Service Properties Trust
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hospitality Properties Trust Third Quarter 2013 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 Senior Manager of Investor Relations, Ms. Katie Strohacker. Please go ahead.

[Katie Strohacker:]

Thanks, Sean, and good morning, everyone. Joining me on today's call are John Murray, President; and Mark Kleifges, Chief Financial Officer. John and Mark will make a few prepared remarks, and then will take your questions. The recording, retransmission and transcription of today's conference call is strictly prohibited without the written prior 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 5, 2013. The company undertakes no obligation to revise or publicly release the results of any revision 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 adjusted EBITDA to net income, as well as components to calculate AFFO, are available in our supplemental package found in the Investor Relations section of the company's website. Actual results may differ materially from these 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 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. And with that, I would like to turn the call over to John Murray.

[John G. Murray:]

Thank you, Katie. Good morning, and welcome to our third quarter 2013 earnings call. Today, HPT reported third quarter normalized FFO of $0.76 per share. Focusing first on our travel center investments. Yesterday, TA reported third quarter EBITDAR of $87.8 million, a 5% increase from the 2012 quarter. Third quarter 2013 performance at HPT-owned travel centers reflects reduced fuel volumes sold, down 2%, offset by increased per gallon fuel margins. Total fuel margin increased $3.6 million or 4.7% versus last year's quarter. Nonfuel sales and gross margin were up 3.6% and 2.5%, respectively, compared to the 2012 quarter. The TA's property-level coverage of HPT's rents remain strong at approximately 1.8x. Turning to HPT's hotel investments. Third quarter RevPAR was up 8.1% this quarter across HPT's 287 comparable hotels. Ongoing hotel renovations continue to impact our results. Excluding noncomparable hotels and the 33 hotels under renovation during the quarter, RevPAR was up 8.7% this quarter. This strong top line performance, which was comprised of both occupancy and rate gains, reflects strong results at the 188 hotels that completed renovations from 2011 through the second quarter of 2013, with RevPAR gains of 10.8%. This helped offset revenue performance at our 34 renovation hotels this quarter, which experienced RevPAR declines of 0.6%, all from lost occupancy. 33 of the 34 hotels under renovation this quarter were Wyndham and Sonesta conversion hotels. Our hotels were also negatively affected by reduced government travel and meetings, but the directly measurable impact was focused in specific regions, primarily Washington D.C., Maryland and Virginia. Tracking the impact of reduced travel by defense contractors like Raytheon, Northrop Grumman or Lockheed is more challenging, as it generally shows up in business transient or special corporate categories at our hotels, and is therefore more difficult to measure. Our Phoenix and Jacksonville hotels near the Mayo Clinics experienced reduced business attributed to less elective surgery on account of economic uncertainty, as well as uncertainty surrounding the Affordable Health Care Act. For the fourth consecutive quarter, HPT's hotel performance, post-renovation, offset the effects of ongoing renovation activity and allowed our portfolio to exceed industry average RevPAR performance. Historic performance has been driven largely by our Staybridge Suites and Candlewood Suites extended stay hotels, and our SpringHill Suites and Crowne Plaza Hotels. More than 1/2 of HPT's hotels are extended stay hotels. Excluding the 31 extended stay conversion hotels, over 90% of HPT's extended stay hotels have been renovated since 2010. Our 127 non-conversion extended stay hotels achieved 11.8% RevPAR growth in the third quarter, benefiting from strong summer leisure travel and revenue management focused on reduced discounting and better length of stay and management and pricing. We expect 23 hotels will be under renovation during all or part of the fourth quarter, and 31 and 23 in the first and second quarters of 2014, respectively. Renovation activity for the balance of 2013 and 2014 will be principally at our Sonesta and Wyndham Hotels. Fourth quarter 2013 RevPAR forecast versus the 2012 quarter for our hotel portfolios vary from small declines to double-digit increases, with an average of between a 5.5% and 6% increase. The fourth quarter is typically the weakest quarter for HPT's hotel portfolio, as transient business travel often winds down around the holidays. Renovations, the government shutdown and continued reduced government travel generally are also impacting these expectations. We are in the early stages of the budgeting process for 2014, but initial guidance from our managers suggests continued healthy RevPAR growth similar to 2013, largely due to renovated hotels, continued U.S. economic growth, continued historically low growth in new hotel room supply and aggressive revenue management. We expect to provide further information on our managers' 2014 outlook during our fourth quarter earnings call. Turning to acquisition activity. On August 1, 2013, we acquired the 219-room Hamilton Park Hotel and Conference Center in Florham Park, New Jersey for $52.75 million, and rebranded it as the Wyndham Hamilton Park Hotel and Conference Center. The hotel has 27,000 square feet of meeting space, and is adjacent to Fairleigh Dickinson University and the Green Florham Park development, which includes a number of important demand generators. Wyndham's headquarters is located in nearby Parsippany, New Jersey. The hotel has been added to the Wyndham portfolio contract, and the annual owner's priority return was increased by $4.2 million. In connection with the acquisition, HPT agreed to provide up to $10 million for renovations over the next 3 years, and our minimum returns will increase as we fund these improvements. In September, we agreed to acquire a 223-room hotel -- full-service hotel, in Orlando for $21 million. The hotel is on a property adjacent to the Sonesta ES Suites Hotel HPT owns in Orlando, and we plan to convert this hotel to a Sonesta Hotel and add it to our portfolio agreement. This acquisition is subject to due diligence and other customary conditions, but is currently expected to be completed during the first quarter of 2014. We continue to see a healthy pipeline of hotel acquisition opportunities. We face competition for acquisitions from private equity investors, REITs and other institutional investors, but we expect to continue to generate accretive acquisition growth. We remain optimistic about this lodging cycle due to continued low room supply and steady demand. This allows for increases in room rates and GOP improvement, particularly as we continue to move towards a fully renovated hotel portfolio. This, in turn, gives our trustees confidence to increase our dividend, which they did on October 10, 2013. Our management trustees will continue to evaluate the dividend rate on a quarterly basis. Before I turn the presentation over to Mark to provide further detail on our financial results, I want to briefly discuss corporate governance. As a result of feedback from shareholders, this year, HPT has made a number of corporate governance changes, which bring us more in line with current industry practice and further align the interest of REIT Management and Research or RMR, our external manager, and HPT shareholders. In June, we announced that HPT's board decided to amend the HPT Shareholder Rights Plan or poison pill, to accelerate its expiration to December 31, 2013, from its scheduled expiration on May 15, 2017. At the same time, HPT announced our board's decision to recommend to shareholders that HPT's declaration of trust be amended to eliminate the requirement that HPT trustees serve staggered, 3-year terms. This matter will be presented to our shareholders at our annual meeting in May 2014, and if approved, HPT trustees will thereafter be elected for 1-year terms. In September, we announced the restructuring of our management agreement with RMR, which will begin in 2014, and includes the base management fee being paid on the lower of historical property cost or HPT's total market capitalization, instead of historical property cost, and the requirement of 10% of RMR's base management fee be paid in HPT common shares instead of cash. The incentive management fee will no longer be based on growth in CAD per share, but instead will be based upon total shareholder returns in excess of benchmarks and will be paid in HPT common shares that vest over time. We view these changes as a positive step in further aligning management's financial incentives with the returns of our shareholders. Our business strategy of delivering shareholders a safe and predictable dividend from stable income and our investment strategy, focused on well-structured portfolio transactions remain unchanged. As a reminder, RMR is a full-service management company that provides HPT executive leadership, capital markets execution and other business management services that include asset management, accounting, legal, investor relations and acquisition underwriting, due diligence and execution in exchange for a fee, which has historically resulted in lower G&A costs for HPT than the G&A costs of our peers. We continue to evaluate our corporate governance and will update you if we make further changes. I will now turn the call over to Mark.

[Mark Lawrence Kleifges:]

Thanks, John. First, let's review third quarter operating results for our hotel properties. Operating results at our 287 comparable hotels were strong this quarter, with RevPAR up 8.1% and a 360 basis point increase in GOP margin percentage. Hotel operations were impacted by renovations again this quarter. In total, 33 of our comparable hotels and one non-comp hotel were under renovation for all or part of the third quarter, compared to 27 comparable hotels in the 2012 third quarter. RevPAR of the 254 comparable hotels not under renovation this quarter was up 8.7% versus the prior year quarter on a 4.1 percentage point increase in occupancy and ADR growth of 3%. This RevPAR increase was driven in large part by the performance of the 27 hotels undergoing renovations during the 2012 third quarter, with RevPAR up 27.5% at these hotels on occupancy and ADR gains of 14.2 points and 5.7%, respectively. Our portfolios with the highest RevPAR growth this quarter were our IHG and Marriott 234 portfolios, with quarter-over-quarter increases of 14.3% and 8.4%, respectively. Although our renovation activities had a negative impact on hotel profitability this quarter, these declines were more than offset by strong performance at our other hotels. Gross operating profit at our 287 comparable hotels increased approximately $21 million or 18.2% quarter-over-quarter, and GOP margin percentage increased 360 basis points to 38.3%. Performance of our InterContinental portfolio was outstanding again this quarter, with gross operating profit up almost 30% and GOP margin percentage up 530 basis points versus the 2012 quarter. Turning to 2013 third quarter coverage. Hotel cash flow available to pay our minimum returns and rents increased $18.1 million or 21.8% quarter-over-quarter. As a result of this growth in hotel cash flow, portfolio-wide coverage for our hotels increased to 0.92x this quarter, compared to 0.8x for the 2012 third quarter. Coverage exceeded 1x for 4 of our 9 agreements this quarter, and coverage improved on a trailing 12-month basis this quarter from the second quarter for 8 of our 9 agreements. Net security deposit and guaranteed draws under our operating agreements were only $2.9 million in the quarter. Information regarding all of our security deposit and guaranteed balances at quarter end is included in our Q3 supplemental and our Form 10-Q. Turning to our travel center portfolio. Property-level EBITDAR this quarter at our 184 travel centers of $96.3 million was essentially flat with the 2012 quarter. For the quarter, fuel volumes declined 2.2%, but fuel gross margin increased 3.1% on improved per gallon margins. The trend for nonfuel revenues in gross margin remain positive, with quarter-over-quarter increases of 3.6% and 2.5%, respectively. Property level rent coverage for the 2013 third quarter was 1.8x for our TA centers and 1.7x for our Petro centers. Yesterday, TA reported third quarter 2013 EBITDAR of approximately $88 million, a 5% increase from the 2012 quarter. TA's EBITDAR coverage of cash rents and interest was strong at 1.47x for the quarter. Turning to HPT's consolidated operating results for the third quarter. This morning, we reported normalized FFO of $105.8 million or $0.76 per share. This compares to third quarter 2012 normalized FFO of $91.5 million or $0.74 per share. The 15.6% increase in normalized FFO from the 2012 quarter is due primarily to increases in our annual minimum returns and rents, resulting from our hotel and travel center capital improvement fundings and our recent hotel acquisitions. We paid a $0.47 per share common dividend in the quarter, and our normalized FFO payout ratio was approximately 62%. In October, we announced a $0.01 per share per quarter or 2% common dividend increase, beginning with our quarterly dividend to be paid later this month. Adjusted EBITDA was $149.9 million in the 2013 third quarter, and our adjusted EBITDA to total fixed charges coverage ratio for the quarter remained strong at 3.5x. Turning to our capital market activity during the quarter. On July 1, we have redeemed all of our outstanding 7% Series C preferred shares using a portion of the proceeds from our senior notes offering in June. Next, I'll provide our quarterly update on where HPT stands with its capital funding commitments and liquidity at quarter end. To date, we have funded $117 million under our Marriott 234 agreement, and we expect to fund the remaining $11 million in the fourth quarter. To date, we have funded $223.4 million under our InterContinental agreement, and we expect to fund an additional $10.6 million during the fourth quarter and the remaining $56 million in 2014. To date, we have funded $55.5 million under our Wyndham agreement. We expect to fund $21.7 million during the fourth quarter and the final $25.8 million over the following 2 [ph] years. To date, we have funded $89.7 million under our Sonesta agreement, and we expect to fund an additional $30.3 million in the fourth quarter and the balance of $120 million in 2014. Finally, we funded $63.2 million for improvements to our travel centers during the first 3 quarters of 2013, and we expect to fund an additional $16.8 million for improvements during the fourth quarter. With respect to our liquidity, at quarter end, we had approximately $17 million of cash, which excludes $30 million of cash escrowed for improvements to our hotels. Our debt-to-total book capitalization at the end of the quarter was approximately 50%, and we had $557 million available under our $750 million revolving credit facility to fund our capital improvement commitments and acquisitions. In closing, we remain optimistic about the prospect of continued strong operating results, including the positive impact our extensive renovation program is having on the performance of our hotels. And with that, operator, we're ready to open it up for questions.

[Operator:]

[Operator Instructions] And first from the line of David Loeb with Baird.

[David Loeb:]

Mark, this is probably for you. Your leverage looks to be just above the high end of your comfort zone. What are your thoughts on that and what are your plans?

[Mark Lawrence Kleifges:]

Yes, David. As we've stated in the past, over the long term, we expect to operate the company with debt-to-total book capitalization of between 40% and 50%, but there will be periods where we do run above that. I think given that both leverage is slightly above 50% at quarter end, as you stated, and the funding commitments remaining under our hotel renovation program, I think it's fair to assume that we may need to raise equity capital at some point. I also think it's important, though, to point out that we do, absent an equity raise, we do have sufficient liquidity under our revolver to fund all of our 2013 and '14 CapEx commitments.

[David Loeb:]

Yes. It -- it seems clear that you have the capacity, and in fact, the front page of your website says capacity for growth, but it's really more about the comfort with leverage. How far would you be willing to push that? How long would you be willing for it to remain above 50%?

[Mark Lawrence Kleifges:]

I don't think there's a hard and fast rule to that. We monitor our capital structure and the capital markets on a regular basis. And any decision -- the decision when and what type of capital raise will be made based on our assessment of the markets and our long and short-term expectations for the need for capital.

[Operator:]

Our next question is from Ryan Meliker with MLH (sic) [MLV].

[Ryan Meliker:]

I was just hoping you could comment a little bit on what you're seeing from an acquisition environment. Obviously, we're hearing a lot about various different portfolios transacting or at least on the market, and there has been a lot of speculation surrounding La Quinta. Any color on what your appetite is for a large portfolio of select service hotels that might be up in play day [ph]?

[John G. Murray:]

We have a policy of not commenting on specific acquisition opportunities, but we -- we're one of the largest -- well, we're one of the largest lodging REITs, and probably the largest one focused on -- with a heavy concentration on select service and extended stay hotels. And so we've been rumored, and the number of the rumors out there about different potential transactions. We look at most transactions that are -- have become available, and we have -- we've always had an appetite for growth, and we continue to look at the opportunities. And we're looking at as many one-off, full-service opportunities as we are portfolios, and it's very difficult to say whether we'll be successful in any given month, so.

[Ryan Meliker:]

That makes sense. I wasn't -- I apologize, I wasn't trying to get you to comment on any specific acquisition. I'm just more trying to understand what the appetite for growth is? And what -- with all the portfolios out there, are there some that might be too big for you? Is there a size that maybe is too big for you, in terms of what you think your capacity could be for acquisition, not just in the form of the capital you need, but also in terms of your operations?

[John G. Murray:]

We would like to continue to grow the company, and it's oftentimes just as easy to do a very large transaction as it is to do a single hotel acquisition. So that's -- besides the obvious security reasons of -- for our fledging [ph] portfolios, the ability to do them reasonably easily, compared to just single deals is an attraction. So I don't -- we don't really have any particular preset limits. We -- if it's in the lodging space and it's available, we take a look. But we also -- we don't just buy for the sake of buying. We have to earn a return. If we don't think we can earn an accretive return on the acquisition, then we move on to other opportunities.

[Ryan Meliker:]

That's helpful. And can you give us any color on RMR and Sonesta's appetite for growth, and maybe new brands or expanding existing brands with larger contracts with you guys?

[John G. Murray:]

I believe that it's fair to say that Sonesta would like to continue to grow. They're in the process of renovating almost every hotel in their portfolio. They've finished renovating, with our help, the Hilton Head property. We've got several other properties that are under renovation, and the balance will start at this quarter and next, so. But besides renovating their existing portfolio, the best way to improve their brand recognition is to grow, so we will keep an eye out for opportunities to grow Sonesta. But I don't believe that Sonesta is actively looking for added brands. I think they're comfortable with where they are.

[Operator:]

And next, we'll go to Wes Golladay with RBC Capital Markets.

[Wes Golladay:]

Been looking at the TA, the coverage ratio seems to be slipping on a sequential basis, looking up the trailing 12 months. I know they have some, probably transitory items going on at TA. Do you see that bottoming out, the coverage ratio, in the near future?

[Mark Lawrence Kleifges:]

You're looking at it, Wes, at the property level, or at a corporate level?

[Wes Golladay:]

At the TA #1 and TA #2, looking at it, for instance, the trailing 12 months, it was 1.59 for TA #1, then 1.61 the prior trailing 12 months, 1.68, 1.69, 1.71. So it seems to be slipping, but I know they have some one-off items going on with a competitor of theirs. Just, do you see that bottoming out anytime soon?

[Mark Lawrence Kleifges:]

Well, I'm not sure, in terms of forward-looking. I think on TA's call yesterday, they talked about the fact that some of the pricing pressures resulting from a competitor that -- to ease off from where they were. If you look at it on a trailing 12-month basis, property-level EBITDAR for our 184 centers is down about 2.3%. But the other thing impacting the coverage ratio is the fact that rents, because of our funding of capital improvements, are up 5.6% year-over-year. So that's what's also driving the decline in coverage, more so than the change in fundamentals of properties.

[Wes Golladay:]

Okay. And that takes a little while, I guess, to impact the property level, that renovation takes maybe a year or so?

[Mark Lawrence Kleifges:]

Yes. Just like any capital improvement price.

[Wes Golladay:]

Okay, that makes sense. And then, I'm trying to get a handle on the Sonesta portfolio. Do you -- can you give us a ballpark on what the EBITDA margins are? And I guess what the total impact of the renovations have been, so we can make sure we capture it in the future years?

[John G. Murray:]

We just -- we finished the renovation in Hilton Head, and all the others are either underway or preparing to get underway, so it's kind of -- it's early in the process to give you, I think, a very good sense of that. It's just because of -- the timing is uncertain, and the amount of experience we have with the speed of ramp-up, post-renovation is limited. I mean, we saw a very strong ramp-up in Hilton Head once they reopened, they reopen in time for the summer season. And there was dramatic improvement in that hotel. But it's very difficult to provide that level. I don't know if -- Mark...

[Mark Lawrence Kleifges:]

Yes, I think this -- the quarter-over-quarter numbers improved fairly significantly at Sonesta this quarter. But keep in mind that the majority of the properties converted in the third quarter of last year, so there's a lot of noise in terms of conversion costs that ran through the prior year. So I think really, when we get to the next quarter, the fourth quarter, it will be easier for us to kind of have a cleaner quarter-over-quarter comparison where we can talk about the impact of renovations a little more effectively.

[Operator:]

[Operator Instructions] And I'll go to Bryan Maher with Craig-Hallum.

[Bryan A. Maher:]

A quick question on TA, kind of following up on the acquisition front. You know, everybody knows, that they've been kind of actively acquiring, kind of onesie-twosies as they've moved through the last couple of years. What, if any, is your appetite, if they came to you with a portfolio of, let's say, 5 to 10 properties? Would you want to continue down that road, or just let them go it on their own?

[John G. Murray:]

We like the travel center business. We've -- in the past, we've had to restructure those leases and we get questions about TA a lot. We don't have any plans right now to acquire additional sites from TA, but we would certainly be open to considering it, if TA came to us and asked us to acquire, whether it would be one site to add to the existing portfolio, or to acquire a small portfolio of sites from them that they had repositioned and ramped up. We would definitely be open to that, to considering that.

[Bryan A. Maher:]

And then as it relates to the -- your hospitality acquisitions, the hotels, there's been a lot of discussion as I'm sure you've seen in the press. What kind of metrics can you share with us, things that you're looking for, as far as kind of return on investment? Are there thresholds that, a portfolio really needs to meet, that you could share with us that would [ph] then, continue you down the road, pursuing that?

[John G. Murray:]

I don't want to box myself in. We're looking at such a wide spectrum of properties, from portfolios of select service assets, to luxury level, full-service hotels that, I mean, we look at covering our cost of capital today as, so we're -- we've been targeting, going in yields around 8%, or certainly within the first couple of years, if we have to do our initial renovation, getting to an 8% return, cash return, fairly quickly. But we also look at the markets, and what kind of new supply is expected to be coming. We look at cost per key. If we think that an acquisition is very attractive, but it's -- compared to all the hotel transaction activity, the cost per key seems out of whack, then we may back away from it for that reason. So there's a lot of different benchmarks that we look at, and it's hard to say, on any given acquisition, which of those things carries the most weight. So we factor a lot of different things into the decisions.

[Bryan A. Maher:]

And just lastly, you have a lot of experience with select service, extended stay, and I would say, characterized more recently, the kind of full-service and urban, particularly with Sonesta. Do you, -- I mean, you have a ton of experience with all of this product now. Is there one product over another that you tend to prefer, from kind of a REIT management standpoint, or not?

[John G. Murray:]

I would say for HPT and its business strategy, the upscale select service and extended stay hotels fit our strategy best. We -- they have very steady, predictable cash flows, they have low fixed cost, and so we're trying to run a company with a steady, predictable dividend return. And so those types of hotels, whether they're Residence Inns or Staybridges, or Sonesta ES Suites or Courtyards or Hyatt Places, we know those types of hotels fit best with HPT's strategy and structure.

[Operator:]

And we do have a follow-up from Ryan Meliker with MLH.

[Ryan Meliker:]

Just a couple of quick follow-ups. First of all, Mark, can you talk a little about the fact that you might need to tap equity markets to reduce leverage? Can you tell me what your view on preferred equity is? I know that you're currently running at preferred as a percentage of total book capitalization that's well below what you've run it over the past few years. Where do you look at the part of the level of preferred within your capital stack? And do you think preferred could be the source of equity you might need, going forward?

[Mark Lawrence Kleifges:]

You're right. On a compared to historical basis, preferred does make up the smaller part of our capital stack today than it had historically. We're always willing to consider preferred. The determining factor there obviously, is the yield there. And the market's been a little pricey, in our view recently, but as I said, we monitor on a regular basis and if the pricing on preferred came in some, that's something we would consider again. But we have no predetermined amount of our capital stock that -- capital stack that needs to be -- that we want to be in preferred.

[Ryan Meliker:]

Okay, that's helpful. And then, just with regards to the commentary you provided earlier, in the capital plan. It sounded like the Sonesta funding went up from $200 million to $240 million. Could you just explain what that was? Maybe I missed it in the prepared remarks, but just wondering what the increase is driven by?

[Mark Lawrence Kleifges:]

I don't have the quarter-over-quarter numbers in front of me, and I don't remember the exact timing of this, but when we bought in the New Orleans Hotel, the fee interest in that hotel, we increased the overall capital budget for the Sonesta portfolio for that hotel.

[Ryan Meliker:]

And that -- would that have been as much as $40 million in CapEx spend?

[Mark Lawrence Kleifges:]

It's probably not all of $40 million, but it's a substantial part of it. The rest of it would just be, as we go through the renovation project, refining budgets, we have hotels where budgets are increasing, and hotels where they're decreasing so that should -- it's New Orleans, plus the net impact of other changes.

[Operator:]

And we have a follow-up from David Loeb with Baird.

[David Loeb:]

Just one more, about dividend outlook. I realize that the amount of dividend you pay is going to vary with the number of common shares. But what's your thought on required dividend distributions, relative to the level you're paying today, and the likelihood that you might need to raise the dividend?

[Mark Lawrence Kleifges:]

Yes, I think, if you're talking from a minimum distribution requirement from a tax standpoint, we are not under any pressure, with respect to that. So any decision on dividends we've made, purely on our outlook of cash flow for the company.

[David Loeb:]

And what's your current thought on your outlook for cash flow from the company?

[Mark Lawrence Kleifges:]

Well, we just raised the dividend here in October, so I think that's probably an indication we feel good about it. But I think as we've stated in the past, a couple of the things that our board focuses on in evaluating the dividend level is, one, where we are in our hotel CapEx program, renovation program, and as we get farther along in that program, and we're about on a dollar spend basis, we're about 70% of the way through that today. And the other thing is, coverage under our operating agreements, and we see continued improvement there. We had 4 of our 9 contracts were above 1-0 [ph] in the quarter, and on a trailing 12-month basis, we saw improvement in 8 of our 9 agreements. So as those trends continue, as we expect they will, we wrap up this renovation program, I think the board will get more comfortable with the higher dividend.

[Operator:]

And to the presenters on the call, there are no additional questions.

[John G. Murray:]

Well, okay. Well, thank you all for joining us on today's call. We hope to see some of you at the upcoming NAREIT conference. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.