Service Properties Trust (SVC) 2009 Q1 法說會逐字稿

Good day and welcome to the Hospitality Properties Trust Fund first quarter financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you and good morning. Joining me on today's call are John Murray, President and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation, followed by a question-and-answer session.

Before we begin today's call, I would like to read the Safe Harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, May 12th, 2009. The Company undertakes no obligation to revise the public release as a result of any revisions of the forward-looking statements made in today's actually other than through filings of the Securities and Exchange Commission.

In addition, this call may contain non-GAAP numbers, including numbers or FFO. The reconciliation of FFO to net income is available in our supplemental package found in the investor relations section of the Company's website. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause those differences is contained in our forms 10-Q and 10-K filed with the Securities and Exchange Commission. And in our Q1 supplemental operating and financial data found on our website at www.HPTReit.com. Investors are cautioned not to place undue reliance on any forward-looking statements. Now, I would like to turn the call over to John.

Thank you, Tim. Good morning, and welcome to our first quarter 2009 earnings conference call. Yesterday HPT reported FFO per share for the 2009 first quarter of $0.95, which, again, reflects the TA rent deferral and non-accrual of straight line rent, which together reduced FFO $0.19 per share versus the first quarter of 2008. Yesterday TA reported respectable and much improved first quarter 2009 financial performance considering the significant decline in the US economy during the quarter, coupled with the seasonal first quarter weakness in trucking demands.

Despite fuel volumes which were down about 15% quarter over quarter across the 185 HPT owned sites, fuel gross profit increased 42% with higher per gallon margins. Non-fuel revenues and gross profit declined 8.8% and 8.4% respectively, much less than fuel volumes dropped. We believe this is an indication of relative preference by profession truck drivers, for TA's, an array of goods and services and the availability of substantial parking. TA's other property level expenses were down 8% compared to the 2008 quarter reflecting the cost-cutting efforts undertaken during 2008.

As a result, in 2009 -- in the 2009 first quarter, TA covered the rent due under its leases with HPT at the property level without deducting any rent deferral. On March 31st, TA had approximately $168 million of cash on hand available under its line of credit, access to additional CapEx reimbursement from HPT of about $14 million and the ability to defer up to $5 million of rent per month through December 2010. We believe the actions taken by TA to improve their business, combined with their current liquidity and flexibility provided by the rent deferral agreement enhances TA's ability to address liquidity risks that may arise during this recession.

Turning to our hotel investment. First quarter 2009 RevPAR declined 20% across our 289 hotels, driven by 8.4 percentage point decline in the average occupancy, 59.9% and a decline in the average daily resident of 8.8%. RevPAR was weak across all regions, all brands and all price points compared with the 2008 first quarter. Although, we are concerned about reduced demand and poor rate integrity, HPT's hotels are well positioned to compete in this period of economic weakness.

In past downturns, our hotels have performed well versus our direct competitors and continue to out perform in the markets today with an average 20% RevPAR premium to their competitive sets. The first quarter is generally one of the seasonal weaker periods of the year for lodging and improving performance later in 2009 may offset some first quarter weakness we are reporting today. The American consumer has been deleveraging, and the fed and treasury have been pouring stimulus into the economy. So there is help that the second half of 2009 may begin a turnaround.

However, based on industry performance in April as reported by Smith Travel and considering the guidance from some of the large brand operators in the latest projections from PKF and Smith Travel, it's still too early to call the bottom or be optimistic about later in 2009. It does appear that results won't get worse, but it's not clear how soon performance will start to improve or at what pace that improvement will come. All of HPT's hotel management agreements and leases require that we be paid rents or returns monthly, and there are corporate guarantees, security deposits and other features which are intended to secure the performance obligations of tenants and operators. We believe the structure of our agreements aligns HPT's interest with those of our tenants and operators and our properties are operated by large, well-known managers like Marriott, IHG, Hyatt and Carlson.

However, the severity of the current recession has caused the effectiveness of our security features to be tested in two portfolios. Under the Marriott number three agreement of 34 hotels, which has a deposit of $36.2 million and the Marriott number four agreement for 19 hotels, which has a deposit of $28.5 million, we have been paid less than the required periodic minimum return in rent amounts.

During the second quarter, following the required notice periods, we drew on the related security deposits for the deficient amounts. For all of 2009, we expect to draw between 6 and $7 million on the Marriott number three deposit and between 5 and $6 million on the Marriott number four deposit based on our currently projections.

Even if this recession continues for a substantial period of time, we believe the security deposits will be adequate to offset the cash flow shortfalls from these portfolios. Although, this is an important issue for us, it's important to keep it in perspective within HPT. The amounts we expect to draw on the deposits represent approximately only 2% of HPT's 2009 total minimum rent and returns, assuming full deferral by TA.

HPT remains one of the most secure hotels REITs in the industry. We have maintained our investment grade rating throughout the difficult economic environment. Also, HPT has one of the strongest balance sheets in the industry, with $6.4 billion of unencumbered property and no significant debt maturities until 2011. Nevertheless, this is the most challenging economic environment we have faced since HPT was formed. Management and Board of Trustees intend to aggressively asset manage our real estate portfolio and maintain our strong capital base and liquidity. I will now turn the presentation over to Mark Kleifges, our CFO.

Thanks, John. The performance of our hotel portfolio in the 2009 first quarter was weak, as you would expect, begin the state of the US economy. RevPAR decreased 20% with declines across all brands and all portfolios, all in excess of 15%. Gross margins declined 5.6 percentage points from the 2008 first quarter to 37.6%, and cash flow available to pay our minimum returns and rents declined 43% quarter over quarter. As a result of this property level performance, all 11 of our hotel operating agreements had returned rent coverage ratios below one times for the first quarter.

Despite the poor property level performance and because of the unique structure of our hotel operating agreements, hotel minimum returns and rents included in FFO in the 2009 first quarter were $86.9 million, up slightly from $86.1 million in the 2008 quarter. As one would expect, additional returns and rents for the amount HPT earns above the minimum payments due to us under the operating agreements declined from $5 million or $0.05 per share in the 2008 first quarter to $700,000 or $0.01 per share in the 2009 first quarter.

Turning to our travel centers portfolio, yesterday TA reported significant year over year growth in corporate level adjusted EBITDAR for the fourth consecutive quarter. TA's first quarter 2009 corporate level adjusted EBITDAR was $53.3 million, a 78% increase over the 2008 first quarter. Cash flow available to pay rent at our 185 travel centers increased $15.6 million, or approximately 32% over the 2008 first quarter.

For the last 12 months, cash flow available to pay rent at our travel centers increased $87.9 million, or approximately 35%. Property level coverage for the last 12 months was 1.48 times for our 145 property lease and 1.57 times for our 40 property lease. Both of the coverage amounts have been calculated based on contractual cash rents and exclude the impact of the rent deferral agreement. TA's adjusted EBITDAR coverage of rent at the corporate level for the quarter was 0.9 times, adding back the $15 million rent deferral during the quarter, coverage of cash rent was 1.2 times.

Turning to HPT's operating results for the first quarter, yesterday we reported FFO of $0.95 per share, down $0.21 or 18% from 2008. The TA rent deferral in non-accrual of straight-line rent resulted in a $0.19 per share decline in FFO. As I previously mentioned, additional returns in percentage rents were done $0.04 per share quarter over quarter. These declines were partially offset by lower G&A and interest costs in the 2009 quarter.

Turning to our balance sheet and liquidity, cash and cash equivalence totaled $36.8 million at March 31st, which includes $25 million of cash escrowed for future improvements to our hotels. HPT's debt to total capital book basis was approximately 51% at March 31st. EBITDA was $134 million in the first quarter, and our EBITDA to total fixed charges coverage ratio remains strong at three times. At March 31st, we had $204 million available under our revolving credit agreement and only one debt maturity at $50 million between now and 2011.

During the first quarter, we funded $49 million of capital improvements to our hotels and travel centers, including $37 million related to the renovation of our Kauai Marriott hotel. We currently expect to fund 20 to $25 million of additional capital improvements in 2009. Although, some of this funding may get pushed out to 2010. These fundings are in excess of amounts contributed to our FF&E reserve escrow accounts under our hotel operating agreements.

Before opening the call up for questions, I would like to touch on our common dividend in the current state of the debt capital markets. As I'm sure everyone listening to this call knows, on April 8th, we suspended our regular quarterly common dividend. We disclosed then that we expected to realize substantial net income in 2009. As you can see, our reported operating results and cash flow for the first quarter remains strong, despite the significant weakness in the economy generally and the lodging and travel center industry specifically.

We do not have in earnings or near-term liquidity problem confronting us. Instead, the issue our Board and management is most focused on is HPT's substantial debt maturities in to 2011 and 2012. In light of the currently economic and capital markets landscape, our Board of Trustees took the prudent course of suspending the common dividends until December, when we will have a better estimate of our taxable income for the year and a currently view of the capital markets and state of the economy.

Based on that information, our Board will determine the amount of our 2009 common dividend and decide what portion, if any, will be paid in common shares. At a minimum, our 2009 dividends will be equal to the amount required for HPT to maintain its REIT's status for federal tax purposes.

In the meantime, we are monitoring the equity in secured and unsecured debt markets closely and are encouraged by the significant improvement in REIT credit spreads over the past two weeks. We have also taken other action to improve HPT's capital position.

During the first quarter, we repurchased approximately $121 million of our 3.8% convertible senior notes for approximately $88 million, representing a 28% discount at face value. Our convertible notes are puttable to HPT in March 2012. In addition, in April and May, we repurchased an aggregate of $57 million of various issues of our senior notes for approximately $45 million at 21% discount at face value. Operator, that concludes our prepared remarks and we are ready to open up the call for questions.

Thank you, sir. (Operator Instructions). Take our first question from Michael Salinsky from RBC Capital Market.

Good morning. John, you talked -- you gave us a sense of the performance during the quarter. Can you give us a sense of how April trends were relative to the quarter, and also, if you're seeing any kind of improvement in May this far?

You know, we don't -- we try not to give guidance. I can tell you that, you know, if you look back historically at the industry averages, we tend to track along with industry average reasonably closely. And I think that Smith Travel last week reported that their preliminary estimate for April was a decline of anywhere between 18 to 20% in that ballpark. And I think that, you know, we're not expecting our portfolio to be much different from that. And as much as we'd like to tell you that, as I said in my comments, we'd love to tell you that things are, you know, we could call it a bottom, and things are getting better. But we don't see things getting any worse than they've gotten, but we don't really see any light at the end of the tunnel, if you will,.

Okay. Looking at the Marriotts in Barcelo management contracts that are behind there. Looks almost like the Marriott didn't pay at all in April. You know, was that -- did they pay any amount to you in April on that contract; and also, you know, can you give us a sense of how discussions are going with them? Whether they're looking possibly to try to renegotiate the contracts or anything lick that?

I apologize in advance if this gets too detailed. The contracts require what we be paid monthly in advance, and when the properties began having cash-flow deficiencies, for a period of time, Marriott was paying the estimated cash flow and was short -- and was short whatever the deficiency was.

Once they had defaulted in period four, and we had sent a default notice and they didn't cure, they made a decision at that point that rather than estimating in advance what the cash flow would be and paying us that and then truing it up later, that they would instead wait roughly 20 days after their period ends and the accounting was complete, and they would send us the full amount of the wire.

So you are correct, in period five, we've not -- we've not received initially, in advance, we haven't received any of the payment. We expect to get the full cash flow once they finish their accounting.

Okay. Any change in discussions with them in terms of, like, you know, the desire to cover going forward or, you know -- or their desire to hold off maybe to renegotiate the contracts or anything like that?

Well, I think that they were asked similar questions on their call, and they've -- they put forth their position. We've stated that we think based on our projections, we believe our security deposit are sufficient, and we're currently evaluating next steps. We have a variety of options available to us which range from drawing on the security deposits any month that there is a deficiency.

As you know, the first quarter is one of the weaker quarters. The second and third quarters typically improve. So there are months coming up where we would be expecting that there would be positive coverage. So, there may be a period where this becomes less of an issue; but in any case, we believe our security deposit its are sufficient.

We also do have the right to terminate the management agreements, and we believe that we may also have the right to terminate the franchise agreements. And so we have -- we have a number of options available to us. You know, at the same time, Marriott is a very well respected brand-management company, and these are very difficult economic times, and so there's a lot of consideration that we have to weigh as we -- as we move forward.

So I wouldn't say that discussions have changed materially since the last conference call. We are still in reasonably constant dialogue.

Okay. That's helpful, then. Finally, two questions for Mark. First, can you talk a little bit about your plans, if you have any plans to address the line of credit at this point. Maybe term out some of that with mortgage debt or new unsecured debt given the pullback we've seen in the unsecured markets as of late?

Well, Mike, as you probably know, our line initially matures in October of 2010. We have the right to extend that for a one-yore period to October of 2011. So in terms of terming out what we have outstanding on that, I guess my first point is, we don't feel any urgency in ding that.

We think is momentum in the debt capital markets, and we think there is probably further tightening to come on spreads. Particularly REIT spreads, even more specifically, spreads on our bonds. So I think we're more or less in the wait and monitor mode now in terms of a debt -- reaching out to the debt capital markets.

Next question comes from Andrew Whitman with Robert. W Baird.

Morning, guys. I just had a couple of questions. Specifically on some of the operating agreements. Looking at IHG, they suggested in their conference call that, any shortfalls that they are funding -- that they are funding a shortfall obviously for the first quarter. Mostly due to seasonality.

I guess my question is what's your expectation for some of the IHG leases for the rest of the year, whether or not there will be a full year draw on their guarantee? And then just kind of a technical issue related to that guarantee, because they drew -- because there was a draw in the first quarter for the guarantee, does that get replenished based on the full-year results?

Yes. This is Mark. I'll try to -- there seem to be a few questions in there. First off, you're correct. IHG did fund -- back up. We have $125 million guarantee from IHG that covers all four of contracts with them. The remaining balance on that guarantee coming into 2009 was about $116 million. And they funded about $14 million under the four contracts on a combined basis during the first quarter, so it leaves us with a guaranteed balance of roughly $102 million.

The calculations under each of our contracts are annual calculations of deficits or deficits and cash flow. So yes, to the extent, in the second, third or fourth quarters, there's positive cash flow, that money will flow back to replenish, if you will, the guarantee under those contracts -- under those four contracts.

Okay. That makes sense. And then I guess, in two other agreements, looking at Hyatt -- the Hyatt Place transformation seems to continue to take hold. As I look at the numbers year over year for the first quarter, done somewhat less than the rest of the hotel agreements. Can you just talk about hutch more expected ramp you continue to see even in this difficult environment?

And I guess, conversely, in the other private company that you've gotten an agreement with, Carlton seems to be one of the weaker performing portfolios. Obviously pretty small in the grand scheme to HPT. But can you just talk about your thoughts about what -- how Carlton did in the quarter and if there's more opportunity for reductions or cost cutting there?

Well, it's -- it's a tough environment to be ramping up a new brand. I guess I'd rather be in Hyatt's shoes with Hyatt Place than in Stall wood shoes with a loss there. Some of those other newer brands that have less units out there in the marketplace. You know, I think they'll continue to ramp up. But, you know, it's -- in most respects it's like being a salmon swimming upstream. It's -- the current is pretty strong going in the other direction.

So we expect that when the economy starts to improve, that ultimately we'll see Hyatt Place occupancy and rates that are very similar to the brand occupancy and rates that you see for courtyards and garden inns and upper upscale -- I'm sorry. Upscale hotels like that, in suburban markets. So I think there's room to run; but any when it will start running again is certainly a question mark.

In terms of Carlton, I think they're working very hard without trying to slight them. They probably -- among the managers and brand owners in our portfolio may be the smaller and a couple of the brands in the Country Inn and Suites, Park Inns may be the less well known of the brands in our portfolio, and in a downturn, I think that has not helped them. But prior to this recession really taking hold, they had pretty good coverage. And we expect them to get through this time period.

It's a large well capitalized privately held company that owns a lot of different brands, and doesn't have -- they've got -- they've got mostly a fee income type company, like a lot of the large hotel brand owners. So we're not worried about that brand. We think they'll come back nicely when the economy comes back.

So in terms of just operationally there, you feel like they're doing what they need to be doing. Especially compared to what their peers are doing?

I think they are. All of our operators are doing the same thing. Our asset managers have weekly and monthly calls of all of our operators and focus on the particular hotels that have the most challenges. And we cross pollinate, the different cost cutting ideas that we see from one brand, we suggest to other brands, if they haven't made use of it. And I think all of our operators are doing a very good job of cost cutting and -- but at the same time, trying to balance that with not significantly impacting the guest experience.

I think, if performance was to get worse, that -- you know, that further cost cutting would come at the expense of the guest experience. So, you know, most of the operators are trying to avoid that.

Okay. That sounds good for. Now I'll jump back in, if there will be more. Thanks.

The next question comes from Will Truelove with UBS.

Hi, thanks. Maybe, Mark, you can help me with this one. Where in the cash-flow statement do you see the transition of the payments from the security deposit to that much of the revenues? Where would we see that?

Well, you won't see any this quarter, because we drew on the security deposits in the second quarter. But you will see -- it will show up in the cash flow statement in the cash flows from operating activities. You'll see it flow through as non-cash revenues starting in the second quarter.

Okay. So it's not in the --

Right.

Secondly, maybe John, you got the Marriott two -- I think it is the Marriott two portfolio coming due in 2010, going to transition from the old-fashion lease TRS agreement. Is the issues going on with Marriott making that -- is there any risk to that transition in 2010 given what's going on with Marriott and you?

We don't think there's any risk there. We -- that portfolio has been a strong performer. They -- you know, there are important hotels, we think, to the Residents Inn brand. They were among some of the the hotels to the brand. So I think that -- although, the lease expires at the end of 2010, the management contract continues through, I believe it's 2020, 2019. I forget exactly.

And the owners' priority payment in that management contract tracks identically with the rent in the lease. So we expect that, you know, things will be largely unchanged with -- the thing that would be different is that, assuming there's no default between now and the end of next year, we will return the security deposit it to host Marriott.

So we would have a transaction that didn't have a guarantee or security deposit it at that point. But otherwise, you know, we expect that -- I think we haven't talked about or had any sort of issues with that portfolio with Marriott up to this point, and we don't expect to.

Okay. And my final question again guess back to the Marriott -- or using the security deposit in the second quarter. Is there any thoughts about perhaps charging Marriott interest, like an interest expense for use of the security deposit so that when things do recover and the security deposit fills back up again, that maybe the future security deposit comes larger or somehow you report interest income. Very similar to the way you deal with Travel Centers of America, right? Can you comment on that?

Haven't amended any agreements. So we have the terms that we have. In the Marriott three portfolio, there isn't a provision for us that charges them interest on the security deposit. . In the Marriott four portfolio, where Crestline is the tenant and Marriott is the manager, there are provisions there for -- I think if we have to draw in the deposit, there's a penalty interest that gets charged on amounts outstanding, draws outstanding on that deposit. So there is a penalty added on

Okay. That's all my questions. Thank you, so much, guys.

(Operator Instructions). We'll go next to Ryan Melker with Morgan Stanley.

Hi, guys. I had a quick question ---

Ryan, we can't hear you. Can you speak up?

I'm sorry. Is that better?

Yes.

Okay. Just a quick question for you. In your prepared remarks and one of your responses and questions, you talked about the fact that you're not really seeing things get worse, though you don't want to call it a bottom. . And I know I'm not asking for guidance, but just a little clarification on what you're referring to.

You know, Marriott in their guidance issued, for the second quarter issued RevPAR down 22 to 25% in the second quarter, which was 4 to 7 points worse than the first quarter in IHG, this morning said that while demand seems to be stabilizing, you know, rates are going to continue to be under pressure. Are you talking specifically about demand, or are you being told something different than what we're hearing from these public

I think it's demand. We're not seeing occupancy go through a free fall, like it seemed like it might be doing in the fourth quarter and the first quarter. And all of these companies, IHG, Marriott, HPT, are all discussing averages of very large groups of hotels. You know, Marriotts numbers are including international and North American hotels, and they are including everything from a Fairfield to a Ritz-Carlton. Similarly for IHG.

So, you know, when I'm talking about our portfolio, I'm talking about the average for our hotels. But it's for the most part, a smaller spectrum than what they're considering.

And you're talking demand specific, not necessarily relevant to rate, correct?

Yes.

All right. I just wanted to make sure. Great. Thank you very much.

Our next question comes from Michael Erwin with Sun Capital Advisers.

Hi, guys. Just a few questions here. First of all, is this the first time that rent coverage has been below one times for all your hotel leases? I imagine it is just given the statements you said earlier, about this being the toughest period for you guys. And I'm just curious, what was rent coverage for the hotel portfolio last quarter. And then I just have a couple other questions.

You know, in front of me, I only have a certain amount of data, so I can't -- I can't tell you, honestly, whether we've ever had a quarter where each portfolio had less than one times coverage. I know, after 9/11, those first couple of quarters were pretty rough.

We thought it would be important we said on the call today that each of our portfolios had less than one times coverage this quarter, but we do typically focus here on the full year. It voids sort of timing difference and takes into account, CapEx funds that you may have made and things like that.

And, you know, when you look at for the rolling 12 month through the first quarter, there were only three portfolios that had less than one times coverage; and with the exception of the Marriott Hotel in Kauai, that declined below one times, wasn't that dramatic. So, Intercontinental was down probably, number four was down probably the most. And I think that's a reflection of, you know, Congress and the media making some business meetings a bad word. .

Right.

That's good. So -- but looking back, last quarter, just for the quarter, there was -- there were six of the portfolios that had less than one times coverage.

Okay.

Again, that was the fourth quarter, which is, you know, the fourth quarter and the first quarter are the two weakest quarters.

Yes. Okay. And then, in terms of the security deposit, you know, for those leases just refresh my memory. Is that like a year that you get -- the year's equivalent of rent.

We have a combination -- in some leases and management contracts, we have security deposits. In others, we have guarantees.

But typically when we entered into the transactions, the amount of that credit support was typically a year's rent or a year's minimum return.

Okay.

Either in the form of a deposit or in the form of a guarantee or in a combination.

Okay. And then the rent defraud agreement, just refresh my memory. That goes through 2009, correct? And in 2010, it goes become to normal.

No. It guess back to 2010.

Okay. Sorry.

Starting in the beginning of 2010, there's a 12% annual interest rate of amounts outstanding.

And there's no option that you have to be able to -- I'm just thinking out loud here. Out performing compared to what you guys expected versus the hotel -- there's no way you could say, "Hey, guys, you know, you guys are doing better. I mean --

No. We think the combination of their ability to potentially claw back some of the shares they gave us if they don't defer the cost of the interest, those are the only incentives built into the agreement. But we don't have any other rights to tell them that we're not going to live up to the agreement.

Okay.

They have that right.

All right. And lastly, the ratings agencies sort of dialogue recently, have you guys talked to them at all, and is there a concern that with the hotel portfolio with rents kind of deteriorating more than expected, that this could -- there have been implications I know in the past that were really focussed more on TA.

Yes. As you would expect, we're in regular dialogue with the rating agencies. Both agencies were aware of the issues we have with the two Marriott contracts, because they really came up subsequent to year end, and so, we're not anticipating any issues on that front.

Okay. All right. Great. All right. Thanks for your time, guys.

Next we have a question from Michael Salinsky i with RBC Capital Markets.

Real quickly, in terms of the acquisition market, I know it's probably a little bit early, but can you talk about what you're seeing whether the stress levels are rising? Whether you're seeing a significant amount of portfolio coming back to the market? And where pricing would need to be right new for you guys to become more interested.

We're hearing a lot about an increasing amount of distress. You know, -- we're hearing about a lot of borrowers who have acquired hotels or refinanced hotels in the last couple of years who took advantage of low interest rates and are not having any problems paying the debt service, but now, see that based on their cash flows, that the value of their hotel may be less than the value of the debt.

There are some other owners having trouble paying the debt service and some owners having trouble paying operating costs. So we know that there's a lot of distress out there.

For the most part, I think a lot of the hotel financing that takes place is done on a secured basis, and so there's a -- there's quite a process that has to be worked through if you -- if you've got CMBS debt on properties that have been sold off and going, you know, CDOs and the like. Just trying to figure out who your lender is a challenge these days. When you get into stress situations.

So we haven't seen that much actually come to market. But we expect probably -- it's a little early. We expect probably it's going to be quite a bit starting sort of late this year and next year when we see a lot of activity. Whether those appeal to us remains to be seen. The transaction flow that we have seen, we've -- we've been offered large urban hotels in reasonably good condition at ten caps. Thus far, we haven't seen any hotel returns that look like they're better than what we could achieve taking advantage of the dislocation in the debt markets. So that's why we've bought back some debt in the second quarter, but have not bought any hotels yet.

Okay. That's helpful. Then, Mark, a question for you.

You look at the ordinary payout from last year's give dividend. It was well over $2. Given the two additional quarters of the deferrals from TA, you know, as well as at the pullback in her deferred on, you know, what kind of range would you expect the ordinary income component dividend to be for 2009?

Well, Mike, I'm not going to -- I don't give GAAP guidance. I'll give you a taxable income guidance. I think that's the question that's on everyone's mind. There's a lot of moving pieces to tax income this year. The deferral just to be clearer on that. I think I mentioned this on prior calls. The deferral itself does not lower our taxable income under the Internal Revenue Code, unless it meets the definition of a bad debt, if you will,, that we can write off for tax purposes.

And since, our position continues to be that if this is simply a deferral of rent, not forgiveness of rent, I think we'd have a tough time making the position for tax that we had bad debt. And we've got the gains that have come about from the debt repurchases. There is a new provision this year that allows us to defer those gains for a five-year period and then amortize them into income over five years. We're evaluating that.

There's some bonus depreciation provisions in the stimulus bill. So there's a number of things that could have an impact year over year on taxable income. So I think we're just -- until we get closer to year end and have a better feel for where taxable income is going to fall out, we'll just -- that's about all we'll say on that subject for now.

Okay. Thank you.

We have no further questions at this time. I would like to turn the call back over to John Murray for any additional or closing comments.

We'd just like to thank everyone for joining us on the call today and look forward to hopefully seeing some of you at the NYU or (Inaudible) conference coming up at the beginning of June. Thanks a lot. Have a good day.

Once again, that does conclude our conference call today. We thank you for your participation.