Service Properties Trust (SVC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the Hospitality Properties Trust's third quarter 2012 financial results conference call. This call is being recorded. At this time, for our opening remarks and introductions, I would like to turn the call over to the Senior Manager of Investor Relations, Ms. Carlynn Finn. Please go ahead, Miss.

Thank you, and good afternoon. Joining me on today's call are John Murray, President; and Mark Kleifges, Chief Financial Officer. John and Mark will make a short presentation, which will be followed by a question-and-answer session. 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, November 6, 2012.

The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements 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 the 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 Form 10-Q to be filed with the SEC and in our Q3 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 statements. Now I'd like to turn the call over to John Murray.

Thank you, Carlynn. Good afternoon and welcome to our third quarter 2012 earnings call. Today HPT reported third quarter normalized FFO of $0.74 per share. Focusing first on our Travel Center investments, this morning, TA reported third quarter 2012 net income of $19 million. TA's third quarter performance at HPT's 185 travel centers included continued strong per gallon diesel margins, despite generally increasing fuel prices and reduced volumes during the quarter. Reduced fuel volumes reflect a combination of factors, including a slowing economy, continued conservation efforts in the trucking industry, and TA's CapEx initiative to update its diesel fuel dispensers, which caused about 7% of its fuel lanes to be out of service this quarter. Nonfuel sales and gross margin were essentially flat quarter-over-quarter.

Turning to HPT's hotel investments, third quarter RevPAR increased 0.2% at our comparable 285 hotels, driven by a 4.3 percentage point decline in occupancy to 72.8%, offset by a 6.1% increase in ADR to $99.14. The third quarter was negatively impacted by 27 hotels that were being renovated, and 35 hotels that went through brand and management conversions during the third quarter. Looking at the 223 comparable hotels, excluding those under renovation and those recently converted, RevPAR increased 4.1% this quarter, the result of a 1.2 percentage point decrease in average occupancy to 75.1%, offset by a 5.8% increase in the average daily rate to $102.68.

As we have discussed over the past couple of quarters, renovations had a negative effect on performance, primarily from the reduced occupancies due to rooms out of service. During the third quarter we converted 15 hotels from IHG and Marriott brands and management to Sonesta brands and management, and August 1 we converted 20 hotels from IHG brands to Wyndham brands and management. The conversion process, even when it goes well, generally has a negative immediate impact, as hotels change their codes on the global distribution systems which enable travel agents and customers to see room availability and make reservations. Changed brands and hotel names also make it initially challenging for return guests to find a hotel and rebook.

There's also a period of time before the new manager's sales teams can book business to offset the fact that the outgoing managers were not booking new business into the hotels that were leaving their systems. Major customer relationships have to be re-established. In HPT's Wyndham and Sonesta portfolios, we expect to see recovery from these transition issues over the next several quarters, but operations will not likely stabilize at these hotels until after renovations are completed in 2013 and 2014. It's important to remember that these affected properties account for only about 7% of HPT's minimum returns, and we have credit support for the Wyndham branded component of that.

Despite the renovations and rebrandings taking place in our portfolios, the average daily rate growth for our 287 hotels was 6.3% in the third quarter of 2012, and increased in each hotel agreement, except Kauai, and for 16 of our 19 brands this quarter compared to last year. However, as I noted, the impact of renovations and conversions continues to weigh on hotel performance, and will through the fourth quarter of 2012 and 2013. We expect the fourth quarter to bring strong growth at renovated properties, flat performance at hotels which have not yet been renovated, and declines of those properties under renovation or recently converted.

Nonetheless, we are pleased that the post-renovation ramp-up which occurs more slowly at Extended Stay hotels is gaining momentum, with hotels renovated in 2011 growing RevPAR 9.1%. Those renovated in the first quarter of 2012 generating 7.7% RevPAR growth, and those renovated in the second quarter already showing 5.9% RevPAR growth. We believe we are on the right course with our renovation program. We expect 31 hotels will be under renovation during all of all parts of the fourth quarter, and about 56 in the first quarter of 2013.

Renovation activity is expected to continue throughout 2013, princely at our Sonesta and Wyndham hotels, and to a lesser extent in our Marriott 234 and IHG components. We have tried to schedule as many renovation projects as possible for periods when they may create the least disruption to hotel performance. Nonetheless, there will be projects underway during each quarter, and the impact will partially offset growth in properties not under renovation.

I know many of you on the call with us today were probably in the path of, or in somewhat impacted by Sandy over the past week. HPT owns many hotels along the Atlantic Coast and along the storm track as Sandy moved inland from New Jersey. We did not sustain material damage at any of our properties, although a few in New Jersey were without power for almost a week. Some hotels had cancellations in anticipation of the storm, but early reports are that we did not lose a material amount of business, and in some cases there was increased business, as a result of evacuations and insurance business. We do not expect that there will be -- I'm sorry, we do expect that there will be a pick-up in business, particularly at our Extended Stay hotels in connection with various rebuilding efforts from Pennsylvania up through Massachusetts, but particularly in New Jersey.

Part of our strategy in acquiring the two Sonesta hotels and establishing an affiliate relationship with Sonesta was to improve our growth opportunities. During the second and third quarter, HPT and Sonesta converted 19 hotels from our IHG and Marriott portfolios to Sonesta brands. Renovations are planned at all of these hotels, which will occur in 2013 and 2014. We also sold two hotels to entities affiliated with Sonesta. We continue to look for opportunities to add to our Sonesta portfolio. The Sonesta relationship is not our only growth opportunity. In August, we closed on the management agreement with Wyndham Hotels and Resorts, whereby Wyndham converted 15 Candlewood Suites and one Staybridge Suites hotel to Wyndham's Hawthorne Suites brand, and four Crowne Plazas to Wyndham hotels.

On Thursday of last week we closed on the acquisition of Hotel 71 in Chicago for $85 million. This hotel will undergo renovations in the first and second quarters of 2013 to renovate some rooms, add meeting space, and modernize elevators. It will be rebranded as the Wyndham Grand Chicago Riverfront. Wyndham will manage the hotel, which will be added to our existing portfolio management agreement. Five of the floors will be leased to, renovated, and operated by Wyndham Vacations. We are currently evaluating other possible acquisition opportunities with Wyndham, and plan to continue to grow this portfolio.

On July 13, we sold the St. Louis Airport Marriott for $29 million. Taking into account the above conversions, the sale of the 3 hotels, and the Hotel 71 acquisition, HPT's hotel portfolio is now made up of 122 Marriott managed hotels, 91 hotels managed by IHG, 22 hotels managed by Hyatt, 21 hotels managed by each of Wyndham and Sonesta, and 11 hotels managed by Carlson. As we have discussed, we are in the process of returning these hotels to like-new condition during the present ongoing renovation process, and expect long-term performance of our hotels to remain strong.

On October 9, we announced a $0.02 per quarter, or 4.4%, increase in our quarterly dividend to $0.47 per common share, beginning with the dividend we will pay later this month. Notwithstanding the renovation and brand conversions that are impacting our reported results currently, we are seeing improving cash flows at our renovated assets and are also adding acquisitions, and this dividend increase is a reflection of our optimism about continued improvement. I will now turn the presentation over to Mark to provide further detail on our financial results.

Thanks, John. First let's review the third quarter operating results for our hotel properties. As John discussed, in the third quarter we rebranded 35 hotels and had 27 of our hotels under renovation for all of or part of the quarter. As would be expected, the disruption to operations caused by these actions had a negative impact on the financial performance of our hotels this quarter, with revenue at our 285 comparable hotels essentially unchanged versus the prior year quarter. Revenues at our 223 hotels not under renovation or not rebranded during the quarter were up 4.2% versus the prior year quarter. However, this increase was offset by quarter-over-quarter declines in revenue of 8.8% at hotels under renovation during the quarter and 18.2% at hotels rebranded during the quarter.

Our strongest performing portfolio again this quarter was our Marriott No. 1 Portfolio, with a quarter-over-quarter revenue increase of 11.2%. Renovation and rebranding activities also had a negative impact on hotel profitability, with gross operating profit for our comparable hotels down $7.4 million, or about 6.5% quarter-over-quarter, and GOP margin percentage down 250 basis points to 35.2%. Excluding hotels under renovation or rebranded during the quarter, gross operating profit increased $5.7 million or 6.2%, and GOP margin percentage increased 70 basis points to 48.8% at our comparable hotels.

Despite the negative impact renovation and rebranding efforts had on our hotel level operating results this quarter, the impact on HPT's consolidated financial results was minimized to a large extent by the guarantee in security deposit features of our hotel operating agreements. During the 2012 third quarter, HPT recognized minimum returns in rents from its hotel operating agreement of $87.2 million, representing only a $3.4 million or 3.8% decline from the 2011 level.

Turning to coverage of our minimum returns in rents for the 2012 third quarter, our Marriott No. 234 and IHG portfolios had coverage of 1 times and 0.86 times, respectively. During the third quarter, the amount available under our Marriott No. 234 guarantee was replenished by $400,000, resulting in a remaining balance of $30.9 million at September 30. During the quarter we utilized $2.7 million of the IHG security deposit to cover cash flow shortfalls, resulting in an available security deposit balance of $38.3 million at the end of the quarter.

Information regarding all of our security deposit and guarantee balances at quarter-end will be included in our Form 10-Q, which will be filed tomorrow. Turning to our Travel Center portfolio, performance this quarter was mixed, with property level EBITDA at our 185 centers down $583,000, or less than 1% versus the 2011 third quarter. Fuel volumes for the third quarter declined 8.9% from the prior year, but per gallon fuel margin increased, resulting in a 2.3% increase in fuel gross margin compared to the 2011 quarter. For the 2012 third quarter, nonfuel revenue increased 1.4% and nonfuel gross margin declined approximately 1%, both compared to the prior year quarter.

Property level rent coverage for the 2011 third quarter -- pardon me, property level rent coverage for the [2000] third quarter was 1.86 times for our TA Centers and 1.85 times for our Petro Centers. Earlier today, TA reported third quarter 2012 corporate level EBITDAR of $83.6 million, a $535,000 increase from the 2011 third quarter. This represents the 11th consecutive quarter TA has realized growth in corporate level EBITDAR versus the prior year quarter. TA's EBITDAR coverage of total cash rents at the corporate level remained strong at 1.35 times on a trailing 12-month basis.

Turning to HPT's operating results for the third quarter, this morning we reported normalized FFO of $91.5 million or $0.74 per share. This compares to third quarter 2011 normalized FFO of $98 million or $0.79 per share. The decline in normalized FFO from the 2011 quarter is due primarily to the loss of income resulting from the temporary elimination of FF&E escrow funding requirements for the Marriott 234 portfolio and lower minimum returns earned from certain of our hotels that were rebranded during the second and third quarters.

These declines were partially offset by increased minimum returns in rents under certain operating agreements, due to our funding of capital improvements, and the impact of our 2012 acquisitions. Adjusted EBITDA was $136.3 million in the third quarter, and our adjusted EBITDA, the total fixed charge coverage ratio for the quarter remains strong at three times. Turning to capital market activities, in August we issued $500 million of 5% senior notes, raising net proceeds of $488 million. In September we used $437 million of these proceeds to redeem our 6.75% senior notes due in 2013, and 6 million shares of our 7% series C preferred stock.

Before opening the call to questions, I'd like to provide an update on where HPT stands at the end of the third quarter with its capital funding commitments and liquidity. We've agreed to fund up to $145 million for renovations for the 68 hotels in our Marriott 234 agreement. As of the end of the quarter, we have funded $64 million. We expect to fund an additional $26 million in the fourth quarter, and the final $55 million in 2013. We have also agreed to fund up to $290 million from renovations to the 91 hotels in our Intercontinental agreement.

As of the end of the quarter, we have funded $169 million. We expect to fund an additional $67 million in the fourth quarter, and the final $54 million in 2013. We've also agreed to fund up to $75 million for renovations to the 20 hotels in our new Wyndham agreement. As of the end of the quarter we have funded $6 million. We expect to fund an additional $10 million in the fourth quarter, and the remaining $59 million in 2013. In connection with our acquisition of Hotel 71 in Chicago, we have agreed to fund an additional $18 million for hotel improvements that we expect to fund in 2013.

We continue to work with Sonesta to develop renovation budgets and timelines for the 19 hotels that have been converted to Sonesta brands. Our preliminary estimate is that we will fund between $130 million and $150 million for these renovations. At the end of the quarter we have funded $7 million. We expect to fund an additional $5 million in the fourth quarter, with the remainder of the funding taking place in 2013 and '14. Finally, we also expect to fund up to $103 million for improvements to our travel centers in 2012. As of the end of the quarter we have funded $48 million.

With respect to our balance sheet and liquidity, at quarter-end we had cash of approximately $17 million, which excludes $39 million of cash escrowed for improvements to our hotels, and had no amounts outstanding on our $750 million revolving credit facility. As of today, after funding the acquisition of the Chicago hotel, we have $65 million outstanding under our revolving credit facility, and $685 million of borrowing capacity available to fund our remaining capital commitments and any future acquisitions. In closing, we remain optimistic about the prospect of continued improvement in the operating results at our travel centers, as well as the positive impact of our extensive renovation program will have on the long-term performance of our hotels. Operator, that concludes our prepared remarks. We're ready to open up for questions.

Of course.

(Operator Instructions)

Ryan Meliker, MLV and Company.

Thanks for the color on where the capital funding stands. I think that's helpful. I had a couple other questions that I was hoping you guys could answer for us. Last quarter on the call you mentioned that your property managers had gotten a little bit more conservative with regards to the RevPAR outlook, down from plus-5% to plus-4% for 2012. Can you give us an update on where they stand right now?

Sure. I think it's fair to say that our operators are more cautious about the guidance now than they were during our last call. The flip side of that is that we've renovated substantially more properties and we're seeing more improvement. So we expect -- well, they're expecting that in the fourth quarter we'll see sort of overall, if you average out portfolios, probably a couple of percent RevPAR growth. But the portions of the IHG and Marriott 1 and Marriott 234 portfolios that have been renovated are expecting 5%, 6%, 7% or more RevPAR growth in the fourth quarter.

The properties that haven't been renovated and the properties that have just been recently converted or are under renovation are going to weigh against that and be flat and, in some cases down for renovations or conversions. So overall we're going to see -- we're expecting to see slightly improved RevPAR performance in the fourth quarter from this quarter or last quarter. But it's, on average it's not going to -- it's still not going to be a wild RevPAR number because of the renovations and conversions. And I think as we go on into 2013, it's very early looks that we're seeing from preliminary budgets, and I haven't seen Wyndham's or Sonesta's yet, but we're expecting RevPAR growth in the 5%, 6%, 7% area.

Okay. That's helpful. And then just if you can refresh my memory, I was hoping you could give us some color on the Sonesta agreement and what security you have, if anything, there. It looks like on a trailing 12-month basis, the Sonesta Number 1 is only at 0.63 times coverage, and I would imagine that over the course of the next year or two as the properties are undergoing renovation, that's only to-- that's probably only getting worse, not better. Can you give us some color on what you might be expecting in terms of coverage from those properties and how the cash flows might look coming out of those properties, from what you'll see after any security that you do have from Sonesta?

There's a lot in that question. I guess I'll start with the first part was about security. The management agreement that we have with Sonesta is very much industry-like. It's not like the typical HPT contracts that have credit support. We decided on this portfolio, which is a smaller component of our overall portfolio, that we would structure this more like the rest of the industry where we don't have credit support, but when result improved we have a much greater participation in the upside. So this portion of our portfolio is a little bit more leveraged to the cycle. In terms of --

That being said, during the renovations you would expect -- and is it safe to assume that cash flows that HPT will actually see from Sonesta are going to go down, but then once the renovations are completed you obviously get to participate in the upside?

Yes, I think I mentioned in the script even, that we expect that we're starting to see some recovery from the immediate sort of negatives of the transition, and that will continue next quarter and the following quarter, but as they start to improve, they'll also be beginning the renovations, and then that will sort of put the recovery on hold, if you will. So I think that you shouldn't really expect that these hotels that are in the Sonesta pool will be performing with strong coverage until after they've completed their renovations. We do expect that they will be covering the returns following the renovation period, which will be in 2013 and 2014, depending on the hotels, with the extended stay hotels being renovated for the most part as a generality, but for the most part the extended hotel extended stay hotels will be done sooner than full-service hotels.

Okay. That's helpful, and then one last question and then I'll yield the floor. But can you give us some color, I mean, obviously Sonesta and Wyndham had occupancy down pretty materially in the quarter. You address that was largely just driven by the changing of the brands and the implications that that has on the ability to sell rooms, but how many properties in those two portfolios were actually under renovation in that 6 million for Wyndham and 7 million for 004 Sonesta? Just wondering how much of an impact renovation had versus just the rebrandings?

It's mostly rebranding. The funds that we've expended for the most part in both portfolios have been associated with purchases of materials for model rooms and for some initial fundings for designers, and so it was mostly non-hotel impacting planning dollars, for the most part.

Okay. That being said, does that surprise you that the occupancies dropped as much as they did in the quarter? Or was that kind of in line with your expectations?

It didn't surprise us. I wouldn't tell you that we had a hard and fast number that was going to be the line in the sand between surprise and non-surprise, but we did expect that when the IHG and Marriott flags came off of the hotels that were rebranded and the Wyndham and Sonesta flags went on, that there would be a decline, for a lot of the reasons that we stated. And also there was turnover. I didn't mention it in the script, but one of the other factors is if you have long-term employees that have been working with Marriott or IHG for 15, 20 years, not all of them want to change employer at that point in their careers. And so there was some turnover that also has an impact on -- because that was particularly in the management ranks and sales ranks that that occurred. And so that also has a negative impact and creates a little bit more of an uphill battle post-transition. So I would describe all of this as in the expected range.

Okay. That's helpful. Thanks a lot. I'll yield the floor.

David Loeb, Baird.

I'd like to just follow up a little bit on Ryan's, not to beat a dead horse, but I guess the disruption in terms of EBITDA dollars was more this quarter than we expected. I wonder if you could give us some kind of estimate on disruption at Sonesta, at the other portfolios that are seeing a lot of renovations. Particularly I guess that's relevant to Marriott 234, because the guarantee is limited to 90%, but can you give us some idea about fourth quarter, first quarter, or second quarter, how much more disruption you expect to hit your bottom line?

We don't give that level of detailed guidance. I think we can guide you towards the fact that the level of impact that you saw during the third quarter, I think, I mean, it was a shortened period. A lot of conversions took place just during August. So it was two out of the three months where the most impact occurred. In the fourth quarter it will be, it's a typically weak quarter, but it will be -- the impact will be felt for the full quarter. And so I expect that probably the impact will be similar in the fourth quarter as it was this quarter.

And David, I guess with respect -- this is Mark, with respect to our credit support, keep in mind that for Marriott we haven't utilized any of the guarantee through the first nine months of this year. So we feel very confident that that credit support will get us through this renovation easily. With IHG, there will be less hotels under renovation next year. So I would hope that coverage will improve. I don't think we'll get back to 1.0 because of the renovation activity, but if you kind of look at burn rates on that security deposit, we feel pretty good that we're going to also get through this renovation program for IHG with security deposit left at the end of the program.

Right. That part I totally get. And it's just a matter of whether you're into that, whether you're below 1.0 on 234 or -- and above 0.9 that you actually have the dollar impact near-term to be run out of that. That's my understanding on that.

Yes.

Am I semi-correct?

That's correct.

Good, and then finally on Hotel 71, congrats on closing that, by the way. Obviously no surprise to most people since it was widely reported. Am I correct in seeing that that's just is an add-on to the Wyndham portfolio and all of the credit support that goes with the Wyndham portfolio applies to this one on the same terms?

That's pretty much the case. We've, in connection with the acquisition, this Hotel 71 is being added to the portfolio of 20 hotels that we already had. The cap on the guarantee is being increased by about a year's minimum return related to that Hotel 71. There's also a component of the hotel that's going to be leased to Wyndham Vacation for rental purposes. And so there's five floors of the hotel will be leased to Wyndham Vacation Rentals, I think is the name of the entity within Wyndham. And that's a recourse lease. The lease starts out at a minimum -- at $1 million annually and has annual bumps.

Great. Thank you.

Wes Golladay, RBC Capital Markets.

What are you seeing in the pipeline at the moment? Is it more full-service or select service? And what type of initial coverage of your minimum rent are you looking for?

We have a pretty active pipeline, and it includes both select service assets and full-service assets. I'd say it's about equally weighted. And pretty much everything that we're looking at right now is being marketed to the greater investment community. And so I think we're underwriting our deals so that we don't enter into any deals so they're underwater, but we're not underwriting 1.3 or 1.5 coverage. We're coming out expecting to have coverage, but small coverage in the first year and growing over time.

Okay. Thank you, guys.

That's what it takes to be competitive if you want a base yield in the 8% range.

Okay. Thanks.

(Operator Instructions)

Jeff Donnelly, Wells Fargo.

John, Mark, I apologize if this is repetitive but I missed some of your opening remarks. In the quarter you guys increased the dividend, but if memory serves me correctly, in the last conference call I think you guys indicated that the dividend increase wouldn't be likely until after the renovations are completed. Just curious what last lead to shift in the Board's thinking over the course of the quarter?

This -- there are a lot of factors that went into it. Mark will probably share some of his thoughts on it too, but we get a lot of calls and questions from investors about the timing of dividend increases. We've been employing various tax strategies over the last couple of years to enable us to keep as much free cash flow as possible to help fund the renovations in our portfolio. But as we were continuing to see improvement post-renovations at the hotels and starting to make acquisitions, we thought it was time to send a message to the shareholders that we are thinking of them and thinking about our improving cash flows, and so that's why we made the increase when we did.

Yes. I think that covers most of the points. I mean, we haven't had a dividend increase since we reinstated the dividend in January 2010. I think the Board just felt, given the cash flow that we're generating in our business, that it made sense to share some of that with our shareholders through an increased dividend. We'll generate this year before CapEx funding in the neighborhood of $110 million or so of free cash flow. The dividend increase amounts to about $10 million a year. So we'll still have significant cash flow available to fund part of our capital commitments going forward.

Okay. Just a different question. I'm curious, maybe John, what's your perspective on the state of the industry as it relates to RevPAR in future years? I'm not angling so much for guidance as it relates to HPT, just maybe more of what your sort of macro view is on where you think RevPAR begins to sort out as we roll through 2013 and '14? I guess maybe what I'm asking, if you think -- do you think that the pace of RevPAR gains is going to be decelerating in the next few years?

Well, I think hotels that have gone through recent renovations are going to see it accelerate. But apart from that, we've -- I've said people, I don't know if I've said it on the calls, but I've said over the course of this year that it seems like there's been sort of a tale of two cities. If you look at -- if we locked ourselves in an office here and just look at our TA and hotel performance across the industry, and didn't watch TV or read the newspaper, we would think the economy was doing a lot better than it seems to be. And so I don't know if that can continue for that much longer where investors are punishing companies that have less than 5% to 6% RevPAR growth, when that's twice what industry average has been over the longer-term.

I think that we've seen some fairly robust improvement in RevPAR over the past couple of years, and I expect that it's going to continue. The supply growth has been very muted, and I think that that is going to continue for at least another year. But if the pace of economic growth in the US economy picks up, and the improvement in RevPAR continues, it's just a matter of time before supply growth starts coming back. Right now it's limited to a few markets like New York, but it will be more widely dispersed if RevPAR continues to grow in the 5% to 10% range for a longer period. So I expect that next year's RevPAR growth will be pretty good. But I think that it's not going to take off like a rocket ship after that. I think it's going to be -- it's going to gradually trend back towards the longer-term average for a couple years, and then it just depends on what your view is on the economic cycle, how long that continues. I think for the next few years, things will be pretty good in the hotel industry.

When you guys talk to the Board, then, about the renovation activity and sort of you're doing more work with Sonesta, I guess, does it ever kind of come up, though, in Board discussions that about maybe getting caught in a situation that you just kind of have a lot of balls in the air as it relates to that type of, I'll call it disruptive work? When we might potentially be late in the cycle? I mean, is that a concern for folks there? Or is it -- or do they think that they'll get that worked on and kind of squeaked in before things really turn over?

I think generally speaking, you'd rather have balls in the air than be sitting around doing nothing. So our Board looks at a lot of different statistics from inside the hotel industry and the trucking industry, which is a pretty good measure of commerce in the US. As Mark mentioned a few minutes ago we have a pretty conservative amount of free cash flow and a pretty conservative leverage level. And I think all of those factors together gives our Board comfort that now is the time to be reinvesting in the properties to make sure that we are as best position as we can be, whether the cycle continues or whether the cycle changes. And we're trying to do it as quickly as possible so that as we get closer to a potential cycle change, we still have balls in the air but there's less of them.

Okay. No, that's helpful. Thank you.

Ryan Meliker, MLV and Company.

Just one more quick question. Can, I guess in 2012 it looks like most of your CapEx dollars were in 1Q, and it sounds like they're going to be in 4Q based on what you just gave color on earlier in the call. Should we expect something similar to that in 2013 where you'll focus your CapEx in 1Q and 4Q?

Yes, that's the plan. The best quarters for our properties have always been in the second and third quarters. So to the extent we can avoid having properties under renovation during those windows, we will. I mean, there's obviously some exceptions to that. When it's 120 degrees in the shade in Phoenix, it is an excellent time to be renovating there, because you don't have as many people seeking out the warmer weather, not like -- as they do in the winter months. So we'll be renovating some hotels in Texas and Arizona and places like that, maybe in the second and third quarters, but mostly first and forth.

Great, that's helpful. And then with regards to the Chicago acquisition of Hotel 71, I know you guys historically haven't done a lot with property level mortgages. Are you considering putting a property level mortgage on that property?

No. No, we borrowed, I think in the neighborhood of $60 million under our revolving credit facility.

$65 million.

$65 million, and -- but no, we don't have any intention of putting secured debt on that.

Okay, that's helpful. Thanks a lot.

All right. Thank you.

And now we'll turn the conference back to Mr. Murray for closing remarks. Please go ahead, sir.

Thank you all for joining us today. We will be at NAREIT next week if any of you would like to meet with us there. Otherwise I hope you all get out and vote today. It's an important election. Thanks.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.