Sotherly Hotels Inc (SOHO) 2007 Q4 法說會逐字稿

Hello, and welcome to the MHI Hospitality Corporation fourth quarter 2007 earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded. Now I would like to turn the conference over to Miss Vicki Baker, Vice President Financial Relations Board.

Good morning, everyone and thank you for joining us for MHI Hospitality Corporation fourth quarter and year 2007 conference call. If you did not receive a copy of the earnings release you may access it 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. We are hosting a live webcast of today's call, which you can access on the website and an audio webcast will be available for one month at www.MHIHospitality.com within the section entitled "webcast and presentations".

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 statements 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 can 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.

I would now like to introduce the members of management with us today. Joining us are Drew Sims, Chief Executive Officer; Bill Zaiser, Chief Financial Officer as well as Dave Folsom, Chief Operating Officer. I would now like to turn the call over to Drew for his opening remarks.

Thank you, Vicki. Good morning, everyone, and thank you for joining us for our fourth quarter and 2007 year end call. I will review our highlights and then ask our CFO, Bill Zaiser, to present the financial results. Dave Folsom, our COO will then provide an update on our portfolio. After that, we will open the call up for your questions.

The end of 2007 marked our third anniversary as a public company. The year also marked the 50th year of our predecessor company's founding. 2007 was a transformational period for the company. We grew the real estate platform, significantly improved the value of our core assets and put in place effective tools to facilitate ongoing growth and stability. We established a joint venture with a private equity partner, The Carlyle Group, to invest in large hotel assets. The venture provides up to $450 million of deal capacity on a leverage basis over the next two and a half years.

We acquired two full-service hotels, the Crowne Plaza Resort, Hollywood Beach in the Greater Miami market acquired through the Carlisle venture, and the soon-to-be Crowne Plaza Westshore in Tampa, which was purchased directly by the Company. With the addition of these two full-service hotels, we have deepened our presence in the Florida market. The addition of these two hotels has allowed us to meet our investment target for the year.

We also strengthened our financial capacity with financing totaling $103 million and a restructuring of our line of credit. These financial transactions were arranged just before the late summer credit crisis, and therefore we were able to lock in favorable terms for the company. Finally, we effected approximately $27 million in portfolio repositioning improvements to our hotels throughout the year.

In the fourth quarter we reported our 12th consecutive quarter-over-quarter increases in revenue per available room or RevPAR and average daily rate. RevPAR for the full-year grew by 6%, which was within our guidance range. I would comment that RevPAR growth in the fourth quarter was negatively affected by the multiple renovations ongoing in the core portfolio. Two of our Hilton hotels are under renovation, and this affected the top line sales of both cases.

Funds from operations were approximately $1.7 million for the fourth quarter and approximately $9.3 million for the year, and were negatively impacted by a non-cash change in the market value of the swap on our line of credit. And the unbudgeted opening and initial ramp up expenses at our Hollywood asset. Optically the FFO appears impaired, but when adjustments are made to account for these two events for the year we were near the middle of our guidance range. From a historic perspective since our IPO in December 2004 the growth of our asset base and improvements to our core portfolio have resulted in the following.

Room and total sales have increased 49.2% and 48.7%, respectively, over the last three years. RevPAR has advanced over 27.1%. The market value of our assets has grown by 151.7% from approximately $111 million to approximately $280 million.

Turning to portfolio highlights, in the fourth quarter we closed on a 250 room hotel in Tampa for $13.5 million or $54,000 per key. This asset sits on four acres in the heart of the city's Westshore corporate and entertainment district and provides 10,000 square feet of meeting space, two restaurants and an outdoor pool. In conjunction with our investment, we signed a ten-year franchise agreement with InterContinental Hotels to brand the hotel as the Crowne Plaza Tampa Westshore. A $23 million deep turn renovation is now underway with the property scheduled to be open in the first quarter of 2009. It is our intention to lease one of the restaurant spaces to a signature restaurant tenant.

The Crowne Plaza Resort Hollywood Beach opened on October first. This newly renovated and full-service waterfront resort is a strong addition to our portfolio. The ramp up in operations has been steadily growing as the high season approaches. Occupancy, ADR and RevPAR have all increased each month since the hotel opened. During the fourth quarter we continue to source hotel assets that can be accretive to the company. We bid on three additional assets in the Southeast with a combined value in excess of approximately $90 million. We continue to pursue these assets.

Over the last quarter we also made substantial progress on core portfolio improvements. Our $15.9 million renovation of the Sheraton Louisville Riverside is almost complete. The hotel is on track to open in April and will be distinguished as the only Starwood brand in the Louisville market. Repositioning efforts totaling $21.4 million are also underway at our Hilton properties in Wilmington, North Carolina and Savannah, Georgia. At the Wilmington asset renovations are scheduled to be finished this quarter. The property will showcase the first Ruth's Chris Steak House on the Carolina Seaboard.

Our $11 million renovation of the Hilton Savannah DeSoto will completely replace all interior design elements of the hotel and will provide our guests with a fresh, modern hotel upon completion. The rehab again in November 2007 and is scheduled to be finished by the end of this year.

And now I will turn the call over to Bill Zaiser for a closer look at our financial results.

Thank you, Drew. Reviewing the performance for the fourth quarter and the year, the company reported consolidated total revenue of approximately $16.8 million in the quarter ended December 31, 2007, which is a 1.2% decrease over the approximately $17 million of total revenue in the fourth quarter of 2006. For the year ended December 31, 2007 the company reported consolidated total revenue of approximately $69.8 million, an increase of 3.8% over a one year ago level of $67.2 million.

For the year consolidated net income was approximately $2.5 million or $0.36 a share after taking an approximately $1 million charge on our ownership share of the Hollywood joint venture and another $0.8 million non-cash charge from the mark to market of the swap associated with our line of credit. This compares to $3.2 million or $0.48 a share in 2006.

Operating income for the quarter decreased 26.2% to approximately $2.1 million as compared to approximately $2.9 million for the fourth quarter of 2006. This decrease was principally due to higher legal and food cost, as well as a nonrecurring consulting fee in the fourth quarter of 2006 from the Hollywood asset developer. For the year net operating income increased 2.4% to approximately $9.7 million.

Funds from operations or FFO for the quarter ended December 31, 2006 were approximately $1.7 million or $0.16 a share as compared to approximately $3.2 million or $0.30 a share in the fourth quarter of 2006. The FFO decrease for the quarter was due to ramp up expenses of approximately $0.4 million related to our ownership share in the Hollywood asset. The quarterly FFO was also impacted by the change in the fair market value of approximately $0.7 million for the interest rate swap on our revolving credit facility.

For the year FFO was approximately $9.3 million or $0.87 a share, a 7.8% decrease from the approximately $10 million or $0.95 a share for the comparable period in 2006. This reflects a non-cash a non-cash charge of approximately $0.8 million due to the interest rate swap on our revolving line of credit and a loss of $1 million associated with the start-up and ramp-up of the Hollywood asset. As Drew communicated, the Crowne Plaza Resort Hollywood Beach is now open and fully operational. The mark to market of a swap will continue to impact our earnings as LIBOR fluctuates, and will add an element of volatility to the quarterly results in 2008.

For the quarter ended December 31, 2007 the hotel operating expenses were $12.5 million versus $12.2 million for the period a year ago. For the full year hotel operating expenses were $51.8 million versus $50.2 million for 2006. In both the fourth quarter and the full year the portfolio delivered continuing top line growth. RevPAR for the quarter increased 1.9% for the fourth quarter versus the same period in 2006. ADR rose 5.3%. These gains represent the 12th consecutive quarter-over-quarter increases in both RevPAR and ADR.

The six hotels included in continuing operations delivered approximately $12.6 million in total room revenue for this period versus approximately $10.4 million in 2006. For the year ended December 31, 2007 the Company delivered increases of 6% in RevPAR and 5.9% in ADR and 0.1% in portfolio occupancy over 2006. For the year our six hotels included in continuing operations generated $69 million of total revenue versus $65.8 million in fiscal 2006, a 4.8% increase in revenue.

The Board of Directors declared a quarterly cash dividend of $0.17 per share on January 14, 2008. This equates to an annualized dividend of $0.68 per share and an effective yield of 9.4% at the share price of $7.20 as of December 31, 2007. The dividend will be paid on April 11, 2008 to shareholders of record as of Friday, March 14, 2008.

At December 31, 2007 the company had approximately $5.7 million of available cash and cash equivalents of which approximately $1.7 million was reserved for capital improvements and other expenses. For the same period the company had approximately $34.4 million outstanding on a $60 million revolving line of credit, which was deployed to fund the acquisition and renovation of the Sheraton Louisville Riverside, the acquisition of the Tampa property and our equity contribution to the Carlisle venture for the Hollywood resort purchase. As of December 31 we have incurred costs of $12.6 million for the Louisville renovation, $8.4 million for Wilmington and $3.2 million for Savannah.

We believe our leverage ratios remain competitive with our peer group. At the end of the fourth quarter our interest-bearing debt to total capitalization, which we define as gross market value of our properties plus cash and other current assets, was a conservative 34.6%. Our debt to total assets on a cost basis was an equally conservative 55.7%.

Total assets as of December 31, 2007 were approximately $160 million, including approximately $109.4 million in net investment and hotel properties. Approximately $31.2 million of property under development plus approximately $5.6 million invested in the joint venture at the Hollywood Plaza Resort -- the Crowne Plaza Resort and Hollywood Beach. Total mortgage debt was approximately $55 million, and unitholder to equity was $19.7 million with approximately $3.7 million in limited partnership units outstanding.

With that, I will turn the call over to our Chief Operating Officer, Dave Folsom.

Thank you, Bill. I will now review our portfolio operations for the fourth quarter and year, for reference a summary of the individual property performance can be viewed on our website within the Investor Relations section at www.MHIhospitality.com. This was a challenging operational fourth quarter and a solid full year for the company. We are pleased with the status of our ongoing renovations, and we will begin to see substantive results when our projects begin to come online beginning this year.

In the fourth quarter we noticed that in addition to the impact of our renovations on our hotels due to the renovations, market forces as evidenced in the broader economy were impacting the lodging sector and some of our hotels fourth quarter numbers reflect a softening in the national lodging market.

In October we purchased the former Clarion Hotel in Tampa for $13.5 million or approximately $54,000 per key. We've executed a franchise agreement for this hotel and it will be flagged as a Crowne Plaza upon the successful completion of our product improvement plan in the first quarter of '09. The hotel was closed when it was purchased by us and will remain so for the duration of the renovations. We have budgeted approximately $23 million for the renovation of the hotel and included in our design as new construction for a ballroom and tenant space for a third party restaurant.

In Hollywood Beach we opened a Crowne Plaza in October. The property is currently in its ramp-up phase and continues to produce solid week over week operational gains. In addition to the hotel we are in the process of designing an adjoining marina along the intercoastal waterway that is expected to be completed by the third quarter this year.

Turning to Jacksonville, Florida, the Crowne Plaza continued to post improved performance in the quarter. This is the outcome of our successful penetration in the North Florida market by the Crowne Plaza brand. The RevPAR in the fourth quarter was $71.86 compared to $62.63 per Q4 of '06, a 14.7% improvement. For the year RevPAR increased 7.8% to $73.41 from $68.16 in 2006. The Jacksonville Crown was also the first hotel in the city and county to participate in Florida's green lodging program and was recognized by the Florida Department of Environmental Protection in 2007. The initiatives at the hotel include an extensive recycling and reuse program, motion sensitive thermostats, environmentally smart cleaning products and lighting that significantly reduces electrical usage.

In Louisville we are nearing completion of the repositioning of the Sheraton Riverside hotel and are on track to open by April. We are already seeing significant interest in the hotel as the opening will coincide with many important spring events in the market, mainly the Kentucky Derby in early May and one of the largest fireworks displays in the US called Thunder over Louisville, which is held on the Ohio River directly in front of our hotel in April. In addition, the Rider Cup will be held in Louisville in September, which will be a significant event for the market.

In North Carolina we are nearing completion of our $10 million renovation to the Wilmington Hilton. We've seen some impact on the hotels operating performance due to the ongoing work at the hotel as Drew mentioned in his opening remarks. RevPAR in the fourth quarter was $68.96 compared to $75.61 for the fourth quarter of '06, a decrease of 8.8%. For the year RevPAR was also down but only by 1.2% from $83.71 in 2006 to $82.66. Correction, that was $83.71 in 2007 to $82.66. We believe that the negative variances are due primarily to the fourth quarter, at which time we closed the entry front door and lobby of the hotel and these variances will subside as we complete the project at the end of Q1. We are also installing a Ruth's Chris Steak House in the hotel, the completion of which will be in the second quarter.

In Philadelphia the Hilton Airport Hotel continues to post great year-over-year returns. 2007 saw an 11.2% improvement in RevPAR at the hotel over 2006. [2000] RevPAR was $104.36 compared to $97.10 in 2006. At our Hilton Savannah DeSoto property we have commenced our $11 million product improvement plan with renovation scheduled to be completed by the end of the year. For the year Savannah posted a 6.8% increase in RevPAR over 2006 while in the fourth quarter RevPAR was flat due to the renovations that are in progress.

In the fourth quarter the hotel -- correction -- in Maryland at our Holiday Inn Laurel property in the fourth quarter the hotel posted RevPAR of $50.31 compared to $51.17 for the same period last year, a decline of 1.7%. For the year RevPAR was slightly up over 2006 by 2.5%. In 2007 we continue to take market share from our competitors, although we have seen some near-term compression in Laurel's overall market. The hotel holds promising long-term potential, as it is strategically located on the I-95 corridor midpoint between Washington and Baltimore. As well with the military base realignment taking place in the area, tens of thousands of defense jobs are expected to move to Maryland over the next five years.

Finally, in 2007 the hotel was recognized by IHG InterContinental Hotels group as a 2007 renovation award winner for the work performed by us in 2005 and 2006. This prestigious award was given to only 45 IHG hotels systemwide and was presented at the 2007 IHG America's Investors Leadership conference that was attended by over 4000 franchise owners, operators and company officials.

And finally, in our Raleigh asset we continue to see solid results. [2000] RevPAR exceeded 2006 by 5.9%. And for the quarter RevPAR exceeded fourth quarter of '06 by 7.3%. With those comments I will turn back now to Drew for final remarks.

Thank you, Dave. I would like to take a moment to provide our views on the lodging industry heading into 2008. We anticipate continuing expansion within the lodging industry throughout 2008, although at a slowed pace. The high concentration of capital focused on the industry is waning. Earlier announced acquisitions of publicly traded lodging companies have for the most part been completed. Cap rates, which last quarter were at an all-time low are now moderating and beginning to rise. Current market value of hotel assets is high and a disconnect between the asking price and what investors are willing to pay has become evident as a result of the credit crisis. Transaction volume has slowed significantly.

With last summer's credit crisis our previous statements regarding supply growth are now tempered as a number of projects have been placed on hold or canceled. The high leverage lenders have retreated from the market and a more stable lending environment is beginning to prevail albeit with much more conservative underwriting standards. It is our view that hotel asset transactions will remain slow until the new reality becomes apparent to the sellers. We believe this process will take six to 12 months to play out.

Within our sector and our markets full-service of our upscale product has not seen the significant growth of other segments. Our full-service hotels which include commencement facilities as well as food and beverage amenities are well positioned to compete. By the end of 2008 our portfolio will be in the best condition since the IPO.

All three Hilton hotels will have been renovated, relicensed for a ten-year term. Our hotels in Jacksonville, Laurel, will have undergone extensive renovations and relicensings with IHG and will be operating under licenses with eight to nine years remaining.

Our hotels in Hollywood, Louisville, Tampa will be fresh and modern and operating under license agreements with nine plus years remaining. Only our Raleigh asset will be subject to renovation during the next eight to ten years.

Our message is that while our earnings have been acceptable, we believe our future is bright. In 2007 we continue to put the building blocks in place for enhanced growth and stability. We established a venture to source large hotel assets and acquired two full-service properties. We made significant progress on our core portfolio improvements and strengthened our financial position.

Turning to guidance, based on consistent gains in RevPAR and ADR and year-over-year growth in total revenue, we have established the following targets for 2008. We expect RevPAR growth to be in the range of 3 to 5%, and we expect FFO per share to be in the range of $1.02 to $1.12. Our FFO forecast reflects our expectation that the Sheraton Louisville will open in April, and the Crowne Plaza Resort Hollywood Beach will post improved performance result as it gains market share in the Greater Miami market.

We also expect continued expansion, albeit slow within the lodging industry throughout 2008. As a counterbalance to the slowed revenue growth, we have initiated an extensive review of our expenses with a goal to reduce operating and personnel costs. Looking ahead, we have established the following goals for 2008. In addition to meeting our projected guidance in FFO and RevPAR, we will continue to provide an above market dividend to shareholders. The company's attractive 9.4% dividend yield at year-end was the third-highest in our peer group and also significantly outpaced the RevPAR index average of 5.3%.

With cap rates beginning to climb and asset prices moderating, we will continue to source lodging acquisitions that meet our criterion. In 2008 we plan to acquire at least one hotel directly and one through our joint venture. This morning we announced that we have executed an agreement to purchase the former Radisson Hotel in Hampton, Virginia. Hampton is part of the Greater Norfolk MSA, a major East Coast market. The hotel is located on the waterfront in downtown Hampton and features 172 guest rooms, extensive meeting space, 21,000 square feet of retail space and a 300-car parking garage. The purchase price is $7.8 million or $45,000 per key. Our repositioning plan includes a $4.5 million renovation and rebranding the hotel to a Crowne Plaza.

In 2008 we plan to complete the repositioning of our Louisville, Wilmington and Savannah properties which should enhance performance and portfolio value. Also in 2008 we will begin planning for the repositioning of our Raleigh asset. We remain focused on initiatives to grow the business platform and enhance long-term value to shareholders. With that, we will open the call up for questions.

(OPERATOR INSTRUCTIONS) Tony Howard, Hilliard Lyons.

Good morning Drew, Bill and Dave. First I need a clarification, Bill. It appears that past results were not restated quarter-over-quarter or year-over-year.

For what?

Discontinued operations, and there were some asset sales.

Well, the discontinued operations aren't -- don't exist in this year.

What about the assets, does that require a restatement of past numbers?

I'm sorry, I didn't understand what you said.

The asset sales.

The asset sales were completed. Are you talking about -- are you looking at the balance sheet?

Right.

The loss on disposal is FF&E that was disposed of as a result of these renovations. And that number simply remained as the non depreciated value.

A second question, Drew, I'm not sure why there was an increase in the credit line sequentially third quarter went from $16 million to $34 million, especially given that in the third quarter you had a hedging loss. Why increase the line when given the swap might have had a loss in the fourth quarter? Was there other ways to raise that capital?

Well, we used the line, Tony, to buy the asset in Tampa. That is why the line went up significantly. And the swap costs, correct me if I'm wrong, Bill, are related -- we have a $30 million notional swap. So it's not going to have any effect one way or the other regarding the balance that is due on that unless we get over $30 million, and then at which point it becomes a benefit. So really our line of credit under the renegotiated terms, the capital is as cheap as you can find anywhere. It is very competitive rate at this point. Dave, what are we paying exactly?

Between 200 and 250 basis points. I think that's right, Bill; is that right?

Over LIBOR, yes.

So it is a very attractive source of capital at this point. And our intention is to try to use all of that capital and put it to work here in the next 18 months.

I noticed your estimate doesn't include any further hedging losses for 2008. Is there a way to offset that or what do you expect?

It is almost impossible -- if I could tell you where LIBOR was going, I could give you an exact answer; that's the problem. I think right now for the first part of the year LIBOR will continue to decline, which will impact the swap by creating a charge, but it will also reduce the interest we pay. So it is a two-edged sword that way. The other thing you need to remember is the swap expires, and at the end of the day it will go to zero. So whatever charges we are taking as unrealized losses on the swap it is non-cash charges, will all come back in terms of they will be burned off. And either we will be paying interest or the swap will itself go to zero LIBOR changes.

Third question, Dave, the Louisville hotel, my understanding was supposed to open in March. It seems like it keeps on being pushed back some and when you say April, are you talking about early April or late April because the derby is actually early May.

Yes, our schedule right now, it has always been the end of March, the end of the quarter due to Starwood's internal processes they have set an April third opening date. So that is when we have looked at opening the hotel for the past several months.

Do you plan to have a grand opening or --

Will have a grand opening later in the summer. We will kick it off in April by opening the doors and turning on the reservation system and getting the guests in that we've already prebooked. Our intent is not to mention we want to capitalize on the activities in April and May that are very important to the market and the hotel. And right now I think we are pretty confident we are going to get there and we are going to take advantage of those things.

Okay, last question Drew and Bill, our G&A expenses were up sequentially. Was a good run rate and Drew you talked about maybe cutting expenses.

Well, we examined that, Tony, as well. It didn't escape our attention. Really the main culprit there is legal expenses. We had -- we did so many transactions in the third quarter and second quarter last year renegotiating lines of credit, putting in new loans, buying hotels, that we end up having some significant overages on our legal bills. And that is not really something I guess we forecasted. But usually we get most of our legal will get capitalized, in this instance a lot of that legal did not get capitalized and ended up on the income statement.

And as far as our fourth quarter run rate going forward.

Bill, you want to answer that?

I would say your annual rate of 3.1, 3.2 million in that range is probably a good rate. The fourth quarter just by itself I think was a little high. Again, that reflected some of this legal work that Drew just mentioned. I would say, though, on an annualized basis 3.1, 3.2 is about right.

Thank you, guys.

David Loeb, R. W. Baird.

Can I just start with a simple clarification? Bill, where do the fees go? Is that in the other operating department's revenue line? Bill Zaiser: Which fees are we talking about?

Like the one last year for (multiple speakers)

Yes, other operating departments, correct.

And I know you said this a couple times but can you tell me one more time what the fee was in the year ago fourth quarter?

We had a -- you remember the Hollywood project was originally going to be a condominium project, and we received -- the project became distressed from the point of view of the developer, and he sought our help and had us a consulting contract with us to enhance the sales, and do work really to help him fulfill the project as a condominium project. And that was a lot of the fees and so forth that he paid to us in the fourth, third really end of the third quarter and primarily the fourth quarter of last year.

I know you said this before, but what was the amount in the fourth quarter?

The amount in the fourth quarter was about $0.5 million.

That makes a lot more sense. And in terms of the startup cost impact, I just want to make sure I understand the FFO impact. You had about a $400,000 loss in the equity line. But that included depreciation of 121. So is it really just the difference about 277,000 --?

Are we talking about Hollywood?

Yes.

The loss for the year was about $1 million.

Right, I was looking at the fourth quarter.

The fourth quarter was $400,000, and you are saying -- and I missed what you were saying there about the depreciation.

On your FFO reconciliation you added back 122,000 of equity and depreciation of joint venture.

Yes, that is included in that $4 million -- $0.4 million.

So the net impact is more like 277 --

About 277, somewhere in there, that's correct.

Do you think you are done with really start-up related issues in Hollywood?

I believe so. The property is ramping up. It had a good December and a good January, so I believe so. Obviously there will be depreciation that will pass through, but just in terms of start-up by itself, I think it is pretty well covered.

Okay, and I guess I'll probably ask you off-line just to make sure we're doing the interest calculation in the joint venture right because we want to get back to the right your share of EBITDA from there. And I guess Bill or Dave, what do you estimate the start-up costs for Louisville are likely to be? And which quarters are going to see that? Is that all going to be second quarter, or will some of that spill into third?

I think you're going to see it in the first and second quarters.

Was it preopening in the first quarter?

It will be preopening in the first quarter. Because you're going to have staff -- you're going to staff the hotel and train the staff prior to opening. And if we are going to open in early April we will be staffing up in at least in March.

And how much do you expect those start-up costs to be?

I believe we've got budgeted somewhere around -- and I don't have the number right in front of me -- but I believe we have somewhere in the about the same as Tampa. And I believe it is about 350.

And that will be largely first quarter but some second quarter, as well?

Right.

I would just comment that at the beginning of last year when we started the Hollywood, when we set our budgets, the Hollywood project was a condominium model. That morphed midyear into purchase scenario in concert with Carlyle, that is why we are having to take all the charges in 2007. We actually had budgeted under the condo model we expected that to be about a plus 7% to FFO contributor. And it ended up being a minus $0.10 or $0.11, so it was about a $0.17 or $0.18 swing in our FFO number. But long-term I think it is absolutely the right thing to do to buy that asset because it is a fabulous hotel.

I'm just trying to get an idea of kind of the recurring level of profitability. And this year I guess the Tampa will also be in the fourth quarter if you expect to open that.

Yes, we have budgeted some in the fourth quarter, that is correct.

So we are trying to kind of get what a clean number without those one time --.

Those numbers are in our FFO projections, as well.

Right, so FFO includes all those start-up costs?

Correct.

And Philly airport, are you still planning renovations in that hotel and when?

We completed a PIP in 2005 and relicensing with Hilton. So we are not going to renovate there. We have allocated a disproportionate share of our capital this year under the 4% reserve to that hotel to replace all the furniture, which we didn't do and was not required under the terms of the product improvement plan with Hilton. But that property is pretty much squared away, I think.

So you don't expect a lot of disruption from that (multiple speakers)

No, it is all done. We are finishing it right now. We did it in the January, February months when we have slower occupancy. So it has almost no effect on our sales at all.

Okay, and the Hampton property, what is the timing of that renovation program?

We're going to probably settle in the third week of April, somewhere in that time frame. We've already commenced the planning for that. We will probably go right into a renovation I would think around June first; it will be about six months. We have negotiated with IHG an accelerated conversion so we could put the flag up mid renovation as opposed to waiting until the end. So hopefully we will have the complete renovation done say by the end of the year and hopefully the flag will go up sometime in the fall.

And it will still remain open during the renovation?

Yes, it will.

Okay, so is there some positive contribution from that hotel in your guidance?

We hope that it will be breakeven given that we are under extensive renovation, and we think it will be.

Okay, and last question, just the perennial supply in Louisville question, I gather ground broke on the building that the Weston is supposed to go into, there have been some Marriott product opened up in that market. What is your sense of the supply issues in that market?

I think the bigger picture in Louisville, and I've had some conversation with contractors and developers that point to some of that anticipated supply not entering the market. For instance, there was an Embassy plan that was showcased in the heart of the Fourth Street district, which is sort of ground zero there in that city, and that deal is fallen through. I can't comment on the Weston although it has been in the works for a long, long time and I think that is going to get done; whether that is a 2010 or 2011 project I'm not sure. But I think our project on the river is significantly more competitively priced, and I think regardless we're going to continue -- we will do very well based on the fact that our key costs are probably going to be half of what some of these other hotels are going to be, and we don't have the Louisville tax structure, as well. So I don't know if that answers your question or not.

It is an awfully big headstart for sure on the Weston. And I guess the Marriott stuff is a little bit out of the segment in terms of competition. I think it was Residence Inn, Courtyard, that kind of thing.

I think there is some product coming on board at the airport, which really doesn't affect us to any great degree, but the Marriott product and some of the Hilton product in downtown that would compete with us, I think those assets are there that are online, I don't know if there is a whole lot of additional product can be squeezed into some of those spaces in the market other than the Weston. The big plus is if they build the arena, it is directly across from our hotel within walking distance along what will become a more pedestrian bridge. And that is going to be a great tool to provide absorption for any anticipated new delivery in the next few years. And I don't know if Tony is still on the phone or not but I have a good sense that that arena project is going to be completed.

Okay, great. Thanks.

Charles Place, Ferris, Baker Watts.

I just wanted to touch upon two things. Most of the other issues have been or questions that I had have been addressed. Can you talk a little bit, about the Norfolk asset that you are just acquiring? What are the metrics of that property as far as RevPAR relative to your other properties?

Well, Charlie, it is not unlike most of the assets we buy. It is a distressed asset. It was the kind of the showpiece, the centerpiece of the Hampton redevelopment, downtown redevelopment effort that went on 20 years ago. And the city has always been the lender on this project. It has gone through a series of owners over the last 20 years, and I guess the last ownership group was about 25 lawyers and doctors and dentists that lived in the local area. And has never had in the last -- with this ownership group -- has never had what I would call professional management. So it kind of fits the bill for us.

It's a great downtown waterfront location with this distressed as a result of poor management and being undercapitalized. Hotel clearly needs a renovation. It lost its Radisson franchise 18 months ago, so it has been operating as an independent hotel. And really during that 18 months the city of Hampton, which had industrial revenue bond financing on the asset has been trying to get it back from the owners. So they were successful in that endeavor, and they put it out to market for to sell the asset and fortunately for us the broker that they picked is very close to us and we feel like we got a very good deal on this asset. We did not have the highest price but I think we had -- we certainly the execution was very important to the city given the circumstances.

So we think we are getting a really, really good buy on this asset. Just to tell you a little bit about Hampton, Virginia, it is very military related. We think ultimately our average rate will be a little over $100 once we stabilize occupancy should be mid to upper 60%, 65% to 68%, somewhere in that range, maybe stabilizing around 70%. Major demand generators are Northrop Grumman shipbuilding. You've got Langley Air Force Base. We've got Hampton University is literally a 200 yard walk, which is a 6000 student university. We've got Fort Monroe, which is an army base which is nearby. So it is a lot of military related business. So it is never going to be real, real high rated stuff, but it is a very consistent market.

It doesn't have big fluctuations up and down. It is probably going to be a lot like our Raleigh asset if I had to characterize it. It is a nice single or double. We think we're getting a good deal on it and we think ultimately given our bases in the project that we'll be able to make money on it.

Okay, great. Can you comment a little bit about your views on the dividend? Now we've been -- it has been three years now. It has been stable. Your operations and your performance have increased significantly over the last three years. I know that obviously the stock price hasn't moved in concert with the improvement of your operating performance, but we've got a bunch of shareholders out there that have owned the stock for a long time. Is there an opportunity in your mind that this would be starting to increase as you continue to grow your FFO?

Well, as a major stockholder I would love to increase the dividend, Charlie, so I could pay myself more money, but I think that given where we are in these tenuous times and talk of recession and those kind of things we spend a lot of time at our board meeting talking about this. We have a biased increase the dividend; we would like to do that. But we also want to make sure that we get all these new hotels open and that they are ramping up as we think they are going to before we commit ourselves to reducing our cash within the company. So I think that we want to that. I think that is something that we have talked about and we will continue to have an upward bias in our dividend, but at the same time given where the economy is today, I think they kind of put the breaks on that idea for at least the next probably two quarters until we see what is going on.

And one final question is you look at your balance sheet and your line of credit, you got about 25 million or so of capacity there, you are going to use some of it to buy Norfolk but not much because you are assuming some debt. How do you kind of look at your financing strategy over the next 12, 24 months? Is there an opportunity to put a mortgage on the Louisville property?

We've got several alternatives, and I probably can't discuss all of those with you right now, but we've got some assets that don't have any mortgages on them. And we've also got the opportunity to increase our line if we so desire to do that because we are really not bumping up against the 55% leverage threshold yet in terms of market value to our debt. So we've got some opportunity there. And certainly we are out looking for equity.

We are talking to different folks about how to make that happen. And we've got our Carlyle joint venture. So we are not shut out of the acquisition markets by any stretch of the imagination. I think we are probably going to get more active than less active because prices are coming down. This is kind of what we've been waiting for, and so we feel like we are pretty well positioned to take advantage of it.

So given your earlier comment of buying one hotel for the company and one through the JV, is that since we've done your one for the company already here, do you anticipate maybe a couple more in 2008?

We would like to do that, yes.

Okay, that's all I had. Thanks, guys.

David Loeb, R. W. Baird.

Just a quick follow-up through on your comment about looking for more equity. Are you talking about possibly doing unit deals or additional joint ventures?

Additional joint ventures is really where we are focused right now.

Okay, great. That was really all I had. Thanks.

(OPERATOR INSTRUCTIONS) Seeing that there are no further questions I would like to turn the conference back over to Drew Sims, President and CEO for any closing comments.

I would like to thank you all for participating in today's call and for your interest in the company. I look forward to talking to you next quarter.

The conference has ended. You may now disconnect your lines. Thank you.