Service Properties Trust (SVC) 2011 Q2 法說會逐字稿

Good day, and welcome to Hospitality Properties Trust Second Quarter 2011 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 Manager of Investor Relations, Carlynn Finn. Please go ahead.

Thank you, and good afternoon. Joining me on today's call are John Murray, President and Mark Kliefges, Chief Financial Officer. John and Mark will make a short presentation, which will be followed by a question-and-answer session. I would also note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of HPT. Before we begin today's call, I would like to read our Safe Harbor statement.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on HPT's present beliefs and expectations as of today, August 9, 2011. The Company undertakes no obligation to revise or publicly release the result of any revision to the forward-looking statement made in today's conference call other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP financial measures including normalized funds from operations or normalized FFO.

A reconciliation of normalized FFO and EBITDA to net income, as well as components to calculate AFFO, CAD or FAD are available in our supplemental package found in our Investor Relations section of the Company's website. Actual results may differ materially from those projected in these 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 SEC, and in our Q2 supplemental operating and financial data found on our website at www.hptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statement. Now I would like to turn the call over to John Murray.

Thank you, Carlynn. Good afternoon, and welcome to our second quarter 2011 earnings call. Today, HPT reported second quarter normalized FFO per share of $0.89, a 9.9% increase over 2010 second quarter normalized FFO per share of $0.81. Focusing first on our TravelCenters investments, this morning TA reported its strongest quarterly results as a public company with second quarter 2011 net income of almost $22 million. This compares to net income of $1.2 million in the 2010 second quarter. TA's second quarter performance included a modest increase in fuel volume and significant increases in per gallon fuel margins and non fuel sales and gross margin. Property level rent coverage for HPT's TravelCenters was almost 2 times for the quarter.

In addition to its strong operating results, TA's financial position remains sound with approximately $137 million of cash on hand at quarter end. Turning to HPT's hotel investments, second quarter RevPAR increased 8.2% across our 289 hotels driven by a 3.3 percentage point increase in average occupancy to 76.2% and a 3.5% increase in average daily rate up to $93.64. Compared with the 2010 second quarter, RevPAR increased in all regions with double digit gains in the New England, Pacific and North Central regions, with only modest improvement in Canada and the South Atlantic region. Our Country Inn Suites, Marriott Hotels and Resorts and TownePlace Suites all generated RevPAR growth in excess of 10% this quarter versus last year. There was no material renovation impact to second quarter results. HPT's hotels are concentrated within upscale and mid scale industry segments in suburban locations.

The average RevPAR increase of our mid scale hotels was 10.1%, 7.4 percentage points above the industry average for that segment. RevPAR at our upscale hotels increased 7.3%, compared to the industry segment average of 7.8% this quarter. HPT's upscale hotels performance versus the segment as a whole has improved significantly, particularly due to completion of Courtyard and Residence Inn renovations over the past18 months. Average daily rate growth was 3.5% in the second quarter of 2011, and has increased in each hotel portfolio this quarter compared to last year as our operators continue to manage guest mix to reduce discounted business.

It is encouraging that despite the macroeconomic environment, we have seen consistent occupancy, rate, and RevPAR improvement each month in 2011 compared to 2010, and great attention continues to be focused on managing rate. Our RevPAR growth this quarter was impacted by various factors including our record number of tornadoes and flooding in the Midwest and southern states reduced government per diems and certain government cutbacks including to NASA and Army base closures. Our managers forecast RevPAR growth across all of our hotel portfolios in the range of 6% to 7% for 2011 and they've indicated they remain comfortable with their full year RevPAR projections for our hotels. There is continued optimism about this ongoing lodging recovery as a result of continued steady increases in demand, average daily rate and GOP margin improvement.

Although the recent slowing of US economic growth and fallout in the aftermath of the S&P downgrade has intensified uncertainty about the pace of lodging recovery going forward, we have yet to see anything that would indicate a decline in hotel room demand. As you know, the recent recession had a significant negative effect on the lodging industry and the result of HPT's hotel did not escape impact. However, despite the significant decline in revenues and cash flow as experienced by our properties, HPT's earnings and cash flows remained relatively insulated as a result of security features in our contracts. These guarantees, security deposits and subordinated management fees were designed to enable HPT to navigate industry cyclicality, not the near catastrophic effects of the recent recession.

Nonetheless they worked as intended providing us time to strengthen our balance sheet position and allowing us to renegotiate on solid footing with our 3 largest operators, TA, Marriott and IHG. Our TA lease amendments completed and announced during the first quarter of 2011 represented the first of 3 significant contract amendments HPT has completed this year. We believe the lower rent amount resulting from this amendment will ensure that TA has the ability to meet all of its rent obligations to HPT going forward including during the next economic downturn. The realignment of 3 management contracts with Marriott was completed June 14, 2011.

HPT entered into a new management agreement which combined 71 hotels which were previously included in our Marriott 2, 3 and 4 portfolios. The total minimum returns due to HPT under the new Marriott agreement are unchanged from the historical contract amounts at $98.4 million annually. In addition to the $3 million historical security government which remained at June 30, 2011, Marriott has provided HPT with a limited guarantee of 90% of our minimum returns. This guarantee has a $40 million cap and runs through 2017. We also modified the cash flow distribution priorities so that 70% of the hotel cash flow remaining after payment of our minimum returns is used to replenish the security deposit back to its original combined balance, $64.7 million. As part of the new agreement we together with Marriott identified 21 hotels which we are offering for sale.

As sales occur, the minimum returns due to HPT under the agreement will be reduced by 9% of the sales proceeds. We also agreed as part of the amendment to fund approximately $102 million towards renovations at the remaining 50 hotels over the next 2 years and our minimum returns will increase by 9% of amounts funded. The term of the new agreement runs through 2025 and it was effective as of January 1, 2011. The restructuring of our 4 contracts with IHG was completed on July 25, 2011 with HPT and IHG agreeing to a single combined management contract for 130 hotels.

The combined minimum returns and rents under the new agreement is the same as it was under the 4 historical agreements, $153 million annually. In addition, IHG provided with us an additional security deposit of $37 million which combined with the existing deposit balance of $27.6 million at June 30 brought the deposit to $64.6 million. We also modified the cash flow distribution priorities, so that 50% of the net cash flow after payment of our minimum returns and rents is used to replenish the security deposit up to $100 million. As part of the new agreement, HPT and IHG identified 42 hotels which we may sell or re-grant. As properties are sold or re-granted our returns from IHG will be reduced, generally by 8%.

Finally, we agreed to fund approximately $300 million towards renovations at the remaining hotels between now and the end of 2013. As we fund the improvements, our returns will increase by 8% of amounts funded. This new agreement runs to 2036, and was effective July 1, 2011. The primary focus of our efforts during the first half of 2011 was on the TA lease amendments and the realignment of our agreements with IHG and Marriott. However, during this period we have also been developing relationships with other lodging companies that may be strategic for our growth later this year, and in the future.

In fact, during the second quarter, we have been working towards potential acquisition of hotel properties. While we continue to work on this potential acquisition, we can provide no assurance that any agreement to acquire properties will be reached. Going forward, we plan to remain disciplined in our investment underwriting, and to maintain our strong balance sheet and liquidity, but we will do so with an increased focus on growing our business on an accretive basis. I'll now turn the presentation over to Mark to provide further detail on our financial results.

Thanks, John. First let's review the second quarter operating results for our hotel properties. Revenues for our hotel portfolio increased $22.6 million or 7.8% versus the prior year. Our strongest performing portfolios were our Carlson, our new combined Marriott and Marriott Number 1 portfolios with RevPAR increases of 14.8%, 8.3% and 7.4% respectively. RevPAR for our new combined IHG portfolio increased 7.1% quarter over quarter, including a 9.2% increase for our 76 Candlewood Suites. With all of our hotel portfolios experiencing gains in both occupancy and ADR this quarter, GOP and cash flow margins each increased this quarter.

Gross operating profit increased by $12.4 million or 11.3% quarter over quarter, and our GOP margin percentage increased 121 basis points to 39.2%. More importantly, net cash flow available to pay our minimum rents and returns increased by approximately $11.5 million or 16.8% versus last year to $79.9 million. The largest increases were in our Hyatt and combined IHG portfolios, which produced net cash flow increases of 20.7% and 16.9% respectively, quarter over quarter. With the improvement in hotel net cash flow, coverage of our minimum returns and rents on a rolling 12-month basis improved from the prior quarter for all portfolios except our Marriott Number 1 portfolio, which has been negatively impacted by renovation activity during the past year.

In the second quarter, our Hyatt portfolio had 1 times coverage and our Marriott Number 1 coverage 0.99 times coverage. During the second quarter, we applied the security deposits we hold in connection with our Marriott and IHG agreements to cover payment shortfalls. We expect the increased IHG security deposit to be sufficient to cover any additional payment shortfalls before the combined portfolio returns to 1 times coverage. The remaining security deposit for our combined Marriott portfolio is expected to be fully utilized in the 2011 third quarter. Thereafter if cash flow is less than our minimum returns, Marriott will fund the difference up to 90% of our minimum return subject to a cumulative cap of $40 million. We expect this guarantee to be more than sufficient to cover up to 90% of any additional payment shortfalls before the portfolio returns to 1 times coverage. Information regarding our security deposit and guarantee balances at quarter end is included in our Form 10-Q which will be filed later today.

Turning to our TravelCenters portfolio, performance was very strong this quarter with EBITDAR up $8.1 million or 9.2% versus the 2010 second quarter. Both fuel volume and per gallon fuel margin increased this quarter resulting in a 13.1% increase in fuel gross margin compared to the 2010 quarter. Non fuel revenues and gross margin increased 8.5% and 5.8% respectively quarter over quarter. Based on the new modified lease terms, property level rent coverage for the last 12 months ended June 30 would have been 1.6 times for our TA centers and 1.5 times for our Petro centers.

Earlier today, TA reported second quarter 2011 corporate level EBITDAR of $82.9 million, a 9.4% increase from the 2010 second quarter. TA's EBITDAR coverage of total cash rents at the corporate level for the second quarter was 1.6 times and based on the new modified lease terms was 1.25 times for the trailing 12 months. Turning to HPT's operating results for the second quarter, this morning we reported normalized FFO of $110.2 million or $0.89 per share. This compares to second quarter 2010 normalized FFO of $100 million or $0.81 per share. This increase was driven primarily by rent increases totaling $4.3 million under our TA and Marriott Number 1 leases, a $4.1 million increase to income as a result of the retroactive effective date of our new Marriott contract and reduced interest expense.

EBITDA was $151.3 million in the second quarter, and our EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.7 times. In May, HPT paid a cash dividend on our common shares of $0.45 per share. Our normalized FFO payout ratio was 50% for the 2011 second quarter. With respect to our balance sheet and liquidity, at quarter end we had cash and cash equivalents of $55 million, which included $52 million of cash escrowed for improvements to our hotels, and had only $153 million of borrowings outstanding on our $750 million revolving credit facility. Our revolver matures in late October, and we are currently working toward a new unsecured facility that we expect to have in place prior to the October maturity date of our existing facility.

During the second quarter of 2011, we made capital fundings in excess of FF&E reserves of $683,000 to fund ongoing renovations at certain of our Courtyard hotels included in our Marriott Number 1 portfolio, and we expect to fund an additional $13 million in 2011 to complete these renovations. During the second quarter, we also made capital fundings under our leases with TA totaling approximately $36 million. As a result, annual rent under our TA leases increased approximately $3 million. As John discussed, our new agreement with Marriott will result in the sale with 21 hotels and HPT funded capital improvements to the remaining 50 hotels of approximately $100 million. We do not expect to make the first capital improvement funding under this agreement until the 2012 first quarter.

Our new agreement with IHG may result in the sale or rebranding of up to 42 hotels, and requires HPT funded capital improvements to the remaining hotels of approximately $300 million through the end of 2013. We expect to make our first capital improvement funding under this agreement in the 2011 fourth quarter. I should also point out that under the terms of the new IHP agreement no FF&E reserves will be escrowed until the planned hotel renovations are completed at the end of 2013. This temporary change in the agreement's cash waterfall schedule will have the effect of lowering our reported net income in normalized FFO and increasing cash available for distribution by the same amount. If this change had been in place for the 2011 second quarter, the impact would have been $6.9 million or $0.06 per share.

In closing, we remain optimistic about the prospect of continued improvement in the operating results at our hotels and TravelCenters, and are excited about our renewed focus on growing the business. That concludes our prepared remarks. Operator, we are ready to take questions.

Thank you. (Operator Instructions). Our first question comes from the line of David Loeb. Please go ahead.

John, Mark, good afternoon to you.

Hello, David.

In the press release that you referenced that you'd spent $800,000 in acquisition related costs. Can you talk a little bit about what that could look like, if you can, and if not, then maybe about what you're looking for in acquisitions, and how that might play out?

On that particular transaction, we're subject to a confidentiality agreement. Frankly, even if we weren't, we probably wouldn't talk about it, ongoing acquisition discussions until they're completed. So I guess all I would say is, we're focused on hotel investments and those conversations are ongoing, and I think the properties that we're looking at will be consistent with the types of properties we own today, and I guess I'd prefer to leave it like that. The accounting has changed in the past you capitalized costs associated with acquisitions, and so if you were working on something, it wouldn't be so evident, but the accounting rules have changed for acquisitions and acquisition related costs get expensed, and so that's why the cat's somewhat out of the bag, but that's as far out of the bag as it's going to get.

That's totally fair. You said similar kinds of assets. Should we assume similar kinds of structure, similar kind of security features and stability of cash flow, that kind of thing?

I'd rather just not go further.

Okay. How about generally speaking, what kind of yields are you looking for from acquisitions and what's the upside split beyond whatever that yield is likely to be, not talking about this one, but just generally as you go shopping for acquisitions?

Well, generally we like -- we've always liked our structure. We've tried in re-negotiating with Marriott and IHG, we've tried to maintain a similar structure in the new combined agreements and over the long haul, I think our plan would be to try and stick to similar type assets in management contracts that are portfolio contracts that provide a return to HPT first and management fees to our operators which are subordinated with credit report to the extent that we can negotiate for it, but it's a very competitive landscape and you don't always get everything you wish for.

What does that mean in terms of returns, though? What's your return hurdle that you're looking for this?

I mean -- we were targeting prior to the last week's events. I think it would be fair to say that we were targeting returns in the 8% range so that our -- both our equity and our weighted capital costs were covered by the returns on the contract.

Okay. And similar kind of fifty-fifty split on the upside? Or is that more complicated?

Yes. If we can negotiate for more in certain transactions for whatever reasons, you know, we'd be happy to get more than a fifty-fifty split, but a bunch of our agreements have splits in that range. So that's probably the direction that we'll be weighted towards.

Great, thanks.

Thank you. Our next question come from Bryan Maher. Please go ahead.

Good afternoon, guys.

Good afternoon.

Switching gears a little bit, can we talk a little bit about the sales process, specifically how long do you think that will play out? Is it kind of 6, 12, 18 months? And secondarily some of the level of interest of the buyers, potential buyers, what you might have seen so far and who they are, not specifically but just generally?

We've got 21 Marriott branded properties that are on the market today and I think that the process is going well. I think we'll probably do a call for offers during the third quarter and hope to be -- have closed on the sale by the end this year. The level of interest has been very strong. We thought because of the mix of properties that, that the portfolio would be sold and in a series -- possibly in a series of mini portfolios and maybe even a couple might be sold on a one off basis, but we've seen very strong portfolio interest, and it's come from a wide variety of sources from hedge funds, sovereign wealth funds, private equity, hotel, third-party hotel operators. Remember this portfolio is being sold subject to existing Marriott branding. So, the IHG hotels, we sold the Memphis hotel for net proceeds of about $6.9 million during the quarter, I guess maybe July and we're currently evaluating what we're going to do with the other properties, and what the best way to go forward there is. So I don't really have a good update there.

So basically the Marriott properties likely this year, and if I read what you're saying probably the IHGs in 2012?

Yes. I think that's a good estimate.

Okay. And then circling back to David's question for a moment as it relates to those acquisition costs, they seemed a little bit high relative to doing an acquisition that would be measured in tens of millions. Would be it safe for us to guess or not, that it's more along the lines of above $100 million purchase?

Yes. I don't want to provide too much.

I don't want you to negotiate against yourself.

I would just -- traditionally we've preferred portfolio contracts, and traditionally, our transaction size has been larger than the average hotel transaction that some of our competitors do. So I'd prefer to just leave it there.

Okay. And then just lastly, and I'll punt off to somebody else, as it relates to TravelCenters, are you in the market at all for any more TravelCenters? Or is that just a done deal for now?

We are not looking at or looking for additional TravelCenters investments at the current time. We are focused on hotel acquisitions.

Thanks, John.

Thank you.

Thank you. Our next question comes from Smedes Rose. Please go ahead.

Hi. Always an adventure, Smedes. I was just wondering for the hotels -- or is it possible to give sort of a pro forma RevPAR percentage increase in the quarter if you take out the hotels that you are planning to sell?

Oh, I don't know if I have that handy.

Okay. Well, if it -- or maybe I can ask you offline. And then I just wanted to be clear, the InterCon hotels that you're selling, those can be re-branded by the buyer? Or re-flagged?

Yes. The IHG branded properties that we may sell can be re-branded. They can be sold with branded management or without.

Okay. And then if you're selling -- I think I'm -- if you're selling the 9 TownePlace Suites does that pretty much take you out of that brand now? In terms of after you've sold those?

I think we may have one -- well, we have a couple left. We had 12, so we'll have a few.

Okay. So you'll have a few left, but you're sort of largely exiting that brand?

Yes.

Okay. That's it for me, thank you.

Thanks.

Thank you. Our next question comes from Jeff Donnelly. Please go ahead.

Good afternoon, guys. John, you were discussing acquisitions earlier. How do you feel about your cost of capital today versus pricing on hotels in the marketplace? I'm just curious given at least in the full service side sort of the froth we've seen there. I'm curious if you think you guys can be competitive for deals while still providing FFO and NEV accretion to your shareholders.

Well, that's a loaded question. Our capital costs today obviously are a lot higher than they were 2 days ago. So it's -- the discussions are in progress and we may not get a deal done. We're not going to buy any hotels with 4 caps or 5 caps on a 1 off basis in New York or Chicago or Denver or Minneapolis. If our competitors are fighting with each other over those, we'll let them have at it.

Maybe a different way --

I do think historically we've done transactions that have been strategic. Important to the operator as well as important to us, and they haven't been so much a widely exposed auction that where we've had to give up returns to our shareholders to get a deal done. So I don't -- we're going to be disciplined and if we can generate an accretive return, then we'll go forward and if we can't, then we'll pass, and wait for the next opportunity.

Do you think that just the reality of the market today probably means that more of your acquisitions are select service than full service?

That may be true. Historically that's been our preferred area of focus anyway. We like the upscale select service hotels like Courtyard and Hyatt Place and Staybridge and Residence Inn. Those are all very well performing, stable properties with high margin. So I don't have any trouble staying in that segment.

And then, I guess to build on Bryan's questions on dispositions, is there a reason we should assume that the experience you're having with selling the Marriott branded assets wouldn't apply to the InterCon assets? Do you think you might have to put capital into those ahead of a sale? I'm just curious why you didn't sound as confident about the path they would take when you put them to market.

Well, they're both -- they're different in that we have the ability to sell only operating management on the Marriott portfolio, the branding can't change. In the IHG portfolio we have the ability to sell encumbered or unencumbered and we, in fact, could retain hotels and re-brand. So it's -- we haven't decided exactly what we're going to do with those hotels yet, and so that's the delay. I think that there's some capital needed in the Marriott properties just as much as there may be in the IHG properties. So I wouldn't -- I don't believe there's any reason why there will be any different level of interest in the IHG properties when we do come to market with them.

And just 2 last questions and I guess for Mark, I don't want to leave you out. Any sense that the gyrations in the market that we've seen in the last few weeks have meaningfully translated to the lending markets for hotels such that might have become more difficult or more challenging for someone looking to get financing to buy these hotels you're selling? And then just separately, can you talk about the pricing on your new credit facility.

Yes. On the first thing I think it's too early to tell the longer term implications of what the fallout, if you will, from the S&P downgrade and some of the other uncertainties in the debt markets these days, but I think they're still -- I think there's still a lot of cash and liquidity out there that wants to be put to work. So I'm hopeful that the markets -- the debt markets will come back. In fact, I know someone did. I received a note earlier today. There was an investment grade deal that's being marketed today. So hopefully that will go off well and I think that will be a positive for the debt markets.

In terms of our revolver, just to refresh people's memory, we're currently paying 55 basis points over LIBOR with our current credit rating on that facility. It's fair to say that today's market for revolvers is not at 55 basis points over LIBOR. So we're going to pay something more than that. Similar to the acquisition front, we're in the middle of those negotiations now. So I don't really want to get into too much detail, but I think it's fair to say that if you look at deals that have priced recently for investment grade companies, the BBB level, it's been in the $120 million to $140 million over area.

Great. Thank you.

Yes.

Thank you. Our next question comes from Ryan Meliker, please go ahead.

Just a quick follow-up on the revolver. So I guess have the events of the past couple weeks altered your view in term of your ability to be able to get the new revolver in place by the time the current one expires in October?

No. Not at all, no. We still feel very good about our ability to replace the revolver and our current expectations is that we'll continue to be a $750 million facility.

Great. And then with regards to the CapEx that you're going to be investing in, the Marriott and IHG properties, sounds like you indicated that the Marriott investment might start around 1Q of next year? Can you give us a time line on both those when they're going to start and how that's going to progress, when it will finish?

Yes, we're still -- on the Marriott you're right. The first funding we make will be in the first quarter of 2012 and we're actually in the process of working through formally scheduling that funding out with Marriott. So we'll have a more detailed update to provide on next quarter's call. With IHG, we expect to make the first funding in the fourth quarter, and at this point, I would expect that funding will be in the $30 million to $50 million range and once again we'll have a more detailed schedule to walk through on next quarter's call.

Great. And then I guess I'm just thinking about as it pertains to the cash flows in versus cash flows out, sounds like you had indicated in previous conversations that you were expecting the funding for these investments to really be driven by the dispositions of all these hotels that you're selling. I'm wondering, is it possible that some of the funding is going to come before the disposition and if that's the case, how are you planning the funding is going to be through the revolver or some other means?

Well, if we're successful in selling the Marriott hotels by the end of the year, in that case proceeds will be greater than funding commitments at that point and to the extent we do not sell and need to fund, our current thinking is we'd do that through the revolver since it's more or less just timing, a timing difference in terms of when we receive proceeds and when we make capital fundings.

Okay. And then just one last question, if you do sell the assets in advance of the investment CapEx being put in, my understanding is your minimum -- your returns go down a little bit. Do you expect -- could that potentially pressure your dividend coverage or is that a non issue?

No. That's not going to be an issue. I mean we're at a 50% FFO payout ratio this quarter. It's just not --

But that's before all the CapEx.

I agree. I understand. It's not going to put any pressure on the dividend.

You'd be able to manage your CapEx to make sure your dividend coverage is comfortable?

Yes.

Great. That's all for me. Thanks a lot.

Okay, thanks.

Thank you. (OPERATOR INSTRUCTIONS). We have a question from Michael Salinsky. Please go ahead.

Good afternoon, guys. Just going back to the acquisition, is there anything under contract at this point?

No. If we had it under contract, I think we'd have to disclose it.

Yes, we would disclose it, yes.

Okay, fair enough. Second of all, Mark, in your comment, you talked about sounded like was it an accounting change related to CapEx. Could you explain that a little bit more?

I think you're talking about the FF&E reserves under the IHG contract?

Yes.

Yes. Well, historically we've escrowed 5% of hotel revenues into the FF&E reserves for under our 4 IHG contracts, and as part of the amended contract there will be no FF&E escrows until we complete all of the hotel renovations at the end of 2013. So until January 1, 2014 there will be no FF&E reserves. Now the way that the FF&E reserves flow through our income statement, they end up in net income and FFO and normalized FFO. And so when you eliminate those and that excess cash flow goes to pay -- in effect, it goes to pay our minimum returns. So we lose the benefit. And this only is an issue when we're drawing on security deposits because we're at less than 1-0 coverage which is the situation we current find ourselves in.

So there will be a decline in net income and FFO and normalized FFO equal to essentially 5% of revenues for the IHG portfolio. On the flip side of that, is that because that cash is not being put into an escrow or restricted cash account, it's available to pay our minimum return the way the waterfall works. So it will reduce the amount we have to draw on security deposits and therefore, since drawing on security deposit is non-cash income, we'll increase our cash available for distribution by an equal amount. Does that make sense? There's a lot of debits and credits and if anyone doesn't get it, please give me a call and we can kind of walk through the debits and credits on the phone.

It sounds like it's going to flow through FFO, but it's going to basically be a wash on AFFO.

It's actually -- well, if you're deducting FF&E reserves from AFFO, that's AFFO, and deducting non-cash income when we draw on a security deposit, well, that should be an increase to AFFO, depending on how you define AFFO.

I'll follow up with you offline on that one, no problem.

That would probably make sense.

Then, just going back to I think Ryan's question, as we're looking at sources and uses here, was the real -- as you're putting together budgets and you're probably early on here, what is the realistic CapEx spend we should expect for 2012? It sounds like you've got a couple years on the IHG one, sounds like the Marriott ones I think are going to be on the front burner there. Should we expect the full Marriott renovations in 2012 and then, split up the $300 million between 2012 and 2013 or --

I think if you're going to model it, that's the right way to do it. You should assume that all the Marriott CapEx gets funded next year, and that the IHG fundings occur over the 2012, 2013. They're getting started probably at IHG, probably in November, early December first on all the extended stay properties. There's more planning involved with the Crowne Plazas and the InterContinentals, so they probably won't start until later in 2012, and that will take during 2013 to get finished. Marriott properties -- a lot of planning has already been done, and so they should be able to finish all of that capital barring any unforeseen circumstances, all next year.

That's helpful. Then finally doesn't sound like you guys are active in the debt markets right now, but can you just give us an update what you're hearing from lenders as to spreads, how far those have blown out, the availability?

Yes. I don't have a whole lot of color on that, Mike. It's not -- it's only been a couple of days -- we're a day and a half into since the S&P announcement. I know on Monday spreads did widen some. I don't have any specific numbers. I think I read something where for all investment grades it was on average 15 basis points to 20 basis points wider. Of course, the treasuries traded up yesterday. So that would have diminished the impact of that widening. As I mentioned earlier, I did see there was an investment grade transaction announced this morning. Hopefully that transaction went well, and I think if that transaction went well, you'll probably see the -- I would hope you'd see the investment grade debt markets open up again this week.

That's all for me, guys. Thanks.

Thanks.

Thanks.

Thank you. We have no further questions. I will turn it back over to John Murray for closing remarks.

Thank you again for joining us today, and we look forward to speaking to you again, give you an update when we talk about our Q3 results in November, unless we have transactions earlier than that. Thank you.

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.