or four quarters. So, rather than trying to go down and opine on all those, we'd just rather not give guidance on it. But we are trying to increase margins, and where we can, we do, and we will. It's just a matter of some factors being out of our control, and some factors being in our control as part of our re-positioning plan which we think is a smart long-term play for the assets.

Maybe I'll try to ask a different way. Looking at the individual quarter, I know that there was -- just on the core non-renovated hotels, you had flow-through of roughly 22%, and on a full year basis it was closer to 40%. Is that kind of a fair assumption or a modeling assumption of what this non-renovated portfolio can do on a forward basis, despite having about 70% of your RevPAR growth driven by rate gains? Is 40% flow-through a good modeling assumption for this type of portfolio?

We're going to step back from trying to answer that question. I know how important that is for you guys to model, but we're just hesitant about providing that kind of guidance at this time.

Okay. Maybe I can ask a question regarding the Radisson. I know you have announced the conversion to the Hilton. You have a number of other Radissons in the portfolio, and I think a question was raised in prior conference calls of what you might do with those properties. Is there a substantial cost to terminate the Radisson flag, and do you have the ability to do that with the other properties within your portfolio?

The cost to terminate the Radisson flags is not very high, just generally. All the deals aren't the same, but they're not prohibitive. So we are evaluating brand changes across our entire portfolio, including the Radissons, and we're focusing in on a few. But at this point in time, we are going to probably step back from making any announcements about what we're going to do. But we do understand that Radisson products are not the investment community's favorite brand, although in some markets they can do very well, and they do do very well. So, we'll continue to evaluate that.

Just looking at during the fourth quarter, it looked like the average hotel size for the renovated properties was around 220, versus the average for the portfolio maybe of just under 200. Does that shift as you do more renovations in '06? Does the average property size decline, and maybe we'll see less of an impact from renovated hotels?

I'll ask [Kimo] to address your question, Gus.

It does shift quarter-to-quarter. The fourth quarter had more rooms under renovation than any of the previous three quarters, and most of those hotels that were under renovation in the fourth quarter will be under renovation in the first quarter of this year, if you look at our schedule. And you can go through -- we gave you the whole year 2006 in that attached schedule so you can have a look at how many rooms are coming in and out of renovation. But the fourth quarter was by far the biggest number of rooms for the entire year.

Okay. Just one last question on the Radisson. Is part of the decision to downsize or shrink the size of that asset driven by the Omni hotel that's going to be coming to the market? And what are your thoughts on that, or where does that hotel stand today in its process?

Yes, that is part of the driver of our whole formula there. The Omni has been announced. It was partly financed by TIF financing. They've recently -- when they got the construction prices in, there was a sizable increase in the cost of construction. And they went back to the city, and the city provided them more TIF financing. So, it looks like it's going to move forward. We don't have the exact date on the construction starts, but I would say it's within the year or sooner.

There is kind of an agreement out there, though. And this asset is, obviously, taking a lot of incentive monies from the city. The Renaissance asset in the marketplace took some money from the city in order to perform a renovation, and there's rumors that another hotel might do the same. And we did not. And the trade for that was that those assets would need to commit a significant portion of their rooms to commission blocks. And a number that I heard, and I don't know if it's the right number; I heard it's as high as potentially 80%, but I just don't know if that's the case. But I heard that it's significant.

And in that market, most of the convention business that comes to that center is more Smurf-type business -- 4-H clubs, Girl Scouts -- these kinds of groups that don't pay the high rates. So, we see an advantage in not taking the money from the city. And when those other assets fill up with this lower rated group, what we think is going to be lower-rated group business, we will get the transient push out to our assets, especially with the H Honors point system as part of our hotel after we convert to Hilton, and we'll be able to benefit from that. So, that's the path that we elected to follow, and we think we'll be okay. I imagine it's at least a couple of years, maybe longer for the Omni to open. Kimo, what do you think? Probably three years?

Rumors are that they're going to break ground around the end of this year. So, we think it would be about a two-year construction process before they're open.

Mel Cutler, Cutler Capital Management.

I have two simple questions. One, what's the ex-dividend on the dividend, the $0.20 dividend?

We will be announcing the dividend on the 15th, and it will be effective for shareholders of record on the last day of the month, and so it will actually be three days before that.

The second easy question is the -- when will your 10-K be available?

We anticipate we will file the 10-K some time early next week.

And the third question, a little more controversial probably. Any comment on the potential conflict between the management by management of the hotels?

Not anything in particular, other than that we see it as an advantage. When we went public we announced that this relationship would exist. And some of our competitors in the industry that have this same kind of setup bought 80, 90% or more of their hotels that are only hotels that they feel they can manage. In our case, the affiliate manages something like 35, 40% of the hotels' rooms, of all hotel rooms that the elites currently own. So it's -- it's an advantage that we bring to the table that where this affiliate can come in and take over management and improve margins and do a better job, then they do it. In a case where it's better to keep an existing manager, the REIT does that. In fact, the vast majority of our assets are where we've kept the existing manager.

Do you make an evaluation on a make or buy type of study?

I'm sorry?

Do you make an evaluation on a make or buy type of study, that is -- in each hotel as you acquire a hotel, how do you determine who will manage it?

It's driven by a few factors. In some cases the seller of the asset is managing the asset, and they will sell the assets only if they can continue to operate the asset. So, we look at it and we evaluate the opportunity based upon that. And if we can sign up the existing owner/operator to a performance-type contract, we will do that. In some cases it's totally management-encumbered. The brands, typically Marriott and Hilton, have got long-term contracts, so it doesn't matter who owns it under what conditions, that they manage these. And so those are not even negotiable. Some other assets are management-unencumbered. And typically the affiliate, Remington, will take over management of those as a matter of course. But not always or not necessarily.

You guys have done a good job so far. Thank you.

David [Bobe], Robert W. Baird.

Gus asked so many good questions, I don't have that many left. But one thing you could talk about -- your portfolio today is less than 10% mezz versus direct investments. Can you just give a little color on where you see the mezz market today? You've got tremendous yields in the stuff that you've got, but is that -- has it been harder for you to find those kinds of good mezz opportunities, and what are you seeing today in the mezz market?

The market has moved in the mezz market. Pricing has gotten much, much more competitive. And in order for us to be more competitive, we've had to line up more attractive financing on our side. So, Doug Kessler here arranged a new warehouse line that took our cost of capital from around L plus 625, down to approximately L plus 200. So that allows us to be more competitive. So, the lull that you see has been as pricing has dropped and narrowed, we were priced out of the market because of our existing financing. But now we're starting to get ramped up more because we can do that. As far as opportunities in the marketplace, Doug, why don't you comment on that?

We are seeing more opportunities today, and it's mainly driven by all the transaction volume that's been occurring in the industry. Many of those transactions are acquiring mezzanine financing, whether it's single assets or these large portfolios that REITs are buying or the op funds are buying. So the product is there, our name is clearly established in the market. Every single one of the first mortgage providers is in contact with us. In many cases, on a given deal, we may be approached by three or four lenders that are competing for that piece of business. So, we are being disciplined, we are being selective, we have clearly been approached by many lenders for many of the deals that are active in the market today, and I think you'll see us exercise judgment to make sure that we're still getting attractive leverage returns given our new debt facility.

So, relative to the chart that you used to have in your presentations that looked like a clock, where do you think we are today? And how do you think that -- as we're looking forward at your investment strategy, what do you think we can expect in terms of mix between direct investment and mezz?

We think -- a number of analysts have described it as something like the third or fourth inning of a nine inning game, as far as fundamentals go, and we agree with that. But values are also largely driven by what's going on in the capital markets. And the capital markets are absolutely outstanding. So, if the capital markets remain as they are, then values, I believe, will continue to increase over the next three or four years, five years, even. If capital markets start to back up, then that will shorten the -- that period of asset increases, asset value increases.

As far as strategies go, it really just depends. We see some mezzanine opportunities, but we still see a good, decent amount of direct hotel opportunities out there, and we see that still as the largest part of what we're targeting. And every time we try to make a prediction about what the market is going to look like a year from now or two years from now, it's tough. And I'll give you an example.

About a year ago this time, I was talking about how I thought the direct hotel market opportunities might be closing, because new supply would start to be coming on. But with what happened with these hurricanes, and with what's happening over in China with all the demand for construction materials, we're seeing construction costs just go sky high, to the tune of 20 to 30% increases. In fact, Doug talked about potentially providing some mezz loans on construction deals, but every time someone comes in, we work out a deal and then they go back and get the final numbers from the GC, the price has gone up 25% and the project is dead. What that has done is pushed back the net new supply growth curve, in our opinion, which means that values will continue to increase, which means that we still see some opportunities to buy direct hotel investments. All that is to say that for the immediate future, we still see direct hotel investments as probably the most attractive opportunity. Doug, do you want to chime in on that?

I think the real signal will be when supply starts to approach demand. Until that happens, you're going to have continued value increases in assets. The fundamentals from an operating standpoint may be a little bit further into the ballgame, but I think most people in the hotel industry are expecting maybe a game that has extra innings on both fronts. So there's still a great deal of positive sentiment for the fundamentals, both from an operating standpoint as well as from a value standpoint. And I think that even though we have been an active buyer, I want to make it very clear that we have been an active seller as well. And I think it's really part and parcel of our strategy to demonstrate that we are recycling capital not by need, but by choice. And it's recycling that capital into either higher yielding investments or capital expenditures which will enhance the yield of some of our higher-quality core assets. And this is something that we've done. And when we've sold really has been out of portfolios, where it's kind of the classic buy the whole chicken and sell the parts at higher prices. And we clearly did that with the FGSB portfolio, where we sold assets. We are, clearly, doing that with the CNL portfolio where we're selling assets. But as Monty said, we're going to be focused primarily still on direct hotel investment opportunities.

(OPERATOR INSTRUCTIONS). Josh [Ray], A.G. Edwards.

This is Josh sitting in for Jeff Randall. First question -- what exactly goes into the discontinued operations number? Does it include interest expense, amortization of loan costs? Are those included in the number?

Yes, it's -- every component of the P&L of the discontinued asset is just removed. All of it is removed from your continuing section, and it's all netted into that one number. So, it has the income tax liability in there as well.

Okay. Secondly, you guys had same-store organic EBITDA growth of 10%, on a near 13% RevPAR gain, equating to a less than onetime flow-through. Are you guys happy with that result?

As we commented earlier, we got beat up on a number of line items. And no, we'd rather see it. And in fact it's typical for us and others to have EBITDA, hotel EBITDA growth at a higher percentage when you've got topline growth at that level. So we are not satisfied with that result, and we are working and putting in plans where we can in order to change that.

Are you guys -- going forward, are you guys expecting growth? And if so, how do you expect to accomplish this?

Say again?

Going forward, do you expect it to grow, and how do you expect to accomplish it?

Do we expect what to grow, the RevPAR?

The flow-through.

We're stepping back from guidance on what that flow-through percentage might be. We've got so many moving parts that we just -- we're just reluctant to do that and potentially mislead someone. So let's just say that this flow-through is not something that we're comfortable with. But at the same time, a number of those factors are out of our control. So that's probably the only guidance that we want to give on that right now.

Adam France, Keane Capital.

Thank you for taking my call. Could you -- I don't know the extent that you can put specific numbers behind this, but do you know the rate of returns, or some economic measure of the renovation dollars being spent?

Sure. When we buy an asset, we'll buy an asset and at the same time contemplate a certain amount of renovation dollars to go into that asset. So we don't look at it separately as much as we look at the entire purchase with the renovation dollars as part of that. And when we do that, we look at returns, unleveraged returns in the probably 9% or above, maybe 10% is where we like to be, and a leverage return somewhere in the low to mid teens typically. Although at least to date, we've had positive variance and aggregates on most of our numbers because of the strength of the economy. But that's where we like to target those. On a stand-alone renovation, it's hard to say. Sometimes you've got to do renovations that are driven by the franchise or the brand, and whether there's a return on capital or not, you just have to do it. And so you put the money in. So, doing a return on capital is almost moot. We'll look at it anyway, and if we feel like we can get unleveraged returns in the low double digits, we're very happy with that. Sometimes it's tough to get, but that's what we like to do.

My second question here, guys, and I'm a big supporter of you all, but I'm sure everybody on this conference call would prefer not to be one of the highest yielding REITs in the hotel space. Any thoughts as to why, if we use strategic or high lender, down in the 5% or lower yields, what do you think the market is telling you as to why you're running a distant third, and any thoughts on changing your approach?

Our structure and our strategy is a little bit different from some of those other guys. When we went public, we went public in the summer of 2003. And at that time, a yield was very important. And when we went public, we told our investors that we were kind of run up to around an $0.18 plus, or $0.20 plus, or target that kind of payout as far as a dividend. So we thought it was very important to achieve what we said we were going to do, because all those initial investors were counting on that.

Now we got there, and we're there, and we've achieved it and we're very happy with it, and they're very happy with it. That is why we subsequently then changed our policy in that going forward it's not a straight 85% of CAD, but it's going to be more on -- an evaluation on a yearly basis. So when you talk about how that -- reevaluating that, we have reevaluated it as far as the dividend policy. We've got no plans and no desire whatsoever to lower that dividend. And we're just going to grow it at a rate that is hopefully slower than our FFO or CAD per-share growth rate. Does that answer your question?

Yes, part of it. You guys have got to be a little bit frustrated. I know we are as well. I'm just curious whether you're rethinking some of your public market approaches. You've been tagged as a serial equity issuer, like it or not. And just trying to gauge at what point the frustration reaches a level where you're saying, we need to do -- to change our attack a little bit.

I think that for a REIT to grow, you do have to raise capital, and to the extent that there is accretive investment opportunities. And I think by looking at what we have acquired, either on our direct hotel investments, which I think if you did a side-by-side comparison, because we are very transparent with what we release in terms of the yields that we buy assets for that on a blended basis, we've actually bought assets at prices that deliver yields well in excess of our peers. And clearly, our mezz is at the highest end of the market.

I think that the last equity raise is a really interesting case study of a point that I think addresses why maybe we haven't gotten the same benefit of the value increases relative to our peers. I think that we have been really below the radar screen for a lot of companies. We purposely did a marketed roadshow on this last equity raise in January, as opposed to doing an overnight. We could have decided not to run the risk of an actual potential fade in our share price. But what actually happened is by getting our story out in front of more institutions that really needed an update to hear what we had accomplished since going public, we benefited from that tremendously by bringing our story to the forefront of some institutions and retail investors that really either didn't know that much about us, didn't understand our story, or needed an update. And as a result, we actually priced the offering at the same price that we launched at, which was very unusual for a marketed deal. And you can certainly see the impact over the last couple of months since that time. So, I think we have made an initiative here to get out in front of more investors over the coming year. We've really been head-down executing our strategy. But bringing our story on a more current basis to people is something that's a clear objective of ours, and we think that with that market recognition that we should see the same benefits that others are seeing.

Gustavo Sarago, FBR.

Just kind of touching base on what David talked about with the mezzanine portfolio. Doug, you can help me with this. I just did some quick math. It looks like your savings on your cost of funds was maybe 350 basis points between the new and the old line at the high-end of those pricing ranges. Have the spreads on the mezz loans themselves compressed more than the 350 basis points?

It depends where you want to be in the capital structure. I would say actually that the difference is wider than that on our reduced financing, because we can borrow at probably a 60% LTV is closer on the grid to about 200 over. So it's really a difference of about 425 basis points. And the spreads have not quite compressed at that level. Remember, you've gotten the benefit of LIBOR increases as well. I think we're still a little bit on the upside relative to the rate compression, relative to the spread compression, and rate meaning our borrowing rate. So you can do the math. And if you have a loan at, let's say at 500 over, and you're getting 60% financing at about 200, you can still get pretty close to 15% levered type returns, 14 to 15% levered returns, which are very attractive today.

Anything in the portfolio coming due? I think we read that the Northland Inn, they were looking to pay that off. Has that been paid off at this point?

No, it has not. We entered into an extension agreement for a few months with the borrower, the loan actually matured in January, and the borrower is in the process of refinancing the hotel. So we extended the maturity to allow him to accomplish that. So currently we would expect it to pay off in the second quarter.

One question for you, Kimo. With regards to the Town Place Suites -- I'm sorry -- the Gen One Residence Inns, when do you think that's going to close, that transaction? Or has it? Maybe I missed (multiple speakers)

It is not closed as of today, but we're hopeful for a closing prior to the end of this quarter.

Is there anything meaningful potentially holding that up, or is it just usual transfer of documents?

The assets are secured by securitized financing, and we have to go through servicer approval, rating agency approval for the buyer to assume that loan. So, it's just taken a lot of time for that to be accomplished. But I think we're almost there, based on my last update. So we're hopeful that by month end, we'll have a closing.

So nothing with the buyer trying to come back and get a haircut on the price?

No. The buyer's earnest money went hard around the first of December, I think. So, from that time until now, we've been working with the lender and the servicer and the rating agency on getting all of the assumption and approvals in place for that transaction. It just takes a lot of work.

How much earnest money is at risk, if you don't mind me asking?

Several million dollars.

At this time we have no further questions. I'd like to turn it back to Mr. Bennett for any closing remarks.

Thank you. We appreciate your attendance on this conference call, and we look forward to talking to you on our next quarterly call.

Ladies and gentlemen, this does conclude today's teleconference. We do thank you for your participation once again, and you may disconnect at this time.