Ashford Hospitality Trust Inc (AHT) 2006 Q2 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.

Good morning and welcome to this Ashford Hospitality Trust conference call to review the Company's results for the second quarter of 2006. 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 remind you 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. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled Risk Factors in Ashford's registration statement on Form S-3, and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the Company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings release and accompanying tables or schedules, which has been filed on Form 8-K with the SEC on August 2nd, 2006, and may also be accessed through the Company's Website, at www.AHTREIT.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release.

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

Good morning and welcome. We are very pleased to report on Ashford's performance during the second quarter of 2006. Our key accomplishments were better-than-anticipated operating metrics, results-oriented internal growth, and successful capital deployment and accretive investments.

Every metric we use to track the performance of our portfolio showed significant improvement from a year ago. AFFO was up 85% on an absolute basis and up 36% on a per-share basis to $0.34. We beat the consensus projections by $0.03 a share, or approximately $0.10 -- 10%. Cash per share increased 35% to $0.31, resulting in a dividend coverage ratio of 153%.

Pro forma RevPAR for hotels not under renovation was up 12.1%, our sixth consecutive double-digit quarterly increase, and well ahead of the industry averages. Pro forma hotel operating profit for hotels not under renovation increased 13.4%, with a 128 basis point improvement in margin.

This strong performance is a direct result of a portfolio management strategy that focuses on the best risk/reward allocations of our capital between direct investments and lending, along with the right mix of assets in terms of geography, segment, brand and manager. Our results are also enhanced by our ongoing internal growth strategies that focus on repositionings, CapEx upgrades, immediate margin improvement, [outsized] market recovery, high initial yields and capital recycling.

Our earnings release and the tables attached to it provide a detailed breakdown of our RevPAR and hotel operating profit by brand, region, and whether the asset is under renovation or not. We continue to provide our investors with a high level of transparency in all our reporting.

The 12.1% increase in pro forma RevPAR for hotels not under renovation was driven by a 7.5% increase in ADR and a 323 basis point increase in occupancy. For all hotels, the pro forma RevPAR increase of 11.5% was driven by a 7.7% increase in ADR and a 266 basis points increase in occupancy.

Our RevPAR yield index for the quarter increased from 111.6% to 115.6% for the hotels not under renovation, and from 111.9% to 115.1% for all hotels. This higher market penetration across our portfolio relative to competitive set properties is a clear indication that our asset management strategies, capital expenditures, and guest service increases are succeeding, capturing an increasing market share.

Hotel operating profit continued its strong pace with a 13.4% increase for hotels not under renovation and a 10.7% increase for all hotels. Last quarter we indicated that we thought margins would be flat year-over-year for the second quarter. We are pleased to report that even though our hotels already have among the highest operating margins, our hotel operating profit margin, or hotel-level EBITDA margin, improved 128 basis points for the hotels not under renovation and 67 basis points for all hotels. Higher incentive management fees, energy, labor, insurance, and property taxes affected the extent of the margin improvement.

We also still have some unfavorable impacts from year-over-year comparisons with the CNL portfolio transaction, in which the previous terms of the management contract are still resulting in an approximate 30 basis points impact to margins. This situation corrects itself in the third quarter comparisons. In fact, we expect that during the second half of the year we will continue to see further margin gains.

During the second quarter we had five hotels under renovation. Two of these have already been completed. We expect to commence renovation work on an additional 14 hotels in the second half of the year, bringing our total capital spending this year to between 30 and $40 million.

As the RevPAR and operating profit improvement attests, we have generated significant value through our aggressive internal growth strategies. One example we highlighted last quarter was the Hilton Fort Worth that had just completed a rebranding and repositioning. Since its conversion from a Radisson in April, we've seen RevPAR growth of 66% for the quarter.

Another example of (indiscernible) the embedded value in our portfolio is the Pan Pacific Hotel we acquired in April. You will recall that we immediately rebranded the hotel as a JW Marriott and allocated $10 million to renovate and upgrade the property. Immediately prior to our ownership, this hotel had lagged its competitive set in terms of RevPAR growth by 50%. Bookings through the Marriott system already significantly exceed that of the prior brand for all of 2005. We are expecting a 25% increase in RevPAR over the next 12 months.

We are pursuing other brand conversions this year that, in conjunction with our renovation program, should provide additional sources of internal growth. We have identified two of our existing Radisson-branded hotels, the Radisson in suburban Boston and the Radisson in downtown Indianapolis that we intend to convert to Sheratons. These conversions are included in our CapEx budget and are expected to be completed in the next 12 months.

One reason we have purposely diversified our portfolio by segment, brand and geography is to guard against any potential impacts one area of the country or one price segment might experience.

Demand throughout our portfolio was fairly balanced between leisure, corporate, transient and group demand. Our guest segment mix for the second quarter was approximately 73% transient, 23% group, and 4% contract. While some other hotel firms have reported softening leisure demand, we have yet to see any softening in the leisure component of our business.

Our earnings release provides a detailed breakout of our portfolio by brands and region. As of June 30th, our portfolio breakdown by segment was 3% luxury, 42% upper upscale, 43% upscale, and 12% midscale without food and beverage. We have also worked to calibrate our markets versus expected new supply. We believe there is a high attrition rate for new supply in many markets, mainly due to the rising cost of raw materials and interest rate increases. These higher costs are in turn leading to early-stage planning projects being dropped. While a few markets across the country are beginning to see the emergence of some new supply, we believe our portfolio is well positioned given the geographic diversity, recent capital expenditures and limited exposure to new hotel openings.

Ashford's capital structure remains one of the strongest in the industry. Our net debt to TEV is low. With our recent capital raised, we have paid down our revolving credit facilities completely, eliminated floating-rate debt, lowered our overall cost of debt capital, and increased our weighted average maturities. With this solid capital structure, we now have the capacity to purchase several hundred million dollars worth of assets.

Our industry outlook for the balance of the year and into 2007 remains very optimistic. We believe the industry is well positioned for future growth and we will continue to excel at each of our growth strategies to deliver an attractive dividend and capital appreciation.

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

Good morning. For the second quarter we reported net income of $8,304,000, EBITDA of $36,798,000, and AFFO of $25,037,000, or $0.34 per share. As of June 30th, the Company had total assets of $1.5 billion, including $88 million in cash.

At quarter-end we had $802 million of mortgage debt, leaving net debt to total enterprise value at 42% at the end of the quarter. Our blended annual net interest cost was approximately 5.7%. At that time our fixed-rate debt accounted for 87% of our total mortgage debt.

At June 30th, we had 57.4 million common shares outstanding, 7.4 million Series B convertible preferred shares outstanding, and 10.3 million OP units issue, for a total share count of 75.1 million. Subsequent to the end of the second quarter, we issued 3.8 million OP units as part of an acquisition and sold approximately 15 million additional common shares at a price of $11.40 via a secondary offering. This puts the number of current shares outstanding or reserved for issuance at 93.9 million. Immediately upon receipt of the proceeds from our secondary offering, we paid down the entire balance of $129 million on our revolving credit facilities.

At quarter-end we owned 72 core hotels containing 12,266 rooms. During the quarter we reclassified seven hotels into continuing operations that were previously held for sale. On April 19th we acquired the 338-room Pan Pacific Hotel in San Francisco and immediately rebranded the property as a JW Marriott. And subsequent to the end of the quarter, we acquired the 697-room Marriott Crystal Gateway in Arlington, Virginia.

We have agreements for management with seven different companies. The most significant managers are Remington Lodging and Hospitality, which manages 29 of our properties, and Marriott International, which manages 24 of our hotels.

As of June 30th, we owned a positioned in 11 mezzanine loans, with total principal outstanding of $112 million, with an average annual unleveraged yield of 13.8%. During the quarter, we were repaid on the $15 million Denver Adam's Mark loan, and the $7 million Minneapolis Northland Inn loan.

Following this, on June 9, we acquired the $26 million Tharaldson mezz loan, which is secured by 107 hotels. And additionally, subsequent to the end of the quarter, we've been repaid on the $15 million Boston Logan Embassy Suites loan.

For the quarter, pro forma RevPAR for all hotels was up 11.5% as compared to second quarter '05, and for the hotels not under renovation, which is all but five hotels, RevPAR was up 12.1%. Pro forma hotel operating profit for the entire portfolio was up by $3.7 million, or 10.7% for the quarter. For the 67 hotels not under renovation, hotel operating profit is up $4.2 million, or 13.4%.

When adjusted for the change in management fee structure on the CNL portfolio, our margins improved by 151 basis points for the hotels not under renovation.

Finally, for the second quarter we reported CAD of $22,708,000, or $0.31 per share, and announced and paid a dividend of $0.20 per share. For the quarter our dividend coverage ratio was 153%, and for the first half of the year our coverage ratio was 138%.

I would now like to turn it over to Doug Kessler to discuss our ongoing investment [plans].

Good morning. In terms of our pipeline, there is a wider selection of transactions available today than in recent months. We are currently reviewing acquisition and lending opportunities totaling nearly $4 billion.

Our broad-based investment strategy enables us to have a deep pipeline, and as a result, we can be even more selective in choosing the accretive deals that reinforce our portfolio management and internal growth strategies. As in the past, we expect to win our fair share of these marketed and off-market deals, while continuing to exercise discipline and conservatively underwriting to our threshold returns.

The investment activity during the second quarter and to date in the third quarter capitalized on opportunities to expand into new high-growth markets where we didn't currently have a presence, or in markets less exposed to new supply.

The $95 million acquisition of the Pan Pacific, at $281,000 per key for this AAA four-diamond luxury hotel, was our first entry into San Francisco, which is both a high-growth and high barrier to entry market. Our investment strategy was based upon significant improvement from three areas. First, San Francisco's market recovery. Second, rebranding to JW Marriott, along with a $10 million renovation. And third, better operating performance from changes Marriott is putting in place. We are already seeing results from our strategy.

Subsequent to the end of the quarter we completed the acquisition of the 697-room Marriott Crystal City Gateway in Arlington, Virginia. We identified this asset in particular for its unique positioning in the dynamic submarket of Crystal City. Acquired at a 9% trailing cap rate for a total consideration of $107 million, we utilized OP units that were priced at a premium to prevailing market price and have a fixed dividend rate of 6.8% in years one through three, and 7.2% thereafter. These payments are below our current dividend payable to the common shareholders. This hotel was not widely marketed, and we believe we created shareholder value via the high current yield, operating partnership unit structure, and restructuring of the Marriott management agreement. This asset will be an excellent addition to the portfolio.

In the quarter, we closed on a $26.3 million junior mezzanine loan that is secured by a portfolio of 107 select service hotels. This portfolio was acquired earlier in the year by Goldman Sachs Whitehall Funds from Tharaldson. Priced at 500 basis points over LIBOR, or 10.25%, the loan has a two-year term with three one-year extension options.

Managing our balance sheet to get the best possible capital structure is also a key strategy for us. In late July, we completed a follow-on public offering of 14,950,000 shares at $11.40 that raised net proceeds of $162.7 million and allowed us to completely pay down all of our credit facilities and reduced our floating rate debt to zero. We were pleased with the execution of the offering and the continued diversification in our institutional investor base.

While we expect short-term diluted impact from the share count increase and the time needed to invest the capital from this raise, we anticipate deploying the capital in accretive investments by year-end. We're also in the process of upsizing our revolving secured property credit facility to $150 million, and reducing the cost by approximately 10 basis points.

Previously, we converted the $45 million Hyatt Dulles mortgage loan into a single-property revolver with a slightly higher borrowing base and a lower interest rate. We recently extended the revolver capability of this loan through October 2007 at no cost.

Complementing the capital-raising and financing efforts, we continue with our capital recycling. We will be evaluating other sale opportunities in our portfolio where we have nonstrategic assets with slower RevPAR growth or low value-added CapEx.

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

Thank you, Doug. We still see opportunities in the marketplace for acquisitions, especially direct hotel investments, despite the growing competition for assets. We do expect to maintain our dividend at $0.20 per share through the end of the year, at which time we will determine whether to increase it or maintain it for 2007.

That concludes our prepared remarks, and now we'll open it up to any questions you may have.

(OPERATOR INSTRUCTIONS). Gustavo Sarago.

Just hopefully, Monty or Doug, you guys could give some more color regarding the CapEx calendar and some of the initiatives that you have moving forward with some of the recent acquisitions. In looking at the calendar, I noticed that you don't have the Research Triangle or the JW Crystal City and some of the Towne Place Suites, which we know you'll be spending some capital over the next few years. So, I was hoping to get a sense of the timing of those renovations and potential impact.

You bet. I'll touch on it, and I'll ask Kimo to touch on it as well. Whenever we takeover an asset, we typically will implement a CapEx plan. And the timing of that plan usually gets done within the first 12 months; sometimes it might take a quarter or two after that.

When we do that, generally we just pick a time as to when we think it's going to occur. And as we get in and we take over the property and understand the specific scope, we'll revise our schedule as to when we think it's really going to happen.

Regarding those properties that you mentioned, all of those will be taking place in 2007, probably in the first quarter, some roll over in the second quarter of 2007, is at least what we're currently anticipating. And in fact, in our next earnings release we will lay out our anticipated renovations for 2007 to give you some color there. Kimo, do you have anymore comments?

I think, just to add, that all of the projects you mentioned, I think, will be done by the end of the second quarter in '07.

That sounds great. Kimo, one question for you. Again, I think the detail in the supplemental is great. Regarding the margin impact, do you foresee property taxes going up across the portfolio? I know they've actually shown a decline on a percentage of revenue basis, but we've been hearing concerns about rising property taxes across some other peers. What is the outlook for your portfolio?

At least historically, for the recent past, they're going up at a rate of about 6 to 7% a year for the portfolio. It's hard to predict the future, if it's going to differentiate a whole lot from that. But I think it's going to go up faster than inflation.

The reason it's difficult to project is that it's not like all of them go up by 6%. We'll have one property that will double or triple, and the others won't move at all. So it just kind of depends upon how many get reassessed. And since we're buying all these properties new (indiscernible) jurisdiction, that triggers a new valuation.

[Jill Slatterly], Merrill Lynch.

I just actually had a quick follow-up question on the CapEx program. Should we be anticipating any sort of significant business interruption from the additional hotels that will be under renovation in the second half? And then also, on the acquisition front, have you guys targeted any specific markets? And would you be able to provide any color on kind of the acquisition criteria?

Sure. I'll touch on it; then see if Kimo or Doug have some additional questions. What we find as kind of the best indication of impact on margins is if you go back through our history of our properties under renovation, not under renovation, or operating profit margin and RevPAR growth, and we break those out versus how many properties we had under renovation during that quarter; that will give you an indication of the amount of impact.

For example, the RevPAR growth between all assets and those that are not under renovation were the closest together this quarter. One was 12% and one was 11%, or thereabouts. (indiscernible). And the reason is because the number of assets we've got renovation at five is one of the lowest -- relative lowest, if not the lowest we've had in some time. But as you look at our calendar, going through the second and third quarter, the number of those properties are picking up.

That being said, a lot of the properties being renovated in the last half of the year or rolling into the first part of next year are select service. And typically we find that those renovations are less -- relatively less disruptive. So I would kind of take those historical metrics and kind of use it as a compass to evaluate what the impact might be for the next couple of quarters.

As far as acquisitions go, there are some markets we would like to be in. We would like to be in Chicago if we can. We would like perhaps some exposure to the Northeast and the Boston market a little bit downtown perhaps. But we really do approach our acquisitions on an opportunistic basis. So while we might stretch a little bit more for one of those markets, it's hard to make a sale happen where a seller doesn't want to sell. So we remain pretty general in our -- of where we want to be. But we would like to have representation in those markets. Doug, Kimo, you guys want to comment?

I think that you also asked a question about our criteria. We still are using the same criteria we started off with when the Company went public, which is generally underwriting our assets to between a 13 and 15% leveraged IRR. And that's using pretty conservative assumptions at a time where there's been some very positive trends in the industry. We use, generally, market trend growth for RevPAR first couple of years, but then later in the cycle, in our modeling of the ownership of the hotel asset, we typically dial back the RevPAR growth to 3 to 4%, just to be conservative. And then our back-end exit assumptions also conservative (indiscernible) 150 basis points lighter than going in cap rate on average.

So when we acquire an asset, it's with a great deal of confidence in its performance. And as Monty said, we still are yield-oriented with a focus on the capital appreciation opportunities as well. So while we can target certain markets, we won't stretch just to be in a particular market.

[Justin Webb], A.G. Edwards.

A quick question for you. On the RevPAR growth, it looked like the Pacific region was relatively weak, and that Texas had pretty good year-over-year gains. I was wondering if maybe you could elaborate on that a little bit.

Sure. What we're experiencing is exactly what you said. Texas for the past quarter, and even this whole year, has just been very strong. It's almost like Texas is starting to catch up with the rest of the country. In fact, even the whole middle part of the country has been relatively stronger than it has been in the past, which, again, is kind of a catching up.

So we are seeing that. We're trying to put our finger exactly on why. For a while we thought that what was happening in Texas was maybe just some holdover of a Katrina effect, of people coming over from Louisiana. But those people are long gone and long moved out, and we're still seeing this strong growth. So Texas is starting to catch up. Regarding Pacific, Kimo, why don't you touch on that?

Let me give you a little color on Texas, too. The numbers are skewed slightly because of the Fort Worth conversion that Monty mentioned, which was 66% year-over-year RevPAR growth. We converted that to a Hilton, and we do have a smaller room count there. So that skews the numbers a little bit for the Texas region.

In the specific -- the real issue there on the [unit] growth is the Anaheim asset. That hotel in 2005 for the full year over 2004 had 25% RevPAR growth. That was Disney's 50th anniversary of Disneyland. We had a phenomenal year last year; it's just tough to top that. So the other assets that we have out there are performing pretty well. That asset is a large asset. And while we're very happy with the current levels, it's just not showing great growth because of the great year it had last year.

Super. Very helpful. Another quick question. On the seven hotels that you had earmarked for sale, I was wondering if you can maybe elaborate a little more on -- it looked like they outperformed in the quarter. Maybe talk a little bit about that, and why some of your reasons for deciding to pull back on that sale.

We had initially targeted seven TownePlace suites to be sold. We marketed them, and in fact we received offers at our price level. But as time -- that we were looking for. But as time went on, we just continued to see strong growth in these assets, strong RevPAR growth and strong hotel operating profit growth.

The reason that we initially thought about selling it was a couple of reasons. One, there's (indiscernible) construction, which in our view aren't good [for] long long-term assets. And second, the TownePlace brand in Marriott is probably one of their weakest brands, although Marriott brands generally are very strong in our opinion. And because of that we initially targeted that. But as we gained experience with the assets and we saw their performance, we started to change our view on it. And the performance -- Kimo, why don't you read off the performance here recently.

Year-to-date, the RevPAR for the assets is up 14% same period last year, and EBITDA is up over 28%. So as we got into the budgeting process in the last year and saw the strong growth that was being forecasted, I think we had a little bit of change of heart in terms of when we might ultimately sell the assets.

If we sold those assets today versus when we were planning on selling them, we think we could sell them for about 30% more than we could have back then. The decision, at least so far, has been a good one, and we're still evaluating it. We don't think (indiscernible) construction is something we want to hold for the long-term. We've made the decision to hold it over the mid-term because we have to invest 4 million CapEx into these assets. So after we invest it, we kind of want the benefit of that to show up in the numbers. But we'll keep evaluating it. And of course we'll let everybody know if we decide to change our mind on that.

If I could also add something -- although this is seven assets, it's a relatively small percentage, obviously, of the Company's EBITDA. And if you look at this decision from a capital market standpoint, the cap rates for this type of product have remained fairly aggressive still. We're not seeing any movement upward in terms of expansion of cap rates yet for this type of product. So while we're getting the benefit of the improved performance, with the cap rate situation we think that we can drive some additional value out of the eventual sale of the portfolio.

And then finally, when we bought the portfolio, we put in place assumable financing at a very, very low interest rate that would accrue to the benefit of a potential buyer. So that only continues to improve from the standpoint as interest rates overall increase, and so the buyer of the portfolio would benefit from the high yield from the debt structure that we put in place.

Asad Kazim, RREEF.

Just a quick question on the mezz platform. Could you just comment on what you think -- how big you guys can grow with the current resources at hand, and why it hasn't grown faster yet. Do you think it's because you're being very selective on deals, or do you think there is not enough equity behind a lot of the deals that are being done recently at the pricing they're being done at?

Our thoughts on the mezz platform is that, first, we're very happy with the results we've been able to achieve. I think we quoted something like 13 or 14% unleveraged current returns on it. But we do -- we do remain very selective on it. And at least here, over the short-term, we don't see it growing as a percentage of our platform, or we don't even know if it will keep up as a percentage of our platform. Because we see in general relatively better investments on the direct hotels platform.

The spreads for the mezz loans have compressed. We have to really work harder and longer to find the kind of yields that we like. Some deals that are getting out there are scary to us. There's loans being originated today that don't have 1.0 trailing debt service. Well, unless there's a significant guarantee, we just won't participate in those loans. We need the coverage. And of course we look at the sponsor, we look at the asset. So we are very careful. And so I'd say it's probably a little bit of a couple of things you said. We just -- it is our secondary strategy, it will be our secondary strategy, but it won't be an [emphasis], and we just remain cautious.

I guess I'm just wondering why it's a secondary strategy with such great returns, pretty decent coverage, and at a time when transaction volume is -- has been at its peak. Assuming you guys are focusing on all different pieces of the pie within your investment strategy, wouldn't this be the time that mezz would be at its peak and decline as transaction volume trails off?

If we could find more deals like the deals we've done, we would do those deals. It's just a lot of work to find the deals that we do (indiscernible). And so unfortunately for us, it's not something where we can just turn on the spigot; it takes a lot of work to find and source the kind of investments that we're comfortable with. But like I said, if we could find more like the ones we've done, we would do more, because the immediate accretion on them is very strong.

The other thing that we look at is just the risk/reward trade-off. With the mezz loans, we in the past have been getting very, very high current yields. But obviously there's no capital appreciation associated with that. As the spreads have compressed, we still can get relatively high yields, but they're pretty consistent with kind of the stabilized yields on our direct investments. But yet we still can benefit on the direct hotel more from the capital appreciation.

I think that the overall lending terms also have become far more relaxed in the market, and -- when we're seeing, as Monty mentioned, sub 1.0 debt service coverage, or transactions where there's really no cash traps, we just want to be very careful. And the other thing that we're seeing in terms of the transaction volume is you're seeing a lot of people also cashing out big positions, where they bought a hotel or a portfolio a year and a half ago, and they're refinancing out all their equity, so they have no skin in the game. And that's something that while it's just an event of the industry given where we are in the strong point of the cycle, we are just -- we want to be careful about lending to those that don't really have an equity interest still in the deal.

We're going to be disciplined. If we still find high yields, you should see us do a few more deals. But we're going to stick with our strategy here of trying to seek both capital appreciation and current yields.

Let me just add one more thing to that -- is that where I could potentially see the percentage going up of our mezz deals is if there's an event in the capital markets that really causes lenders to pull back -- such as, heaven forbid, a 9/11 or an Asian financial crisis, where the capital markets start to dry up -- what happens typically in those situations is you don't see a lot of people selling properties because they can't get full value because buyers can't get financing. So the selling pace stops.

So on one hand we can't -- wouldn't be able to buy very many properties. But on the other hand, people still need to refinance. And the terms of that really just become very favorable for a lender, since the capital markets are so tight. I think after 9/11, mezz deals were getting spreads (indiscernible) 1500, and they were just really, really favorable. So maybe that -- maybe some loans on developments, because we can get wider spreads there. But again, we just remain very, very cautious. So we'll see.

Will Marks, JMP Securities.

Really one question relating to the Crystal City property. Can you comment at all on the market? I know you used the term dynamic, but I really know nothing about the market besides that. I've been there, but how has it done year-to-date? What's the forecast? Is there any construction? That's a pretty big asset for you guys.

It is a pretty big asset for us. Overall, the Washington D.C. market -- its growth year-over-year has not been as strong as it has in the past, although this asset has been pretty strong. And we normally don't give out stats on individual assets. But since this is one we just recently acquired, we pulled that data just in case. Kimo, I think you've got some of that information.

The asset was budgeted to do an 8% year-over-year RevPAR growth. And through the first six months of the year, RevPAR is up 10% for that asset, which is a little bit better than the market, but pretty close to what the market is doing. So far that's year-to-date through June.

That's its immediate market -- immediate competitive set.

Great. Any construction in that market? How are the barriers to entry?

The barriers to entry are tough in that Crystal City market. You may be aware that [Bornado] is doing some redevelopments there, adding apartments and retail, and on and on. I don't think we're aware of any new assets coming into the market. There's a Westin, I believe, out 395 some direction, but that's not competitive to this market. And in fact, there's supply going out of the market with the other Marriott shutting down. So we (technical difficulty) net supply is going in our direction.

David Loeb, Baird.

Just a few things. First, a question with a little bit of an editorial point of view. Are we getting closer to the time when you guys think it would be appropriate to give guidance?

You know, we -- we have got a policy of no guidance. And as far as changing that, we don't see changing that. We've got 10 of you guys out there, analysts, that do a great job in following the Company. And our platform is such that sometimes we want to jump out there and do a mezz loan versus a direct hotel investment. And referencing what Asad implied earlier is that the mezz loans are extremely accretive, while direct hotel investments short-term are not, but they're accretive later on. And we can just see that cause a blip in our numbers this way or that. We just never want to be in a position where we don't want to do a deal or we do a deal because of quarterly results. So we think you guys do a great job of forecasting, and so for right now we're probably going to stay put.

Thanks for the compliment. A lot of young, acquisitive companies give sort of stable portfolio, or steady portfolio guidance, excluding any additional acquisitions or investments and the like. And that's certainly something you guys could do. Clearly, you're capable of forecasting better than we are.

We probably are. As far as stable portfolio guidance, we haven't even discussed that potential internally. So we will discuss that and think about that as well.

Doug, I appreciate your comments on the pipeline. If I heard you correctly, you're saying that your threshold, your return hurdles have not changed. What are you seeing in the market? Have the prices changed, either asking prices or where you think stuff is going to close?

I think we're just beginning to see some push back on cap rates, so that we certainly feel that they've stabilized, and the market still remains fairly robust as we look ahead. So we're still able to underwrite a fair amount of growth into these acquisitions.

Any view on timing on -- I'm guessing that -- I guess I would conclude that you had no contracts signed at the time of the secondary, or you would have had to disclose that. But my assumption is that you would have had letters of intent. Any progress on converting those letters of intent to closings to contracts, and what's sort of the earliest you think you might be able to close on deals that are in your pipeline?

You're correct. I think the test is whether we think a transaction is probable in order to disclose it in that offering. And we did not have a transaction that was probable at that point of time. And also, as you know, we haven't announced anything since that offering, which is a threshold as well.

We see a lot of transactions out there, and we're chasing a few. In fact, we're chasing several hundred million dollars worth right now. We are making progress on them. We're excited about some opportunities out there. But as we've told you in the past is that we could go through our due diligence checklist of 100 items, and if just one item is off, then the deal falls through. And you just don't know until you complete your whole checklist. So unfortunately, if we've got our list of 100 items and we're checked down to number 75 at this point, we don't know if we're going to make it to 100 or not. We just don't know.

So, clearly, we would not have raised the capital if we didn't think that we could deploy it in accretive investments, say, by year-end-ish. And that's what we think is probable, and that's what we're gunning for. I wish I could give you some more specific information on it; it's just so hard to predict.

Year-end-ish is actually a lot better information, so that helps. I appreciate that. One final question, just on the two potential Radisson-to-Sheraton conversions. Can you talk a little bit more about how much capital that could involve, what kind of revenue -- incremental revenue growth opportunities you see there, and what kind of RevPAR increases you might see, given the market dynamics around those hotels?

The Milford Radisson should convert to a Sheraton, I'm guessing, midpoint of the first quarter next year. That hotel went through a (indiscernible) after we bought it with Radisson, and the incremental CapEx to bring it to a Sheraton was about $1 million. We see an opportunity for probably an incremental 15 to 20% RevPAR with the up-branding on that hotel, and very good return on the incremental capital there.

Similarly, the downtown Indy hotel is now going through the [pip] that was part of our acquisition with the Radisson brand. And all of that work was done with the eye towards potentially up-branding it, and the incremental CapEx there to up-brand it is about $2 million. That should be completed about the end of the second quarter next year for a conversion, and we would see a like amount of RevPAR growth there, probably 15 to 20%. And really it's just gaining some index from our comp site competitors there and making these hotels more competitive. So we don't need to see a lot of RevPAR growth for the market area; we're going to see a lot of business just by having a more competitive brand.

And do you see conversion opportunities for your other Radissons or for other assets? I'm particularly thinking of Covington and Long Island.

We see opportunities and we're pursuing them. In fact, every quarter or so we look at our opportunities. And for a variety of reasons, we move forward or we don't, as you can imagine. But we are scouring our portfolio. No plans at this time, though, to make any other brand changes.

So the performance on those other two is -- I guess my conclusion would be it's either satisfactory or there's not a lot you can do there.

What, on the other ones?

Yes. Particularly Covington and Long Island, the ones you've [honed] from the beginning.

I'm sorry; what did you say? What were my options?

They were that you're satisfied with the performance, or there's not a lot you can do in terms of available brands or where you think a brand would do, given the structure of the hotel.

I guess suffice to say since we're not capital constrained that if we could invest capital and get superior returns on it, we would do it. So maybe we can't because certain brands aren't available. Maybe we look at the amount of CapEx we have to put in for different brands, and it just doesn't pencil. Maybe we're in negotiations with other brands right now and just haven't consummated. But I wouldn't say we're ever satisfied with the returns an asset is generating.

Justin Webb, A.G. Edwards.

Just one more quick question. I know you discussed supply and said it didn't seem to be a concern as of yet. Equity Inn had come out with a pretty good little study on sort of the competitive threats in their different segments. And I was wondering, with such a large percentage of your rooms in the limited service segment, if you had anything like that coming out, or you have done anything like that or were planning on it.

We have started that process. We're starting to gather data; we're just not in a position to report anything more specific, although we've talked internally about perhaps on our next call giving a little more detail on that.

Gustavo Sarago, Friedman Billings Ramsey.

Just two questions, one to kind of tag along to David's comment about the conversions. Could you discuss maybe the contract terms of the Sheraton conversions or the Radisson conversions? Are they more favorable to -- are they [market] terms, the management agreements?

There typical what you would see in a conversion. They have a ramp-up on the royalty over the first three years, and then they go to market after that. The length of the contract is the typical 20 years with the normal outs.

Thank you. At this time it appears we have no further questions. I would like to turn the conference back over to Mr. Bennett for any additional or closing remarks.

Before we close, I would like to mention that we plan to conduct an analyst and institutional investor tour of our JW Marriott hotel in San Francisco at the NAREIT Annual Convention, currently scheduled for November 8-10. We plan to hold the tour either the day before or the afternoon of the first day of the conference. We will showcase the renovation work being done on the asset, provide a market overview, and a before and after guest room tour. Please but the date on your calendar and look for details on this tour to come to you soon. Thanks for your participation on our call today. We look forward to speaking with you again on the third-quarter call.

That does conclude today's presentation. We thank you for your participation, and you may disconnect at this time.