Ashford Hospitality Trust Inc (AHT) 2007 Q2 法說會逐字稿

Welcome to the Ashford Hospitality Trust conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan.

Thank you. Welcome to this Ashford Hospitality Trust conference call to review the Company's results for the second 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 noticed to 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 and 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. 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 1, 2007, and may also be accessed through the Company's Web site, 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.

Thank you, Tripp. Good morning and thank you for joining us. This morning we will be focusing on two key themes, our solid second-quarter performance, and our focus on internal growth.

This is the first quarter for us to report on the inclusion of the CNL Hotels and Resorts portfolio transaction and we are pleased with the smooth integration and the favorable impacts this portfolio is already having on our performance.

For the hotels not under renovation, we recorded a pro forma RevPAR increase of 6.5% and a 73 basis point improvement in operating margin. AFFO per quarter for the quarter was $0.44 per diluted share compared with $0.34 per diluted share a year ago. AFFO did not include the gains on sales booked in the second quarter. CAD per diluted share was $0.35, which resulted in a dividend coverage ratio of 167%.

We are confident in the future performance of our high-quality portfolio, with over 94% of our portfolio EBITDA in the upper-upscale and upscale segments, as well as 95% in the four premier brands. We believe we have strong internal growth opportunities available through aggressive asset management and capital expenditure programs. We are particularly excited about the re-positioning and reinvestment opportunities available in the new CHR portfolio.

Looking back on the first half of the year, our primary focus has centered on the CNL Hotels and Resorts transaction, with the integration of the portfolio, identification of the value-added CapEx, and the de-leveraging of the balance sheet through capital raising and disposition activity. The second quarter was a pivotal period for each of these strategies, and we executed each very well in the quarter and continued to act upon the programs we have put in place. Although it has required a lot of hard work by our team, there were no surprises during the integration process, and we are confident in the future shareholder benefits.

We remain optimistic about the near-term prospects for the lodging industry over the next several years in terms of above-normal RevPAR growth and increases in hotel value. Absent an unforeseen event, we believe the fundamentals in lodging should provide some of the highest returns relative to other real estate segments, and we don't foresee that abating anytime soon.

As a result, we expect capital from a variety of domestic and offshore sources to continue to increase their lodging investment pace despite the recent turmoil in the credit markets. Thus, even in the midst of new supply and decelerating RevPAR growth, we anticipate hotel values continuing to increase.

Since inception of this company, we have grown significantly by capitalizing on transaction and capital markets conditions to buy and finance hotels at the best possible yields, and assemble a high-quality portfolio for future growth. We closely monitor opportunities in the market, but (inaudible) by our CNL Hotels and Resorts transaction. To have completed this investment at a forward NOI cap rate close to 100 basis points above current pricing is a great accomplishment for our shareholders, particularly considering the high asset equality in terms of location, brand and price segment. We have yet to see any opportunity come close to this and, as a result, we'll remain sharply focused on maximizing the embedded internal growth in our portfolio.

In summary, we believe we're in the right spot at the right time to take advantage of this market and are exploring many options to make sure we're getting the best returns on our investment for our shareholders.

To speak in greater detail about our second-quarter 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 $14,051,000, and EBITDA of $134,673,000, each including gains on sales of 33.3 million. We also reported AFFO excluding gains on sales of $56,535,000, or $0.44 per diluted share.

At quarter-end, Ashford had total assets of $4.8 billion, including $205 million of cash, with $300 million available under our existing credit facilities. We had $2.9 billion of mortgage debt, leaving net debt to total enterprise value at 57%, and our blended annual interest cost was approximately 6.1%, with 78% of our mortgage debt fixed.

During the second quarter the Company sold 12 of the 18 phase 1 for-sale assets and booked a gain on sale of $33.3 million. The $6.9 million tax provision for these sales was deferred to a 1031 like-kind exchange. As of today, 15 of the 18 phase 1 for-sale assets have been sold, representing approximately 150 million of the 170 million expected sale proceeds.

At quarter-end our portfolio consisted of 118 hotels and continuing operations, containing 26,971 rooms. During the quarter, we received repayment on three mezz loans totaling $22 million. At quarter-end we owned a position in seven mezzanine loans with total principal outstanding of $73 million with an average annual unleveraged yield of 12.5%.

For the quarter, pro forma RevPAR for all hotels was up 5.8% as compared to the second quarter '06, and for the hotels not under renovation, which is all but four hotels, the pro forma RevPAR was up 6.5%, driven by a 5.9% increase in ADR and a 41 basis point increase in occupancy. Pro forma hotel operating profit for the entire portfolio was up $7.9 million, or 7.2% for the quarter. For the 114 hotels not under renovation, pro forma hotel operating profit increased 8.7%. Our pro forma hotel operating profit margin improved 73 basis points for the hotels not under renovation, and 49 basis points for all hotels.

We ended the quarter with 122.6 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 143.6 million.

We currently have agreements for management with eight companies. The most significant managers are Marriott International, which manages 46 of our hotels, Remington Lodging and Hospitality and its affiliates, which manage 38 of our properties, and Hilton, which now manages 14 of our assets.

For the second quarter we reported CAD of $45,389,000, or $0.35 per diluted share, and announced and paid a dividend of $0.21 per share. Our dividend coverage ratio was 167% of CAD for the quarter.

Finally, you will 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 the last four quarters. This table includes the 53 hotels purchased in the second quarter. In this table, you will see a distinct seasonality trend for EBITDA and EBITDA margin. I'd like to point out that within our current portfolio, the third quarter has historically been the weakest quarter of the year for EBITDA contribution. We encourage our investors and analysts to consider our historical seasonality when forecasting our operating results.

Now I'd like to turn it over to Doug to discuss our capital plan.

Thanks, David. Our capital needs with respect to the CHR acquisition have been completed well ahead of schedule with the successful equity offering in April and the July $200 million Series D preferred offering. In addition, by issuing the Series D preferred when we did, we saved almost $5 million in fees. In hindsight, the timing of the capital transactions could not have been better, particularly considering the current market.

As David mentioned, we have substantially completed our phase 1 asset sales. Of the 18 assets, we only have the DoubleTree in Dayton Ohio, the Sheraton Iowa City, and the Fort Worth office building remaining.

We commenced marketing of the phase 2 asset sales during the quarter, consisting of 10 hotels from the CHR transaction. We already have four of these assets under contract for a total sales price of $93 million, which is in line with our expectations for those properties. We continue to analyze the remaining assets listed for sale.

Our capital expenditure forecast is to invest $280 million during 2007 and 2008 across the portfolio. During the second quarter we had four hotels under renovation. Two of these were completed in the quarter. Our total capital spending in the second quarter was $25 million. On July 12 we officially converted the Radisson Downtown Indianapolis to a Sheraton. We have an additional nine hotels under renovation now in the third quarter, and expect to start an additional 10 renovations in the fourth quarter.

We currently expect that during the second half of this year, we will begin initiatives to invest over $100 million, with the balance spread across 2008. These expenditures will be carefully monitored to minimize operational disruption and maximize future performance.

Several notable projects underway are the luxury conversion of the Sea Turtle Inn to One Ocean in Atlantic Beach, Florida for $24 million, the $14 million guest room and meeting space refresh at the JW Marriott San Francisco, and a $5 million room refresh at the Las Vegas Embassy Suites.

Major initiatives in the second half of the year will be the $14 million guest room refresh at the Marriott Crystal Gateway, $8 million guest room and public area upgrades each to Philadelphia and Santa Clara Embassy Suites, and $5 million upgrades each to the Embassy Suites Walnut Creek, Courtyard San Francisco, and Hilton Minneapolis.

We're also exploring other ROI opportunities that previously had not been contemplated when we acquired these hotels. After conducting more thorough reviews, we believe several hotels could be prime candidates for more extensive value-added projects. We will provide more insight on the scope and timing of these additional projects on our next earnings call.

We continue to discuss possible joint ventures or other means to monetize a portion of our assets, with a focus mainly on several of our select service hotels. The pricing will need to be compelling for our shareholders for us to move forward.

For the past few months, we have effectively taken ourselves out of the mezzanine loans business due to our views on the risk/reward imbalance and how we viewed pricing. Our position has proven to be correct with the recent tightening of credit. As a result, we have seen spreads and terms on mezzanine loans start to become more attractive. With more discipline in the market today, there might be more opportunities in the second half of the year to expand the lending program at even more attractive returns.

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

(OPERATOR INSTRUCTIONS). Nap Overton, Morgan Keegan.

Basic question which you may have covered; I missed your first minute or so. Is the likelihood of proceeding with the phase 2 sales -- I heard you talking about four hotels for $93 million under contract. What is your view of that, given the current market conditions?

We are still evaluating the hotels (technical difficulty) asset-by-asset basis. We have not seen the existing credit situations affect pricing on those hotels that we're out there talking to people about. Now, that might happen down the line as they talk to their lenders. But for each asset we're going through an analysis of looking at the price we can get today versus what the cash flows we think will be over time, and a value if we sold it sometime five, 10 years from now. So it's really still individually an asset-by-asset view. I wouldn't say that the current market conditions have really affected our thinking yet. If it's a sustained situation in the public markets, that might. It might lean us a little more towards trying to gain some more liquidity. But right now, we've -- still moving down the path on the phase 1 assets. And on the phase 2 assets, we are definitely selling some of them, and some of them are under contract; the rest we're still evaluating. I don't think there's a single phase 2 asset that we have determined for sure that we're going to hang onto it.

But we've also had a few other wrenches thrown in the mix. And with the recent announced acquisition of Hilton by Blackstone, they are now our partners, or will be our partners, on these select JV Hilton assets. And they've got a point of view that looks like it may be shaping up a little bit different fro Hilton's, so we're just talking to the guys over there to see what we're going to do collectively on that portfolio. We may be doing some horse trading and still may be selling some; we just don't know yet. It's just still too early. So essentially, Nap, I would say that the answer to your question is the existing market conditions haven't altered our thinking, but we're still looking at each asset individually before making that decision on whether to sell or not.

Just a quick question of clarification for David. I believe you mentioned you avoided 5 million in fees by the timing of a transaction. If you could just clarify that; I didn't pick up on what you were saying.

This is Doug, actually, responding to that question, Nap. When we arranged the Series C preferred with Wachovia as part of the original funding of the CNL Hotels and Resorts transaction, we structured an arrangement whereby if we replace that Series C preferred over a period of time, we would be able to get a return of some of the initial fees paid for that transaction. And as you know, preferred deals are typically priced at a 3.15% gross spread to the bankers. We received a rebate, essentially, of 2.15% on the 200 million, so that equates to about $4.3 million. We then were able to negotiate with the banks an expense reimbursement that accounted for about another $600,000. So that's the approximate $5 million that we obtained as a result of completing the Series D preferred within the timeframe that we did.

The limits on the timeframe was that we had to replace, I believe it's all of that Series D $200 million worth within six months of the close. And we closed this transaction in April. So we were able to get it done here in July, and that's what created that benefit.

Jeff Randall, A.G. Edwards.

I just wondered if you could comment a little bit on the [rooms guest] displacement that occurred with the four hotels under renovation in the second quarter, and then how much we can expect over the balance of the year. It looks like you'll have about 20% of your hotels under renovation in the fourth quarter, and I guess about half of that in the third quarter. It looked like you had a great second quarter, and I'm just trying to gauge how much displacement might occur in the back half of the year. Thanks.

I'll make a comment, and then, Kimo, you might want to get a little bit more specific if I don't touch on it. Regarding displacements, generally, there wasn't that much displacement displacement, because only four hotels were under renovation. But specifically on the assets under renovation, when it comes to the Sea Turtle, which was under renovation, I would say heavy or significant displacement was going on at that asset. But that's because that asset is going through a very major renovation. Also, the JW Marriott in San Francisco is going through a relatively larger renovation. And so there was decent displacement there.

As far as going forward, the displacement, yes; there's a lot more properties that are [going to be] under renovation. There will be more renovation and -- or more displacement, I should say. But by and large, the new renovations coming on are not as dramatic as the two that I just mentioned to you.

I think in looking at the future performance -- and for all of you guys that are interested in trying to predict what earnings would be, I think a more relevant point is for everyone to take a look at that table in our earnings release that outlines the seasonality of our earnings. Our second quarter is by far our strongest. And that table shows what pro forma the results of all these assets have been over the past four quarters. And our third quarter is one of our softest ones because of the nature of the assets we have, and also because for our Marriott hotels we have an extra period that's reported in our fourth quarter. And we have a significant number of Marriott hotels. So I think that should be a greater driver for short-term determination of what our earnings might be, perhaps, than the renovations would be. Kimo, you want to make a comment on that?

Just a little comment on the renovations. We try to do them in the shoulder periods when the hotels aren't at peak occupancy. And typically, as we renovate, we take one floor out at a time. So we try to keep the disruption to a minimum. And we will have more hotels under renovation than we have had historically. But I think if you look back at the various reports that we have filed over the last couple of years, we've always reported the metrics of not under renovation versus the total portfolio, so you can see the disruption historically. And it should be similar going forward. We don't expect anything different.

Is there any way -- that's helpful. But is there any way in the back half of the year to talk about room nights lost, as have some of your peers with respect to their renovations?

We don't forecast or provide information on anticipated room nights lost. And even if we did internally, renovations are such that that number would just move around a lot because of what you have to do to get the renovation done. So we don't have any information on that.

Just one more question on -- Kimo, on the unfavorable contract liability. That bumped up about 65% sequentially from the first quarter of the year. I just wondered what's behind that.

One of the contracts that we assumed in the CNL acquisition was a Marriott contract that had a little bit higher incentive fee than we thought was market, and so we marked that to market, much like we did the Gateway asset last year. And I think that was roughly about a $10 million mark-to-market, and that was the reason.

Will Marks, JMP Securities.

I had a question that, I think, largely has been answered, but having to do with, I think, as you call them, phase 1, 2 and 3 dispositions. And I think you gave detail on 1 and 2, and maybe 3 was referenced in terms of having to deal with Blackstone a little bit. Any other thoughts on phase 3 and what we can assume there?

I think what you're referring to is when we looked at our deleveraging strategy, at one point we talked about our phase 1 sales, which we talked about here on the phone call today, phase 2 sales, which we also talked about, and then phase 3 being joint venturing potentially some of our assets with an outside firm in order to deleverage. And we are continuing to talk about having joint venture discussions and other ways to monetize some of our assets in that regard, although those discussions are ongoing and they are fairly fluid. And we just don't know yet whether they'll be something that's attractive us for us to pursue. And my apologies, because in our wording, sometimes that can be confused with the separate joint venture that we have already with Hilton that we inherited in the CNL Hotels and Resorts transaction. But that is just a separate -- that's already joint venture, and we're working with Hilton/Blackstone to see what the best course of action is there. That joint venture is one where we're by and large about a 75% owner, and Hilton, now Blackstone, is 25% owner, while if we executed a so-called phase 3 strategy, it would be one where we were a minority owner most likely, anywhere between 10% to 49%; again, if we found joint venture terms that were attractive to us.

Is there any general update as to the total amount of dispositions you may make in this calendar year?

Not really. The amounts of the phase 1 assets was about $170 million. We're well on our way on completing that. The phase 2 total amount, as I recall, was something like $400 million. We are in the process of selling at least a quarter of that, and are continuing to look at the other assets. But we just have not made a determination yet whether we'll pull the trigger on the remaining $300 million of that phase 2.

Actually, one other question. I came in late on the call. On the CapEx guidance that you've given, can you just please reiterate that? And also just mention what -- if you can give us an idea of return on investment there, or how that leads to RevPAR in '08. Could RevPAR in '08 actually be higher than '07 due to all the (inaudible) you're making?

We don't give RevPAR guidance, so I won't be able to comment on that. And all of the CapEx that we're doing now -- and Kimo will give you the details of the CapEx guidance -- was all done as part of the acquisition purchase. So the return on investment on CapEx is really lumped into the purchase price since it's all a requirement of -- almost all requirements of buying the assets themselves when we bought them, whether it be part of the CHR transaction, or before. So there's not separate ROI calculations.

However, we are taking all of our existing assets and we're looking at all the CapEx and value-add opportunities that are there that were not required by the brands and by ourselves as part of the purchase, and looking at opportunities to deploy capital and to earn returns on that. That is a process that we're going through during the summer. We expect on our conference call at the end of the third quarter to announce to the marketplace how much additional CapEx we plan to do above and beyond the numbers Kimo is about to give you over '08 and possibly '09 and 2010, and what our expected returns would be on those. Generally, we have a threshold return of a 10% unleveraged internal rate of return for those projects. And that process is what's taking a large portion of our time right now to determine what those projects are, and how much we're going to spend each year, and what the terms would be. Kimo?

The guidance we've given on the CapEx program is $280 million to be spent in 2007 and 2008, and through the first two quarters of 2007 we spent $45 million. I think Doug mentioned in his script that we are taking off over $100 million of initiatives here in the second half of the year.

Kimo, let's be clear. That $285 million; does it include towards the end of two years after we bought CNL? So wouldn't that go into the first quarter of '09? No. Yes.

No, it's 2007, 2008.

It's the 285 million.

Correct.

Thank you very much.

David Loeb, Baird.

Several of us have danced around this question. I think Nap and Will were doing it. Let me just come straight out and ask. For those of us that are looking at your credit statistics other than just debt to market cap, I think we're having a hard time trying to figure out what your leverage is going to look like in the future, next quarter, next year, at the end of this year. Can you just help us understand about your comfort level with the current level of leverage? Should we expect that you will be doing more deleveraging other than the stuff that you have under contract now? Or are you comfortable where you are today?

We are comfortable where we are today. However, if we see an opportunity to sell assets at a good price, we'll continue to sell them. We wanted to get below 60%. And except for the recent stock price drop, we're there. We're just slightly above it right now, but should be back underneath it with these planned sales that we have. So from a deleveraging standpoint, our focus as we look at opportunities is no longer to delever. However, because we don't see an opportunity to buy very many more properties in the marketplace today, because of the current condition of so much private equity and the fact that all these assets are being bid up, it's much more likely for us to be a net seller than a net buyer for one [reason] or the other. So through happenstance and through opportunity, we may be deleveraging some more.

But that is going to depend also upon our alternative uses of capital. And if we find good uses of capital, either to pay down debt or to stay invested in these ROI projects, that might tilt some of these potential sales when way or the other. So, as far as direction or guidance on future leverage, I would say that prior to the deleveraging we did post the CNL transaction, we wanted to get to below 60%. And we are on a mission to do that. We have done that, and now we have no other internal objective to hit a lower deleveraging point on that. Our interest coverage ratio is 2.1 times, and our fixed charge coverage is 1.9 times, both on a trailing basis. We think that's fine. It's always nice to have more. But again, our focus on deleveraging is no longer there.

I really appreciate that clarity. I do think you seem very concerned about your stock price, and you seem concerned about it before. It does seem to me that there are investors out there, and perhaps a lot of them, that are concerned about your debt to EBITDA, for example, rather than just your debt to market cap, and are concerned that if we hit a downturn, if the economy goes into recession, you are more vulnerable to that downturn than any other public lodging player because of your total debt on your balance sheet relative to your cash flow. That's why I asked that. I do appreciate that clarity.

Thanks, David. We have looked at it a lot, and we found no correlation between debt levels and valuation. It's just nonexistent in the REIT world. So while there may be concerns among certain investors, we respect those concerns, we just don't see that as, at least historically, being an impact on stock price. So, we think the prudent thing is to take a look at the stats and try to manage off of that, rather than what one or two or five investors may believe is a drag down on our stock price.

But as far as what the future holds, and the positioning if someone's in a recession, I disagree a little bit with you on that in that while debt levels are one indication about one's survivability and one's performance during tougher times, there's a host of other factors. And those include what your interest rate is on that debt, and ours is relatively very low. Another factor is the type of assets that you have. Are they -- do you have a portfolio of a more stable component, which we do in some of our select service type assets, and the physical condition of our assets, which are very good and getting better. So I think that one has to look at all those factors in looking at how some people perform during tougher times. That being said, we don't see tougher times coming for [four] years.

Thanks for your candor.

Michael Salinsky, RBC Capital Markets.

You provided a breakout of the total portfolio and the adjusted excluding renovations. Do you have a breakout of your legacy portfolio -- do you have a description you can provide us of the legacy -- the performance of the legacy portfolio versus the CNL portfolio during the quarter?

We thought about and talked about doing that, and we don't give out specific stats on one group of assets or one asset versus the total, just because it's a long road with no turns. But for this first call, I think it's appropriate to say that the legacy portfolio and the CHR portfolio from a RevPAR standpoint were fairly comparable. They were just a few basis points one way or the other on the key metrics of RevPAR growth. So there's not a substantial difference in the second quarter for those portfolios.

Second, in your comments you had mentioned -- I may have misread this, but I thought you mentioned that you were looking at possibly selling -- you were looking at possibly selling some of the limited service assets. Is that something you are currently looking at, given some of the transactions we've seen in the market there?

That something we're reviewing, yes. And it is a possibility. There's a few trade-offs to it. For example, that will sell at the highest cap rate yield, and so it's most -- it's less accretive, I should say -- I almost said most dilutive -- but less accretive than selling off another type of assets, because the limited-service probably don't have as much growth in them as the full-service assets do. So the short-term effect wouldn't be as strong as if we sold off some of the full-service assets. However, over the next two or three years, we think, it would be better. And we're also talking internally about what that means to our multiple and our positioning, and, most importantly, what kind of pricing we could get. Ideally we would like to sell those assets, if we did sell them, in a format where we could still be involved and receive some type of fees off them. So we're looking at some alternatives, but it's just kind of complicated in the long road. So right now, we're not providing any guidance as to whether we think something like that will happen or not.

My third and last question. I know you guys did not give guidance, but a lot of your peers are looking for a pretty good pickup in the fourth quarter. Do you think that is something you will see in your portfolio as well?

We don't give guidance on our specific portfolio. But as far as the industry goes, we're hopeful. It's really just hard to say. The past quarters have been a little bit slower because of what's happened with the economy and year-over-year Katrina comparisons. So we are certainly hopeful that's the case. But as far as guidance on what our portfolio is, we'd probably just do best to step back from commenting on that.

Gustavo Sarago, FBR Investment Bank.

Just want to touch upon the phase 2. You guys mentioned four hotels, $93 million under contract. Maybe I missed it in the prepared remarks, but was there any color on pricing metrics and how that related perhaps to your overall purchase of the CNL assets?

We haven't released that information yet. As far as overall purchase, it's hard to compare, because you don't -- since we just bought these assets, you have a year to even set the basis on them. So, obviously, the basis is going to match whatever we sell them for, because that's what the market value is. So there's no gains or losses on those assets.

As far as other metrics, such as trailing NOI rates, or future NOI rates, generally, we're trying to sell those assets that we don't think have that much growth opportunity to them. So while sometimes we'll be able to sell them at cap rates as good or better than what we bought CNL at, the plan is to sell those assets that maybe have a little higher cap rates, again, because they don't have to grow. But once we get to a point where we can release information on those transactions, we'll be providing that detail.

Just the sense -- are these more on the upper-end, or upper-scale, versus select service type product? Or -- no color on that sense either.

No; they're more of the select service. Some of each.

Kind of touching on your balance sheet, with the recent purchase of CHR, the variable-rate component of your debt structure has kind of jumped up a bit. Where do you see -- or maybe this is for Doug. What are you guys thinking from a debt management standpoint -- I know you probably have some hedges in place -- but longer-term for that component of your variable-rate debt structure?

In times like this that we're in, our belief is that historically, interest rates come down; they don't go up when you're facing credit problems in the market. When the market is facing credit problems, that is more likely to ease than increase. That being said, of the approximately 22% of our debt structure that's floating, we've got caps on that. And if we have blown all the way through all those caps, the net additional annual interest expense to us would be about $4 million more per year. So it's not an impact financially materially for us.

You guys mentioned that there was some -- or the balance sheet shows that there were some mezz paydowns or prepayments in the second quarter. Where does the portfolio, the mezz portfolio, stand today, and do you expect any other prepayments?

The mezz portfolio is in the -- the balance is in the $70-ish million range, $72 million, $73 million. As far as going forward, that portfolio has a weighted average interest rate of about 12.5% unleveraged. As far as going forward, it's just hard to say, Gus. It's been tough for us to put money out over the past almost a year. And so the size of that portfolio has been steadily declining. We hope to be able to reverse that trend. We don't anticipate that mezz platform will be anywhere to be a material part of our portfolio, but it is some nice (inaudible) income, and it provides us access to all kinds of deal flow. So we're continuing out in the marketplace looking, and we hope that the current credit squeeze will provide an opportunity for us to be a lender again in the mezz space.

Maybe for Kimo, just talking about G&A on the P&L. As you guys have assimilated the CHR portfolio into the Company, you have increased headcount. Is that pretty much done? And when we look at the G&A number in the second quarter, is that a good approximation for a run rate? Or is it going to tick up a little more from here?

I think I would stick to the guidance that we've given previously on the incremental 12 to $15 million range. The G&A is not fully baked in the quarter, so that's not a good run rate. We're continuing to finish off the hiring and the incremental expenses will creep in over time, so I would stick to what we've previously said.

One last question, and for you, Monty. I read in a trade magazine that, I guess, Ashford has hired as a consultant or adviser [Alan Callas]. If you could probably give some color into what that relates to, that would be wonderful.

Sure. Alan is a fantastic executive. He is a veteran of the industry for many years, and he's been living in Dallas and working with La Quinta. And the recent purchase of La Quinta by Blackstone afforded him an opportunity to do a number of things, including retire, if he wanted. But after spending some time talking with him, and understanding the incredible amount of experience that he's got, we asked him to come on board, and to be an adviser to us for a period as well, as we evaluate these ROI projects that we've got. So he has come in to help us in the asset management function and the ROI project function. Some have asked about whether he'll be joining us on a more full-time basis, and that certainly could be a possibility as well. But right now, he is an adviser to us. And we're very happy to have him, and he's doing an excellent job for us.

Charles Suh, KeyBanc.

Just had a couple quick questions. You made some comments earlier about asset pricing, how it's holding up. I was just hoping to get some clarification, given kind of what's happening in the credit markets, why you think asset prices are still holding up.

The asset prices are holding up because the borrowers really don't know anything different. What we've seen is that the lenders that they have had on tap to provide the financing just are not in a position to -- haven't been in a position to provide any updated quotes. Some of the comments are -- well, we'd quote you a changed rate if we knew what that changed rate was, but we just don't know yet. So until someone knows, then that pricing is going to stick. But as that pricing starts change, there might be some slippage; there might not be. But that's why there hasn't been a change yet, and that the credit markets just move faster than the real estate transactions that occur on Main Street.

So presumably, if and when they get a quote, then the asset prices will reflect that?

Very possibly. (multiple speakers) depending on the LTB levels that the lenders are comfortable with, and their pricing.

With your current portfolio of hotels, are your loans assumable -- can you sell those properties with the loans that you already have on them?

By and large that's the case. Yes.

Another question I had was can you just talk about trends in property taxes, insurance?

Regarding property taxes, we have accrued a pretty healthy increase this past quarter. In fact, our 73 or 74 basis point increase in margin would have been higher if it weren't for two main factors -- franchise fees, which were due to agreements that were contracted [to step] over time; and what's going on in property taxes, because those are going up. Some jurisdictions like Texas are becoming very aggressive. So we've accrued what we think is plenty for those increases. We are being very aggressive in filing for refunds, filing for new appraisals. But until some of those actually happen, we're reluctant to show better property tax performance than what we've put in the financials. So we think that's the right number. Regarding insurance, Kimo, why don't you make a comment on it?

In the quarter we actually showed a 27 basis point improvement with our insurance expense as it relates to revenue. And so I think that reflects what's going on in the industry. The markets have softened. Rates are coming down. If we have another good summer like we did last year with respect to hurricanes, I think, they'll continue to come down. So, we see a good, positive trend with respect to the insurance expenses.

[Smeade Rhodes], KBW Investment Banking.

You've actually answered almost all my questions. One of your competitors is also going through a large renovation CapEx program that announced significant delays and overruns. And in your CapEx guidance, are you guys layering in sort of a cushion there, or do you have any concerns around those issues?

We haven't provided any guidance to layer a cushion around. But as far as the renovations, I've got to hand it to our crew; they've done a pretty good job, a very good job of finishing the renovations on time and on budget. With this new [slug] coming through, it is a lot. As Kimo said, its $285 million through the end of '08; that's what we would like to get done. We're on a pace right now where it's still theoretically possible. But probably the next call, or the following call, we'll be able to give you a little more insight as to whether we think that will all happen. Look, if we think it's going to [provide] too much disruption, we're going to go back to the brands and push those renovations out. So we try to modulate that. In the past, since our IPO in August of 2003, I don't think we can say that renovations for any one quarter significantly affected us. They affect the operations, but not significant. We hope to keep it that way. And when you look at the size of renovation -- again, about $300 million for almost $5 billion of assets over two years -- that's not an overly significant amount. So hopefully we won't have that kind of experience as one of our competitors that you referred to.

Let me add some color with respect to your question on overages. We've done a lot of renovations so far in the past, and we have yet to miss a budget with respect to completion of that renovation. And I think we have a great team that does a very detailed scope up front. We have line item budgets that go down to every lampshade that we're going to buy. We make commitments against line item budgets. And so it's very difficult for us to break a budget because of the way that we commit and the way that we report. So we are not concerned about missing those budgets at all.

(OPERATOR INSTRUCTIONS). Jeff Randall, A.G. Edwards.

Just on the 285 million in CapEx over -- through the end of '08, can you just tell us how much of that is brand required, and how much is really special project CapEx?

I would say a way to characterize it is that just about all that CapEx is what was negotiated and determined as part of the purchase of assets. So whether it was brand required or something that we thought that just had to be done at the time, although most of it is brand required of that, it was part of that initial. As far as special projects, or what I call ROI projects, where you go in and you add a spa here, or you add a wing of rooms there, add additional meeting space, or do something like that, that $285 million includes very little of that. The Sea Turtle conversion to the One Ocean Hotel of 20, $25 million was elective. But other than that, there's very little of it. Those so-called special projects or ROI projects would be additional CapEx on top of that that we'll give the market more color on come the fall.

So that number, the 285, will likely go up as you guys give more color. My second question -- can you give us just a sense of what the nature of those special projects are? You mentioned spas, changing tenant mix, meeting space. Can you give us an idea as far as what those might be?

Sure. An example would be, say, the Capitol Hilton in D.C. is a great hotel, and it's got a great location. And there's all kinds of opportunities for that asset. For example, we're looking at potentially taking some of the sub-basement and sub-sub-basements there and turning that into parking, if the building will accommodate the extra weight. Because the hotel currently has no parking. We're looking at the basement, and maybe turning that into executive conference space, which is a possibility. We're looking at changing the brand potentially from a Hilton to Waldorf Collection, and what that cost might be. We're looking at adding some more retail space there on the street corners; totally renovating the lobby, which is not a requirement with Hilton right now, but we might get a bang out of the buck for doing that. Even converting some of the rooms into office space, because it's a very hot office market. There's just lots of opportunities there.

Another is the Hilton, the El Conquistador in Tucson, which was a great resort in its time, but now is being surpassed by properties like the JW Marriott Starr Pass and some other assets. So we could take that asset, do a rooms refresh, put in a 3000 square foot spa, and be done. Or we could put in $100,000 a room or more, and put in a 20,000 square foot spa, and totally renovate the facility into a property that's competitive more with some of the new product that's out there. And that's just something we're having to determine the economics on. And in the cases of [at least] the El Conquistador asset, work with our partner Hilton, now Blackstone, on what their desires are. So there's a number of hotels with these kind of opportunities that we're going through.

(OPERATOR INSTRUCTIONS). It appears we have no further questions. Mr. Bennett, I would like to turn the call over to you for any additional or closing remarks.

Thank you, Melissa. Thank you all for participation in today's call. We look forward to speaking with you guys on our next call at the end of the third quarter.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.