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Edited Transcript of FCH earnings conference call or presentation 6-Aug-09 4:00pm GMT

Thomson Reuters StreetEvents

Q2 2009 FelCor Lodging Trust Incorporated Earnings Conference Call

IRVING Sep 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Felcor Lodging Trust Inc earnings conference call or presentation Thursday, August 6, 2009 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen Schafer

FelCor Lodging Trust Incorporated - VP-IR

* Richard Smith

FelCor Lodging Trust Incorporated - President & CEO

* Andrew Welch

FelCor Lodging Trust Incorporated - EVP & CFO

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Conference Call Participants

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* Will Marks

JMP Securities - Analyst

* David Loeb

Robert W. Baird - Analyst

* Susan Berliner

JPMorgan - Analyst

* Nikhil Bhalla

FBR Capital Markets - Analyst

* Dennis Farrell

Wells Fargo Securities - Analyst

* Shabad Thadani

Clearnato Management - Analyst

* Kevin Coyne

Goldman Sachs - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to FelCor's second quarter earnings conference call. (Operator Instructions). Thank you. Mr. Schafer, you may begin your conference.

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Stephen Schafer, FelCor Lodging Trust Incorporated - VP-IR [2]

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Thank you, and good morning to everyone. With me this morning are Rick Smith, President and CEO, and Andy Welch, Executive Vice President and Chief Financial Officer. They will address the current operating environment, our areas of focus, results for the quarter and our outlook. Following their remarks, we'll take your questions. Before I turn the call over to Rick, let me remind you that with the exception of historical information, the matters discussed on this conference call may include forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements are expressions of current expectations and not guarantees of future performance. Numerous risks and uncertainties and the occurrence of future events may cause actual results to differ materially from those currently expected. These risks and uncertainties are described in FelCor's filings with the Securities and Exchange Commission. Although we believe our current expectations to be based upon reasonable assumptions, we cannot assure you that our expectations will be attained or that actual results will not differ materially. With that, I will turn it over to Rick.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [3]

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Thanks, Steve. Good morning, everyone, and thanks for joining us this morning. As I mentioned to you on the last call, we're primarily focused on two areas this year -- operations and our balance sheet. Operationally, our focus continues to be on the areas we can control, which are market share and flow through. We gained 2% in market share across our portfolio during the second quarter, up from 1% in the first quarter. And we have gained share every month this year. Our portfolio as a whole is running at a market share index of 116. We continue to work diligently on managing the mix of our business in our hotels with the managers. And that, coupled with the excellent condition of our hotels post renovation, continues to help us drive share.

This was helped by the results of the San Francisco Marriott Union Square. The final product is an unbelievable transformation and is one of the best redevelopments I've ever seen. It looks like a new building from top to bottom. More importantly, it's exceeding our expectations operationally. While the absolute numbers are obviously down due to the economy, the hotel ran a market share index of 109 during the quarter with the lobby still under renovation for most of the quarter. We had planned for the hotel to run at an index of 110 against a pretty stellar set after stabilization, and have been running basically at that level out of the blocks. The Marriott team there, led by GM Oscar Rodriguez is doing a great job. We continue to do an excellent job on flow through as well.

Flow through to EBITDA, relative to our missed budgeted revenue during the quarter was limited to only 27%. And our flow through to prior year was 53%. Not only do we continue to evaluate and make adjustments to hotel level costs on a constant basis this year, but we have also used this downturn as an opportunity to retool our cost structure, including increased efficiencies in labor, F&B and energy. And many of the reductions, particularly in our Hilton portfolio, will be permanent. While we have cut substantially, we still have other programs that are being completed to save additional expense such as complex and certain positions and our PDQ housekeeping program which results in a permanent reduction in labor hours while maintaining quality and service levels. In some cases, we were even complexing with other owners in our market. We will obviously continue to monitor costs very closely to see our way through this economy.

While we met the low end of our FFO per share expectations, we were slightly below our expected EBITDA for the quarter. Not withstanding the job we did with market share and flow through, we simply did not see the deceleration of the RevPAR product line that we expected beginning in May. Given that May of '08 began the decline in travel demands, we expected comparable RevPAR to improve slightly in May and June. That didn't happen until July. Despite the fact that our RevPAR decline was better than all of our peers, our comp sets and the upper upscale market, it was still below our expectations. The good news is that July fared better, down only 15% versus May and June at 22 and 20%, respectively. In fact, mid-week occupancies in July were better than they have been all year. While this is nowhere near a trend, this coupled with the positive indications in the market recently, certainly are welcome. However, we will approach the remainder of the year as we have so far to continue to drive market share and flow through.

For the quarter, occupancy declined 10% and ADR declined 12%. The rate drop is slightly more than 50% from mix changes versus absolute rate drops. This is important, as the mix portion will bring back rate more quickly once the economy improves. From a segmentation perspective, group business, particularly in corporate group, was again the weakest, down 21%, led primarily by occupancy, as the rate was down only 8% in this segment. Group pays in June compared to the same time last year was down 22%, which is running about the same level as it was in March. Government and leisure transient business were both up during the quarter, and weekend leisure was particularly strong, which helped to offset the losses in the premium corporate segment.

Now let's turn to the balance sheet. We announced in June that we had completed our $200 million term loan and eliminated our line of credit along with our corporate level financial covenants outside of our incurrence test on the senior notes. While we are very pleased to have all of our 2009 issues behind us, we are aggressively working on all of our 2010, 2011 maturities. Given the debt to be refinanced and the dynamics of the credit market, this is going to be a very fluid and complex process. But we feel very good about the progress we've made thus far. As we are in progress to do the refinance -- to refinance this debt, and will be in the market in the near-term, we will not be providing any detail on these discussions. However, Andy will provide some color on the process itself. We are very encouraged with the overall improvement in the public debt and equity markets. At the same time, there's still no significant movement in the secured debt markets. There's a tremendous disconnect between current lender requirements and current loan to values given the precipitous decline in earnings. Thus, extensions that allow borrowers the time to get back to more stable leverage through earnings improvement, asset sales or the issuance of equity will be the only viable option in some cases, and is definitely in the best interest of both lenders and borrowers. While the government is trying to find some solution to bridge this gap, they certainly have not found it yet. Hopefully, continued progress will be made there. Notwithstanding this, as I previously mentioned, we feel good about progress made to date on our debt and the improvement in the public markets, and are confident that we will get our 2010, 2011 maturities squared away as efficiently as possible. With that, I'll turn the call over to Andy.

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [4]

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Thanks, Rick, and good morning. Although RevPAR was below our forecast, we were able to make up the shortfall with continued expense controls at the hotel level, combined with lower interest expense. We met the low end of our internal FFO forecast at $0.33 per share. Second quarter RevPAR declined 20.6%. Our drive-to markets, including Ventura and Myrtle Beach, our Florida leisure markets and Texas were our best performing markets. Atlanta also had a good quarter, led by the Sheraton Gateway, which had a 35% increase in group business, and gained 13% market share. California, with the exception of Mandalay Beach, LAX and Union Square, and Arizona and Chicago, were our worst performing markets.

Hotel EBITDA margins declined 530 basis points and were better than expected, as we continue to make appropriate expense reductions in step with business levels and RevPAR in order to maximize operating margins. The following contributed to a reduction in expenses. Lower labor costs, including permanent reductions and hotel departmental employees; decreases in noncritical room expenses such as guest transportation and in-room amenities; lower incentive fees; and improved efficiency in food and beverage outlets. Hotel operating expenses declined $30 million to prior year, or 15%. Property operating costs per occupied room, including rooms and F&B expenses, were $53.34, $4 less than the first quarter and $4 less than the prior year, a 7% reduction, which reflects increased productivity and cost containment measures. Overhead costs per available room, including maintenance and G&A were $28.75, a 14% reduction compared to last year, largely due to lower headcount.

Prior to property taxes, insurance and land leases, hotel EBITDA margins declined only 359 basis points. Total TI&L was flat to prior year, with an increase in property taxes offsetting a decline in general liability and property insurance and land lease expense. Interest expense was approximately $23 million during the second quarter, which is better than anticipated and reflects lower LIBOR. Again, 50% of our debt remains at floating rates. Based on the forward LIBOR curve, interest rates are projected to be lower for the remainder of the year compared to our projection last quarter.

During the quarter we spent $22 million on capital. Year-to-date, we have spent $48 million. Approximately $25 million was related to redevelopment and renovations and $23 million related to normal and recurring capital. As part of our continued focus to preserve liquidity, our future capital expenditures will be concentrated on critical normal and recurring projects such as Life Safety and ongoing maintenance.

We repaid and terminated our line of credit in June, and we are no longer subject to its restrictive financial covenants. As Rick mentioned, we are working on our 2010 and 2011 debt maturities. We are actively engaged in discussions with our current and potential new lenders for our secured debt, and are in discussions with our bankers regarding the unsecured debt markets. We continue to evaluate all our options. We currently have 20 unencumbered hotels and $119 million of cash that can be used to help refinance maturing debt. Hotel EBITDA for our unencumbered hotels remains proportionate to the remainder of the portfolio.

As disclosed in our press release, we have two non-recourse mortgage loans totaling $14 million that matured in June. The hotels that secure these loans are Embassy Suites Boca Raton and the Doubletree in Wilmington. Although we have sufficient liquidity to repay these loans, we feel our best option is to extend the maturity of both loans. The servicer would not engage in discussions with us to extend the maturity dates unless the loans were in default. Consequently, at the maturity date, we withheld payment and permitted the loans to go into default. Although these loans are in default, there are no cross defaults to any of our secured or unsecured debt, nor are there any adverse consequences to the parent company. We are currently in negotiations with a special servicer to extend the maturity dates. If we are unsuccessful in our efforts, we have the right to repay the amounts. If we do repay the balance, we would then have 22 unencumbered hotels available to refinance our upcoming debt. Consistent with our customary practice, we do not disclose NOI, LTV, or debt service coverage for specific hotels.

Regarding our 2010 maturities, we are working with the current lenders, a life company and a participant, who hold that $115 million mortgage, and the servicers, who control the $160 million of securitized debt to extend the maturity dates and/or modify the terms of each loan. We have engaged a consultant to help with the negotiations concerning our secured type debt. On a normal course, we wouldn't hire a consultant to assist with these negotiations. However, this firm has established relationships with these special servicers, has access to them, a demonstrated track record in dealing with them.

At the same time, we continue to analyze a variety of potential resolutions. The capital markets have improved over the last three months. The unsecured debt market, which was virtually shut down at the beginning of this year, has experienced increased activity; not only in the high yield market, but specifically in the lodging, gaming and real estate sectors. The equity markets have improved, as REITS have been very successful in issuing equity over the past four months. The mortgage market has seen new funds into the market, but remain dislocated. Activity remains very spotty and relationship-driven.

Lodging demand remains weak, and in some markets continues to deteriorate. Consequently, we now expect our RevPAR for the year to decline more than our previous guidance.

We currently expect full year 2009 RevPAR to decrease between 15 and 17%. While we expect RevPAR to decline sharply in 2009, our portfolio will benefit from the renovations completed in 2008 and the redevelopment of our San Francisco Marriott. Therefore, we expect our hotels will continue to grow market share relative to their competitive sets. Our EBITDA outlook reflects our revised expectations regarding full year RevPAR declines and also assumes the benefits from our strict expense controls. Our FFO outlook is being reduced more modestly, given the reduction in our interest expense expectations. That concludes our formal remarks. Operator, we'll now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Will Marks from JPM Securities. Your line is open.

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Will Marks, JMP Securities - Analyst [2]

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Thank you. Good morning Andy. Good morning, Rick.

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [3]

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Good morning, Will.

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Will Marks, JMP Securities - Analyst [4]

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Can I just start with talking about brands, and particularly the Embassy Suites and such? It's so important to you all. And it seems to be relatively resilient I guess; and maybe talk about what typically happens with this brand throughout the cycle, if there's anything we can point to in history.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [5]

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I think if you look back through history, I think because of the value play at the Embassy's, the second room, the free breakfast, the free drinks and so forth in the evening -- the evening Manager's Reception, you see the Embassy gain share during that time. And in times like -- in addition to that, the government increase opens up; and on top of that, you've got situations in certain cases and in certain markets where you can even drive rate a little better at the Embassy's because people would rather see Embassy versus some other names on their expense reports as we go through this type of market. So the Embassy's typically do very well in a down market, and we've seen that continue to occur in this down market.

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Will Marks, JMP Securities - Analyst [6]

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How about, since everyone seems to be looking ahead to the up market, what happened last time around when things started to recover?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [7]

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Well, I mean, two things. I think that we have to keep in mind first of all, it's a very different Company; and even with regard to looking at a -- kind of a same-stores basis from the Embassy portfolio perspective, the hotels are in vastly better condition. They went from number four or five from a quality standpoint in their set, coming out of the last down cycle, to being one or two across the board in their sets in this down cycle -- coming out of this down cycle, whenever that may be. Obviously, we're not sure yet when that'll be. But I think that quick rate gains as close out government and leisure pick-up and so forth will help. But I think that -- we look for us to be able to maintain the market share premiums that we have gained through the down cycle. I mean, that's going to be the focus. I think that it'll be a challenge to maintain all of it, because we have picked up quite some premiums, not only with regard to the value play from Embassy, but also from -- just from the pick up out of the renovations and the changes we've made operationally to manage the mix more effectively. So I think it's going to -- it's always a challenge, obviously, but I think that we feel like we're in pretty good shape there.

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Will Marks, JMP Securities - Analyst [8]

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Okay, and then just one balance sheet related question. Any -- I understand what you're thinking about in terms of capital needs. What about actually extending capital, buying back debt at a discount, buying stock? Any thoughts?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [9]

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Yes, there's -- I mean, well, we are looking at the global picture and looking at everything we have. And the use of liquidity right now for any of those purposes has to be part of a global solution. I mean, with what we are looking at on the 2010 maturities and being able to get those pushed out and the 2010 debt -- the senior notes -- we have to -- and having a finite number of hotels available to us unencumbered-wise and a finite amount of cash, we have to make sure that any use of liquidity is part of the global plan. And so that's what we're working on right now. We have a good plan in place. We feel very good about the progress we've made thus far, as I said, and so I feel pretty good about doing it. But in a vacuum to go out and buy, whether it's debt at a discount, or anything else, is problematic until you know kind of what you need that liquidity for on the global plan. Does that make sense, Will?

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Will Marks, JMP Securities - Analyst [10]

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Yes, it does make sense. Thank you. Okay, that's all for me now for now, thanks.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [11]

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Thanks, Will

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Operator [12]

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Your next question comes from the line of David Loeb from Baird. Your line is open.

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David Loeb, Robert W. Baird - Analyst [13]

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Thank you. Andy and Rick, I respect your limited ability to talk about the debt maturities, but can I just clarify one thing? Andy, you mentioned if you don't get the extension on the CMBS, you have the option to repay that in full. Am I correct that you also have the option to turn those two properties over to the special servicer?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [14]

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Yes, we do.

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David Loeb, Robert W. Baird - Analyst [15]

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And can you talk a little about what flexibility you believe they have? I mean, do you believe that within the REMIC rules they have the opportunity to extend it, and do they have the opportunity to change the interest rate on an extension period?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [16]

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Yes, good question, Dave. Once it goes to the special servicer, they do have rights to negotiate on behalf of the trust and the best interest of the trust. So it's an exercise, and value today versus value in the future -- cash flows today, future. Is it better to leave the borrower in place and the management team? Where's the cash flows today and in the future? And that's all part of the discussions. And if the outcome is to extend with an interest rate modification, that's an option, as well as taking back the keys, as well as just an extension of the current rate. So those are all possibilities. The servicer doesn't have that ability. So the action plan is to get these loans to the special servicer to begin those negotiations.

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David Loeb, Robert W. Baird - Analyst [17]

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Okay, and I wonder if you could just look two years into the future and two and a half years, and talk about what your options are relative to the senior notes?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [18]

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Well, the options are we can -- everything from look at the 20 unencumbered hotels from a secured basis to an exchange of the current notes to a new issue, and that can all be done between now all the way up to the respective maturity dates in 2011.

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David Loeb, Robert W. Baird - Analyst [19]

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Okay, and you say exchange -- you mean exchange for additional notes, or could that be a debt for equity swap?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [20]

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Those are --

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [21]

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It's notes for notes.

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [22]

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Notes for notes.

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David Loeb, Robert W. Baird - Analyst [23]

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That's at least what your preference today is? Okay, that makes sense. And Rick, just one kind of strategic operation question. A couple of other CEOs on calls have talked about market share gains versus maximizing cash flow, and trying rate gains in order to increase bottom line cash flow at hotels, even at the expense of a little occupancy. What's your thought on that, and what's your experience with your portfolio in terms of trying to push rate gains today?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [24]

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Well, I think pushing rate gains -- I mean, frankly, from my perspective, is not related to -- I mean, you don't -- I don't think you try to make moves to help something that is unrelated to it. I mean, I think that you have to look at it on a market by market basis; and where it makes sense to push rate gains, given what the demand dynamics are in the marketplace, then I think that you do that regardless of where your cash flow sits. You don't make the decision to go out and try to boost rate gains in order to boost your cash flow if it doesn't make sense in the marketplace. So it's a market by market look; and of course, you always try to boost rates as much as you can, primarily in an economy like this through the mix to the extent that you can.

Understanding the demand generators and the business that's in there, your comparable nature of your location and your -- the comparable nature of your location and the quality of your assets relative to your competitors and the optimal -- and making the optimal mix adjustments that you need, that helps you with rates. As far as taking rate up on an absolute basis in a vacuum, it's tough to do. And so you've got to look at each market -- what makes sense, what doesn't. Drive rate as much as you can; and obviously, if you can drive rate, it does boost your cash. But you're not going to make a decision across the board to go out in all your markets and just take rate up to try to boost your cash, because you're just going to lose business.

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David Loeb, Robert W. Baird - Analyst [25]

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That's kind of what the other companies said, but they also said that in certain markets you push rate and you absolutely and immediately lose occupancy; and in other markets, you don't, that's what I was curious about. With your type of hotels, are you seeing markets where you're able to trade-off a little bit of rate for occupancy, or are your hotels generally so competitive with others that that's a negative sum gain?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [26]

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Well, we're pretty competitive with all of our hotels across the markets. I mean, in many, many markets, we absolutely own the market. And so there are places where you can push -- and I agree with the assessment, what you started out with. Our RevPAR penetration index is 116. And we made all that -- post renovation, made all the changes to the sets to make sure that they were right and they were very tough and competitive sets. And so, as a -- running at 116, we by and large are running a premium across the board. So we look at any -- and I agree with -- what I was getting to a minute ago, I agree with the initial assessment or initial statement that you made that in some markets if you try to take up rates you're going to lose occupancy, and in some markets, you may be able to push here and there on certain -- and the devil's always in the details, Dave.

You may be able to push on certain pieces of business because you have a premium location or you have a customer who really, really likes you and is willing to pay a little more in a certain location. And you -- those are case by case basis from a market perspective, and you've got to make those decisions with the proper diligence and understand what you're doing. That's what I was talking about in my first answer, as far as doing anything on a global basis. I mean, occupancy is going to help with that. And so to the extent that there's compression, even if it's within your hotel on a given day, you play with the rates there. It's a daily look at where your rates are. It's not like you set rates for a month and then you wait and see what happens. It's a constant moving thing from a revenue management standpoint that you're hitting on. So I mean, I don't know if that answers your question. But yes, the bottom line is, we try to push rate through mix, as well as absolute rates, in every instance we can, every day that we can. And to the extent that we're successful on that, that helps obviously boost cash flow. But the -- we're not going to make silly decisions in a marketplace where trying to do something different with rate is going to hurt you.

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David Loeb, Robert W. Baird - Analyst [27]

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Got it, great, that's helpful. Thank you.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [28]

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Thanks.

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Operator [29]

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Your next question comes from the line of Susan Berliner from JPMorgan. Your line is open.

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Susan Berliner, JPMorgan - Analyst [30]

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Thank you. Just wanted to follow-up, on -- I think last quarter you talked about some potential asset sales; and also, in regards to your 20 unsecured or unencumbered hotels, I guess, how many of those according to your covenants could actually be secured? And I know it would vary depending on EBITDA of each property, but I was wondering if you could just give us a general framework?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [31]

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Well, two things. I think that the first part of that is, it is totally dependent on how you look at it, as far as which assets could be encumbered further. And so I can't really give you that number, because it varies depending on a lot of things. But it's based on gross asset value as far as support for the current bond, and that's a 150 test -- gross asset value to the face amount of the bonds. And so that's how that's calculated. And so you can divvy that up to where it's a lot less hotels, you can divvy it up to where it's a lot more hotels, that are available for you to do other things with, as it relates to just rainy day money or helping with the secured assets. What was the first part of the question? I'm sorry, Susan.

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Susan Berliner, JPMorgan - Analyst [32]

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Last quarter, you had talked about some hotels that you would potentially sell, and I guess if you could just update us on that.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [33]

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Right, asset sales. There's not been any movement. I mean, there's no mortgage debt available out there at levels that any potential buyers want to transact on. We -- and we've expected this. We knew full well that there was a pretty decent chance that these hotels might not sell in '09. We currently don't expect much in the way of sales in '09. We're certainly not going to drop our price below where it makes sense for us. And so I mean, we just don't expect a lot of movement there. We think future asset sales, as far as the second phase of asset sales for this Company strategically, will happen further down the road after the economy comes back and we're more in a stabilized mode, given that there's not a lot of capital to go into those assets that would be sold, given our three-year plan that we completed in '08.

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Susan Berliner, JPMorgan - Analyst [34]

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And one last question. I was wondering if one of your potential financing strategies could also involve bringing in a joint venture partner?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [35]

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Potentially. We're certainly looking at every possible angle on various things. I mean, a joint venture partner would likely be at the asset level versus the corporate level.

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Susan Berliner, JPMorgan - Analyst [36]

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Okay, thank you very much.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [37]

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Thanks.

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Operator [38]

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Your next question comes from the line of Nikhil Bhalla from FBR Capital Markets. Your line is open.

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Nikhil Bhalla, FBR Capital Markets - Analyst [39]

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Good afternoon, guys. I'm asking a question on behalf of Patrick Scholes. Just couple of quick questions. It seems like the Doubletree underperformed the rest of your portfolio quite a bit. I was just wondering why that was the case? And also if you can remind us, in the third quarter of 2008, seems like F&B margins were quite low. I wasn't sure exactly why.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [40]

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Okay, let me take the first part of that -- and I'm sorry -- to be candid, I was reading a note that was handed to me on a call today. But on the first part of that, the Doubletree basically was driven by two hotels, Wilmington and Raleigh, and it was related to specific accounts. We had a pretty good drop-off with a couple -- two accounts in Wilmington, Delaware, and two accounts in Raleigh at the Doubletree, and that was what drove the Doubletree. The rest of the Doubletrees did just fine. So it's not a system-wide issue with the Doubletrees or anything of that nature. Hope that answers the first part of your question. What was the second part again?

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Nikhil Bhalla, FBR Capital Markets - Analyst [41]

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Just looking at the third quarter of 2008 F&B margins, seems like the margins were quite low, and we were just wondering, how should we think about Q3 '09 compared to that? It just seemed -- I think the margins were like in the 15%, which seemed way too low, and I was wondering what impacted the third quarter of last year.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [42]

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Okay. You know what? We're going to have to get back to you offline on that one.

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Nikhil Bhalla, FBR Capital Markets - Analyst [43]

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Okay.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [44]

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Just need to do a little bit of looking that up. But I can tell you, we've made pretty good strides in a number of fronts on the F&B side that have improved performance and also some plans going forward. So we look for those margins to improve.

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Nikhil Bhalla, FBR Capital Markets - Analyst [45]

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Okay.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [46]

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But as far as specifically what occurred -- some of the things that occurred last year to drive that -- we're going to have to get back to you offline on that.

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Nikhil Bhalla, FBR Capital Markets - Analyst [47]

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Okay, thank you very much.

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [48]

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Part of that was we took back the leases, or when leases ended we added F&B operations. But for more detail, we'll talk to you offline.

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Nikhil Bhalla, FBR Capital Markets - Analyst [49]

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Sounds good. Thank you

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Operator [50]

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Your next question comes from Dennis Farrell from Wells Fargo Securities. Your line is open.

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Dennis Farrell, Wells Fargo Securities - Analyst [51]

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Good afternoon, guys. A quick question, in regards to just cash flow, looks like the Company -- assuming modest maintenance CapEx -- continues to generate cash and you're obviously growing that on the balance sheet. Just kind of wondering, what's the minimum maintenance that -- you've just spent a lot of money on your hotels -- that you could carry through for like the next two years and what the cash build could be for you?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [52]

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Well, from a capital standpoint, it's going to ramp up. I mean, I think it's going to go down significantly next year from where it is this year. I don't think, I know -- it's going to go down significantly next year. And we don't have the budgeting complete on that yet, but it will absolutely go down substantially from the spend this year. It will start to ramp back up and stabilize at a 6% level probably in -- the question will be whether that will be '11 or '12, but we have got to finish the three and five year plan based on what we are going to do in '10. We've kind of got to redo the three and five-year plan capital-wise once we understand the '10 number sufficiently.

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Dennis Farrell, Wells Fargo Securities - Analyst [53]

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Okay, and then in regards to just -- kind of you're talking about a global solution. I mean, we've seen other companies in a very similar situation to you kind of take a global approach with both the debt and equity markets, I mean, because it's really not an issue of the business generating positive cash flow, it's just an issue of maturities.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [54]

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Right.

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Dennis Farrell, Wells Fargo Securities - Analyst [55]

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I'm just kind of wondering, I mean, is that -- do you think that there's a potential combination that you can kind of address around the same time? Or is this something you're just going to continue to wait and see how the markets play out?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [56]

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Well, as I -- from a debt perspective -- I mean, a combination of debt and equity -- no, not currently. We are looking at what the options are. We have got a plan in place that we feel pretty good about and some things that we think we can get done, and we are going to address it through those means first, and then we'll see where we are. We're not waiting for anything. I mean, we're going -- the minute we got the $200 million term loan closed, the very next week, discussions started on five different fronts. So we're not waiting on anything. We've made good progress this far. And I'd like to give you more details, but we're in the market right now. I mean, we're having discussions in the marketplace, and we just can't do that. But we're not waiting on anything; but yes, equity will not be part of it right now.

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Dennis Farrell, Wells Fargo Securities - Analyst [57]

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Okay, and then what about pulling? Is there any -- I mean, do you have a fair amount of joint ventures? Is there any ability to pull value out of those?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [58]

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I'm sorry, say that again?

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Dennis Farrell, Wells Fargo Securities - Analyst [59]

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Is there any ability for you to pull any value out of the joint ventures? Cash or in any way in the near-term?

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [60]

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Very little. I mean, there might be some opportunities here and there, but not a great deal.

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Dennis Farrell, Wells Fargo Securities - Analyst [61]

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Thank you.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [62]

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Thanks.

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Operator [63]

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(Operator Instructions). Your next question comes from Shabad Thadani from Claren Road Management. Your line is open.

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Shabad Thadani, Clearnato Management - Analyst [64]

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I just had a quick housekeeping question. What was cash interest expense for the quarter?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [65]

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Total was $23 million, and about $1million to $2 million was non-cash.

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Shabad Thadani, Clearnato Management - Analyst [66]

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Okay, great, thanks. And then, just with regard to the CMBS for next year, is it a similar situation to the June loan that just went by, where you're only able to negotiate with the special servicer for which the loan being in default, or is that a conversation that you can kind of start up, even at this point?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [67]

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The -- you need to have the loan transfered from the servicer to the special. We do think there are some avenues to have the loan transferred prior to having the loan go in default.

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Shabad Thadani, Clearnato Management - Analyst [68]

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Got it, okay. All right and then just one last housekeeping thing. Are you still on track for $84 million of CapEx this year, or has that number changed?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [69]

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Yes, we're still on plan for $84 million.

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Dennis Farrell, Wells Fargo Securities - Analyst [70]

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Okay, great. Thanks a lot, guys.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [71]

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Operator, we'll take one more question.

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Operator [72]

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Your final question will come from Kevin Coyne from Goldman Sachs. Your line is open.

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Kevin Coyne, Goldman Sachs - Analyst [73]

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Thank you for taking my call. Just getting back to the special servicer, I was wondering if you could just expand a little bit on the process. Like, does the special servicer have basically the fiduciary duty to manage for the trust, or do they have to reach out to the respective, let's say, CMBS security holders for any type of vote, or do they just make the decision on behalf of the trust on their own? And is that similar to the May 2010 process as well?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [74]

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I think as a general course of action, they can make their own decisions for the trust. Every trust document is different in terms of the pooling and service agreements. But my understanding is generally they can make decisions on behalf of the trust, but I'm assuming on certain occasions they will talk to security holders.

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Kevin Coyne, Goldman Sachs - Analyst [75]

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Do you have any sense as to how widely held the CMBS securities are? Or are they fairly tightly held in a few number of accounts?

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Andrew Welch, FelCor Lodging Trust Incorporated - EVP & CFO [76]

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Most of these are multiple billion securities that have 100-plus individual loans put in them, and my assumption is they're very, very widely held.

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Kevin Coyne, Goldman Sachs - Analyst [77]

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Okay, excellent. Thank you.

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Richard Smith, FelCor Lodging Trust Incorporated - President & CEO [78]

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Thanks. Thank you, everyone, for joining us today, and that will conclude the call.

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Operator [79]

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This concludes today's conference call. You may now disconnect.