Ashford Hospitality Trust Inc (AHT) 2007 Q1 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 of Corporate Communications. Please go ahead sir.

Welcome to this Ashford Hospitality Trust conference call to review the Company's results for the first quarter of 2007. 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 afternoon 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 have been filed on Form 8-K with the SEC on May 2, 2007, and may also be accessed through the Company's Web site, at www.AHTREIT.com. Each listener is encouraged to review these reconciliations provided in the earnings release, together will all other information provided in the release.

I will now turn the call over to Monty Bennett.

Good afternoon and thank you for joining us. We are very pleased to report another strong quarter of financial and operating results for the first quarter of 2007. For the hotels not under renovation, we reported a RevPAR increase of 11.1%, a 286 basis point improvement in operating margin, and a RevPAR yield penetration index of 116.2%, which was a 160 basis point improvement. AFFO per share for the quarter was $0.31 per diluted share, compared with $0.27 per diluted share a year ago. CAD per diluted share was $0.28, which resulted in a dividend coverage ratio of 133%.

While our first-quarter results were outstanding, the CNL Hotels and Resorts transaction continues to grab the headlines. We've talked quite a bit about the strategic benefits of this transaction, its accretion, best-in-class hotel properties, diversification, strong brands, [capable] financing, attractive pricing, etcetera. But there are a couple of items in particular I would like to highlight today. That is the transformation of our company and the internal growth opportunities.

Our RevPAR gains were once again well above the industry average at 5.2% for the quarter, which demonstrates the continued benefits of concentrating our portfolio in the upper-upscale and upscale segments in higher growth markets, our ongoing capital investment program, and the focus of our asset management efforts. Our management team is committed to more internal growth initiatives to drive topline and bottom-line performance.

Following the acquisition of the CHR hotels as measured by hotel EBITDA, we now have 95% of our hotels in the upper-upscale and upscale segments, 95% of the portfolio (inaudible) the four premier brands of Marriott, Hilton, Hyatt and Starwood. We have eight different property managers, with Marriott the largest at 44%, and we are heavily concentrated in major metropolitan and coastal markets that are showing above-average RevPAR growth. This transaction provides us with the platform offering size and the opportunity to once again prove what we do best; namely, quickly integrate large portfolio acquisitions, recycle hotel assets that no longer achieve our return thresholds, and maximize value through asset management and financial strategies.

First on integration. We are well on our way to completing the staffing for these additional assets. We have brought over three asset managers from CHR who are familiar with these hotels. The accounting and other system integration is seamless, as our existing financial reporting systems allow for multiple managers. With the exception of Hilton, the other managers already manage properties for us. Having worked with Hilton in the past, we expect that integration to be smooth as well. There really aren't any issues [in inspiration]; it simply involves a lot of hard work on everyone's part and is proceeding according to schedule.

We are also on track to be at the low end of the incremental G&A cost range we issued previously of about 12 to $16 million. As a percentage of the deal size, this is a very efficient cost structure.

A large value-added asset management undertaking that will begin shortly is implementing our strategic capital expenditure plan for these assets. Having worked with the brands to determine asset management strategies, we have developed a plan to invest at least $280 million over the next two years across our entire portfolio. All but 56 million of this total is value-added, with roughly half being invested in 2007 and the remaining half in 2008. Although our initial [underwriting of the future] investment projected a 7.6% forward 12 month NOI return and a 9.0% EBITDA yield, we believe there is room for improvement in these numbers in the out years through reinvestment and proactive asset management. In addition, we have already completed a favorable restructuring of several of the existing management agreements on the CHR portfolio that is accretive to our original underwriting.

Our value-added efforts are certainly not limited to the CHR portfolio. We currently have 11 renovations underway with a budget of approximately 140 million for 2007 and a total of 30 hotels to receive value-added capital expenditures during the year for all assets.

A good example of these investments would be the two Radissons in our portfolio we are converting to Sheratons. The first property in Milford, Mass. was completed in January, and the second one is in Indianapolis, and is expected to be completed in July. At Milford, we experienced a 54% improvement in RevPAR in the first quarter and expect strong results in Indianapolis as well. Our track record (inaudible) of hitting our budgeted CapEx is superb.

We have achieved well ahead of our schedule our deleveraging target with the recent follow-on equity offering. With 48.9 million shares in total, including the upsizing and the overallotment, we raised roughly $549 million in net proceeds. As we mentioned to many of you we met on the road show, we elected to pursue the offering immediately upon closing the CHR transaction because of current market conditions, timing benefits, and a desire to remove the equity overhang in our share price.

With the equity raised, our net debt to TEV is already sub-60%, which was our stated goal to accomplish within one year of closing. Now that we have eased the initial concern with the leverage through the [FB] offering, we have more flexibility to structure potential transactions on some of our assets. We are well on our way to completing phase 1 of our asset sales and have already initiated marketing on a sale of 10 assets from the CHR portfolio for phase 2.

I'm also pleased to note that we were able to finance the CHR purchase with very cost-effective financing. Our current financing on the portfolio has a weighted average interest rate of 6.39%, with primarily long-term financing, including preferred. We are also working on refinancing some of the assumed debt, which should bring that total down -- that cost down even further.

In summary, we couldn't be in better shape right now with integration and financing of the CHR transaction, a mere three weeks after closing. I'm very proud of our team and the hard work that has been invested in getting us to this point.

I'd also like to comment on the industry trends we're seeing. Certainly from an investment perspective, this remains an incredibly exciting time in our industry. A number of large transactions have been completed and a few of our peers have exited. Our firm belief is that the current investment cycle still has another three to four years of value increase. The lodging industry is providing some of the highest returns in real estate right now, with above-average future growth and increasing capital inflows.

The operating environment remains favorable. We expect to see mid single-digit RevPAR growth for the rest of the industry for the remainder of 2007. We have been outpacing the industry with our RevPAR growth for the past couple of years, and hope this trend continues. Many of the trends I noted before -- new supply growth well below historical averages, high construction costs, abundance of (inaudible) capital -- are still at work in the industry. The greater concentration we now have in upper-upscale and upscale brands in primary markets for our full-service assets and the premium urban select service assets, however, is enhancing the positive trends in our markets, while at the same time insulating us from many of the negative factors. We are enjoying the benefits of growth while maintaining and eye on (inaudible) sustainability.

For the balance of the year, we expect to continue using this concentration in better-performing assets and markets to drive our internal growth.

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

Good afternoon. For the first quarter, we reported net income of $8,698,000, EBITDA of $46,243,000, and AFFO of $28,520,000, or $0.31 per diluted share. At quarter-end, Ashford had total assets of $2 billion, including $82 million of cash. We had $1.1 billion of mortgage debt, leaving net debt to total enterprise value at 46%. And our blended annual interest cost was approximately 5.9%, with 79% of our mortgage debt fixed.

During the first quarter, management made the decision to list for sale the Embassy Suites Phoenix. This asset, which has been sold, was classified as held for sale on our balance sheet, and its operating results are included in the income from discontinued operations line on our income statement. Its historical operating results are no longer included in the various pro forma statistical tables included with our earnings release. As of today, $90 million worth of the 170 million phase 1 for-sale assets have been sold, with another 57 million to be sold mid-May. The remaining assets are in various stages of the sales process.

At quarter-end our portfolio consisted of 65 hotels in continuing operations, containing 13,093 rooms. On April 11th we acquired an additional 51 hotels, containing 13,524 rooms after adjusting for joint venture interest. At quarter-end we owned a position in 10 mezzanine loans, with total principal outstanding at $95 million, with an average annual unleveraged yield of 13.1%.

For the quarter, pro forma RevPAR for all hotels was up 8.6% as compared to the first quarter '06. For the hotels not under renovation, which is all but 11 hotels, the pro forma RevPAR was up 11.1%, driven by an 8.7% increase in ADR and a 160 basis point increase in occupancy.

Pro forma hotel operating profit for the entire portfolio was up $5.8 million, or 16% for the quarter. For the 54 hotels not under renovation, pro forma hotel operating profit increased 22%. Our hotel operating profit margin improved 286 basis points for the hotels not under renovation, and 209 basis points for all hotels.

During the first quarter we had 11 hotels under renovation, and eight of these are now complete. We have added an additional four hotels under renovation now in the second quarter, and expect to start an additional seven renovations in the third quarter. Our total capital spending in the first quarter was $20 million.

We ended the quarter with 73.8 million common shares outstanding, 7.4 million Series B convertible preferred shares outstanding, and 13.5 million OP units issued, for a total share count of 94.7 million. On April 24th we issued an additional 48.9 million common shares at a price of $11.75 in a follow-on offering.

We currently have agreements for management with eight different companies. The most significant managers are Marriott International, which manages 46 of our hotels, Remington Lodging and Hospitality and its affiliates, which manage 35 of our properties, and Hilton, which now manages 14 of our assets.

In the first quarter we reported CAD of $25,939,000, or $0.28 per diluted share, and announced and paid a dividend of $0.21 per share. Our dividend coverage ratio was 133% for the quarter.

Finally, you will note that we once again included a table in our release that provides a quarterly pro forma breakdown of hotel EBITDA and hotel EBITDA margins for the full year 2006. This year-end '06 table has been updated to include the 51 hotels purchased from CNL Hotels and Resorts. In this table you will see a distinct seasonality trend for EBITDA and EBITDA margins. We encourage our investors and analysts to consider our historical seasonality when forecasting our operating results. Hopefully this table will be of assistance for those updating models to include the 51-hotel acquisition. Our policy continues to be to provide as much disclosure and detail as possible on existing metrics in lieu of specific future earnings guidance.

I would now like to turn it over to Doug to discuss the ongoing investment plan.

Thanks, David. From an investment perspective, our primary focus during the quarter and the subsequent weeks was on the various aspects of the CHR portfolio acquisition; namely, closing the transaction, finalizing the financing, integrating the assets into our platform, completing an equity raise, and successfully deleveraging. I'd like to spend a few moments on each area.

As planned, we were able to close on the CHR portfolio almost immediately after CHR received shareholder approval. We funded the transaction with $928.5 million of 10-year fixed CMBS at 5.95%, assumed debt from the existing joint ventures of approximately $436.9 million at an average interest rate of 6.08%, a $555.1 million pool of floating rate CMBS at 165 basis points over LIBOR, $200 million of preferred equity at 250 basis points over LIBOR, $325 million term loan at a rate of 150 basis points over LIBOR for one year with two one-year extensions, and a three-year $200 million revolver with two one-year extensions that is priced between 155 to 195 basis points over LIBOR, depending on the net debt to gross assets ratio.

Of the $437 million of assumed debt, which is associated primarily with the Hilton joint venture within this portfolio, we are in negotiations to replace that debt with new financing early in the third quarter at a lower interest rate, which should drive down our overall financing costs and improve FFO per share. Last week we closed on a follow-on offering that raised $549 million in net proceeds. With the proceeds from this offering, we subsequently paid off the $325 million term loan, $180 million of the floating rate CMBS, and $45 million in other debt at a blended rate of 6.9%.

In addition to our equity raised, we have made significant progress on the first phase of asset sales. During the quarter we sold the Marriott Trumbull in Trumbull, Connecticut and a Fairfield Inn in Princeton, Indiana. Subsequent to the end of the quarter we sold the following assets -- the Radisson Indianapolis Airport, the Embassy Suites Phoenix Airport, the Fairfield Inn Evansville, the Radisson Covington, and the office building in West Palm Beach. The portfolio of seven TownePlace Suites is under hard contract now, and expected to close later this month. We have three other hotels and one office building that will close near the end of the second quarter.

In total, these sales will generate proceeds of approximately $170 million, with a net gain of $35 million. We are on track with that projection, and expect that most of the gain will show up in the second quarter. Our phase 1 asset sales again demonstrate our ability to successfully integrate portfolios and maximize their value, since each of these assets was acquired in a portfolio transaction and is being sold at a collective 25% premium to book value.

We expect to continue this track record of success with portfolio transactions with the $400 million phase 2 potential asset sales out of the 51-hotel CHR transaction, assuming we decide to move forward based upon returns. We've identified the following 10 hotels as possible sales candidates -- the Doubletree Crystal City, the Marriott BWI, the Hyatt Dearborn, Hilton Suites Auburn Hills, the JW Marriott New Orleans, the Hilton Ryetown, Hilton Birmingham, and the Residence Inns in Torrance, Atlanta Perimeter West, and Kansas City.

Our joint venture discussions are ongoing. We had originally projected those joint ventures could approach 350 to $400 million, and are still comfortable with that projection if we move forward. Obviously, joint ventures take the longest to bring to fruition, but we still believe this strategy can be a potential source of capital recycling for us.

The goal of our deleveraging strategy was to reduce leverage to below 60% within 12 months, and we have already achieved this goal within just a few days of closing on the transaction. After factoring in the equity raise and all the phase 1 asset sales, our leverage will be 57%, assuming yesterday's closing stock price of $11.89 per share.

The current environment for lodging investments has been very active since our last call, with a couple of our lodging peers acquired or agreeing to be acquired. Considering the implied cap rates on those transactions are somewhere around the 7% range on forward NOI, we believe the 7.6 forward cap rate -- NOI cap rate on the higher-quality CHR transaction is looking better by the day. Considering the CHR portfolio consolidates our total portfolio in higher growth markets and, on an EBITDA basis, solidifies our position with 95% in upper-upscale and upscale chain segments with the strongest brands, we are very pleased with the yield and future growth opportunity in our portfolio.

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

(OPERATOR INSTRUCTIONS). Celeste Brown, Morgan Stanley.

Congratulations again on the equity raise; that's great. Just first, I know you guys don't give guidance, but some of your managers have back-end-loaded their RevPAR expectations. Is that -- does that make sense to you for your own hotels, or are you sort of expecting steady growth throughout the year?

You mean some of our managers? Someone like Marriott, the guidance that they've given?

Marriott, Starwood and Hilton have all talked about the fourth quarter being the strongest.

You know what? I think the best way that we could comment on that there's no question that for the industry in general -- not so much on our existing portfolio, but the industry in general -- the first quarter was softer because of the year-over-year comparisons for Katrina. From a demand standpoint, my expectations, and most of the marketplace, is that the demand will start picking up on a year-over-year basis, even as net new supply slowly continues its upward path. So if I had to be pinned down, my thoughts would be that RevPAR growth would be stronger going forward, and even into next year, compared to first quarter. I think we hit a relative low in the first quarter.

Great. And then you, obviously, just bought quite a few assets. In terms of the competitiveness for assets out there, do you think there are additional opportunities for your company, or are you satisfied with what you have today?

If you look at the price we paid for our assets compared to some of the recent trades in the marketplace, it compares very, very favorably, both on an asset quality comparison, and the amount of price comparison. We paid about 11.1 times forward, or 11 two or three times (inaudible). And the trades for some of our peers and some of the large asset trades that happened out there have been anywhere between 12.5 to 13.6 times 2007 EBITDA. So, we don't expect to see pricing like that available on these kinds of assets out there. And generally, if an asset is heavily shopped in the marketplace, we just can't be competitive.

Sometimes, if a deal comes to us on a one-off basis, or it's not widely marketed, or maybe some of the likely bidders are tied up in another transaction, we might see an opportunity pop out. And that can be an opportunity for one asset or for a portfolio again. But in an open-bid situation, we can't be competitive. So, if I had to guess, I'd have to guess that our acquisition activity would be severely muted for the rest of the year, but it's just hard to project what will come our way.

We do think that valuations for hotel properties will continue to increase for another three to four years. And so, internally, we think, our window is for another maybe year and a half, year to continue acquisitions, if we see good opportunities. It's just a big question mark about whether we will or not. I think the more important component is that right now, where we stand, we are much more focused relatively on internal growth and all the opportunities we've got in the assets, especially with the assets we just purchased.

Finally, I know you have a pretty big infrastructure to kind of grow into it, particularly as you plan to acquire more hotels. Do you have enough management capacity now as you do a lot of these renovations, or do you need to add additional people?

We have had to increase the number of bodies in our entire company. Because of this acquisition, and also just because of growth besides the acquisition, we plan on adding about 28 people this year. We have filled already two-thirds of those positions. So we're well on our way of filling out in order to take care of it. And most of those, or almost all of them, maybe all of them, are non-senior-level positions. We won't be adding very many, if any, senior-level positions.

Jeff Randall, A.G. Edwards.

You guys mentioned restructuring certain management contracts related to the CNL acquisition. I'm just wondering if you can give investors some sense of what was restructured and why.

You bet. You want to talk about that one?

One of the Marriott contracts that we were set to inherit was secured by 14 different properties, sort of a cross-collateralized contract. And Marriott has made an investment in that portfolio. And the deal that they cut with CNL was that, following the payment of the [owner's] priority, Marriott was to receive the next $33 million in cash flow. And in our model, that looked like it was going to be the next four years of cash flow. So, from a REIT standpoint, we would be showing no growth; all the cash flow would be going to Marriott. So we were able to sit down with Marriott and restructure that, I think, in a manner that was favorable for both companies.

What we ended up with and we signed at closing was an agreement whereby we paid Marriott an upfront payment of $5 million, and gave them some additional base fee, a 1.5 point base fee over the next four years, just the next four years; it goes away after that. And they removed a $33 million layer. So immediately, we will participate in the cash flow after the owner's priority. So we believe that that's about a $0.03 to $0.04 annual increase to our FFO from what it had been. And when you look at the NPV, we paid off the NPV of that $33 million layer at about half of what the gross amount would have been. So, Marriott was happy, I think, because they got some additional base fee, which they get more credit for in their valuation, and we get additional cash flow and additional earnings.

To clarify that -- excuse me, Jeff. To clarify that accretion, the way we think it's going to turn out is something like $0.01 in year one, $0.02 in year two, up to $0.05 in year five, above and beyond what our original underwriting accretion was for this transaction.

Okay. So, I guess, was there any ongoing requirements with respect to higher PIPs going forward on your behalf?

No.

My next question -- you guys mentioned the current cycle, I believe, and the current cycle continuing for another three or four years. Was there much consideration given to not raising, I guess, what would be expensive equity at this point in the cycle to pay down debt, and just kind of leveraging your exposure to the cycle going forward?

Yes. There was a good amount of consideration of doing that. We had a healthy internal debate among our management team and our board of directors. And ultimately, one side felt that by hanging on and being more leveraged and waiting for stock price to run up and then raising equity had its own merits, for obvious reasons. The other side felt that we could raise capital now. It would be accretive to our last raise and be accretive to the whole investment on a combined basis with the financing, and get it done and remove the equity overhang in the stock, which might be there otherwise for months, quarters, years -- you just don't know. And so, if we waited for it to run up, we didn't know how long we could wait. And in the meantime, something could happen in the marketplace where the availability for capital could close well ahead of when we think there's going to be a downturn in the industry. But then we'd be trapped, and we wouldn't be able to go into the downturn of the industry with the leverage levels that we want. And we just didn't think that was in the best long-term interest of the shareholders to potentially fall into that trap. So, that was the argument that won the day for us.

Jeff Donnelly, Wachovia.

First, just on asset repositioning. When you guys were on your road show, I think, you talked about this a little bit. When should we have, I guess, a more definitive view about your plan to reposition some of the properties you discussed? I think it was a [capital health] property in Tucson. Specifically, timing and capital investment.

In my (inaudible) laid out that we've got that $280 million focused on these assets over the next couple of years. We're working on the mechanics of that, and internally planning about the realistic opportunity to get that much capital into these assets over this period of time, from just a manpower standpoint, etcetera. So we're assessing that right now to begin with.

But what we also shared with you and others on the road show is that that capital we've got set aside, other than the capital set aside for our pre-CHR portfolio, was kind of pre-fixed. Or said a different way, for the CHR portfolio, the only capital that we plan right now is spend the reserves and to spend an extra $50 million or so for each of the next two years, which was largely pre-worked out by CNL and the brands prior to our purchase.

What CNL had not done, which we're in the process of going back and doing, is going and seeing what opportunity there is for these really big value-add projects -- adding ballrooms, converting first-floor space to lease it out to operations, you name it; the more kind of structural, larger-type. And we are diving into that headlong.

I think that sometime in the fall, we'll come back to investors and say, look, we're continuing (inaudible) all these pre-baked capital plans, but now we think that there's an additional 20 million, 50 million, 100 million, who knows what it is, of really strong value-add that we want to commence. And based upon our progress thus far and the amount of disruption, we'll lay out how much it's going to be over the next few years in order so it's done smoothly.

Maybe it could be done sooner. Maybe it could be done by our third-quarter conference call, but I doubt it. I think it's going to be farther into the fall. Because in some respects, it's really kind of [moot for] us to hurry up and determine it because of all the existing capital already planned in the assets; we really don't want to upset that apple cart until that's well underway. So we couldn't get to some of these projects until the first part of next year anyway.

That's helpful. In that same regard, on joint ventures, is there any way at this time to be maybe a little bit more specific about the precise form or nature of the JV structure you guys have been thinking about? Could you even consider more of an open-end fund structure?

Sure. We'll give you some color on that. We would love to do an open-end structure. But in hospitality, we're finding that extremely difficult. I don't know of an open-ended structure at a JV in hospitality. And we've talked to some folks that would be potentially helping us raise money, and while that structure is not uncommon in the other property types, in hospitality the market is just not nearly as deep. We have spoken to some potential JV partners. But right now, the terms on them, to me, just aren't compelling. We're looking at doing something like an 80/20 deal, selling off some of those assets, obviously, at a premium to which we paid for them, getting some type of promoted structure over 9%, 10%, 11%. But the management fee just isn't very compelling. It covers our costs a little bit, but it doesn't move the needle. And our belief is that on the promote, we won't realize it until the assets or sold or done five, seven years from now, and that flows to the statement on a onetime basis, and don't really get much credit in the public markets for it. So it's really just not that compelling unless we can find a joint venture opportunity that pays higher management fees or does something for us that can give us some current credit.

There's also the ongoing debate of if we think the assets are going to do well, why don't we hang onto all of them? And if we don't think they're going to do well, we should sell all of it. But aside from that, that is kind of the quandary we're looking at. And again, the market for joint venture capital for hospitality is maybe one-quarter the depth of the markets in the other property types. So the players are just fewer and farther between.

And on asset sales, I had heard that you guys were [still softly] marketing some of the CNL assets, or maybe even some of your own, in the last few weeks. Do you have any feedback at this point from the marketplace on pricing for some of those assets, or any specificity you can give around timing of sales or gross proceeds, or ideally, sort of average multiples?

On the phase 1 sales, which were all pre-CHR assets, the gross proceeds (inaudible) about $170 million. [The cap rate came up] -- I think you quoted it; I don't know if you know it offhand here.

High 7s.

High 7s on a trailing basis on those assets. And we think that the majority will get done in the second quarter. A little bit of it might hang over to the third quarter. We'll see.

As far as the phase 2 assets, that's hard to give, because we're marketing the assets. And truthfully, we don't know how many of those we might just pull back. We raised a good amount of equity. We don't need to do that now as part of a deleveraging strategy. So where before, a good driver behind selling those was deleveraging, that's not fair anymore. It's a consideration, but it's not a driver. So we just don't know which assets we'll end up pulling the trigger on.

If I had to guess broadly, we're seeing pricing on that to be slightly worse than the average of what we bought from CHR on a cap rate basis or a multiple basis. And that's because we're selling assets that aren't as good as the average of the CHR quality, [such as these three gen-one] assets. So hopefully that will give you some idea. But we just don't know what that number is going to be yet.

Why keep them if you don't think they're -- if you're thinking of selling them because they're not very good properties, or their growth profiles aren't so great, even though you raised more equity, I guess, why keep them? Why not just let them go? (multiple speakers) selling them at a slower pace?

You bet. That's an excellent question. There's some assets, like the [three] generation ones, where we just want to get a market clearing price and be done with them, because we just don't think those are long-term holders for us. There's assets such as the Doubletree Crystal City, which is in a market where we have got heavy representation already, so we want to sell that one for that reason. But most of the others have their own story.

For example, the Ryetown Hilton. It's an old asset. It's going to require a lot of CapEx. We think that the returns on that could be attractive. But if we had to sell assets, the returns on that are going to be short-term dilutive, as we tear the place up and put the money into it. And there's also other development opportunities perhaps on that site -- it has some additional acreage; that's more of a long-term type of asset. So it's not that it's not a good asset or it's not a good investment; it's just the profile of when you'd make the money on it was drawn out. So if we had to pull the trigger in order to raise money, that's probably the kind of assets you want to sell, assuming that should be like the buyer's paying you for that future value.

JW Marriott New Orleans is kind of the same way. Short-term, New Orleans is struggling. But longer-term, New Orleans should come back and do pretty well. Well, if we're going to sell an asset, we might as well sell one that when we sold it would be accretive, because the short-term earnings from that asset is just not very strong. It's a great asset and it's a great location. So hopefully those two examples kind of give you an idea why some of them we're kind of on the fence on.

Last question was just on your dividend payout strategy over the next 12 to 18 months. By my estimates, the cushion between your FAD and your current dividend at least seems like it could increase two to threefold as we roll forward. Do you keep your payout ratio where it is? Or maybe because (inaudible) later cycle, do you look for maybe more of a token increase in your dividend to kind of increase that cushion?

I think it's the latter. If you look at our dividend, it's very competitive. It's on the high-end of all of our peers. That's one of the most attractive aspects of our stock. So from a market standpoint, we just don't see the need to raise it very much. At the end of this year in December, we plan on giving a dividend guidance for the next year. We'll probably either keep it flat or raise it very modestly, and focus instead on increasing that cushion.

Asad Kazim, RReef.

If you don't mind kind of laying out what the IRRs were, and just some valuation metrics for some of the deals (inaudible) take place in the marketplace today. And then, two, at least with two of the deals, there were affiliated manager issues. Can you kind of walk us through how your affiliated manager is performing relative to the other managers that you have in the portfolio? Thank you.

Sure. (inaudible) you want to comment on that?

On the affiliated manager question, for the last three quarters, the affiliated manager has outperformed all of our other managers in terms of RevPAR growth and EBITDA margin growth. So they are at the top-end of the pool of managers that we have. All of our managers are achieving budgets and, we think, doing a good job for us. But our affiliated manager has been the one to outperform here recently.

Doug, you got any comments about market transactions?

Sure. There's been a pretty good sample set of acquisitions recently in the market. As Monty highlighted in a comment, that the current EBITDA multiples range from about 12 to 13.6 times. And in terms of how that works out, the way most of these buyers are looking at it, almost in every case it's a financial buyer as opposed to another REIT peer that's looking at the opportunity. With the availability of debt and the low cost of debt, these groups are able to acquire assets, in some cases, with very little equity, or using maybe the existing preferred in the capital structure to be the equity component, and they're just leveraging it the rest of the way.

I think that the targeted returns are still in the 15 to 20 range for most of the financial buyers that are looking at transactions. In some cases these buyers are partnering up with low-cost, either domestic pension or offshore capital partners, and they're stripping out some of the flow of funds from these investments to match up with the desired threshold that each participant has. I think, once again, that given where those trade, and given the fact that we acquired the CNL portfolio at an 11.1, that is a great indication of the embedded value that we see in the CNL portfolio. And it certainly raises the question, if that were to trade now, given a lot of these recent precedents, if it wouldn't trade for significantly more than that in an open market bid process.

Gustavo Sarago, FBR.

My questions are for Doug. In talking about the TownePlace portfolio, could you provide maybe some more color on the transaction in the sense, when you structured that deal, I know you put in some pretty favorable financing, assumable financing, but more importantly, the ability to layer on mezz, I think. Is the buyer -- is there an opportunity for you guys to place any paper with the sale of those assets?

The short answer to that is no. There is the opportunity, but the type of buyer, the answer is no. You're right; early on when we acquired that portfolio, we identified an opportunity to position assets in various pools with very attractive financing that had assumability provisions, and also gave us the opportunity to layer in mezzanine, recognizing that as time went on these assets would increase in value, and the relative loan to value on this (inaudible) that we put in place would be low, creating an opportunity for mezzanine. The lender agreed to that type of structure.

When we went out with the TownePlace Suites portfolio, we identified a [tick] buyer who had a different leverage requirement. And as a result, they would not be assuming the current debt, nor would there be a need for the opportunity for us to put a layer of mezz. But we're very pleased with the pricing. It's consistent with what we've seen for those best quality TownePlace Suites assets in the market. And as we've indicated, we expect to close on that later this month.

So which pool of Merrill Lynch debt is that? Is that pool one or pool two that will get paid off?

We're looking it up for you here, Gus.

My second question -- again, for you, Doug -- is given the depth we've seen in pricing in the CMBS market, have you guys received any other notices on prepayments or payments, notices for your mezz portfolio? I noticed in looking at some of the maturity dates and terms that some stuff can get paid off now in this year without any penalties.

I'm sorry; Doug, you know what those answers might be?

I think the question is are we getting notices from borrowers as to whether or not (multiple speakers) expect to get paid off. And given the competitiveness of the debt market, we do occasionally receive a request for early payoff. As we evaluate those, we have for the fixed rate deals typically some form of defeasance or yield maintenance structure. And we will benefit from that to the extent that the borrower decides to go down that path. I think that's really all that we can say at this point with respect to borrowers' intentions. They'll give us notice when they see the opportunity, and typically it's sort of a 30-day notice provision. So, nothing really material on the horizon at this point.

If I had to guess, Gus, I think that our portfolio might be reduced by another 20 million this year or so -- maybe more, maybe less -- in payoffs of that portfolio. And I've got no guidance on whether we'll be able to replace it or not. We won't be able to replace it on the same rates, but we may be able to replace it; we'll see. We're still looking at a couple of deals, but it's just very competitive out there. I think Kimo has got your answer here.

The debt on that portfolio is described as Merrill Lynch pool six, and it's just collateralized solely by those seven hotels. So it's its own pool.

Will Marks, JMP Securities.

One, did you get -- I know you talked a lot about the management -- your management contracts. Have you given any figure as to how many contracts or what percentages are the managers making incentive fees?

Sure. I think we've given out some of that information. And I think I know some of this off the top of my head, Kimo, unless you think you know it and could quote it better than I could.

The number of managers?

No. I think, the amount of the incentive fee. Is that what you're asking?

Both would be helpful, but maybe a percentage of your hotels that are generating incentive fees for the manager.

So, the number of hotels that have incentive managed fee contracts. Well, that's hard to say, because they're also kind of different. For example, the Remington managed -- the affiliate managed incentive fee management contracts, the amount that's available to pay the manager is an additional 1 point of gross revenues. And that's the max, and that's based upon annually set hurdles by the independent directors.

The other management agreements, most notably by Marriott, that have incentive fees, are typically a percentage amount above hitting a certain return on the owner's priority. And that can vary anywhere between 10% to 50%, depending upon the contract. Also, that owner's priority amount can change. As we put CapEx into the assets above and beyond the normal reserve, then that raises the bar on that owner's priority amount, and therefore, raises the bar in the amount of owner's priority return, which is typically 11.5% on that owner's priority amount. So some of the contracts are in the money and some of them aren't. But that being said, Kimo, do you have any --?

I think to give you an estimate of the numbers, I would say 90% of our contracts have an incentive feature. And in times like we're in today, most of them are in the money. It ebbs and flows each year, but almost all of our contracts have an incentive feature to them.

Great. Just one other unrelated question. Did you guys take a look at Highland and its portfolio, and any thoughts there?

We took a brief look at it. But as I kind of commented earlier about where assets are trading, as a REIT, we just can't be nearly as competitive as a public company buyer. I'm sorry; a public company buyer like us can't be as competitive as a private buyer with the amount of financings they can put on it. So something that we would value at a much lower multiple ultimately went for 13.6 times 2007. I think the only takeaway is what Doug said earlier about how the CHR acquisition for us is a much higher-quality portfolio [than that] Highland portfolio, and we were able to buy it at 11 times -- 7.5 times or so, 2007.

Nap Overton, Morgan Keegan.

Is $30 million a reasonable run rate for G&A expense going forward annually?

Yes. And when you're commenting on that, Kimo, does that include stock amortization, or is that just cash?

Non-cash. Excuse me -- cash. Not including stock grants.

You've talked about the accretion of the CNL transaction in several ways at different points in time over the last few months. Based on the way you have financed it, how accretive do you consider it to be in your own analysis?

We've got to be careful about that, Nap, because we don't give guidance. But what we did tell the marketplace is that on a leverage-neutral basis, it was about even on a CAD accretion basis in year one, and then grew from there. And on an FFO basis was several cents accretive, $0.05 to $0.10 accretive, and then more leverage would jack that up. I think in our call we said that the way we're financing it is something like 35% FFO accretive in year one. And then finally, you have to adjust that for the fact that that does not include this Marriott (inaudible) restructure, which will add another $0.01, $0.02, $0.03, up to $0.05 in year five, of accretion. We just want to be careful about getting too granular because of our desire not to give guidance.

And then, the 17 joint venture -- I think there's 17 hotels in the CNL portfolio that were joint ventures. Those are consolidated on your books, correct?

They will be.

Will be?

Yes.

And the joint venture, or the minority interest share of that, how much debt in total is on those?

Are allocated portion is 436 million. There's --

Does that include the Interstate joint venture?

Yes. There's roughly 120 million, I believe, of total debt for the entire joint venture, in addition to the -- our allocated portion.

Michael Salinsky, RBC Capital Markets.

Can you comment on the performance of the CNL portfolio you bought in the first quarter?

Sure. The CNL portfolio, in 2006 over 2005, had about a 10% plus RevPAR growth. So pretty strong. In the first quarter, January was about flat year-over-year, because of Katrina and, you name it, some year-over-year groups. But then the second quarter picked up to about 4.5% RevPAR growth, and then the markets picked up to about 6.5 -- actually closer to 7% RevPAR growth. And that's outperformed last year and for the first three months.

Secondly then, with $140 million of projected CapEx for the -- basically for the year, should we expect disruptions essentially to arise from the current levels? How much of that 140 million is massive takedown projects where you're taking a significant amount of rooms off-line, projects such as that?

I think that the last schedule on our earnings release kind of gives you an impact of how much the renovations will affect. It will show which properties are being impacted compared to what they are today. We don't expect it to be massive, massive; we expect it to be more than the impact here in the first quarter, because we spent about only $20 million in the first quarter. So it's definitely going to ramp up. But again, I'd like to point you to that table; I think that will give you a better indication.

The table you have in the back here talks primarily about your existing assets. That was more in reference to the CNL portfolio as a whole.

On the CNL portfolio, most of that work is not majorly disruptive. We intend to spend about $50 million above their reserves. And $50 million on a $2.5 billion portfolio is just not material, in our view, to substantially impact numbers. It may be very, very modest. But I think you can expect in our third-quarter and fourth-quarter conference calls, when we talk about it, if we say that renovation impacted us, we'll say it's going to be a minor impact, or maybe even very flat to minor impact to us. Now, in the fall, when we give some indication about where some of these value-add CapEx projects are that we might embark on the following year or the following year, then we can give you an indication about how disruptive that may be.

Jeff Donnelly, Wachovia.

Just one follow-up. Concerning the asset sales that you've executed this year and you're at least thinking about doing for 2007 and beyond, can you tell us how they break out between the different managers, Hilton, Marriott, Remington, just at least from a remodeling standpoint? That would help.

Sure. Kimo, you want to go over that?

On the -- let's see -- the 18 hotels that are in phase 1, seven are Marriott managed, two are office buildings, so that leaves 16. Three are with Dunn, and two are with Interstate, and four are with Remington.

(inaudible) total?

I think so.

What about some of the assets you're thinking about selling but, obviously, haven't executed on.

Sure. We can go back (inaudible) on those. Let us pull up the list here. Four Hilton assets. Five Hilton assets -- excuse me -- two Marriotts, and five Marriotts. So it would be five Hilton assets, five Marriott assets.

Hang on one second. We know there's one Hyatt in there. (multiple speakers)

Four Hilton, one Hyatt, five Marriott.

At this time we have no further questions. I would like to provide everyone one final chance to signal for questions today. (OPERATOR INSTRUCTIONS). With no further questions, I'd like to turn the conference back to Mr. Bennett for any additional or closing remarks.

Thank you for your participation on today's call. We look forward to speaking with you again on our next call.

Thank you. Once again, that will conclude today's call. We thank you for your participation, and you may disconnect at this time.