Ashford Hospitality Trust Inc (AHT) 2006 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'd like to turn the conference over to 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 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.

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-- 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 in the Company is not obligated to publicly update or revise them. In addition certain terms used in this column are non-GAAP financial measures, reconciliations of which are provided in the Company's earnings released and the accompanying tables or schedules which has been filed on form 8-K with the SEC on March 7th, 2007, and may also be accessed on the Company's web site at www.AHT.GIG.com.

Each listener is encouraged to review those reconciliations within the earnings release together with all other information provided in the release. I will now turn the call over to Monty Bennett.

Good morning and welcome to our call. I've had a bit of an eye infection this morning which makes it difficult for me to read so I will ask Doug Kessler to read my portion of the script as well as his own. I am going to be on the call and will be available for the Q&A session. Doug, please go ahead.

Good morning and thank you for joining us. The focal point for this call will be our very successful fourth quarter results, the status of the CNL Hotels and Resorts transaction and our balance sheet strategies. For the past few months we have taken significant steps leading with the CHR transaction to create long-term shareholder value. Through disciplined execution of our portfolio management and internal growth strategies, we continue to position Ashford for success.

First, we are very pleased to share with you our results for the fourth quarter 2006. Overall the recent quarter was one of our strongest internal growth performances in terms of the combined benefits for the hotels not under renovation with RevPAR growth of 10.3%, a 206 basis point improvement and operating margins and a RevPAR yield penetration index of 117.8% which was a 230 basis point improvement.

The $86 million of capital investments we have made at 33 hotels over the last two years has favorably impacted our portfolio performance. Our capital expenditure program and enhanced services at many of our hotels continued to position our assets for strong RevPAR growth while still improving our already high operating margins.

AFFO was $0.27 per share for the quarter. For the year, AFFO per share was up 18%, and cash per share increased 13% resulting in a full year dividend coverage ratio of 124%. We expect 2007 to once again demonstrate the benefits of our portfolio management and internal growth strategies.

Since our last earnings call we completed or announced several transactions, the most significant being the agreement to acquire 51 hotels from CNL Hotels and Resorts for $2.4 billion. This is an unparalleled investment opportunity that Ashford diligently pursued. We were successful in securing this transaction while still adhering to our stringent criteria, because we demonstrated efforts to fully underwrite the transaction early in the process, arranged an attractive financing commitment, creatively addressed complex structural issues and teamed up with a capital partner in Morgan Stanley that saw the real economic value in the eight largest assets in the $6.6 billion transaction.

There are many highlights to this transaction. First, the transaction is accretive to FFO and CAD on both a current and future basis even after adjusting for our targeted leverage levels. The portfolio is a best-in-class collection of high-quality, geographically diverse, strong branded hotels. Investment is expected to provide an attractive forward NOI yield of 7.6%.

The $177,000 per key value is substantially below replacement cost. Our ownership among top-rated hotels increases substantially and Marriott becomes our largest brand manager among seven different property management companies. The acquisition concentrates Ashford in higher performing upper upscale assets and strong growth markets.

With some recent negotiations with Wachovia, the financing package they committed to is now on even better terms than we previously structured. Aside from the aforementioned benefits specific to the deal, we believe Ashford may gain platform advantages from other aspects of this transaction, including value-added portfolio and asset management strategies on a broader scale; increased access to accretive investments; stronger brand relationships; greater interest from potential joint venture partners and institutional capital, and broader industry awareness.

To ensure we extract the maximum value from this transaction we are focused on several key strategies. Portfolio integration, financial fine-tuning, value-added asset management and deleveraging. We are progressing smoothly in each of these areas with energy and commitment and our entire management team is confident in our expertise in these areas to achieve our goals. Integrating this portfolio into our existing asset base from the asset management and accounting prospectus is proceeding according to plan.

As we previously mentioned our additional staffing requirements will be modest with a targeted addition of around 25 new employees, mainly in the accounting and asset management areas. We're pleased to report that several of our value-added strategy discussions involving brand management terms and existing joint venture arrangements are proceeding ahead of plan; and we look forward to discussing these in more detail in upcoming calls.

As we will discuss later our primary focus is on the balance sheet and our deleveraging strategies. We have a multiphase approach to reduce debt. The strategies available to us include asset sales, joint ventures, the public markets and organic growth to help deleverage.

Before moving onto some more specifics about our fourth quarter results and the CHR transaction, I would like to share our perspective on the industry trends. While there are some indications of the change in market trends relative to peak performance periods, we reflect on the relative comparison to industry averages and conclude that we are still experiencing a bullish part of the cycle. RevPAR growth while decelerating is still well above average growth and is forecast to be approximately 6% industry wide per 2007. Early indications are that this forecast could be revised upward.

New supply, while accelerating, is still well below normal growth and we continue to see the high construction costs dampening the forecasted supply growth. With the abundance of capital, inexpensive debt and relative strength of the lodging sector compared to other real estate classes, we anticipate lodging values will continue to increase for the next three to four years.

As each year approaches closer to the peak we remain proactive in our capital recycling strategy. Our focus has been to trade into upper upscale assets in primary markets with the best brands. Our select service portfolio is certainly taking on more of an urban focus with the sale of some existing assets and the addition of the CHR assets. We believe these shifts will better insulate the portfolio value when and if cap rates adjust and inspectors investors show a flight to quality in terms of assets, markets, and brands.

Consistent with these trends we expect our debt platform to become a less significant contributor to EBITDA, given the lower spread returns in the current market.

For 2007, we look forward to maximizing the value from our recent investments as well as pursuing additional accretive transactions while focusing on job number one -- proactively managing our balance sheet. To speak in greater detail about our fourth quarter results I would now like to turn the call over to David Kimichik to take you through the numbers.

Good morning. For the fourth quarter, we reported net income of $7,942,000; EBITDA of $37,227,000; and AFFO of $25,512,000 or $0.27 per share. At quarter end Ashford had total assets of $2 billion including $83 million of cash. We had $1.1 billion of mortgage debt leaving net debt to total enterprise value at 45%. And our blended annual interest cost was approximately 5.9% with 78% of our mortgage debt fixed.

During the fourth quarter, management made the strategic decision to list for sale 15 hotel assets and one office building. These assets are now classified as held for sale on our balance sheet and their operating results are included in the incomes from discontinued operations line on our income statement. Their historical operating results are no longer included in the various pro forma statistical tables included with our earnings release.

As of today two of the assets have been sold and the others are at various stages of the sales process.

At year end our portfolio consisted of 66 hotels and continuing operations containing 13,322 rooms. At quarter end, we owned a position in 11 mezzanine loans with total principal outstanding of $103 million with an average annual unleveraged deal of 13.2%. For the quarter, pro forma RevPAR for all hotels was up 8.7% as compared to the fourth quarter '05. For the hotels not under renovations which is all but 11 hotels the pro forma RevPAR was up 10.3% driven by an 8.3% increase in ADR and a 132 basis point increase in occupancy.

Pro forma hotel operating profit for the entire portfolio was up $4.1 million or 11.1% for the quarter. For the 55 hotels not under renovation hotel operating profit increased 15.5%.

Our hotel operating profit margin improved 206 basis points for the hotels not under renovation and 134 basis points for all hotels. During the fourth quarter we had 11 hotels under renovation. Three of these were completed in the quarter. We have an additional three hotels under renovation now in the first quarter and expect to start an additional four renovations in the second quarter. Our total capital spending in 2006 was $48 billion.

We ended the year with 72.9 million common shares outstanding; 7.4 million Series B convertible preferred shares outstanding; and 13.5 million of the units issued for a total share count of 93.9 million. We have agreements from management with seven different companies. The most significant managers are Remington Lodging and Hospitality and its affiliates, which manage 37 of our properties and Marriott International which manages 24 of our hotels. Following the CHR transaction Marriott will be our largest manager accounting for management at 53 of our hotels.

For the fourth quarter, we reported CADD of $21,537,000 or $0.23 per share, and announced and paid a dividend of $0.20 per share. Our dividend coverage ratio was 124% of CADD for the year 2006.

Finally you'll note that we have once again included a table in our release that provides a quarterly pro forma breakdown of hotel EBITDA and hotel EBITDA margin for current and prior year periods. In this table you will see a distinctive analogy trend with the second quarter having by far the highest margin over the other periods. Published estimates for Ashford's EBITDA market for the first quarter of 2007 currently show an average margin of 30% compared to actual results of approximately 27% for the last two years.

With our current core portfolio, each 60 basis point change and EBITDA margin equates to approximately $0.01 per share of FFO. We encourage our investors and analysts to consider our historical seasonality when forecasting our operating results. Our policy continues to be to provide as much disclosure and detail as possible in existing metrics in lieu of specific future guidance. I will now turn it over to Doug to discuss the ongoing investments.

Thanks David. The current environment for transactions is as busy as it has ever been. Never before have we witnessed as much buying and selling and single assets, portfolios, private platforms and public companies as today.

Last year set a record for industry transactions. 2007 may exceed that pace. Several catalysts for this are continued outperformance of the lodging industry fundamentals; increased allocation for lodging investments among core buyers; low-cost financing; relative yield compared to other classes of real estate, or simply a desire by management to exit the business.

We continue our investment strategy of investing across capital structure, geography, price segment and brand but with the renewed focus on upper upscale and primary markets and premium urban select service hotels. You can clearly see a distinct separation from our announced nonstrategic assets that we are selling, compared to what we're currently holding in our portfolio to position Ashford for growth.

In the fourth quarter, we completed the acquisitions of the Westin O'Hare for $125 million, and a seven hotel portfolio of full-service hotels for $267 million. Also in December we closed on two mezzanine junior loans totaling $11 million on the Hilton Suites Galleria and the Wyndham Dallas North. During the quarter we received a payoff on the $5 million Hotel Teatro and mez loan.

Turning to the CHR portfolio I'd like to update you on the timing of the closing, the financing and our deleveraging initiatives. CHR filed a proxy with the shareholder vote scheduled for April 10th and Ashford will be ready to close immediately thereafter. As we discussed on the transaction call, the financing we arranged with Wachovia on this acquisition provides us substantial flexibility on favorable terms. The expected blended all in costs of capital in this financing is now expected to be 6.39%. The funding allocations are as follows. $1.2 billion of 10 year fixed CMBS at swaps plus 61 basis points, 900 million of which we already rate locked at a rate of 5.95%.

There is a $340 million pool of floating rate CMBS at LIBOR plus 165 on assets that may be disposition candidates. Wachovia is providing $200 million of preferred equity at LIBOR plus 250. We also have a new three-year $150 million revolver that is priced on an LTV grid from LIBOR plus 155 to LIBOR plus 195.

Recently, we restructured the term loan with Wachovia to provide us with improved terms on $325 million of the capital structure that resulted in a reduced spread of LIBOR plus 150 basis points and lower fees. The balance of the financing is the assumed debt from the existing joint ventures of approximately $463.1 million.

Reducing the leverage associated with this transaction to under 60% in the first 12 months is a top priority for us. Our existing assets in the CHR portfolio consists of high-quality properties in desirable markets with strong brands, thereby making for very marketable assets particularly in the current transaction environment. Many of our financing arrangements on our assets gives us the flexibility to sell either with the favorable debt we put in place over time or unencumbered with debt.

Already we have progressed on Phase I of our capital recycling initiative with $170 million of assets either sold, under contract or letter of intent. Of this amount, 32 million is sold included the recently acquired Marriott [Trumble] and $50 million is under hard deposit contract including the TownePlace Suites portfolio. We expect all these assets to be sold by June.

We have commenced Phase II of assets sales consisting of approximately $400 million of CHR portfolio assets. Our joint venture discussions on $350 to $450 million of gross asset value is active.

In total, we are considering transactions on approximately $975 million of assets at the current time. The pace is ahead of our plan to achieve our target leveraged level within the first year of closing, considering that we have not yet even closed on the CHR transaction.

In summary, the fourth quarter was a very active period for transactions and we've started 2007 on an even stronger pace. There will be a lot of leading pieces as we integrate the recent acquisitions, complete the asset sales and execute our deleveraging strategy. But 2007 promises to be the most important and potentially rewarding years of far in our history.

That concludes our prepared remarks and now we will open up to any questions you may have.

(OPERATOR INSTRUCTIONS) Will Marks, JMP Securities.

Good morning. I had a question on -- first of all, on the debt, your plan to reduce leverage to under 60%. Is that based on enterprise value?

Generally that is the case. Of course you never know what the stock is which drives enterprise value. So we are looking at the metric, both on a [TEV] basis, same on a gross asset basis. So ideally we will be under both, but not necessarily.

Just to do the math and not -- if you were to sell 975 million today, where would that put you?

Kimo, do you have those numbers offhanded? Even that $900 million number included some joint ventures and so it's not quite a sale and it depends upon how much of it we would keep in that joint venture.

So -- I'm sorry. So the 975 would include essentially the full sale of all of the assets while you may not sell part of them. Is that --?

That's right. If you joint venture we might retain 10%, 20%, 30, 40. Anything up to 49% or so.

Got it.

And as far as that ratio it also depends upon how much CapEx we put in over the next few years and how much of that count at which specific point in time. I don't know if we have got that number as far as if we didn't put any CapEx in and we sold all of that. Kimo, you might have it on hand. If you do share with them, but if you don't you don't.

Will, it's that -- the combination of the Phase I sales and the base to sales and a joint venture and, again, there's some difference in terms of the assumption you make on share price or for comparing it to gross assets. But that those three events alone potentially get us right at the 60% level. Smidge -- just a smidge above.

Phase I, we know, is 170. Phase II I think you said 400 million?

Joint venture we took the midpoint of between 350 and 450 and are looking at a $400 million number.

Got it. That's very helpful. Thank you. One other unrelated question not your how you can answer or if you answer, but in terms of looking at RevPAR growth this year if you were to dig the industry projection that you set at 6%. What kind of EBITDA growth could you get out of that or maybe you just discuss can you get 150% of your RevPAR growth in the form of EBITDA growth? I assume you're going to get some margin improvement but if you can address this question at all I would appreciate it.

Sure. This is Monty. Our answer is, as I think you suspect, is a nebulous one. It depends upon how much of that has been average daily rate versus occupancy which we anticipate most of being an average daily rate. Also that 6% is for the industry broadly while the higher end segments typically do a little bit better than that which might adjust that.

We do anticipate to have the bottom line grow disproportionately above that. Whether that is 150% or not that's just hard to say. Kimo, if you might want to comment on that. We also are careful about giving guidance so are talking just theoretically but with the operating leveraged inherent in hotels it will be above the 6% level. Just hard to say how much.

A rule of thumb that I always use is to take conservatively between 40 and 50% of incremental revenue flowing to the bottom line. So if you do the math on that I think that would be our expectation from a conservative standpoint but again it all depends on the mix of occupancy rate, how much food and beverage revenue, etc.

So that's on $1.00 basis so if 6% translated into an additional $10 million in revenue then Kimo's formula says 4 to 5 million would be be increase in your EBITDA. (indiscernible) thanks.

I just want to go back to the comment just to clarify. It's between, depending upon the assumptions on share price that one makes, it's between 60 and 65.

I'm sorry. The midpoint of the JV range?

Yes.

Charles [Cerankosky], KeyBank.

Just had a quick question with regard to -- if you could walk us through the taking for those seven TownePlace Suites? I know you had put into discontinued earlier and then refi brought back to the core and now you are tagging it for sale again or it is in process. Can you just walk us through what went on with those properties and then also if you could just talk briefly about pricing? I think you said you got an 8% cap on a trailing NOI basis and some other REITs they're talking about being able to sell their hotels for five or six. If you could just kind of help clarify what's behind those numbers.

Sure. On the Town Place when we bought the original CNL portfolio a year and a half ago, almost two years ago we identified certain properties that we wanted to flush out immediately. And the Town Place Suites were part of that. While the assets were relatively new bills, they were stick constructions and we knew we didn't want to hold them for the long-term. That's why we classified them.

However as we marketed them we were getting pricing coming in at about our basis of it. We saw which direction the market was going in. It was continuing to be up and the assets themselves continued to perform very well.

So we thought as a management team that since the assets weren't particularly old and that even though they were stick they would still be in good condition for the next 10 years that we wouldn't be so quick in order to sell them. So we pulled them off the market.

Subsequent to that -- maybe six, nine months later in various conversations with various folks -- we received an offer that was a good bit above what our basis was. Then so we changed our minds and decided to go ahead and sell it because it was a great trade for us. So that was the thinking behind it. And if we weren't getting the valuation that we were getting we would probably still hang onto it because we do think there is a good bit of a time on it.

Regarding the pricing and cap rates, there may be a difference between limited service hotels and full-service hotels but let me ask David Kimichik to comment on that.

Yes. I think we announced a 7.0% NOI cap rate on trailing numbers for the portfolio. Obviously there's a collection of different assets in there. I think it's indicative of we are selling really our nonstrategic hotels, lower quality. You have to factor in what the CapEx is going to be on the change of license with the franchisor but we are selling assets in Horse Cave, Kentucky and Fairfield Inns in Princeton, Indiana, Iowa City, Dayton. One of the hotels we are selling is the hotel at the terminal at the airport in Indianapolis, which is on a 20-year ground lease and the terminal building is moving.

So as you could suspect we are probably not getting a great cap rate on that. I think all in, the cap rate is a pretty good cap rate for a collection of hotels that we are selling.

Jeff Randall, A. G. Edwards.

I'm just curious with the announcement made just last week regarding the sale of those 16 hotels, why is it that the fourth quarter results excluded them?

Kimo, why don't you comment on that?

We had made a decision near the end of the quarter to sell the hotels and as you are required to do when you think a sale is probable you are supposed to reclass them. So in discussions with our auditors we made the decision to classify them as held for sale. Subsequent to the end of the quarter we decided to sell an additional hotel and so there were actually 16 hotels that we were selling even though we reclassed 15.

It's not -- Jeff, it's not necessarily related on when you make the announcement it is when you internally make the decision.

I understand that but Kimo's earlier comment said it was during the fourth quarter.

I think I said it was near the end of the quarter.

Can you give investors some sense as to how the total portfolio performed? Including renovations and assets held for sale?

Those numbers are included in our FFO numbers.

I'm talking about year-over-year comparisons for RevPAR and margins.

I don't think it would change materially. It's consistent with what we reported.

David Loeb, Robert W. Baird.

Kimo, can you explain the tax benefit in the fourth quarter? I was surprised that it was positive.

We talked about this on our last call actually as well. The taxes come out of the TRS that leases the property and with the renovation activity, etc., some of those leases are having a bumpy ride and don't work real efficiently during periods of renovation, etc.

So we -- this was not unexpected and we talked about that in the third quarter call. We expect that to rectify itself in '07 and we expect to be a taxpayer. But it's just the fact that there's a lot of disruption and a lot of properties.

And when you say taxpayer is that for GAAP purposes or would you actually pay cash taxes?

For GAAP purposes as well as tax purposes.

But not cash?

Yes.

When he said yes he means, yes, we will be paying cash.

Oh. Okay. thank you. I appreciate the clarification you made about the EBITDA margins in the first quarter. It looks like you are getting really close to the line of guidance. I guess what I would like to know is if the estimates were off in the other direction, if we were extremely conservative in our estimates in one place or another, would you also be highlighting those kinds of discrepancies?

I think that we are getting into a lot of hypotheticals there. I think the only reason that we mentioned this is that this has happened maybe to our three times where our seasonality tables have not gotten the proper attention that they deserved. They were too much in another direction or another. It's hard to say what we would've done but that's the reason why we just encourage people to keep looking at the seasonality table because it changes. That's just important for everyone to note.

Monty or Doug, one final one. Doug mentioned that you expect hotel prices to continue to increase. Is that really RevPAR NOI driven or do think that there is more cap rate compression and if so how much?

Doug, why don't you comment on that?

I think it's partly capital markets-driven, David. The RevPAR is going to continue to grow. It's just not at its lofty levels that it was a year or so ago and there's more capital flowing into the sector. And so I think it's a function of the available supply of properties and the requirement for capital to deploy in this segment. I also think that with the high construction costs that supply will be a little bit more muted than what the forecasters are projecting. And so, that should continue to help keep values up. I think it's really a collection of reasons, but generally it is still a very healthy industry and there's still a lot of capital chasing product.

So if I heard you right that's both NOI growth and cap rate compression?

I think that's hard to say. Because many times it's a little bit of both, but -- and we all have slightly different opinions on that. If I had to put my comments out there, it would be that it would primarily be growth in the fundamentals and not so much for the compression of the cap rates.

That's what I would say fundamentals would need to grow and the cap rates stay about the same; therefore values would increase.

I would agree with that. I think we are seeing cap rates stabilize and there's not much movement on either side of the cap rate situation.

One follow-up on that and I promise I'm done. If you take that values are going to rise over the next three or four years, when do you think you'll be significant net sellers or do you think you will be?

I think -- and we think -- that values will rise for another three to four years, which means that we think that the window to buy is out there for the next 18 months or two years, because after we buy we want to able to have a time period in order for those assets to appreciate.

However, by and large over the short-term here, our relative focus is on deleveraging and not increasing leverage. Now that being said there may be an opportunity here there along the way that we just can't resist, but we've already turned down some opportunities just continuing to focus on it.

So I would say that over the next 18 months, we will be net sellers just from a deleveraging standpoint not necessarily because it's the best time in the cycle, although I don't think that is what you were asking. I would say after two years from now and going forward, our profile will be one where we will be net sellers -- not necessarily because we are selling a lot, but we'll definitely be selling more and more buying if we are buying at that time. And we continue to evaluate our strategy about how do we reduce our exposure at that point in time to the volatility of cash flows from hotel properties when maybe three, four years from now, the potential upside in those cash flows become outweighed by the potential downflows, downswings in those cash flows.

(OPERATOR INSTRUCTIONS) Nap Overton, Morgan Keegan.

Could you talk about basically the question is this -- you talked about I think $0.35 accretion on the entire CNL portfolio acquisition, using all debt to finance the acquisition. And that it was roughly flat to FFO per share on a leveraged neutral basis and then there was a $0.16 number I believe per share thrown out for the 170 million in asset sales.

Could you talk about the accretion level that you expect that your targeted debt level with all three basis of the debt reduction complete?

Sure. I will turn it over to Kimo and let him comment on the [minute], but I think that I don't know what the answer to that is offhand because it depends upon so many variables including when we get that done; and we are also finding some opportunities within the existing portfolio to increase accretion. And as those start to bear fruit we will be able to share some of those.

It includes moving around our capital structure and reworking some agreements with some of the managers. So it's just hard to say because we've got some gems through there that are going to be able to fully improve upon some of those numbers we share. And like I said in order even to give an estimate I would have to make assumptions down a list of six or seven categories and because it is so speculative, we just haven't done that.

Kimo, do you have any comments on that?

No. I think we will to stick to the range of our previous statement based on full leverage to existing leverage and leave it at that.

And would then the reason be for the -- you had a $0.35 estimate on the $2.4 billion acquisition and then a $0.16 dilution estimate on 170 million in sales. Those seem disproportionate. Is that a -- primarily a capitalization rates issue on the two portfolios will be driving that?

The $0.16 is not necessarily the dilutive number. That is the FFO that we are leading. It is what we do with those proceeds if we pay down debt, etc. The net dilution would be different. I think we are just trying to give guidance in our release on the sale of what those assets were contributing to our FFO.

So what Kimo is saying is that $0.16 assumes that the proceeds from that will just kind of held off to the side and they weren't used to pay down debt. And if they were then that $0.16 dilution would be a good bit smaller?

All right. Thanks.

Smedes Rose, Calyon Securities.

Two questions on the Phase II -- the $400 million of asset sales, did you say what sort of cap rate you are expecting to get on that?

No we haven't.

Could you or a range, I mean would it be similar to Phase I or --?

(MULTIPLE SPEAKERS) very different assets than the assets in Phase I as we highlighted for you. It is a mixture of assets within the portfolio that we view to be nonstrategic to our platform. I think as we get further into the sales process we would be happy to provide updates on pricing.

Also, those numbers are very round. As we go through the sales process if we get for instance, certain assets and we are getting unsolicited interest in some of the assets that aren't part of that pool, we may be encouraged to break loose an asset or two. And then, conversely, if one of the assets that we are thinking about marketing just doesn't get the pricing traction that we expect we will pull it back.

So when we see 400 million it could be 300, it could be 500, it's just tough to say but therefore it makes it even harder to come in with what the cap rate on those might be.

And then on your -- for the asset share in the process of acquiring I think you said you expect to invest 55 million in renovations. Could you maybe go through the rest of your CapEx budget a little bit for '07?

Sure. Kimo, why don't you give him the full picture on all that CapEx?

On our third quarter call, we gave guidance that for that portfolio we anticipated $120 million worth of capital plans for 2007 and 2008. And then on our Safire call we talked about 55 million of owner funding for year one of the Safire investment.

Safire being a CNL Hotels and Resorts.

Right. Sorry I'm using code names. That's on top of their annual reserve which is $35 million. So that's $90 million for that portfolio so that would put us at about 210 of cap plans for '07 and '08 that we have talked about. There will be some additional '08 dollars for the CNL portfolio.

So right now, I think we are looking at -- for the overall portfolio -- about $280 million in CapEx for '07 and '08.

And that would include just basic maintenance CapEx?

That's correct. It would include, well, the sources would be the CapEx reserve combined with owner funding and some dollars available on berries loans. So if you're talking about maintenance CapEx meaning the reserves the answer is yes.

Thank you.

(OPERATOR INSTRUCTIONS). Gustavo Sarago, SBS Investment Bank.

Yes. It's actually FBR, but most of my questions have been answered but maybe Kimo from a housekeeping standpoint, you talked about 25 additional employees being added given the portfolio transaction. What is that going to do to your G&A? If you can help us figure out the incremental cost there?

Kimo? Why don't you give them guidance on our G&A?

We actually stated on the CNL announcement call that we thought our incremental G&A for this transaction would be between $12 and $15 million and that's the cash portion that doesn't include any non-cash stock amortization, etc. So I think we feel like we will come in at the lower end of that range, but that's the guidance that we've given previously and I think it is still true.

(OPERATOR INSTRUCTIONS). At this time we have no further questions in the queue. I will turn the conference back over to Mr. Kessler for any additional or closing remarks.

Again, thank you for your participation on today's call and we look forward to speaking to you again on our next call.

That does conclude today's conference. You may disconnect at this time. We do appreciate your participation.