Sotherly Hotels Inc (SOHO) 2008 Q4 法說會逐字稿

Hello and welcome to the MHI Hospitality Corporation announces fourth quarter earnings conference call. (Operator Instructions). Please note this conference is being recorded. Now I would like to turn the conference over to Victoria Baker.

Good morning everyone, and thank you for joining us for MHI Hospitality Corporation's fourth quarter 2008 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're 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 in 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 Mr. Sims for his opening remarks.

Good morning everyone and thank you for joining us for our 2008 fourth quarter call. I will begin with a report on where we are today and what we're doing to position the Company going forward. Our COO, Dave Folsom will then provide an update on our portfolio progress. Following that Bill Zaiser, our CFO, will present the financial results for the quarter and the year. After that we will be happy to take your questions.

It is fair to say that 2008 was extraordinarily challenging for all companies, and in particular for those within the hospitality business. A national recession directly affected the hotel industry, which according to Smith Travel Research is on track to become the longest on record. As the year came to close, companies continue to shed jobs, the credit markets remain virtually shut down, and consumers curtailed their spending and travel. The loss of confidence in the public markets also caused near panic selling toward the end of year resulting in a sharp drop in our stock price in the fourth quarter.

It is also safe to say that this has been the most challenging operating environment for our Company since our IPO. Heading into our fifth year as a public company we are clearly focused on positioning ourselves in order to operate profitably in the near term. First, we are in the final stages of completing all portfolio improvements. And second we're taking the necessary steps to protect and enhance our financial position.

I would like to highlight what we're doing in both areas. Since our inception our business objective has been to acquire underperforming hotel assets in promising markets, with an emphasis on the Southeast United States. We have then worked to transform these properties into modern, full-service hotels that can compete effectively in their respective markets. Our goal has been to acquire and renovate the assets at a cost basis that is less than market value and a fraction of replacement cost.

Today I'm pleased to report that we have completed over 90% of our portfolio inventory renovations in the past three years. All of the repositioned properties have been extensively renovated and relicensed with our franchise partners for 10 or more years.

Our recent progress includes the following. We have completed all renovations and upbranding at our newest asset, the Crowne Plaza Hampton Marina in Hampton, Virginia. Our extensive repositioning of the Hilton Savannah DeSoto is now also finished.

In 2008 we completed extensive product improvement plans at the Hilton Wilmington Riverside in North Carolina and the Sheraton Louisville Riverside in Louisville, Kentucky.

As Dave will report in a few minutes, we are pleased to report that after an 18 month deep turn renovation we will open the doors to the Crowne Plaza Tampa Westshore in the next few weeks. With Tampa wrapping up, we have completed the transformation of our portfolio.

To put this in perspective, just last quarter Dave reported that over 50% of the portfolio was either undergoing renovations, closed, or in initial ramp up following improvements. So we have made considerable progress since that time and over the last several years.

Today we have in place a portfolio of completely modernized, upper upscale hotels. These assets have been rebranded with our franchise partners, six with InterContinental Hotels Group, including four with the Crowne Plaza flag, three with the Hilton core brand, and one with Starwood.

Turning to the operating environment, 2009 is expected to be one of the toughest years on record for the hotel industry. According to PKF Hospitality Research, the number of full-service hotels that will experience a debt service coverage deficiency is expected to rise by 25%. The average US hotel is expected to face a nearly 11% drop in RevPAR this year, which would be the fourth largest annual decline since 1930. And hotels are not expected to deliver year-over-year quarterly increases in RevPAR until the third quarter of 2010.

Within our geographic markets, the Mid-Atlantic and Southeast, we have seen double-digit declines in our competitive sets in RevPAR, mainly driven by a loss in occupancy. The good news is we're taking market share in most markets. And we anticipate an acceleration in market penetration as our newly renovated hotels in Wilmington, North Carolina; Louisville, Kentucky; Hollywood, Florida; Hampton, Virginia; and Savannah, Georgia ramp back up following their extensive renovations.

We're also experiencing good fair share growth in Laurel, Maryland following a management change in 2008.

We anticipate limited lodging inventory expansion through 2009 as announced projects continued to be canceled as a result of funding issues and market fundamentals.

The current market value of hotel assets is undetermined since almost no trade volume exists. For the little product on the market a disconnect remains between the asking price and what investors are willing to pay, a direct result of the credit crisis.

Cap rates, which were at the lowest at the beginning of 2007, continue to move higher. Like all real estate products there is almost no funding available to the industry. Capital is scarce. Those companies that acquire capital will be the winners in the next few years as overleveraged deals unwind and excellent buying opportunities come to market.

Within this environment in 2008 we took the following steps to strengthen our balance sheet. We increased our line of credit to $80 million, its full capacity. We restructured the mortgage on our joint venture Hollywood Florida property with improved terms. On asset by asset basis over the last year we worked with our management company to reduce payroll and other operating expenses.

And on the corporate level, we implemented a series of cost-cutting measures. This concludes eliminating a full-time position and several construction management positions.

Subsequent to year-end we entered into two full financial transactions that Bill will report on in detail in a few minutes. The first is a loan in the amount of $4.75 million from The Carlyle Group entity that is a member of the joint venture entity that owns the Company's Hollywood asset. The loan brings the Company added liquidity for ongoing hotel operations.

And last week the Company entered into a third amendment to our credit agreement with BB&T and other lenders. The amended terms of the agreement modify certain financial covenants, while providing our lender group within a more competitive interest rate and enhanced collateral position. We have no doubt -- we have no debt maturing before May 2011.

With eight our nine properties having completed a major renovation in the last four years, we expect our capital expenditures will be lower than historical and industry norms. The only significant capital expenditure we anticipate is a product improvement plan for our Raleigh asset in connection with its relicensing in 2011.

In 2008 we also moved to the NASDAQ Stock Market, which we believe should enhance visibility with investors.

Looking ahead, we expect operating trends within the hotel sector to continue to decline in 2009. In the interest of preserving capital within this environment the Board of Directors amended the dividend policy in December. Going forward the annual dividend payout will be approximately $0.18 per share on an annualized basis. The Company will pay that level of dividends necessary to maintain its REIT status.

With these collective measures, and with the re-energized portfolio in place, I believe we're in relatively good shape moving forward.

I will now turn the call over to Dave to provide an update on the portfolio.

For everyone's reference, the property statistics can be viewed on our website. In the fourth quarter we continue to see our property performance affected by the ongoing negative effects of the recession. Selectively however, we have seen that in certain individual markets our properties have been able to capture market share and our RevPAR compression, albeit unwanted, is not as dramatic as the market in general.

Additionally, on another note, we are seeing the ongoing positive effects of our renovations and the continuing ramp up of our newly renovated assets, such as our Hilton in Wilmington, North Carolina and our Sheraton in Louisville, Kentucky. We have completed our renovations at the Hilton Savannah DeSoto and the Crowne Plaza Hampton Marina, and are newly finished with our renovation of the Crowne Plaza Tampa Westshore.

Turning to our Crowne Plaza flags, as Drew mentioned, we have completed the $4.5 million renovation in our newest asset in Hampton, Virginia, the Crowne Plaza Hampton Marina. This project came in on time, on budget, and we received the Crowne Plaza flag 60 days ahead of schedule.

At the Crowne Plaza Tampa Westshore in Tampa, Florida after a deep turn renovation of this asset the hotel will be open for business shortly. Excluding acquisition and transaction costs, we have spent as of December 31, approximately $19 million on this project, with an additional plus or minus $3.5 million estimated to be required to close out the project in the first quarter this year.

The Crowne Plaza Hollywood Beach Resort, our joint venture asset with Carlyle, continues its ramp up and stabilization. For the fourth quarter occupancy at the hotel was 59%, rate was $143.97, and resulting RevPAR was $85.12. On a year-over-year basis our RevPAR at this hotel was up 62% from the fourth quarter of '07, the first quarter the hotel was open for business. By comparison, market RevPAR was down 4% during the same period, driven mainly by rate pressure.

We achieved 87% of RevPAR fair share during this quarter compared to a 51% share in the fourth quarter of '07. We're very pleased with the progress being made at the hotel as we continue to gather market share.

Turning to our Crowne Plaza Jacksonville Florida, in the fourth quarter RevPAR increased 3.4% against Q4 of '07. Occupancy for the quarter was 58.5%. We had rate at $126.97. In the market, however, fourth quarter RevPAR was down 4%. Our fair share went from 94% in the fourth quarter of '07 to 101% in the fourth quarter of '08. Annually our RevPAR was down a little over 3% from our 2007 RevPAR of $73.41 to $70.97 in 2008. The market by comparison was off by much more. It was off by 6%. Annually in '08 our fair share increased as well from 92% in '07 to 95% in '08.

At our Sheraton hotel asset in Louisville, this renovated upper upscale hotel opened for business in May 1, 2008, and as the only Starwood branded product in the market. In Q4 of '08 RevPAR at the hotel was $32.63. Occupancy was 32.4%, and we had $100 in rate. Our market comps were off 17% in RevPAR in the fourth quarter. And the softness of the market has made ongoing market penetration challenging, as evidenced by our fair share in the fourth quarter of 45%.

I would note, though, that we are seeing attractive results in 2009 that are very encouraging. We seem to have turned the corner at the property with regards to its ramp up. Although we do not have a full year's worth of operating history in Louisville, I would add that for the full year market RevPAR in our comp set was up 5%, beating the negative national trend.

Lastly, we recently concluded lease negotiations in the fourth quarter with our final restaurant tenant, which will when they complete their work add rental income to the property.

Turning to our Hilton assets. At the Hilton Wilmington Riverside in North Carolina we concluded in the second quarter of '08 our renovation of the property, and opened a new Ruth's Chris restaurant. In the fourth quarter market RevPAR was down 15%, while our Hilton was up 15% in RevPAR over the same period. RevPAR penetration was 168% of fair share, a 35% improvement. These remarkable results in a down market were achieved due to the product improvement and the hotel's ability to snap back quickly from the negative operational impact of the renovation.

For the year 2008 market RevPAR was down 11%, while our Hilton was up 7%. Statistically Q4 occupancy was 66.3%, rate was $120 and RevPAR was $79.62. For the year occupancy was 71%, rate was $125.83 and RevPAR was $89.28. RevPAR was up 8% for the year.

Turning to Philadelphia, the Philadelphia Airport market experienced continued challenges both in the fourth quarter and for the year 2008. For the quarter market RevPAR was down nearly 4% and for the year 9%. Individual business travel suffered in 2008 due to the economic contraction and due to soaring fuel costs mid year.

Our hotel at the airport, however, continued to grab market share. That is the good news. In the fourth quarter our RevPAR penetration held steady at 120% of fair share year-over-year. And for calendar year 2008 our penetration was 123% of fair share compared to 116% in '07. For the fourth quarter we had occupancy and rate of 70.7% and $133.22, respectively, with a resulting $94 RevPAR number. For the year we had 75.6% in occupancy, rate at $134 and RevPAR was $101.

At our Hilton Savannah DeSoto property we have completed our $11 million renovation. The Savannah market, which is predominately a leisure tourist destination, continues to struggle amidst the economic headwinds. Fourth quarter saw market RevPAR decline 4%, while for the year RevPAR was down 14%.

Our project in Savannah was in the midst of the most invasive part of its renovation during 2008. And operationally these two factors, the renovation and the economy, were reflected in the hotel's performance. For the quarter our occupancy and rate were 57% at $130, with resulting RevPAR of $74.05, which is down 16% from '07. And for the year our RevPAR was $83.29, down nearly 20% over 2007.

We can assume that looking historically at this hotel, which we have owned for more than a decade, that without the impact of the renovation we would have at a minimum performed at the same level as the market. As we conclude the renovations and offer a newly minted hotel, which is arguably in our opinion the best product in our comp set, we believe 2009 will bring us back in line with the market, and more than likely exceed it.

Moving to our Holiday Inn assets, turning to our Laurel Maryland hotel in the Baltimore/Washington corridor, we are seeing market trends there that mirror closely the national averages. In this market fourth quarter RevPAR was off 9%, and for the year the RevPAR was off nearly 5%.

This market contains a high concentration of government business, transient and interstate travelers, as well as a SMERF component. Our hotel during the fourth quarter saw its RevPAR of $49.69 beat the market however, as we were down only 1% for the quarter. And our fair share penetration climbed from 81% in '07 to 89% in '08. For the year our RevPAR was off 5%, which was in line with the market.

Finally, our Raleigh asset had a great year. In fact it was the best year ever for this hotel. This market held firm in '08, with a slight 1% increase in year-over-year RevPAR, while in the fourth quarter RevPAR was off by nearly 5%. At our hotel at the Brownstone Holiday Inn in Raleigh by comparison our annual RevPAR increased 7.5%, far outpacing the market, while during the fourth quarter our RevPAR was up by 4.5%.

Our market penetration mirrors these numbers. In the fourth quarter we captured a 124% of fair share number compared to 112% in the fourth quarter last year. Annually in calendar year 2008 our fair share in Raleigh was 122% compared to 112% in 2007.

Now with those stats I will turn the call over to Bill Zaiser for an update on our financials.

Our performance in the fourth quarter and for the year reflected the weakness in fundamentals within the hotel sector, as well as the effects of the remaining renovations taking place within our portfolio.

Reviewing that performance, the Company reported consolidated total revenue of approximately $17.6 million for the quarter ended December 31, 2008, which is an increase of 4.8% or $0.8 million over the $16.8 million for the fourth quarter of 2007.

For the fourth quarter the Company reported a consolidated net loss of approximately $0.9 million or $0.13 a share. This compares to the consolidated net income of approximately $7,000 or $0.00 per share for the comparable period in 2007.

For the year the Company reported consolidated total revenue of approximately $70.8 million, and a consolidated net loss of approximately $0.6 million or $0.09 a share. This compares to total revenue of $69.8 million and consolidated net income of approximately $2.5 million or $0.36 per share for the comparable period in 2007.

For the quarter, revenue per available room, or RevPAR, for the same-store portfolio decreased 1%, on a 2% decrease in occupancy, offset by a 1% increase in the average daily rate.

For the year ended December 31, 2008 the same-store portfolio generated a 1% increase in ADR over the prior period. For 2008 same-store revenue decreased by 5.4% to approximately $65.3 million versus approximately $69 million in 2007.

Total revenue and RevPAR were negatively impacted this quarter by the continued renovations at our Savannah and Hampton properties, as well as a recessionary economy impacting consumer demand in virtually all markets, but particularly Philadelphia, Laurel and Hollywood. This market also made gaining traction in Louisville very difficult.

Operating income for the fourth quarter decreased to approximately $1.3 million as compared to approximately $2.1 million for the same period in 2007. Funds from operations, or FFO, was approximately $0.4 million or $0.04 per share for the fourth quarter, compared to approximately $1.7 million or $0.16 a share for the same period in 2007.

Included in this calculation is a non-cash unrealized loss of approximately $0.8 million on the value of the interest rate swap. The interest rate swap is required by the Company's lenders on its revolving line of credit.

FFO for the full year was approximately $6.3 million or $0.59 a share. This compares to approximately $9.3 million or $0.87 a share for the full year of 2008, a decrease of 40.8%. FFO for both periods reflected non-cash charges of approximately $0.7 million in 2008, and approximately $0.8 million in 2007, both related to the interest rate swap.

As of December 31, 2008 total assets were approximately $211.2 million, an increase of 32% over the $160 million in total assets for the same period one year ago. This includes $154.3 million in net investment in hotel properties, approximately $33.1 million in property under development, plus approximately $10.3 million for our joint venture investment in the Crowne Plaza Hollywood Beach.

On January 14, 2009 the Company declared a quarterly cash dividend of $0.01 per share to shareholders of record as of March 20, 2009. The dividend will be paid on March 30. We expect to pay an annualized dividend of $0.18 share, with an effective yield of 14.2% at the share price of $1.27 as of December 31, 2008.

In December the Company announced that in the interest of capital preservation within the current economic environment the Company had amended its dividend policy. Last week the Company entered into an amendment agreement to its credit agreement with a syndicate of banks in which we agreed to certain restrictions on the payment of dividends to enable us to accumulate additional liquidity while paying those dividends necessary to maintain a REIT status.

At December 31, 2008 the Company had approximately $4.3 million of available cash and cash equivalents, of which approximately $2.6 million is reserved for capital improvements and certain other expenses. The Company also has approximately $73.2 million outstanding on its $80 million revolving line of credit.

The outstanding balance was deployed to fund the acquisition and renovation of the Sheraton Louisville Riverside, as well as the Company's equity contribution to the joint venture with The Carlyle Group for the purchase of the Crowne Plaza Hollywood Beach Resort, and junior participation in the repurchase of a portion of the mortgage loan, as well as the Company's acquisitions and renovations of the Tampa Florida and Hampton Virginia hotel properties.

As Drew stated, two transactions have occurred subsequent to year-end affecting the Company's liquidity. On February 9 an indirect subsidiary, which is a member of the joint venture entity which owns the Hollywood asset, borrowed $4.75 million from the Carlyle entity, that is the other member of the joint venture entity, for the purpose of improving the Company's liquidity.

On February 19 the Company entered into the third amendment to its credit agreement with BB&T, as administrative agent and lender, to address certain covenants and provisions, including the determination of the maximum leverage permitted under the debt covenant. The amendment agreement accomplished the following.

It established a new method for valuation of the hotel properties under renovation for the purpose of meeting certain financial covenants, by establishing a new valuation category and methodology for those assets under renovation. It waives any covenant defaults in 2008.

It increases the applicable margin for the rate of interest payable by 1.125%. The new applicable margin ranges now are 2.75% to 3.25%. It increases the maximum total leverage ratio to 62.5% from 55%.

It also limits cash distributions the Company may pay to shareholders to a level necessary to maintain its REIT qualification, until the Company accumulates $10 million in liquidity.

At the end of the fourth quarter our interest-bearing debt to total capitalization, which we define as the gross market value of our properties, plus cash or other assets, was 59.9%. Our debt to total assets on a cost basis was 68.9%. As Drew mentioned, we have no debt maturing before May 2011.

Our total mortgage debt was approximately $72.3 million. And unitholders' equity was $17.5 million, with approximately 3.7 million limited partnership units outstanding.

With that, I will turn the call back over to Drew.

We believe that the overall economic conditions will remain unpredictable for the near-term and continue to impact our markets and customer base. Because of this, we have decided to suspend guidance for 2009.

Looking ahead, we have established the following goals for the year. We will maximize our marketing efforts across the portfolio by ramping up operations at our newly renovated hotels as quickly as possible in order to capture increasing market share. When appropriate, we will seek out additional sources of equity to further enhance our financial position. And we will continue to control expenses at the asset and corporate levels.

We're very pleased with the progress we have made with our portfolio. Looking ahead, we believe this revitalized platform of real estate will provide a stable, long-term investment opportunity. We continue to have confidence in the underlying strength of our business model, and look forward to a profitable year ahead. With that, we will open the call up for questions.

(Operator Instructions). Dave Loeb, Baird.

I've got a few for Bill to start out with. Bill, can you talk about the capital spending in the first quarter and in the second quarter? I am particularly interested in the disbursements that you'll have to make for work that was completed in the fourth quarter and for work at you're going to complete in the second quarter, and how those payments and the total CapEx is likely to break out in the first two quarters.

You're talking about payments we're going to make but -- or have made in January for the balance of 2008?

Yes. I really interested in what the total amount that you're going to have to pay out in capital spending for the first quarter, including stuff to pay for work done in the fourth quarter for completed renovations.

I believe we have budgeted, or have projected, approximately $6 million total.

That is in the first quarter?

No, that's to conclusion of the projects, which is the first quarter, yes.

What do you think the second quarter CapEx is likely to be then, given that you'll conclude all these projects by the first quarter?

We are assuming it's going to be a regular routine capital, which in this case should be fairly low really, because just about everything has just been renovated. I am not -- I'm projecting it based on my models of a couple of hundred thousand at most.

How much of the $6 million, or in the second quarter that kind of normal $200,000 a quarter spending is going to come out of restricted cash?

The restricted cash has about $2 million in it.

$2.5 million at the end of --.

Right. So about $2 million of it will come out of there.

$2 million of the $6 million in the first quarter is going to be from restricted cash?

Yes.

Do you have an estimate -- you or Dave have an estimate of what the startup costs are likely to be in the first quarter and in the second quarter related to the completion of these renovations?

The only one that is going to have startup costs in that group should be Tampa. And we have a budget of approximately $1 million. It is a little less than that.

Savannah and the Hampton assets are already open.

Right, so those are really just -- Savannah and Hampton are really just ramp up (multiple speakers).

That is just a ramp up. But we wrap the opening costs for Tampa into the master budget. So those numbers that Bill talked about earlier include those things. We do expect expect some of that, and I think that is embedded in our internal budget.

It is. I believe you will find that the only things that would be expensed would be labor or training, that sort of thing. But inventory, those kinds of startup expenses, are already in that $6 million.

Most of that $6 million is going to be capital, and most of the -- and a small portion of that will actually be expensed?

Yes.

Let me -- one more on the balance sheet side. What is the credit line balance or availability as of today?

Let me see, it is about $2 million to $3 million.

Then finally, I guess this is probably for Drew, I just want to make sure I understand your dividend policy. You're going to continue to pay $0.01 a quarter -- a REIT -- by the way, thank you for filing the credit facility and doing it in a timely manner, that really helps. But as we understand it the credit facility said you could continue to pay $0.01 a quarter. Is that your plan, and then to pay a special dividend at the end of the year?

Yes, that is our plan. If I can just comment on the funding issue that you brought before, all of our -- the Hampton project, we really haven't mentioned, but that was funded separate through a first mortgage loan. And we've got funds outstanding there to complete that project. So that doesn't really enter into -- you have got to use that as a separate funding source pursuant to Bill's $6 million. I want to make sure you -- he didn't mention that, but we need to mention that.

How much was outstanding on that loan then at 4Q end, and how much is available?

We probably have about $0.5 million to $600,000 remaining to be drawn. We are basically ahead of time -- we're ahead of schedule and ahead of budget, so that is basically excess capital reserve.

Yes, and there's a little bit -- and then in addition to that the Savannah asset is fully funded. As of today everything is basically paid for. It is finished. It is done. And so that is not going to be a drain on us.

Tampa, we have been paying -- every invoice is paid weekly. We are up-to-date on every payment. So when you start talking about how much we have left on our line, we have been drawing down on our line to keep all those payments current. We are up to the point -- we just sent a check to our general contractor, so that at this point the only thing we owe them is retainage -- retainage and some change orders that are going to be negotiated. But other than that, we're fully paid up on that project.

So I just want to be clear on that that somehow we've got this huge contingent liability hanging out there. That is really not the case. Everything to date has been paid for (multiple speakers).

We're really just trying to quantify what the sources and uses look like. And I assume that the Carlyle loan has been funded, so you're actually sitting on that $4.75 million today.

That is our rainy day fund. We're putting that aside in a separate account, and we're going to use that as are rainy day fund. And if it is needed, we will use it, if it is not, then when it comes time to pay it back a couple of years from now we will use that to pay it back.

Right. So your cash and cash equivalents, your unrestricted cash, at the end of the second quarter should be a bit higher?

Yes.

Yes.

That is exactly where I was aiming, Drew. I'm really trying to understand how much rainy day room you have. And clearly we and everybody else in the market has clearly been concerned about your ability to fund all this. And the Carlyle loan looks like it clearly gives you more than enough cushion. But that is what we're trying to quantify here.

That is what I'm trying to help you. You and I are thinking the exact same way. We're trying to make sure we have -- we've got some funding available if something terrible happens, and all of a sudden we become unprofitable. We have never been unprofitable and we don't think we'll be unprofitable this year, but who knows in today's world. Yes, we have some funds set aside for that purpose.

Just to finish up on the dividend, are you considering that fourth quarter special dividend payment in stock or would that almost certainly be cash?

That would be cash.

Actually they recently came out with a pronouncement, I just saw it last night and forwarded it on to everyone else. But the SEC is not looking kindly on those companies with UPREIT units that issue stock, because they cannot issue the UPREIT unitholders' stock as a dividend. It creates some problems.

This just happened this week, so I don't think anybody is aware of what the exact ramifications are. But to answer your question, it is our intention to pay in cash, and that is what we have negotiated under our modification with our lender group is that we can pay cash.

Carol Kemple, Hilliard Lyons.

On your new covenant where you have to have your debt to total assets of 62.5%, it looks like at the end of the fourth quarter you were in violation of that. Are you all okay with -- okay on that now, or how are you going to get there?

We're in violation of the 62.5%?

Yes.

No.

Than I look at -- what is the exact formula to calculate that? Maybe that is where my problem is.

It is NOI for specific properties, for the specific properties capped at 8.5%.

But we get a holiday for our repositioned assets. So we really probably should talk to you off-line about the exact formula, because it would take us a while to explain it to you.

But it is -- for instance, that was part of the problem. Our big problem was when you did a twelve-month look back on an asset like Savannah, where we completely renovated the hotel, expanded the lobby, caused all kinds of disruption to the operation of the hotel by renovating it, we impaired the value of the asset.

And so at the very time that we were putting $11 million worth of new equity into the hotel for improvements, the value of the hotel, based on the formula that we had in the original loan agreement showed that the hotel decreased in value by $22 million. So there was almost a $34 million change in value in a negative way based on how we calculated the values of the assets under the old credit agreement.

So that was the problem. And that is what we worked with our lenders to change that, because we are in the business of renovating hotels. So if we're going to be penalized for renovating hotels, it makes it very difficult for us to draw on our line. And so that is really the essence of the whole modification and why we did the modification.

I would like to say that our lender group was very receptive to that idea. They understood what we were doing. We paid a price for the modification, but it was a fair price. And we appreciate the efforts of KeyBank and BB&T in that regard.

Can I add a little to that, Drew?

Sure.

Just to further magnify what Drew just said, before we commenced the renovation of the Savannah hotel, its market value was about $41 million to $45 million. This was at the end of '07. And we had an appraisal done for the refinancing of the asset which was about $35 million.

Not too long after that when we're in the most invasive part of the renovation, using an NOI formula for this hotel, the value of the hotel for purposes of the calculation and the credit facility was $17 million. So it was not only just the loss in the value on this calculation methodology, it was after we had put $11 million into the hotel. So there was really a $30 million swing in the value of this hotel for purposes of the leverage test in the credit agreement.

That is what tripped us up with the lenders, and which we identified with the lenders, and we had them come down to the Savannah hotel and say, you have to take a look at this. Stand back and look at the forest instead of the bark on the tree. And do you really think that the value of this hotel in nine months has decreased $30 million, after we have now put $11 million and made it probably the best quality product on the market? The answer is, no, we need to address this in the credit facility, which we did.

So our credit facility valued -- it is a secured facility -- and it valued our assets one of two ways. One on an income approach for our stabilized hotels like Philadelphia at the Airport Hilton, and another for newly acquired hotels like Louisville, where we value it on a cost basis, because Louisville was closed, just like Tampa. So it has no value on an income approach, so the banks value it on a cost basis. And then they give us some lag time to get the hotel ramped up before they switch it to becoming a core portfolio hotel.

So we needed a third category, which is what we got in this amendment. We gave some things up in this amendment, and you saw that in terms of spread, but we also received some things we needed to match the strategy of MHI. If you have any other questions on the credit agreement I worked for ten weeks on it, so I can talk to you about it.

Just have you all done any calculations figuring how low RevPAR would have to go this year before you all would break your covenant or lose your ability to make your interest payment?

We have looked at all kinds of scenarios, obviously. And the worst, worst-case is what we tried to build our modification of our loan based on the worst, worst-case. Bill, I don't have that RevPAR number in my head, but we could probably dig it out and give it to you.

We didn't really -- we didn't do it so much by RevPAR, but I can go look at our very worst, worst-case and get it for you. I don't have it right in front of me.

Bill, I will give you a call afterwards.

That's fine. I got about 30 different models. We can talk about any one of them you want. But the worst, worst one, I do know.

[Amin Visram], [Zama Realty Holdings].

My question simply goes to the issue of the dividends. In the December press releases the Company had basically in the interest of capital preservation, reduced the dividends to $0.20 on an annualized basis. Now today obviously it has been reduced further to $0.18 on an annualized basis. My question simply is this, $0.18 on an annualized basis is done to maintain the REIT status. So it is there a fear that we could lose the REIT status, as we're doing this just to preserve the REIT status at this point? That is my question one.

My question two is, somebody made a comment that this 18% is the equivalent of 14% on a share value of today. Is that a true indication to calculate it on the share value of today or would it be calculated on the share value of December 31 at the time, because these are Q4 financials?

And so these are the first two questions I have. (multiple speakers). Sorry, if I can just -- the third one is how long is the covenant with the bank for in terms of just the $0.18? Is it until you reach a certain threshold? Is it until you have a certain amount of liquidity? And if so, when do you anticipate that happening?

First thing was the 14% was based on the closing price of December 31, not on today's price. The restriction, if you will call it that, is based on the attainment of a certain amount of liquidity, $10 million. The covenants with the bank or the modification runs through the end of the line of credit, which would be the May 2011 date.

Now the $0.18 is not a locked-in hard member. The number is 90% of taxable REIT income. We estimate it to be $0.18.

But that is the minimum threshold for the REIT status?

The 90%.

We do not anticipate that we're going to violate our REIT status in any way, shape or form. We will retain our REIT status. What really forced the issue was the lender wanted to restrict cash out of the Company until such time as we had adequate liquidity. They deemed adequate liquidity to be $10 million. So at this point we're going to have -- probably at the end of the quarter we will have somewhere around $6 million. So we're going to somewhere in that neighborhood.

We're going to have to build that over the year. Since we're not paying dividends, we feel like that it is -- we are going to be building our cash position as the year goes on.

That is fair. It is why I probably anticipate that you are at $6 million by the end of the quarter, so without the payment of dividends we anticipate that there will be some layer on top of that over the next, call it, six months to a year.

And there was a last comment that somebody made was that the unitholder equity was $16.5 million. That was as of December 31, I would imagine.

Yes.

Today obviously a different number.

Yes, it would change. And the minority interest, which is the unitholder, was $17.5 million.

That is where I had a little bit of a confusion, because if you have got $17.5 million of unitholder equity back then in December 31, and that amounts to 14%, it just didn't tally in my head. But that's okay.

(Operator Instructions). David Loeb, Baird.

Just to follow-up on that last question, to make sure I heard this right and I understand what is going on. If you don't have $10 million of liquidity by year end, you are restricted to paying estimated taxable income, which at this point you estimate to be -- well, 90% of estimated taxable income, which at this point you estimate to be $0.18 per share in total.

Correct.

Does that mean that effectively the dollar equivalent of $0.02 per share you will pay in tax?

No, are you looking at the $0.18 relative to the $0.20?

No, I am looking at $0.18 as being 90%. So 100% of taxable income would be $0.20.

Right, that's what we estimate it. That is what we estimate our taxable --.

Right. So you would actually have to pay tax on the difference, right?

No. As long as we maintain REIT status, we don't.

My understanding is that the dividend is effectively a deduction from your tax liability, and --

I understand that.

So that you would still have tax liability for that last 10%.

But it the taxable income to the --

Unitholders.

No, to the LP. We also have to consolidate in the TRS. We have a significant loss carryforward anyway, so even if it was taxable, there would actually be no money going out the door.

So no cash taxes in that case?

No.

Then it in fact you have $10 million by the end of the year, is it the Board's plan to pay out what 100% of taxable income?

At this point what we're looking at is to just retain the 90% at this moment. Let's see where we are when we get there. It has been such a roller coaster ride the last couple of three quarters that we're going to stay at the 90% until we're sure we have the $10 million plus what we need to pay out in dividends. So that is where we are.

I see. So it really -- I guess since you won't be paying any cash taxes it is not really an issue.

Right.

Correct.

(Operator Instructions). At this time we show no further questions. I would like to turn the conference back over to Mr. Sims for any closing remarks.

I would just like to thank everyone for participating in today's call and for your interest in the Company. We look forward to reporting our progress in the next quarter. Everyone have a good morning. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.