Sotherly Hotels Inc (SOHO) 2005 Q1 法說會逐字稿

Please stand by we're about to begin.

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the MHI Hospitality Corporation first quarter 2005 earnings conference call.

[Operator Instructions]

I would now like to turn the conference to Georganne Palffy of the Financial Relations Board, please go ahead.

Good morning everyone and thank you for participating on the MHI Hospitality Corporation conference call to discuss first quarter results. The press release was distributed this morning and if you did not receive a copy you may access it via the company's web site at www.MHIhospitality.com.

In the release the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Additionally we are hosting a live web cast of today's call, which you can access in the same section. Following this live call, an audio web cast will be available for one month on the company's web site again at www.MHIhospitality.com under the header web cast and presentations.

To be added to the company's distribution list please contact me at 312 640 6768. At this time management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. Although MHI Hospitality Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements are detailed in today's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statement.

And having said all of that I would like to introduce management that is with us today. We have Drew Sims, Chief Executive Officer and Bill Zaiser Chief Financial Officer and I'd now like to turn the call over to Drew for his opening remarks. Please go ahead sir.

Thank you Georganne. Good morning everyone and we appreciate that all of you have joined us this morning to discuss our first quarter results, as well as our outlook for the balance of the year. Before we begin I'd like to review the format of today's call. I will discuss a brief overview of our company, our investment approach as well as our current lodging industry dynamics as they pertain to MHI Hospitality. Bill Zaiser our CFO, will then comment on our operating results for the quarter, the first full quarter since our IPO was completed in late 2004.

I will then provide you with an update of our properties including our operating plans and finally an outlook for the year. Then we'll open the line for questions.

As you know we're into a lodging recovery. The reasons are fairly straightforward. Simply put, demand is strong relative to supply. The latest Smith Travel Research report shows that industry occupancy reached 54.8% in the first 3 months of 2005. Up 2.8% versus the first quarter of 2004. The first quarter average room rate increased 4.9% to $90.25 and revenue per available room, RevPAR, improved 7.2% to $52.74.

Industry room supply increased 0.6% in the quarter, versus a 1% growth in the first quarter of 2004. Industry demand, meaning the room not sold, increased 3.5% in the first quarter of 2005 compared to the demand growth of 5.4% in the first quarter of 2004. Since this is our first call, for the benefit of those investors new to our story, or even those who attended our IPO road show I'd like to take a moment to discuss our business approach.

We went public on December 17, 2004 pricing 6 million shares at $10 with an additional over allotment of 700,000 shares, which subsequently closed on January 19, 2005.

With a net proceeds of $61.3 million we used $42.1 million to repay our outstanding indebtedness and fund the acquisition of our initial hotel portfolio. We also used $3.5 million in cash proceeds to acquire the lease hold interest in Shell Island Resort, a condominium resort property in Wilmington, North Carolina.

We have fine-tuned our real estate operating strategy over the past 47 years in business, we have essentially grown up in the lodging business. Our experience includes buying and selling 22 hotels and managing over 60 properties. Today we own or have interest in 6 full service hotels representing the Hilton and Holiday Inn brand and own a resort lease. Our market focus is the mid Atlantic and Southeastern states.

In our view MHI Hospitality represents an investment in branded lodging below replacement cost. We look to acquire under performing assets at a discount then apply our management and branding relationships to unlock the value in the assets. You could call us turnaround specialists.

As managers of shareholders capital it's our job to improve the cash flows and therefore the market value of every property we own. Our goal is to generate increasing cash flows for dividends and to build equity capital. Our operating strategy includes both internal growth derived from improving the performance of our original hotels, and external growth from accretive acquisitions.

As a general rule, currently we look to achieve an average cash on cash return of 12 to 14%, and an internal rate of return of 20% on our investments. We know that turning around an under-performing property involves risk. We manage that risk from the beginning with an attractive purchase price and finding the A location in the markets we operate.

With our expertise in renovations and repositioning, the result is an investment at a low cost per unit. New management then works to provide a brand, improve the guest mix and the net resolve being an increase in occupancy as well as the average room rate.

Like the majority of other real estate sectors, the lodging segment has seen increased competition for investment opportunities. Additional competition comes from other REITs, private buyers, insurance companies, pension funds, etc. We generally see CAP rates in the range of 9%, down from a range of plus or minus 10.5% a year ago.

That said we believe because of our investment criteria that includes under-performing assets with occupancy levels in the 50% range that reduces competition to mostly institutional -- non-institutional investors. Most institutional investors are unwilling to wait the 2 to 3 years required to accomplish a hotel repositioning.

We believe we have a competitive advantage being a well-funded public company over private buyers. As we become more established in the marketplace we expect our financial position and track record will move us to the top of the major brokers and sellers list when it comes to seeking out a buyer for distressed properties. We believe our Laurel asset is a perfect example of the type of opportunity we are seeking.

The all-in costs will be approximately $16.5 million or $80,000 per unit. In this highly desirable Baltimore Washington market to acquire the land and build a similar product would cost upwards of $125,000 per key, or $25.6 million. We are associating ourselves with 2 very powerful brands to effect a turn around, Holiday Inn and Outback Steakhouse. We believe the end result will be a hotel generating an attractive cash flow in the range of 12 to 14% on invested capital on a current leverage basis and a compelling internal rate of return on sales.

We currently see a solid acquisition pipeline. As we grow our company I see us using 3 distinct types of deal structures. First we will use conventional acquisition of an operating under-performing hotel with the repositioning stories we talked about earlier.

Second, we will acquire similar to our leased condominium resort property at Shell Island whereby we acquire the public space and lease it to an operator.

Third, we will conduct joint venture agreements with development partners for a major renovation of a closed hotel and/or change the use of another type of building such as an office or an apartment building.

We're in the final stages of contract execution for the acquisition of a hotel in northern Florida. Presently we have 2 offers out for under-performing hotels in North Carolina and Georgia. We are in discussions with a major condominium developer to put a format in place that will allow us to do extensive business in the hotel condominium arena. Additionally we are in discussions with a single unit owner to enter a southern resort market with a condo model.

None of these opportunities are a sure thing, however suffice it to say we are examining many investment opportunities, it is our goal to prudently grow our company as good investments present themselves. I will now turn the call over to CFO, Bill Zaiser.

Thank you Drew. For the quarter FFO totaled 886,000 or $0.08 a share. The company's consolidated total revenues were $11.4 million with total operating expenses of $11 million. The consolidated net loss for the quarter was $28,000, which is less than $0.01 a share. Traditionally the first quarter has been our slow quarter.

Our overall portfolio RevPAR was $61.59 and that's a 12% increase over the same properties for 2004, for the first quarter. This RevPAR growth was driven primarily by an 8% increase during the quarter in the average daily room rate to $92.19 and that's an increase as I said of 8% over the comparable period in 2004. As Drew pointed out earlier, this strong rate component to our RevPAR mirrors the growth in the industry.

Our occupancy percent was up 3% to 66.8%. As I mentioned our occupancy is up 3%, by comparison the national average was up 2.8%. Our ADR growth was 8.3%, the national average 4.2%. Our RevPAR growth 12%, the national average 7.2%.

We recently announced our second quarter cash dividend of $0.17 a share which equates to an annualized dividend of $0.68 a share and an effective yield of 7.16% at the current stock price. Again that's higher than the lodging mean, which is 5.77%.

We currently have a $23 million line of credit available and at quarter's end we had $10.5 million in cash and cash equivalents.

We recently renegotiated our property casualty and worker's comp insurance contracts and have realized an annualized savings of approximately a $0.5 million. The net effect in this year will be $350,000 or roughly $0.03 a share.

Renovation work continues at the properties in Laurel, Philadelphia and Williamsburg. We anticipate a September completion with costs coming within the budgeted figures totaling $7.9 million.

Drew will now give you the property overview and the outlook for the balance of the year. Drew?

Thank you Bill, very briefly I'm going to go through each hotel and just give you a summary of the results.

Our Raleigh hotel had substantial RevPAR growth in the first quarter, growing at 9.7%. Our RevPAR index, which is basically a fair share index is operating at about 105.4% of fair share so we're taking business away from our competitors and we're growing our rate and that's a good thing. So we had a very good quarter there.

Williamsburg, Virginia, again we're growing RevPAR. Our RevPAR index is at 142% of our competitive set which is outstanding, that's the good news. The bad news is it's a very difficult market so the market itself is struggling but we're certainly doing a good job in terms of taking share from our competitors. The Williamsburg hotel is in the midst of a product improvement plan as mandated by Intercontinental Hotel, the franchisor for Holiday Inn. I'd say we're about 60% through that process and probably have about $200,000 left to spend to complete that project.

The Philadelphia hotel, again is under a product improvement plan as mandated by Hilton as part of our transaction, the IPO transaction, we extended the license agreement for 10 years and we have approximately 44 rooms out of service and will probably through the end of July.

That's part of the bad news, the good news is we've actually seen substantial RevPAR growth even though we have fewer rooms. And the main reason for that is that we have exited US Air from the hotel. We did approximately 80 rooms of business with US Air. We're now down to about 15, I believe, on a nightly basis, and that was at a very low rate. The market is exceptionally strong and as a result we've been able to increase rate.

Our Savannah hotel is our star performer, continues to do very well, RevPAR growth at 10.3% and is competing in the market place, taking share from its competitors, performing at a very high level.

Our Wilmington hotel, we did extensive renovations in the first quarter, loaded in basically all of their, or the majority of their capital improvements for 2005 into the first quarter when it was slow. As a result our NOI suffered slightly however RevPAR growth was in the 5% range and our RevPAR index, our fair share measurement is about 124%, so we're getting about 24% more than fair share. We expect the second quarter to be strong as we go forward.

Our Laurel hotel, which is a new acquisition for us, was done as part of the IPO we closed on December 20th. It's been a very pleasant surprise. We knew the property was under managed we just didn't know how much it was under managed. Without having done any renovations, rebranding or the like the hotel has seen almost a 30% increase in RevPAR, simply by us adjusting the rates.

So the hotel has done quite well in the first quarter. The RevPAR index still only performing at 87%, when we took over it was performing at about 66% of fair share, now it’s up to 87% and as I said we really haven't done any of the renovations, or the renovations haven't taken effect yet.

Our renovations will be completed by the end of September. At that time we will be changing the brand on the hotel from Best Western over to Holiday Inn and we will be opening an Outback Steakhouse in the building.

The Wrightsville Beach property is simply a leased operation and we would expect to get our lease payments from the management company at approximately $640,000 per annum, that's 6 equal seasonal payments, that's again this month I believe.

Our outlook for the year, we are reaffirming our previous guidance and anticipate that RevPAR growth for 2005 will be in the range of 5 to 6% compared to the predecessor group, which is the defined accounting group in the IPO and 9 to 12% for the initial 6 hotels as compared to prior year. FFO per share will be in the range of $0.90 to $0.95, our assumptions in that regard include a 3% overall increase in expenses. Also increased costs associated with a Sarbanes-Oxley compliance in the range of $160,000 to $225,000 have been included in that estimate.

Our goal for the first year of operations are consistent with what we stated at the inception of our public company and include the following -- we would have an FFO for 2005 of 90 to 95% based on improved market conditions. We believe this still to be the case. We would pay a 7% dividend based on a $10 stock price. We believe we will accomplish this task.

We told you all we'd acquire the Laurel asset and align ourselves with Holiday Inn and Outback brands. We have acquired the hotel and we have executed the documents to accomplish these goals, this project is on schedule and on budget. We also told you all we would close one additional investment for 2005. We are scheduled to accomplish this task via the northern Florida acquisition, which we hope will close in June subject to satisfying certain conditions.

We make our living by exceeding our guest's expectations at our hotels every day. Similarly we intend to deliver on the goals we present to our investors and exceed your expectations. Before addressing any questions you may have I'd like to say that 2005 has started off very well.

We are outperforming the national trends and we are taking market share from our competitors. We are focused on achieving our target of returns on our existing assets at the same time we have several potential acquisitions under negotiations, the timing of which is uncertain but we are well positioned to capitalize on these opportunities. We would now like to open the call up for questions.

[Operator Instructions]

We'll take our first question from Jim Pelts with William Harris Investors.

Good morning.

Morning Jim.

Hi Drew. I sense that (technical difficulty) underwrote Laurel at, you're going to exceed that, can you be a little more specific?

I'm sorry Jim could you repeat the question?

I sense that whatever you underwrote Laurel at, it looks like you're going to exceed that.

Well, we hope so. Our goal was to reach 102% of fair share in the market on an underwriting basis, based on what the market was performing at a year ago. The market has improved considerably and certainly we're taking market share away from our competitors really by just cleaning the hotel up and pricing it right. But I would expect, when we put those 2 powerful Outback and Holiday Inn brands on the property that we should be -- at least attain our goal of 102% of fair share. So yes, I would say that's a reasonable expectation.

And my second questions is, can you tell us what the outlook is for Williamsburg in terms of when there might be a turn around there.

Well, we're actually, we've actually seen good RevPAR growth in the first quarter, it didn't really reflect in our NOI numbers mainly because we had to expense a lot of the product improvement plan issues that I've discussed, but we have seen a significant improvement in the operations and the second quarter looks to be very strong here in Williamsburg. I would point out that Williamsburg is a very small part of the overall enterprise, represents maybe 5% of the NOI, so it isn't going to move us a lot one way or the other.

Okay, and then my final question is on the Florida acquisition, can you give us some guidelines in terms of the impact this might have on NOI.

I would love to but I guess with the new Sarbanes-Oxley laws council has advised me not to discuss that venture until its executed and we thought it was going to be executed last week and unfortunately it didn't happen. We're dealing with an institutional seller and with lots of bells and whistles that have to occur before they actually sign anything.

Everything's agreed to and they have final investment committee approval scheduled for later this week. We should be able to put a press release out this week, at least that's our goal hopefully by Thursday or Friday. At that time I'd be glad to discuss it with you, if anybody has questions about that acquisition feel free to call me later in the week and once we disclose what it is we'd be glad to talk with you about it.

Thank you very much.

Okay.

Michael Riley (ph) from Ferris Baker Watts is our next question.

This is Bob Lin (ph) in the same room. Could you please explain your fair share and how you arrive -- how that figure's arrived at? Second question, I see that since you have rooms in renovation all the time, we don't know how many rooms are online at a given time so could you talk about that? And the third question is when are you getting off the American Stock Exchange?

Okay. Let’s talk about fair share. Fair share is really determined by Smith Travel Research and they call it your RevPAR index and essentially that's your fair share of the marketplace and so every month, or even sooner if you want, you can actually – it’s gotten to the point now with the technology that's available that you can check every single day to see how you're doing against your competitive set. So once you fill out your competitive set, which is who you do business against in each market, Smith Travel provides that information to you. It’s available nationwide for almost all major branded and unbranded hotels.

As far as the number of rooms under renovation, presently we've only got about 20 rooms out of order in Laurel and we have about 44 rooms out in Philadelphia, so that's it. I mean we've got about 65 rooms out of order right now that are under renovation. That's probably going to stay pretty consistent. The renovations in Williamsburg are going to be held off until the slow period comes back in November or so, when it doesn't matter. When it's not going to affect our sales. So we kind of -- that's where we are on that.

Finally, with regard to the stock exchange. We just got on the American Stock Exchange so I know that there are some challenges there but it’s probably going to be several years I would think at the earliest before we get off the American.

Thank you.

Moving on to Jim Crop (ph) from Realty Enterprise Fund.

Good morning Drew, good quarter.

Good morning. Thank you Jim.

Could -- I've got a follow up on Laurel, just maybe to be a little more specific. Can you give us some indication of what RevPAR or ADR was for that property alone for the first quarter and where you might expect at least ADR to be once everything is complete and the brands are in place?

I can give you the RevPAR numbers, Bill while I'm giving him those can you look up the average rate for us?

Yes.

The RevPAR numbers, we did a $44.08 RevPAR this first quarter of this year. Last year the first quarter under previous management was $33.94. So that's a 29.9% increase. Our budget was $43.46, so we exceeded budget by about, whatever, $0.60.

And, and that assumes that we -- I guess the amazing part is that we -- all we did was really change the rates. The market is exceptionally strong, you know it’s in the Baltimore Washington corridor very, very difficult to build product in that market, and very expensive. So you've got great barriers to enter. So once we get this product shined up and repositioned, we think that we're going to have a long period of very successful operations there.

is that sort of a $99 to $119 type market, is that -- ?

I would say that market is, the ADR in that market is creeping up to higher of the range of what you just said, closer to the $110 to $120 range. Bill, where are we on average rate?

For the end of -- for the first quarter we were at $70.33 versus a year ago it was about $64.09.

And we increased occupancy.

Yes, we increased occupancy by 10%.

So typically when we go into these deals what we try to do is build occupancy to a level of 65 to 70% and then push rate. So we think that we've got some opportunities to push rate, I mean you can hear, we're only at $80, we can push rate $20 to $30 once we get this thing cleaned up.

Got it, thank you, now next, on the portfolio as it is, can you give us a little bit of color on what we might expect in terms of seasonality? Maybe on an FFO basis or any other basis you're comfortable dealing with just so we understand the seasonal patterns of the portfolio as it stands now?

Sure I'd be glad to. We're not going to give guidance right now on a quarterly basis. Mainly because we don't have the comparables to give you from previous years so it doesn't make sense to just give those out so we may look at that next year, but first quarter is the slowest quarter.

Our second and third quarters are our best quarters and the fourth quarter is the third best. So it's pretty typical of the national trends in our industry. At least January, February, March is by far the worst and then April, May, June is a very good quarter and July, August, September is probably the second best quarter and then the fourth quarter is the third best so, I probably cant give you any more guidance than that. Bill, I don't know if you have any, do you have it broken down by quarter --?

Oh, I don't have it by quarter, I would just say that the fourth quarter can be a little bit of a wild card in that October's usually a very good month and then depending on, a little bit on weather and a few other things, November can be a very good month and if it is then you have a very strong fourth quarter. Kind of hinges on what happens in November.

To get at it just a slightly different way or one comment, the Florida properties or Florida properties usually reverse that cycle a little bit but a northern Florida property may not I guess?

Well no, this is -- I think what you're going to find is that this property will smooth it out a little bit.

Okay.

Yes this -- I would say you could expect a good first quarter results from this property.

Okay. Lastly, the Philadelphia and Williamsburg, the amount of renovation you did in the first quarter, I guess Williamsburg is slow, but Philadelphia must be busy all the time. You had solid RevPAR growth even with renovations going on in Philadelphia. Do you think that that impacted the quarter much or --?

Oh, I would say it definitely impacted our quarter in a negative way but the good news is we grew rate and kind of just, we took some undesirable business and got rid of that and replaced that with some higher rated business and the overall effect was we still grew our RevPAR by almost double digits.

So if we had had those other 44 rooms, oh yes, we should have knocked -- we would have had a home run but we've got to get this work done and the work’s got to get done between now and September, that's our deadline with our franchisor so --

Well as I say, I thought it was a great quarter will all, being that you hadn't finished the renovations so --

Right.

Thank you.

Thank you Jim

[Operator Instructions]

We'll take our next question from Stephanie Krewson BB&T.

Hey guys, just a quick question, could you please explain, and there's nothing wrong with it but, Holiday Inn is a brand that not a lot of people are still going with, the flag has some contentions about it, there are people that love Holiday Inns, people that don't and usually the latter have never stayed in one and they don't understand the changes that that brand is trying to effect, but could you please explain your decision to go with the Holiday Inn flag at the Laurel property?

Thank you Stephanie. I'd be glad to jump on that one. We actually had an almost identical situation in another instance in Fredicksburg, Virginia where we had a Sheraton property that was right on Interstate 95 that had an image problem and the image problem was that it was too expensive to stay there for the transient traffic that was going up and down the interstate, so they would pull off and they'd say lets go to the Hampton Inn, we don't want to go to the Sheraton, in fact the Hampton Inn was getting a higher rate than the Sheraton.

When we changed the brand over to Holiday Inn what we found was it’s kind of an all-inclusive brand and I would disagree with the folks that like to talk down the Holiday Inn brand. Number 1 it delivers on the - the Holidex machine delivers no matter how you cut it it delivers -- our experience has been, in the markets that we're in, that it delivers as much volume over the reservation system as the Hilton system. So they will deliver you business right off the Holidex machine and that's really what you're paying for when it comes right down to a brand.

But specific to Laurel, we think that by putting that Holiday Inn brand out on the interstate that we are going to add to our room mix, our guest mix, those folks traveling up and down 95, they're looking for a stay for the night. This will be a very high quality product, very high quality Holiday Inn, but the fact of the matter is once you're off the interstate and you're into the property and see the Outback Steakhouse and see the improvements you're going to be willing to spend that extra $20 or $25 that it takes for us to be successful in that market.

And I believe that the Holiday Inn brand is the perfect brand for this asset once the frequent travelers, the priority club members find out that this property is there, it’s going to be a superior product to anything else, the other property that was in Laurel has been -- left the system, that was a condition that we placed on Holiday Inn when we bought the brand, that we'd be willing to give them the brand on this hotel but only if they took out the inferior product that existed in the market. So the other product is gone, we've got this new product coming. Once the priority club members find out about it they'll be very loyal to this location I'm sure.

Great, well you guys have a tremendous track record so I will look forward to seeing great things from this asset and from the rest of your assets. Great quarter.

Thank you Stephanie.

We have a follow up question from Michael Riley.

Nope, Bob Lin again, could you comment on whether or not you have any plans for a dividend reinvestment plan and secondly, what kind of revenues were you getting from US Air on the rooms that you changed?

I'll take the second one first. US Air was paying us $43 and our average rate is now over $100 so you can see that there's a big gap there. So basically we had taken the US Air contract right after 9/11 as an insurance policy to make sure that we could maintain occupancy and keep heads in beds and the plan was always to displace them at some point. That got accelerated when they filed bankruptcy again so we went to battle with them and got them out of the hotel.

As far as a dividend reinvestment policy, we don't have one right now, it’s certainly something we'd like to look at and if there's a lot of demand for it we'd certainly like to put one in place. So if you all have stockholders that are interested in that I sure would like to know about it and we'll see if we can act on that.

Thank you.

We'll take our next question from Jerry Com (ph) with William Harris Investors.

Hello?

Jerry, good morning.

Very good news so far.

Thank you.

With regard to your expansion plans, and I know you may not get everything you're bidding on, I have a couple of questions, one is it sounds like there are 4 properties involved, 1 in Florida, I think you said there were 2 in the Carolinas and I think there was a separate one in which is a condo model. How -- and I assume that would happen like this year, if you’re top in the negotiations with them now. How are you going to finance this?

Well, number one we think the Jacksonville deal is almost a done deal. That should be announced this week. So that's going to take a certain amount of capital.

Right.

Lets just say in the $7 million range.

Okay.

Okay? The properties in, the North Carolina property that we're bidding on, there's actually one in North Carolina and one in Georgia, that's an either or, we're either going to do the one in North Carolina or we're going to do the one in Georgia.

I got you.

Alright? So we're trying to work two sides of the street on that one. One of those investments is going to require in the neighborhood of $5 million worth of capital on a leverage basis because we'd probably just go ahead and finance the hotel and the other one would require maybe $8 to 10 million in capital. So right now we've got about $6 million plus or minus of the greenshoe underwriters over-allotment proceeds that we need to put to work, so we kind of see that as what's going to happen in the northern Florida thing.

Okay.

We're going to take most of that, we're going to put it to work, it’s more of a performing hotel, not a turn around opportunity, you'll get immediate impact, immediate return to that capital. And then these other assets, we would leverage them probably to 50% and make this investment.

As far as the condominium, which is the fourth one we talked about. It’s much less capital intensive and so we're talking about an investment somewhere between $5 to 8 million, maybe as much as $10 million to take over a very very large condominium complex and again that could be leveraged but probably would not be so I guess the answer is that, and also the timing of that would be not this year, it would be next year. It's a major -- it's a ground up construction project so --

So it's in construction?

It’s -- they're about ready to go.

Okay.

So, so we may -- it may not even be the end of next year, so it's a long term type of deal there in terms of --

Then what would you do, manage it?

No, we would actually -- the model that we're looking on the condominiums is not unlike what we're doing in Shell Island. What we do is buy all the, what's call the C1 unit, the commercial unit in the condominium, which includes the restaurants and the public space and the meeting rooms and all that and then we would lease that to an operator.

The balance of it.

Right. We would -- so effectively you control the rental program in the condominium because you own all the public space.

You said Jackonsonville was $7 million performing. $7 million can't be cost of the whole property with no debt.

Oh, I didn't say Jacksonville, I said northern Florida, but no it’s not. That's going to be a highly leveraged deal.

I thought you did say Jacksonville.

It’s going to be about a $25 million project.

And would you put in 7?

Yes.

Okay, maybe I heard you wrong. And since that one will be performing, the question wouldn't apply, but if you buy one of the other two, when you buy one of those, like I guess the one in Maryland, for a while you're probably losing money there right, if you look at it from an FFO basis?

I don't think so. I think that both of these are marginally un-performing. They're kind of what we would term shallow turn arounds.

Okay.

So we ought to at least make 7% on them so we can pay our dividend, or at least cover our debt. We're probably going to fund that out of our line of credit so as long as we can cover our line of credit that's all we really need to do.

Okay. Thank you.

Okay?

Yes.

[Operator Instructions]

It appears we have no further questions, I'll turn the conference back to management for any additional or closing remarks.

Okay, bear with me one second. Just like to say that we're very pleased with the results that we had in the first quarter and appreciate everyone participating in today's conference call. I'll be attending the NAREIT and the NYU conferences in New York next month and look forward to seeing you all there. Thank you.

That does conclude today's conference, we thank you for your participation. You may now disconnect.