Hersha Hospitality Trust (HT) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hersha Hospitality Trust Third Quarter 2008 Earnings Conference Call. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference.

(Operator Instructions)

With that I would like to now turn the presentation over to your host for today's call, Mr. [Ken Abalos] of Investors Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Before we begin today's discussion management has asked me to make a cautionary comment regarding forward-looking statements. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933; Section 21E of the Securities Exchange Act of 1934; as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect Hersha Hospitality Trust's plans and expectations, including the company's anticipated results of operations, joint ventures and capital investment.

These forward-looking statements involve both known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance, achievements, or space or position to be materially different from any future results, performance, achievements, or financial position expressed or implied by these forward-looking statements. These factors detail the company's personal beliefs and from time to time in the company's SEC filings. With that, let me turn the call over to Mr. Jay Shah, Chief Executive Officer. Jay?

Okay, thank you, Ken. With me on the call today is Neil Shah, our President and Chief Operating Officers; and Ashish Parikh, our Chief Financial Officer. Today we'll be discussing our third quarter results and our financial position presenting the conditions we observed in our markets and explaining our ongoing operational changes in response to the market conditions.

And we'll also spend some time highlighting the characteristics of our strategic portfolio and model that lead us to believe that we're in a very defensible position amidst all of the turmoil in the economic markets.

The liquidity crisis precipitated by the subprime collapse has led to reduced corporate spending and investment, low consumer spending and significant unemployment which is growing. All these of these backers have each contributed to a strong GDP contraction and clearly conditions in our sector are correlated and have deteriorated.

Estimating the depth or length of what is bound to be a recession has alluded the world experts. But we've been encouraged by the response by the policymakers around the globe, not the least of which was the Bank of New England's bold 150 base point cut this morning, and hope that their initiatives to restore liquidity mitigate the most severe recessionary conditions. Although in our view we believe we're headed into a significant recession, we don't believe that we'll be facing a depression.

Despite the overwhelming environment, Hersha remains relatively well positioned to operate in this environment. We expect our portfolio mix in strategic locations to help us weather the cyclical downturn better than many in our peer set. Additionally, our debt service coverage ratios are solid, our dividend remains very well covered, and our balance sheet has minimal maturities until 2013 given the renewal of our credit line.

Over the last several years, we have effectively executed a strategy that should position Hersha to outperform in the environment that we currently face. The company has successfully assembled a defensible portfolio of high quality, newly constructed properties in urban and high barrier to entry suburban markets.

Our acquisition program has always focused on markets with a robust variety of demand generators and on assets that benefit from both leisure and corporate travel. We've invested in markets that have good travel infrastructure such as rail and bus systems as well as highway systems, so our assets are less exposed to fluctuations in air travel. We now generate roughly 75% to 80% of our EBITDA from Boston, New York, Philadelphia and the D.C. metro region.

From a capital and liquidity perspective we recently announced that the company has entered into a revolving credit loan and security agreement with a consortium of lenders to increase our financial flexibility. We recognize that refinancing risk is one of the greatest concerns investors have for all companies today and in order to demonstrate with specificity our virtual lack of refinancing risk, we've added a debt maturity schedule for 2009 and 2010 in our supplemental schedules.

We believe that our balance sheet focus positions us well against ongoing economic and market volatility while at the same time affording us the flexibility to capitalize on attractive investment opportunities that may arise in the future.

Now I'll make some brief comments on our third quarter results. Despite the deteriorating economic backdrop, our portfolio performed well during the third quarter. Third quarter AFFO was $21.8 million or $0.39 per share and unit which compares to AFFO of $20.8 million or $0.44 per share and unit in the third quarter of last year. Driving the growth in total AFFO was 2.1% internal growth, our (inaudible) growth at our consolidated same store portfolio, and the effect of accretive acquisitions.

AFFO per share and unit was negatively impacted by the reversal of the interest accrual related to our Gold Street development loan where we stopped recognizing interest in the third quarter. Due to the current credit environment, the developer of this project which is anticipated to be a residential retail and hotel mixed use project, has not been able to secure construction financing and is not able to make his debt service payments to use or the senior lender on the project.

Currently our loan and the senior loan are in work out and we are look at a variety of options in regards to the loan and how we can make the project move forward. Nonetheless a negative impact to AFFO in the quarter was $800,000 roughly, or approximately $0.015 per share in unit.

Excluding this charge, AFFO per share and unit for the quarter would have been $0.40. Also decreasing per share results was the $6.6 million share offering we completed during the second quarter which effectively increased our share count and gave us a liquidity injection at the right time of 15%.

AFFO was also negatively impacted by the additional $2.5 million operating partnership units issued for acquisitions during the first two quarters of 2008. The proceeds from these capital events were used to pay down debt and to purchase several newly built assets that should be accretive to earnings as they stabilize over the next several years.

Our portfolio outperformed the peer set on a rev par and EBITDA basis. Our same store consolidated portfolio grew rev par by 2.1% as I mentioned during the third quarter compared to a 1.4% growth for the consolidated hotel portfolio. The consolidated hotel rev par growth of 1.4% showed rate growth slight offset by occupancy decline. Consolidated hotel EBITDA increased 6.9% to $28.7 million as a result of rev par increases and acquisitions.

I'm going to spend a little time now to discuss our clusters in key geographic markets in the northeast which have performed better on a relative basis adding to our results in the quarter. As I may have mentioned before, 75% to 80% of our EBITDA is generated from New York, Boston, Philadelphia and Washington D.C.

Our New York City hotels increased rev par by 13.1% versus market growth in the quarter of 8.4% according to Smith Travel research data. At three Hampton Inn properties in Manhattan produced rev par growth of approximately 11.8% with EBITDA margins of approximately 52.2%.

Our largest market is New York City with over 40% of our 2008 EBITDA generated from that region. We believe our properties in the New York City market will continue to generate peer leading performance given their solid locations, their young age, and the limited service format which we believe will be less susceptible to economic fluctuations.

Also giving us some comfort in the outlook for New York City is a quickly shrinking supply pipeline. A recent CB Richard Ellis report in which the firm visited every site under plan or under construction estimates that Manhattan hotel deliveries between now and the year 2010 will be 30% less than previous forecasts.

Capital constraints and construction delays were the primary reasons sited for the shrinking pipeline. Our on the ground intelligence suggests that the actual delivery number will be lower than the CBRE estimates particularly in 2010 and we believe that the lower supply for the next several years will significantly help shelter our portfolio and better protect occupancy and rate metrics well beyond 2009.

Let me now continue on with our other significant clusters. The company's Washington D.C. properties grew rev par by 3.4% compared to rev par growth of 1.9% for the market for the quarter.

In metro Philadelphia, the company rev par increased 1.3% versus a market rev par decline of 5.5%. Notable properties within our Philadelphia portfolio were our Courtyard and Residence Inn in the northeastern section of Philadelphia which drove a rev par increase of approximately 13%. In Boston, urban property rev par increased 2.9% versus a market rev par decrease of 2.2%.

As we move forward into the fourth quarter in 2009, we're going to focus on maintaining our operating margins, driving occupancy gains, and increasing our share in each of our operating markets. We believe that in a declining environment capturing share is critical and will benefit us when the markets finally turn. It's critical for us to capture as much rate as we can and expect to focus on increasing occupancy will enable us to push rate somewhat because of the market leading brands and distribution systems of our hotels.

To that end, we've implemented a number of sales and marketing initiatives to help us maximize occupancy at our properties and benefit our rate performance and margins. We've added sales support to all of our hotels, on the ground direct sales dollars are being spent, and have increased our internet distribution. To drive traffic and capture demand at its source, we outsourced European sales support for our independent hotels to a Europe based company.

Additionally in some markets we are intensifying our marketing to groups that we have previously not actively reached out to, such as airlines and local conference business. We used to view this as lower rated business and have been displaced by our strong transient demand. We're now approaching those groups and those L&Rs once again. I think the key takeaway is that we're focused intently on driving occupancy and are pulling as many levers as we can.

Controlling expenses at the portfolio hotels is also a focus. Among some of the initiatives that we're pursuing include leveraging our cluster and select service strategy to combine property level positions within clusters, eliminating any sales and marketing initiatives that were purely awareness campaigns to drive incremental demand so that we could push rate, reducing par inventories to better reflect lower demand at the properties, review all outside services and consulting agreements to see if elimination is viable or cycle times can be increased, repairs and maintenance, budgets on a POR, room bases are being reduced and limited to life safety and essential guest experience items, to name just a few of the initiatives that we're currently engaged in.

Now turning to other activities in the quarter. In July, Hersha opened a new hotel in Brooklyn, New York, a 93 room independent boutique hotel. The company purchased a four story shell for $17 million from a third party developer and Hersha designed and completed the update of the hotel for an additional $6 million. The location is within a Brooklyn submarket with many demand drivers with limited supply, particularly for boutique type assets such as this.

In August, the company purchased the newly built 101 room Hampton Inn located in Smithfield, Rhode Island for $12.6 million. The hotel was sourced through Hersha's development loan program and was purchased at a very attractive basis in an off-market transaction.

Lastly, let me also highlight our continued focus on the status of the development loan and land leased portfolio. We ended the third quarter with approximately $83 million in development loans and $24 million in land leases outstanding to 13 separate hotel development projects. We continue to feel very strongly about all of these projects and nearly all of these loans we have no obligation to purchase upon completion. We hold a right of first offer, not a forward commitment.

We most recently exercised this optionality on the Tribeca Hilton Garden Inn by not purchasing the asset on the first pass on which we currently hold a mezzanine loan because of the current market conditions. The developer suggested he is currently marketing the property for sale, but it's likely that we'll have an opportunity to look at it again in a more favorable market environment.

We expect to continue to invest in mezzanine loans either purchasing existing notes, originating development oriented loans in our most strategic markets which in light of the challenging liquidity environment should help us find attractive entry points into compelling investments. With that overview of the quarter, let me now turn the call over to Ashish to go into some additional detail on our financial position. Ashish?

Thanks, Jay. Today I'll go into more detail about our hotel operating metrics during the quarter and then focus on our balance sheet, our outlook and our updated guidance. Our portfolio of 61 consolidated hotel properties generated rev par growth of 1.4% during the third quarter primarily driven by a 4.6% increase in ADR which more than offset a 245 basis point decline in occupancy.

Our same store consolidated portfolio had rev par growth of 2.1% driven primarily by a 3.3% growth in ADR. Occupancy declined 93 basis points to 79.4% for our same store consolidated hotels during the quarter. Although occupancy declined year over year, we continue to post occupancy levels approximating 78% which is well above industry average estimated to be in the mid-60% range.

The strong occupancy levels in our portfolio are conducive to our strategy of optimizing rev par through rate led growth and while we continue to be encouraged by the resiliency of our average daily rates for the majority of our assets, we understand the challenge going forward.

As Jay mentioned, we'll also make a more concerted effort to capture market share in this challenging operating environment and have committed significant sales and marketing resources to this end.

Our quarterly results also benefited from the stabilization of several of our joint venture assets, mostly notably our Holiday Inn Express in Chelsea, New York, and the Homewood Suites in Glastonbury, Connecticut. All of our JV assets produced positive cash flow for distribution for the third quarter.

Our portfolio EBITDA margins were affected by the acquisitions we completed in the first two quarters of the year. We purchased six new assets throughout the period with little to no operating history and the ramp up associated with these assets affect our margins for the quarter.

Through aggressive cost containment programs, we were able to maintain stable EBITDA margins for our same store assets. Our asset management group and operators have put more programs in place to contain costs and will continue to aggressively take action as is necessary in this environment.

Turning to our balance sheet, our overall capital structure remains favorable with respect to our ability to execute our long term growth plan. As Jay mentioned, we recently announced that the company has entered into a revolving credit loan and security agreement with a consortium of lenders. The credit agreement provides for a revolving line of credit in the principal amount of up to $175 million. The existing bank group has committed $135 million and the credit agreement is structured to allow for an increase of an additional $40 million to be arranged on a best effort basis with new participants.

Our weighted average debt maturity is approximately eight years. Regarding our near term maturities, we expect to be able to refinance our 2009 consolidated debt maturities of $32.5 million with the existing lenders; however, our new credit facility gives us the flexibility to refinance these maturities using proceeds from the facility if we needed a contingency plan.

Outside of this $32.5 million we have already either refinance or have unilateral extension at our option for any remaining consolidated debt maturing in 2009. This leaves the company with advantageous position of having no significant debt maturities through the end of 2013. Most of our debt maturities between now and 2013 are for individual asset loans that are at reasonable loan to values and we believe that most of these assets would be refinanceable with regional lenders even in today's credit environment.

One example of this is our recent refinance of the Holiday Inn Express in Cambridge, Massachusetts at the end of September. The loan on this asset was maturing in 2009 and we recently refinanced this asset for approximately 25% more in proceeds and fixed the interest rate at 6.625% for the next five years. The term on this debt is 15 years and the maturity is now extended out to 2023.

We ended the third quarter with approximately $83 million in development loans and $24 million in land leases outstanding to 13 hotel development projects. The increase development loan balance primarily reflects the initiation of a new development loan for a hotel project in lower Manhattan that was initiated during the quarter.

As Jay mentioned earlier, we have one second mortgage in a mezzanine loan aggregating $20 million in residential retail and hotel mixed use development project in Brooklyn, New York where we have stopped recognizing interest as the developer is unable to obtain further construction financing.

We continue to work with the borrower at this point and are considering alternative structures that may allow the development to continue, but we felt it was appropriate to be conservative in the recognition of current income from the project.

We'll keep the market up to date on our progress as we move forward, but we want to be very clear that we are not obligated to provide any further capital commitment or any type of loan guarantees on this project and we will not further leverage our balance sheet in order to restructure this loan. In addition, we note that this is the only project we have with this unaffiliated developer and that all of our other development projects are current on their interest payments.

We are committed to increasing our financial flexibility and are actively working to further strengthen our balance sheet. Steps we are taking to enhance our balance sheet and liquidity include the following.

First, we are limiting our capital investments. We are able to do this due to the young age of our portfolio and its excellent condition. Although we still have growth in cash flow from the inherent ramp up in our young portfolio, we are currently delaying the majority of our product improvement plans and routine capital expenditures until the end of 2009 or into 2010 when we believe we'll be able to realize a greater return on investment on these expenditures.

The one significant project for 2009 is our refresh of the Courtyard Brookline in Boston as we see a potential to move rates and maintain our leadership position in this market.

Second, we'll continue to look at ways to recycle capital. We recently sold one hotel and three in 2007. There is still liquidity in the market for smaller limited service hotels in secondary and tertiary markets and in the coming years we may sell more and utilize the proceeds to pay down debt and enhance our liquidity.

Our continued growth in EBITDA and AFFO also continued to drive solid credit statistics and dividend coverage levels and we continue to main strong fixed charge and interest coverage levels. We estimate our current fixed charge coverage levels to be approximately two times and our EBITDA interest to approximate 2.4 times.

We're also pleased to have substantial earnings covering our dividend. Based upon our 2008 forecasted results, we expect our AFFO less the capital expenditures reserve to exceed our dividend payments by approximately 1.5 times. Our strong dividend continues to be a priority of management and of our Board of Trustees and an integral part of our overall objective of providing investors with earnings growth and sustainable income during challenging times.

To that end, in 2007 when our industry experienced an unprecedented decline in rev par of over 7%, Hersha was able to sustain its dividend. Since that time, we have dramatically strengthened the company and our presence in key geographic markets. We continue to refine our operating forecast and have modeled numerous rev par decline scenarios to stress test our dividend coverage. It is currently our intention to maintain our dividend, but again it is a Board decision.

As we work through our year end forecast, in addition to the results we've delivered in the first three quarters of the year, we must consider the realized and expected continued slowdown in travel spending. We acknowledge the challenging operating environment and while the overall outlook calls for rev par declines possibly through 2009 and into 2010, the strength of our portfolio in the first three quarters of 2008 gives us some comfort that we won't experience the same degree of cash flow volatility that may impact others in the industry.

Some of the portfolio characteristics that should help us during the next year include the significant percentage of extended stay business, nearly a third of our mix, the fact that our markets tend to have a diverse set of demand drivers, easy access through alternative means of transportation, and a good combination of corporate and leisure travel.

Additionally, our franchise model allows us to exert more control over our revenue mix and expenses and allows our asset management team to work much more closely with our operators in order to control costs and improve yields.

To that end, since our hotels are managed by regional management companies rather than brand, it allows more responsiveness and alignment of interest with owners. Due to the success of our aggressive asset management efforts, we now believe that total expenses on a comparable basis throughout the portfolio can be limited and we're working very aggressively with all of our operators to cut costs and capture additional market share.

With that said, we expect the next several quarters to be quite challenging and we will focus on executing and working to replicate the solid performance of the last several quarters. Therefore, we are reducing our rev par forecast for the full year ended December 31, 2008 to be between 1% and 2% for our same store portfolio and 2% to 3% for our consolidated portfolio. Given our current margin expectation and the asset acquisitions completed to date and including the impact of not recognizing approximately $2.1 million of income on the Gold Street loan, our EBITDA is expected to be between $120 million and $122 million and our adjusted FFO is expected to be in the rate of $1.18 to $1.22 per share.

We are not providing any guidance for 2009 at this time and will plan to issue this guidance on our year end conference call to be held in late February. This concludes my formal remarks. I'd now like to turn the call back to Jay.

Thanks, Ashish. I'd like to reiterate that our current level of earnings and expectation for future growth albeit at a more modest pace puts us in a strong position to support our dividend with expected excess capital to be used for growth purposes. That platform by design continues to avoid the extremes and therefore we are not as susceptible to the lows in the deteriorating economic cycle relative to our peers.

We have positioned ourselves defensively, having assembled a portfolio in high bearing entry markets such as New York City, Boston, Philadelphia, D.C., where in total we derive 75% to 80% of our EBITDA. We understand the uncertainties facing the entire industry but we've been working hard these past few years to enable our portfolio to outperform and as the third quarter evidences it's working.

Some of the reasons include the ramp up from our young portfolio, six hotels opened in the last year, nine hotels opened in the last two years, and nearly half of our EBITDA is derived from hotels opened in less than four years. The implication is that there is incremental ramp up beyond normal market growth rates.

The portfolio is comprised of the best in class brands. Most of our hotels fly category leading brands like Hampton, Residence, Courtyard which historically have benefited from trading down during difficult economic cycles. We're in solid markets that are not overly reliant on discretionary air travel.

And finally we have a portfolio of smaller hotels which allows our asset management group and the yield management group, the revenue management groups that are operating companies to better manage the yields of these hotels. While there's no question that we're in difficult times, our experience from the '01 to '03 cycle leads us to believe that we are well positioned both financially and operationally to successfully navigate this downturn and move into the opportunistic phase of this cycle. With that, Operator, I'd like to open the line up for questions.

Thank you. (Operator Instructions). Our first question will come from David Loeb with Baird.

Hi, guys. I apologize if I ask you stuff that I missed but my power went out briefly and I lost it for a couple of minutes. On Gold Street, Ashish, is that the same one that's listed in the supplement as the Hilton Garden Inn and Homewood Suites?

That is the same one as maybe listed as Johnson Street in Brooklyn, New York.

You bought that at a discount. Have you -- are you in a position where you have to make a fair value assessment of that mortgage?

Well what we did is when we booked the development loan we actually took a certain percentage of the loan and allocated a certain percentage of the value to the option that we had to purchase the hotel at a fixed price. So we issued a loan -- mez loan for $20 million -- and we -- out of that we booked about a $1.8 million option value on that project.

You know as we continue to work with the borrower and the senior lender, we're going to try to work out this loan. If we come to a decision point where we can't or we don't see that the value justifies keeping it on the books then we'll have to take an impairment charge.

Okay. And the discount that's listed in the supplement, you actually paid less than face value for this, right?

Well we initiated the loan and ...

This is not the one that you purchased?

No, it's not.

Oh, okay. So the 1236 discount that's where you're talking about -- that's the option value?

That's correct.

Okay. And what's -- if you get to a point where the lender, the first mortgage lender takes this back, what happens? What position are you in? Or would you take it back first and then decide what to do about that first?

We're currently -- David, this is Jay -- you know we're currently in conversations with the -- with the senior lender and it would be our intention that if we are going to pursue this we're looking at two or three different alternatives. First, we're trying to work with the developer to see if there is some additional assistance we can give him to help him get financing and move forward.

Another alternative is looking at some of our other developers that operate in that marketplace to see if we could have them come into the project to assist in getting it completed and its existing plan state or in some modified state.

And thirdly, the third option would be for us to bring it on to -- to bring the development project on to our own books and have the REIT complete the development.

And so we're looking at these three different options. You know at this point there is probably -- there hasn't been in the last couple of months -- any real market for any sort of real estate, particularly a development parcel. So we are getting cooperation from the senior lender.

If we were going to move forward with any of the three options I've mentioned we would either have to foreclose first or enter into some sort of an interim agreement with the existing developer if we chose the prior option. If the senior lender chooses to foreclose without our having taken any action, then the nature of the mezzanine loan is that our position would be wiped out.

That would be bad.

Yes.

Yes. And then this is a much larger mixed use project than just these two hotels, right?

Yes. It was anticipated to have -- half of the project was anticipated to be residential and then there was going to be retail on the ground floor.

So is there a way -- given the zoning, given the planning, given all that's gone into this -- would there be a way to carve out just the hotel part and build hotel without the residential?

That's one of the things that we're exploring right now.

Okay. And in the supplement -- two things. In the release you talked about the urban Boston portfolio. The supplement mentions eight hotels in the Boston metro. I guess you've got a total of ten in the state. The other two, are those the Dartmouth area ones and are those counted in other?

Those are counted in other.

Okay. So which -- I'm guessing that it's Brookline, the two south Boston, Cambridge and Revere that are the urban?

That's right.

So were the results from Framingham, Norwood and Franklin just not quite as good?

The urban portfolio hotel for the third quarter?

Yes.

They were from the third quarter the -- those three hotels had -- yes, they didn't have as good performance as the Boston urban portfolio. That's correct.

Okay. And when you talk about 80% in the four large urban areas, that's the whole Boston metro, not just the urban part of Boston metro, right?

That's correct.

Okay. So are you -- I mean you've actually been able to find some liquidity in terms of asset sales. Are you looking further at Dartmouth or Framingham, Norwood, central Pennsylvania, Connecticut, Rhode Island, other? Are you looking at those as candidates for sale in this environment?

David, this is Neil. Yes, we are. We've been having some conversations across the last several months with regional owner operators in some of those markets on some of those assets. More recently we've also started discussion with the more of a broader marketing of some of those assets.

I -- we're still nothing definite but we think that across the next six to twelve months that there will be an opportunity to sell a handful more of those smaller, limited service assets in some of our more secondary locations.

Great. That's very helpful, Neil.

And I apologize again. I missed some of the discussion on the dividend. Clearly in this environment your peers are generally cutting their dividends across the board. You've got probably the best payout, are among the top two or three best payouts of anybody these days. Are you seriously considering cutting just to preserve more capital and give you more options even though the dividend is pretty well covered?

You know we have looked at this as you can imagine several different times and we've discussed it with our Board. Currently the dividend coverage as you mentioned is strong. We've sensitized '09 on a down 5% rev par basis, down negative 10% rev par basis -- we've sensitized it even further. I don't know that that's relevant but we've done it to a negative 12%, negative 15% and negative 20%.

But we -- as we take a look at our sensitivities, we feel pretty comfortable with coverage of the dividend through this negative 5% rev par scenario. You know our -- historically our portfolio when we look at our segment of hotels and we look at our portfolio historically, we've typically faired better -- far better than industry. But even if we're to assume sort of an industry view of our portfolio, we'd be looking at a negative 5% kind of environment. And at that number, we're still at a payout of 79% and we're at a total fixed charge coverage is still about 1.9 times. So we feel comfortable.

I think to suggest that we won't continue to visit this issue would be inaccurate. You know obviously I think it's prudent to look at it every so often and I think we'll be doing it on a monthly basis. But as of right now our cutting the dividend from a -- to meet our next income tax and so on and so forth, we wouldn't be in a position to cut it.

But let's just say we cut it by a third or whatever the case might be, if the amount of capital that we would be preserving and using to pay down debt it really doesn't move any needle. It doesn't help any of our metrics. And it might not be as meaningful as it is for others.

On the other hand, maintaining the dividend I think is a strong sign of the value in our stock and I know one would argue that it's not really being shown right now but I think it puts us at the forefront of being recognized as a value as times change. I think dividend and yield plays are going to probably be the first to see signs of recovery.

With 18% yield I would agree that it's not really being valued in the market today. I guess two perspectives. One is it really would only be as a capital preservation move. You don't need to do this. But there will be opportunities out there and probably numerous opportunities out there over the next couple of years. But I guess what I'm more curious about if you could give us a little color on the taxable income requirement and how that stacks up relative to the dividend?

Sure, David, this is Ashish. I can comment on that. As we're looking at it today and based on '08 taxable income, in order just to hit our REIT requirements we could probably bring the dividend down somewhere in the $0.48 to $0.52 level and still be fully in compliance with the REIT rules.

And that would be paying 100%?

That would be paying 100%.

Okay, so no tax liability from that.

So no tax liability on top of that. So we'd be in REIT rules as well as we wouldn't have any tax on that distribution between 190%.

That helps an awful lot. And presumably if FFO -- if rev par is down FFO is down next year, taxable income is probably down a little bit more?

That's correct.

Okay.

But cutting the dividend to that extent, David, would, you know, as you can imagine, yields about $12 million in capital that we'd be preserving.

And 12%. That's still a pretty high yield. I hear you, Jay. That makes a lot of sense. Thank you very much.

We'll go next to Will Marks with JMP Securities.

Hello, Ashish. Hello, Jay.

How are you?

Fine, thanks. One follow up to David's question. Did I catch this, did you give a payout ratio based on a negative 5% scenario?

Yes.

You said 79% based on if rev par were down 5%?

That's right.

Okay. I just wanted to clarify that. Thank you. Can you -- you touched on qualitatively some CapEx issues and maybe a little bit quantitatively. I'm wondering if you can add to that a little bit. You mentioned Brookline. What should we assume if you can break out a maintenance number for next year as well as Brookline and anything else in terms of non-maintenance CapEx?

Will, this is Neil Shah. The Courtyard Brookline that we mentioned is the one significant hit that we are going through currently and we'll be completing early part of this year. It's significant vis a vis our other projects but it's still less than a million dollar cost.

Our -- I think our kind of basic maintenance and expenses that we expect to be incurring is somewhere between $5 million and $8 million across this year -- overall across that portfolio.

I'm sorry, that's this year?

This year. We feel --

This year being '08 or '09?

I'm sorry, '09.

No, that's all right. So a $5 million to $8 million maintenance for '09 and with a little bit extra including projects such as Brookline?

That's right.

Okay. One other question unrelated. On New York, you guys I don't think had any kind of outlook, not just New York but in general, for October and what you're seeing. And in particular, I'm curious on New York. I've heard differing views.

Certainly Smith Travel shows rev par declines of I think in the neighborhood of 12% the last 28 days and we heard from one company yesterday that it -- that occupancy for certain hotels weren't off that much. But I imagine they generally are, it appears so with Smith Travel. So maybe you can talk a little bit about that?

Yes, Will, in New York urban for October we've been following this on a weekly basis obviously and you're seeing a sort of total down in New York for around negative 12% range. And I'm sorry, the metro area saw more significant down scenario than that -- about 14%, 15%. You know we had a week one down of 17.2%, 16.9% in week two, 11% week three, and 13.6% --

That's metro.

That's the metro, yes.

Okay.

You know our numbers didn't fair all that well either. We were probably in the low double digits down. You know we had a couple weeks with negative 12%s and one week with a negative 14%. Now October was an interesting month for obvious reasons.

You know there was a -- the significance I think of a financial crisis really manifested themselves in October and New York was sort of at ground zero. So you had almost the intensity of an external event in New York combined with comps being shifted a little bit because of the Jewish holidays being in the different month and you combined those two and it resulted in a bit of a difficult month for October.

Now as challenging as October was, in this early part of November we're seeing the conditions being not as challenging. I don't know necessarily what I -- what more I could do to help quantify that because it's really very low visibility. But we don't expect to have as disastrous a November and December as we did in October. We're anticipating more a much less volatile end of the quarter than we had in October.

Okay. Great, that's very helpful. And any other markets -- would you say that's the worst of your markets right now?

No, you know I would say that that is -- that is one that got pummeled pretty good and then when you take a look at the Boston metro and urban market that was also very difficult. There you had obviously the impact of the financial crisis I mentioned before, and you had a comp which didn't include the World Series. So you know the fourth week of October was down 26% in the marketplace.

Wow. Okay. All right.

But again -- we don't expect -- I mean again it's going to be challenging through the end of the quarter. But you've got the election out of the way to some degree. I don't know what impact that has exactly.

You've got some of the -- you've gotten the financial crisis, you know the day after day bad news scenario has slowed somewhat.

And you're moving into the holiday season into New York and Boston which will most likely be weaker than in past years but it will still be -- it will still show relative strength.

Okay. All right. That's perfect for me, so all I need. Thank you very much.

(Operator Instructions). We'll move next to [Dan Cooney] with KBW.

Hey, guys, good morning. I guess somewhat related to the last question. Could you maybe give a little more color on the decision to kind of pass on the Hilton Garden Inn in Tribeca? Maybe kind of related to your long term strategy about increasing earnings exposure in New York City?

Sure. I think the long term strategy and our long term outlook for New York is still very strong. I didn't mean to mention that -- I don't want that to be read as a shift in strategy by any means.

Okay.

I think it's just that the timing of it, it's expected to open any day now and the developer approached us and said are you going to buy it and we explained to him that in this environment this was not an opportune time to be buying an asset anywhere, even New York. We have a mezzanine loan on it and that was the reason that we were looking at it in the first place. We feel very secure in our loan there and we believe the asset's going to be successful.

Secretly it's our -- obviously we didn't want to hurt any of our development partners. Secretly it's our wish that in this environment -- most buyers have the same view we do and they pass on it as well and we'll have another look at it because it's a very attractive asset.

Okay. I mean is it any kind of relation to what pricing was now versus where you think it might go later or just in that regard or?

Yes, again this was a development asset that is about to open so it didn't have any trailing numbers. I don't know that we'll see that much movement in the price, but currently based on outlooks for New York it would have appeared to be a very, very low cap rate. I don't know that from a replacement cost standpoint if you're to valuate the asset you're going to be far off from where it was priced. But you know in this current environment the cash on cash yield has become a priority for us.

In today's environment we are unable to get the kind of first mortgage loan that this kind of asset would deserve or require us to serve as a nice cash on cash return.

We would hope that the next time we have the opportunity to look at this asset the credit markets will be better and we can use actually at 50% to 60% first mortgage loan on the asset. In today's environment it would have required a lot of equity which would have lowered our return on the cash on cash basis.

Okay, good.

(Operator Instructions). It appears we have no other questions at this time. I'd like to turn it back to our presenters for any additional or closing remarks.

If there are no further questions, we'll just thank everyone for your continued support and thank you for being on the call. And we'll look forward to speaking to each of you again soon. Thank you.

This does conclude our call. We'd like to thank everyone for their participation. Have a great day.