Ashford Hospitality Trust Inc (AHT) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ashford Hospitality Trust fourth quarter 2012 conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions.

(Operator Instructions)

Today's conference is being recorded, February 28, 2013. I would now like to turn the conference over to Scott Eckstein. Please go ahead.

Thank you, operator. Good day, everyone, and welcome to Ashford Hospitality Trust conference call to review the Company's results for the fourth quarter of 2012. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; David Kimichik, Chief Financial Officer; and Jeremy Welter, Executive Vice President 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 distributed yesterday afternoon in a press release that has been covered by the financial media.

At this time, let me remind you that certain statements and assumptions in this conference call contain, or are based upon, forward-looking information, are being made pursuant to the Safe Harbor previsions 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 day 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 February 27, 2013, and they will be accessed through the Company's website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

Thank you and good morning. 2012 was an excellent year for Ashford. Our total shareholder returns for 2012 was 38%, which was among the top of our peers. Our two and three year total shareholder returns ending December 31, 2012, was 19% and 148% respectively, also among the top of our peers. Even since our IPO, almost ten years ago, we are one of the best performing lodging REITs in term of total shareholder returns with results almost double that of our peer average. We are proud of these returns and believe that they demonstrate both the dedication and the skill of this management team.

Historically, we have strived to be one of the most transparent platforms in terms of information shared with the market place. We believe it is paramount that investors have enough information to make informed investment decisions and we provide the same financial information to investors that we find most useful in running our business. In the summer of last year, based on analyst and investor feedback, we even expanded that transparency with additional disclosures of hotel performance by debt pools and hotel performance by major market areas. Our hope is that this additional information will equip our investors and analysts with additional details to help them build their valuation and financial models with even greater precision.

We also have, we believe, the most highly aligned, stable and effective management team in the industry. This Company is operated by the same people that IPO'd this platform a decade ago. We collectively have sold very little of our stock over the years and have made material additional cash purchases of shares. Our insider ownership is now at 21% and is the highest in the industry and clearly sets us apart from our peers. The majority of our management team's net worth is in Ashford stock and, as a result, we strive to be good stewards of the capital entrusted to us by our investors, since our own personal capital is at risk with yours.

Our management team has spent their entire careers working in the lodging industry in a variety of roles, including acquisitions and dispositions, asset management, property management, finance, accounting, et cetera. If you look at just the top 10 most senior executives in our Company, we have well over 200 years of hotel and real estate experience. We are a team that has worked hard to achieve many successes. We also realize that sometimes mistakes are made and we strive to learn from those. We believe that our industry and capital allocation expertise is most clearly reflected and demonstrated in the strong, consistent shareholder returns that I quoted earlier. I'm proud to say, as the CEO and now Chairman of Ashford, that I have one of the best teams in the business.

For 2012, the gradually improving economy provided the catalyst for RevPAR growth. Demand increased while new -- hotel room supplies remained at historically low levels. Furthermore, the forecast for new hotel room supply remains well below historical levels for the next several years. PKF Hospitality Research projects new supply growth for 2013 and 2014 of 0.8% and 1.4% respectively. At the same time, RevPAR growth projections remain strong for US hotels with PKF projecting growth of 6.0% in 2013 and 8.4% in 2014. We believe these growth forecasts for the industry should provide a compelling investment opportunity for the hotel REIT sector, and in particular, for our Company, given our track record of strong EBITDA growth. Our RevPAR growth and operational efficiencies contributed to a solid adjusted EBITDA performance. Adjusted EBITDA increased $8.2 million, or 10.9%, to $83 million during the fourth quarter and grew $42.3 million, or 14.3%, to $336.8 million for the full year 2012.

This was the tenth consecutive quarter of at least 10% growth in adjusted EBITDA. In our legacy portfolio, we generated EBITDA flows of 60% and margin improvement of 133 basis points for all hotels not under renovation in continuing operations during the fourth quarter. In the Highland Hospitality portfolio, we achieved EBITDA flows of 76% and margin improvement of 337 basis points for all hotels not under renovation in continuing operations. The Highland portfolio continues to exceed our original underwriting expectations, and we are very pleased with the success of our asset management efforts. We look forward to even greater impact from improvements in our topline performance in our ongoing capital expenditures in the future, absent unforeseen circumstances.

For the fourth quarter of 2012, we reported AFFO per diluted share of $0.39, compared to $0.42 a year ago. Much of this year-over-year difference is due to the significant reduction in interest rate derivative income given those hedging benefits have dissipated as planned, coinciding with the timing of the lodging industry recovery. The reduced derivative income affected AFFO per share by approximately $0.10. We expect this impact to diminish in our financial reporting as the economic recovery continues and the hedges terminate.

As previously announced, our Board of Directors declared a dividend of $0.11 per share for the fourth quarter of 2012, which represented an annual rate of $0.44 per share for the year. The Board approved a 9% increase in our dividend policy for 2013, during which we expect to pay a quarterly cash dividend of $0.12 per share, or $0.48 per share on an annualized basis. The adoption of this dividend policy does not commit the Board to declare future dividends and the Company will continue to review its dividend policy on a quarter-to-quarter basis as it has done in the past.

Currently, we believe there is a gap between public and private market valuations as well as with our trade multiple compared to our peers. Research has shown that many public market lodging REITs -- REIT values are to varying degrees below current private market transactions on a per-key basis. A possible reason is that macro market factors are still influencing lodging and REIT valuations, given the investment environment of either being risk-on or risk-off. Small increases in per-key valuations of public companies can have a large impact on share prices. The more leveraged companies, like ours, have a greater impact from value per key increases or, for that matter, EBITDA multiple changes as well.

HBS predicts that the value of a typical US hotel will increase by approximately 35% per room over the next three years. Leveraged at 50%, this is a 70% increase in the equity value of hotels. This value prediction may provide increased momentum to lodging REIT share prices. Looking specifically at Ashford, we perceive that we are still trading at an EBITDA multiple discount to our peers, despite the fact that our historical shareholder return performance speaks for itself. Even after the dramatic run up in our stock price over the last four months, we now trade at a larger discount to the average peer EBITDA multiple. [Ity], as of yesterday, has us listed at trading at a 1.3 times EBITDA multiple discounts to the peer average.

Lastly, I'd like to comment on the recent changes to our Board of Directors. As most of you know, effective January 18, 2013, and consistent with our corporate governance guidelines, my father, Archie Bennett Jr, retired on his 75th birthday as Chairman of the Board and assumed the role of Chairman emeritus and advisor to the Company. We are thankful for his many years of service and are very pleased to have his continuing support and guidance. At the same time, I assumed the role of Chairman of the Board. I am honored by this appointment and will continue to serve to create shareholder value. The strong financial alignment we both continue to have with our investors is somewhat unique, compared to our peers, given that our personal holdings of Ashford is among the largest of our shareholders.

Also, our board modified the Company's corporate governance guidelines to increase the size of the Board from seven to nine members and to rotate several members and Chairmanships to the Board committees. Michael Murphy was appointed the Board's new lead Independent Director, replacing Marty Edelman. Michael, who is head of Lodging and Leisure Capital Markets for First Fidelity companies, has also served as a director since our formation. Our press release dated December 24 provides additional details on the Board's committee composition following these actions.

Also effective January 19 2013, Doug Kessler, our President, and Mr. Kamal Jafarnia were appointed to the Board. I'm sure most of you know Doug and how important he has been to our success since working with me to form Ashford ten years ago. I'm also excited about the experience Kamal Jafarnia brings to our Board, given his background as an attorney and extensive experience in the real estate financial services industry. Kamal has counseled in the financial services and products group and a member of the REIT practice group, the New York office of Alston and Bird LLP.

Alan Tallis also joined our Board, effective January 24. Alan, who was formerly Ashford's Executive Vice President and Head of Asset Management from 2008 to 2011, has a wealth of insight across many strategic lodging situations. We are very pleased to add the expertise and industry knowledge of these three talented individual to our Board, and are looking forward to their contributions as we work towards continuing to increase long-term shareholder value.

With that, I will now turn the call over to Kimo to review our financial performance for the quarter.

Thanks, Monty. For the fourth quarter we reported a net loss to common shareholders of $21.092 million, adjusted EBITDA of $83.130 million and AFFO of $33.262 million, or $0.39 per diluted share. At quarter's end, Ashford had total assets of $3.5 billion in continuing operations and $4.5 billion overall, including the Highland portfolio, which is not consolidated. We had $2.3 billion of mortgage debt in continuing operations and $3.1 billion overall, including Highland. Our total combined debt currently has a blended average interest rate of 4.5%, clearly one of the lowest among our peers.

With the maturing of some of our swap positions, we currently have 58% fixed-rate debt, 42% floating rate, and a weighted average maturity of 3.7 years. Since the length of the swap does not match the term of the underlying fixed-rate debt, for GAAP purposes, swap is not considered an effective hedge. Results of this are that the changes in market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are non-cash entries that will affect our net income, will be added back for purposes of calculating our AFFO. For the fourth quarter, it was a loss of $8.9 million and for the year it was a loss of $35.7 million. At quarter's end our legacy portfolio consisted of 94 hotels in continuing operations. Additionally, we own 71.74% of the 28 Highland hotels in the joint venture. All combined, we currently own a total of 25,573 net rooms. Hotel operating profits for all hotels, including Highlands, was up by $8.2 million, or 9.5% for the quarter, and for the year it was improved by $35.7 million, or 10.5%. Our share count currently stands at 85.8 million fully diluted shares outstanding, which is comprised of 68.2 million common shares and 17.6 million operating partnership units.

And I'd like to turn the call over to Jeremy to discuss our asset management accomplishments for the quarter.

Thank you, Kimo. During the quarter, we anticipated some impact from the political uncertainty related to the election, the fiscal cliff negotiations and a general reduction in government travel expenditures. However, the most significant event in the quarter was Hurricane Sandy. In total, 34 of our hotels, representing over 8,000 rooms, were located in the storm's impact area. Our risk management teams, along with our affected staff at the hotels, responded extremely well to this situation. These properties were exceptionally well-prepared with detailed contingency plans, reserve power generators and clear lines of communication. In looking at Sandy's impact to our portfolio's performance, there were two main affected markets. First, in our largest market in terms of rooms in EBITDA, Washington DC, the storm interrupted travel in and out of the city and caused several large group cancellations, which adversely affected our operating results. Looking ahead, we remain confident in Washington DC's excellent long-term prospects and expect to see improved performance.

The other main market impacted by Hurricane Sandy was New York/New Jersey where RevPAR actually increased 16.9% in Q4 2012 versus Q4 2011. The increase was largely driven by disaster recovery and insurance adjustment business. Fortunately for all of our hotels, we expect physical damage from the storm to total less than $1 million. In looking at other MSAs in our portfolio with large RevPAR increases in quarter, Austin benefited from a Formula 1 Grand Prix race, while a strong city-wide calendar aided Atlanta's results, and Seattle experienced increased group and corporate transient business. These MSAs all delivered RevPAR growth greater than 15%.

Turning to our full year performance, our RevPAR increased 5.1% across the portfolio with our Highland hotels RevPAR growing 5% while the legacy portfolio's RevPAR growth was 5.2%. During the year ADR growth comprised the majority of both portfolios RevPAR growth as ADR and occupancy grew 3.4% and 1.1% at the Highland properties and 3.4% and 1.3% in the legacy portfolio respectively. Our aggressive approach to controlling costs and improving margins was particularly evident after the first full calendar year of managing the Highland portfolio, which delivered EBITDA flows of 94% and 247 basis points improvement in operating margins. For the legacy portfolio, the team delivered 2012 EBITDA flows of 57% and 131 basis points improvement in EBITDA margin.

Finally, in terms of capital expenditures, we continue to strategically invest to strengthen our assets' competitive position. In 2012 we invested $108.1 million. Of this amount, $35.4 million was owner-funded above and beyond our [SF&A] reserve. Looking ahead at 2013 capital plans, we expect to continue to prudently invest in the projects that we believe will best strengthen our assets' competitive positions and create the most long-term value for our shareholders.

Now I'd like to turn the call over to Douglas to discuss our capital market strategies.

Thanks, Jeremy. During the fourth quarter we focused our capital initiatives on both enhancing our financial liquidity and continuing to proactively manage upcoming debt maturities. We made significant progress in both areas. We completed an early refinance of our $154 million loan on five hotels with a new $211 million mortgage loan. The new financing is interest only and provides for a floating interest rate of LIBOR plus 6.15% with a 25 basis point LIBOR floor. The refinance resulted in over $50 million of excess proceeds and annual interest savings of about $6 million per year. This refinance not only added to our cash reserves but also resulted in an AFFO per share accretion of approximately $0.07.

New debt financing is neutral to the Company on a net debt basis and the Company will continue to reduce leverage through ongoing debt amortization payments and other various property level loans. We also successfully refinanced $141 million of loans in the Highland Hospitality portfolio that were set to mature in the first and second quarters of 2013. In December, we closed a $103 million loan, which is secured by the Hilton Boston Back Bay. The new financing has a five-year term and a fixed interest rate of 4.38%, replacing an existing $63 million loan with a fixed interest rate of 5.96%.

At closing, $31.9 million of the excess loan proceeds were used to pay down the mezzanine debt balance on the overall Highland Hospitality portfolio, which had an average interest rate of 8.4%, thereby achieving annual interest savings of approximately $2 million. These aforementioned terms refer to 100% of the loan indebtedness of which Ashford has a 71.74% ownership interest in our joint venture with Prudential. Later that same month, we closed another $112.6 million loan secured by the Renaissance Hotel in Nashville, Tennessee and the Westin Hotel in Princeton, New Jersey, both part of the Highland Hospitality portfolio.

The new financing has a five year term with a fixed interest rate of 4.44%, replacing two existing loans with a combined balance of $76.8 million and a weighted average interest rate of 6.05%. At closing, $30 million of the excess loan proceeds were deposited into reserve accounts to be used mainly for future capital expenditures and $3.8 million were used to pay down the mezzanine debt balance on the overall Highland Hospitality portfolio. Again, these terms refer to the 100% joint venture ownership, rather than Ashford's pro-rata share.

Subsequent to the quarter's end, we recently refinanced our only remaining 2013 debt maturity. The existing $141.7 million loan, secured by the Capital Hilton in Washington DC, and the Hilton La Jolla Torrey Pines in La Jolla, California was refinanced with a new $200 million loan that matures in February of 2018. The new loan has a floating interest rate of LIBOR plus 3.5% with no LIBOR floor. Ashford has a 75% ownership in the properties with Hilton holding the remaining 25%. The excess loan proceeds above closing costs and reserves were distributed to the partners pro rata.

Over the years, in both up and down cycles, we have demonstrated a successful record of managing both the maturity and interest expense of our debt obligations. Our efforts this past quarter reinforce this track record. Looking ahead in 2014 and 2015, our non-extendable debt maturities total only $110 million and $423 million respectively. The trailing 12 month EBITDA debt yields are generally in the 11% to 14% range with the exception of the Courtyard Manchester, which is a small loan balance of only $5.3 million. It is important to note that all of our debt is currently nonrecourse.

On the transaction side in November, we completed the sale of the Doubletree Guest Suites in Columbus, Ohio. This transaction generated approximately $7.3 million in net proceeds. Additionally, in December, we transferred ownership of the Hilton El Conquistador in Tucson to the lender as part of a consensual foreclosure agreement. The strategic disposition served two purposes. First, it lowered our overall debt level by removing the associated $19.7 million loan balance. Second, removing this asset from our portfolio will be approximately $0.03 accretive to AFFO based upon its trailing 12 month EBITDA contribution of negative $1.7 million. Both the Doubletree Guest Suites and the Hilton El Conquistador were previously acquired within a large portfolio transaction and over time became non-strategic as well as requiring significant future capital expenditures. We concluded that the aforementioned transactions were in the best interest of long-term shareholder value creation.

Regarding our investment strategy, finding accretive hotel transactions is still a challenge for us given our estimated current high cost of capital. Any prospective hotel acquisition must be accretive to future anticipated share prices in our corporate model, rather than just reflecting attractive per-key valuations or internal rates of return.

We recognize that the cyclical nature of the lodging business is affected by many micro-market conditions as well as global market headlines that can contribute to investors risk-on and risk-off investment patterns. We believe that any positive acceleration in market conditions or, alternatively, a reduction in global market risk, could lead to an even more robust lodging sector and REIT recovery. We anticipate there to be strong pent-up demand for capital inflows into both private and public lodging investments, due to the growth prospects from the favorable forecasted supply and demand fundamentals for the industry for the next few years. In light of these prevailing industry trends, we believe we are still less than halfway through the current lodging cycle with meaningful upside still achievable.

That concludes our prepared remarks and we will now open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Hi, guys. It's Austin Wurschmidt here with Jordan Sadler. I appreciate the color that you provided on Washington, DC during the quarter. It looks like that market has continued to remain challenging, particularly due to the loss of group you had during the quarter. I know that that was a bit of a benefit in 3Q and, obviously, 1Q should benefit -- of this year, should benefit from the inauguration. But as you look out, are you seeing any pickup in group demand across the DC market?

DC is a market that's got a -- is a little harder to put your finger on because of what's happening with the sequestration and the like. It's just hard to know what's going to happen there, or how much that might affect it. But absent of that, the DC market continues to have group pickup, and continues to hang in there. So, it's not like there's wild swings going on. But we see it modestly positive, with the caveat that the sequester might impact us in ways we're not fully aware of yet.

Okay. That's helpful, thank you. And then in terms of Seattle, anything there going on in group that's particularly notable?

No. Just a strong market, and it's doing well in the recovery.

Okay. Thanks. And then just switching to the investment side, it looks like you guys had some dead deal costs during the quarter. Would you say you're more or less optimistic today on acquisitions versus three to six months ago?

I'd say we're a little more optimistic. Our stock price has run up and, therefore, it's helped our cost of capital a little bit. But as I mentioned in my script, there is just a serious gap between the private market value of hotels and the public market value of hotels, which makes it very challenging for us, or any of our peers, to be out buying hotels because you're buying with capital that's discounted compared to what you're paying for with it. So, we remain very cautious, and we do think we have a high cost of capital, so we're being very careful with it. But we're probably a little more optimistic.

Given the disconnect that you discussed between private and public market valuations, would you consider selling any hotels today, opportunistically?

Perhaps, if we felt like we were approached and were getting a good price. We've done that from time to time over the past number of years. I think we've sold one or two assets a year over the past number of years. And so, that's always a chance. We're not actively discussing it too much because that gap can disappear pretty quick if the markets cooperate. So, we've got a lot of assets that we're pretty happy with, so I wouldn't say we're actively doing it. But it's not a bad idea if this continued to -- the markets continue to behave this way.

That's very helpful. Thank you very much.

Ryan Meliker with MLV & Company.

Just a couple of quick questions for you. First of all, you guys have done a remarkable job over the past few months in refinancing your near-term maturities and being able to take a lot of proceeds out. Obviously, as you mentioned, 2013 -- there's nothing left that's maturing. In March of next year, you have got the big CMBS deal on Highland. I'm imagining there's defeasance associated with refinancing that too early. Can you just walk us through when you think you might start to work on that process, and when you think you might start to see results there, where you might announce something?

Thanks, Ryan. This is Doug. Obviously, we're mindful of what's taking place in the capital market, and it's a fairly robust period for debt liquidity today. But we're always trying to strike the balance between early financings, which I think we've shown a really good track record of doing, and also trying to maximize the loan proceeds. The numbers that were reflected in the most recent quarter for Highland obviously reflected some very strong RevPAR growth, and we want to make sure that when we do refinance the Highland portfolio, that we're taking advantage of the maximum opportunity to capitalize on the growth in the portfolio, as well as keeping a careful eye on any potential changes in the debt capital markets.

We don't see the debt capital markets deteriorating. In fact, we see more liquidity and, perhaps, even greater opportunities for financing. So, I don't expect us to engage, really, any time in the near term, but it's something that's clearly on our list. And it's something that we see as an opportunity within the portfolio, not only in terms of the refinancing but also how we refinance and how we potentially take portions of the portfolio and determine which assets we might want to sell out of the portfolio. Which ones we have potentially plans for, for longer-term holds, and make sure that we have the long-term flexibility to execute on our capital recycling, which you've seen us do in the past.

Sure. No, that's helpful. And then with regards to Highland, as you mentioned, this was really strong RevPAR growth this quarter of 8.6%. I guess what we've seen over the course of 2012, particularly in Highland, but to some extent in the legacy portfolio, is a little bit of choppy RevPAR growth. And I think Highland this year was up 2.7%, then 6.4%, then 3.4%, then 8.6%. Can you give us any understanding as to what's driving the choppiness in the top line RevPAR growth? And then, if we should expect something similar to that next year?

This is Monty. As you know, we don't provide guidance, but as far as historically, those changes are almost all markets' changes. It's not like our RevPAR yield index is changing materially from quarter to quarter. So, those changes that you have been seeing have been changes in the markets, and the reasons for those changes are kind of a markets-by-markets story. So, maybe offline we can kind of go through what's going on in individual markets, but it's related to the markets more so than it is to the assets.

So, your RevPAR penetration then didn't really gain or lose share in any one individual quarter over the course of the year, for the Highland portfolio?

Not materially much. When we first took over the portfolio, we lost a little bit, and now we're about flat and are starting to build on it. But we're talking about very modest amounts. So, no, it hasn't been because of a big run-up in RevPAR yield index.

Okay, that's helpful. And then just one last quick question I have for you guys, and I think I know the answer, and I apologize if I missed it already, but have you seen any impact from the sequester yet?

No, we have not seen any impact.

Great. Thanks a lot.

Patrick Scholes with SunTrust.

Good morning. Question for you on the Highland margins -- how much more efficiency improvements do you think you have to go here? It looks like your margins are -- for the Highland versus the legacy portfolio -- about 400 basis points away. Is that a fair target to think down the road that you'll be at equal, roughly equal, margins for those portfolios?

Probably not. We've got more select service in the legacy pool that has more select service, which is running at higher margins, as you know. We do think there's a little bit of marginal margins, if you will, to squeeze out of Highlands. But we're getting towards the end of it on the Highlands portfolio.

Okay. Very good. That is all. Thank you.

James Milam with Sandler O'Neill.

Good morning, guys. I appreciate your comments so far. I just wanted to dig in a little bit more, as you guys continue to build this cash balance, how you are thinking about potential uses. Is it more offensive or defensive in nature? And I know you made some comments about how you view your cost of capital, but clearly there's also a cost to retaining a large cash balance that's effectively earning zero. So, I was just wondering if you could make some comments on that.

Sure. The cash balance is a drag, and it is expensive to carry when you have a high cost of capital. At the same time, we live in an uncertain world, and we think that having that cash balance does a few things for us. First of all, it's an offset for our debt levels that are above most of our peers. We think our debt levels are fine, but in the public arena, most of our peers have lower debt levels. Not only does the cash offset that from a net debt perspective, but much, much more so does it offset it from an optionality standpoint, because if tough times ever come, being able to have some cash to pay down a loan, extend a loan, is very, very valuable. And we think that that is generally underappreciated by the markets because you'd much, much rather have a -- some cash in the bank than not, regardless of your debt levels.

Also, it's both from a -- in a defensive and offensive perspective, the world is uncertain. We want to have that cash just in case something goes awry somewhere. Obviously Europe has problems. There's been talk about Japan and what might happen to them and their elevated debt levels. Even our debt levels in this country have not come under proper control. But also opportunistically, if there is a drop, we want to be able to buy assets at discounted prices and/or buy our stock at discounted prices. That was a great, great win for our shareholders this past downturn.

And so, while the current cost on it is mildly dilutive from carrying the cash, the long-term benefits are highly accretive, and I think that that's why -- one of the reasons why our long-term returns are so far superior to our peers, in that we take a longer-term perspective. And so, sometimes that means you have to take a short-term [hicky] a little bit, but long term we think it makes a lot of sense and it's very wise to do what we're doing.

Okay. So, just to kind of repeat what you said, I guess is -- the acquisition underwriting won't change. That's based more on where the public market suggests your cost of capital is. And then the cash balance is really for defensive or, if there is a material disruption, that you feel like you can take advantage of with it -- that's when you would maybe look to use that?

I think that accurately reflects it. And maybe I'd better understand where you're headed for in your first part of your comments in that we don't see our underwriting materially changing because of this buildup in cash, and feel like we've got to go run out and do something with it. We still think our cost of capital is elevated. It's probably a little less elevated than it was a few months ago, but we aren't desirous of running out and spending it on something unless we think it's a great opportunity.

Okay. That's helpful. I appreciate that. And then let me ask just one more. And I mean this with the sincerest respect for Archie and everything that he has accomplished, obviously. I guess I'm curious given -- I guess, given his role and the fact that he's still a major shareholder, can you give us a little more kind of color into what his involvement will be from sort of the strategic side beyond his capacity as just a large shareholder?

Well, we hope as much as possible. He is getting a little older, although he's still very quick and very bright, and he is spending more of his time overseas. He's got a home in Scotland. And so, we hope to continue to have his insights. He's a very smart, strategic thinker, and has been very valuable to us over time. So, as much of that as we can get, and he's usually pretty willing to comment on, and to offer advice and suggestions. So, we hope to continue to have that expertise going forward.

Okay. Great. Thank you, guys.

David Loeb with Baird.

Hi, Monty. A couple on acquisition and dispositions -- just to stick with Europe, which you backhandedly alluded to with Scotland. At the investor meeting, you were talking about looking at European hotels for acquisition. We're hearing that there are a lot of liquidity-starved owners in Europe, including some inadvertent owners. What do you think of that market today, and are you still looking? Are you still interested in opportunities in Europe?

We are looking. We are interested. But we're being careful. How you make money in the hotel business is generally buying at the right time. That's what you've got to do. And sometimes that's when the skies are darkest is when you've got to jump out there. Each country over there has got a different story, and you've got to understand what's going on in each country and be comfortable that you're through most of the storm before you jump. But we want to be ready and we want to be prepared.

So, there's been a few deals that have traded over there. We clearly have not seen the opportunity for us yet, but we want to stay close to that market -- are staying close to that market, have lots of contacts over there and continue to build contacts. We've been doing it for over 1 year now -- maybe 1.5 years -- so that when the time is right, we'll jump. We think that for some countries, the growth prospects are a little bit stronger. Generally, the UK and Germany are stronger markets. Generally, the major cities, the international gateway cities, are stronger.

But we are just very cautious because as one of our investors quoted to me -- early is also wrong. So, we just want to be smart, and we want to be careful. But we are interested, and we think there's some great opportunities there. We just want to make sure that when we do go over there, if we go over there, it's done at the right time. And hopefully all our investors see that we are very patient, and we've been talking about it for 1.5 years, and still haven't pulled the trigger because we just don't think the time has been right. And we'll let you know when we think it is.

Great. Thanks. On the disposition side, you've talked about some of the select service assets being potential candidates for sale. As you approach the maturity of the Wachovia pools that those are in, what are your thoughts on dispositions, and is there anything that you plan to do ahead of those loan maturities in terms of renovation or repositioning that might aid in their sale?

I'll comment on this and, Doug, you might want to comment on it as well. For those other folks on the call that -- doesn't know what David is referring to is that we have a few fixed-rate loans on a number of select service assets that are coming due in 2016, and mostly in 2017. And as we get closer to those, the flexibility of what we can do with those increases. The defeasance penalties on those are pretty substantial right now, so it's tough to do too much. We looked at selling the entire pool, selling the assets with the debt, but the dollars we'd receive above the debt amounts was just not material, so it just wasn't worth the effort.

So, as we come up, we've got that question to answer for ourselves. Do we want to sell them? Do we want to take advantage of low interest rates and pay some defeasance to refinance them early? At the very least, we would refinance them in ways that are probably a little bit smarter. We've got some debt pools where we have got like one full service assets and three select service assets, when we'd probably put the select service assets together, the full service assets together, so that if we do sell them, we can sell them in those pools. But we just haven't made a determination yet about what we're going to do with those because it is a few years out.

David, the only thing I'd add to that is, obviously, if you've looked at -- for example, the Apple re-trade that Blackstone did, and you look at the benchmark pricing for that, it's a bit of an eye-opener when you take those valuations, and then think about our overall portfolio and draw the comparison as to where we're trading relative to that, given the much higher quality of our asset base.

So, we've seen some increased demand clearly in the market for select service portfolios. But as Monty said, the transaction today really isn't that much of a game-changer for us, and yet the assets continue to perform well. We anticipate stronger cash flows out of those assets and, presumably, given where cap rates are, we don't see really any sort of cap rate movement in that segment either, particularly with the low, risk-free rate as where it is. So, I think our view is that now would not be the right time to maximize value for the shareholders, but we do see the heightened interest for that type of product in the transaction market today.

Great. That's very helpful. One more, if I can. Monty, on dividend policy, I understand you won't -- the Board won't be looking at that until later in the year. But given the decrease in your payout relative to AFFO, can you give us an idea about what the Board's attitude is towards that? Are you trying to drive that down closer to the minimum requirement? How do you view AFFO payout when you think about dividend levels?

Regarding dividends, the amounts of required payouts, because of the tax code, is not a driver. We've got plenty of room there. And so, that really doesn't go into our decision making. We paid out $0.11 a quarter last year. In December of this year, we gave guidance that we'd like to pay $0.12 a quarter this coming year, and that each quarter we'd make that decision. You know our history, though, is that we usually stick with that.

And I doubt -- again, since it's our guidance, that there would be too much of a change or consideration of that policy until December of this coming year, as far as what the future holds. So, compared to in the past, we do have more cash flow out, in that we do have amortizing loans that don't show up on the balance sheet, and that's cash out the door, and CapEx above and beyond the [FF and the] reserves continues to be a cash draw. So, we'd look at cash flow probably as much as AFFO, and that goes into our thinking. But we think we're about right now.

Okay. Great. Thank you.

Will Marks of JMP Securities.

Thank you and good morning. Couple of questions -- one, in your press release, you always give the seasonality trailing, and I'm wondering should that apply to the future as well -- roughly the same rates?

This is Kimo. I think generally that's pretty accurate. It changes a little bit from year to year, but the -- generally the second quarter is our best quarter, and the third quarter is our worst quarter. And that holds true.

What's happened in the past is probably the best guide to use going forward, and that's why we provide it.

All right. Thank you. Okay.

And for you, Monty, I think big-picture question is sort of beating a dead horse, but looking at your successful track record of buying back stock when things aren't good and, arguably, things are a heck of a lot better now than when you bought back stock. But this disconnect that you point out seems to point toward -- why not selling some assets, generate some cash, and buy back a lot of stock, or sell the whole company if there really is a big disconnect? And that's very short-term focused, I realize. And maybe that's your response, but I'll let you address it. Thanks.

I think you answered that. The challenge with that, as you know, is to gear up to settlements with properties. First of all, we have a little bit of friction -- a little difficulty because of what debt is on which properties, and how easy it is to pay that debt off and the penalties associated with that. So, that ties our hands a little bit. But also, just generally, you can get way geared up and go to market some assets and, in the meantime, either the private market changes or the public market changes, so that that disconnect is not there very much anymore. And so, in the past, when we tried to pursue such policies, we'd find 101 things change between, say, now and, say, six months from now when you'd actually get a private market transaction done.

But we also have faith in the markets. We see just an incredible amount of liquidity that the Fed is pumping into the economy, something like $85 billion a month. And that money has gone into very low yielding investments at first. And not far out on the risk curve, hotels, in general, are viewed as farther out on the risk curve. And so, I think that money that's coming into the economy is starting to move out the risk curve.

And in our platform -- specifically within the hotel industry is viewed as riskier because of our higher leverage of -- higher level of non-recourse leverage. And so, I think that it's just a matter of time before capital that is tired of getting 0% in T-bills, tired of getting very low returns on some other sectors continues to move out the curve, and will really have a tremendous impact on the entire lodging sector, including ourselves. So, I think that if we're just patient, it will all come to pass.

Okay. Thank you very much.

Robin Farley with UBS.

Great. Thanks. Most of my questions have been answered. Just one on Highland -- and you talked a little bit about margins, and kind of where you are in terms of having room to go. I guess, do you have any comments on RevPAR for the year? I know quarter to quarter there was choppiness, and you addressed that already.

But for the year, was it kind of largely in line with legacy RevPAR growth? And I think initially when you [talked about] the transaction, there was this idea that the Highland RevPAR would outperform over time. And I guess I'm just wondering whether you still see that in 2013, or whether it will be more largely in line with legacy?

Your question is about the future Highlands RevPAR performance compared to legacy, and -- is that right?

Yes. Yes.

I've got to say that our expectations are that it would, except that a lot of it is driven by -- there's two things that are driving it, right? There's the individual markets; then there's the assets within the markets. The assets themselves we have repositioned, we've put CapEx. We've got more CapEx going in. So, over time, we anticipate the Highland assets to outperform their markets much more so than the legacy assets. That being said, the markets themselves can be a little choppy and, this past year, the difference in Highland and legacy has been almost all market-driven. And that's just harder to predict and harder to know exactly what's going to happen longer term. So, everything being equal, yes, we'd expect Highland to outperform. The real variable is going to be on how Highland's markets perform compared to legacy's markets.

Okay. Great. Thank you.

Bryan Maher with Craig-Hallum Capital Group.

David got my question on the European acquisition opportunities. But really, on the back of the HPT news yesterday, on their $375 million deal with NH Hotel, as they specifically also are doing some stuff down in Latin America. Have you guys, or would you guys consider any investments in Latin America?

We have talked about that a lot internally, and that's probably an area that we would steer clear from. Mexico, maybe; Canada; but Latin America, for a few reasons, are just not that attractive to us right now. Argentina has got their financial problems. Brazil, there's always so many hotel rooms that go in, in and around the Olympics, which is planned down there. So, Latin America is something that we're just not spending some time looking at.

We're looking a little bit in Asia, but we're just biding our times here. Like I said, sometimes when we talk about things like that, some investors will get a little concerned that we'll -- we jump out there, but we've been talking about this 1.5 years. So, hopefully investors know the truth is that we are just very careful and very planful, and we want to jump out there and get some -- buy some hotels when the timing is right. And we haven't jumped yet. And it may never be, and that's fine with us. We just wanted to telegraph to our investors that may be something that we'll do at some point in the future.

And then, taking that to a different level, relative to the NH Hoteles deal, are you seeing any opportunities out there with respect to teaming up with somebody who may be trying to grow, has capital needs of their own, or anything in the mez-debt area that catches your eye that could result in something similar to what happened with Highland?

Not as much on the mez-debt side, although I'm sure those opportunities are out there. But we've definitely seen a number of opportunities like what HPT did with NH Hoteles where you've got these owner-operators, especially in Europe, that need capital. They've got issues, and the capital infusion would help them go a long way. We've seen a number of those. We've talked to a number of providers or companies overseas, but just haven't felt like the opportunity was right yet on something like that. So, we see them there -- just haven't felt like they were right for us.

Thanks a lot.

Sure.

Nikhil Bhalla with FBR, please go ahead.

Thank you. Monty, just on the Highland portfolio in the fourth quarter, would you give us some sense of which particular markets led to the strong performance in RevPAR growth there in the Highland portfolio?

Yes. This is Jeremy Welter.

Hi, Jeremy.

New York/New Jersey and, particularly in the northeast, aside from the Mid-Atlantic states, had great growth because of Hurricane Sandy. And then Atlanta was very strong as well.

Got it. And did you see some easier comparisons by any chance, given that in the fourth quarter of 2011 you had like eight of those hotels under renovations?

No. We still had some hotels that were in renovation in the fourth quarter for Highland as well for 2012.

Okay. And just a question on the legacy portfolio, if you look at the number of renovations planned for 2013 -- looks like that number is down by almost 28%. I counted 29 hotels, I think you renovated this year versus 40 last year. All things being equal, should one expect some easier comparisons, and maybe RevPAR to be a little bit better?

Yes. Probably on a portfolio basis, a little bit better.

Thank you.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the conference back to management for any final remarks.

Thank you. Thank you, all, for participating in the call today. We look forward to speaking with you again on our next quarterly call.

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