Good day, and welcome to the Hospitality Properties Trust Fourth Quarter and Year End 2011 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

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. I would note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of HPT. Before we begin today's call, I'd like to read our Safe Harbor Statement and set some ground rules concerning certain questions. 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, February 29, 2012. 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 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 any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-K to be filed with the SEC and in our Q4 supplemental operating and financial data package found on our website at www.hptreit.com. Investors are cautioned not to place undue reliance on any forward-looking statements. Before I turn the call over to John and Mark, you should be aware that TravelCenters of America, or TA, has not completed its year end reporting, and accordingly, the company's remarks today will not refer to TA's fourth quarter or full year 2011 results, and we will not take questions related to TA's fourth quarter or full year 2011 performance. And now, I'd like to turn the call over to John Murray.

Thank you, Tim. Good afternoon, and welcome to our Fourth Quarter 2011 Earnings Call. Today, HPT reported fourth quarter normalized FFO of $0.78 per share. As Tim mentioned, we are not yet able to update you on TA's performance for the fourth quarter or full year. As you may recall, TA's performance was very strong through the first 3 quarters of 2011, with EBITDAR up $21.8 million or 11.5% year-over-year at our 185 travel centers. Because TA is not a large accelerated filer under SEC reporting rules, it has until March 15 to report. Turning to HPT's hotel investments. Fourth quarter RevPAR increased 6.9% at our 288 hotels, driven by a 1.2 percentage point increase in average occupancy to 67.2%, and a 4.9% increase in average daily rate to $94.63. Compared with the 2010 fourth quarter, RevPAR increased in all regions, with double-digit gains in the New England and Pacific regions due to strong revenue performance at our hotels in Massachusetts and California, but only modest improvement in the West, North Central and South Atlantic regions as a result of weaker performance at our hotels in Virginia, Georgia and the Carolinas. Our Park Plaza, Country Inns & Suites, Courtyards, SpringHill Suites and TownePlace Suites branded hotels each generated RevPAR growth in excess of 10% this quarter versus last year. During the quarter, we had 41 hotels under significant renovation, including 9 hotels in each of our Marriott portfolios, 18 hotels in our IHG portfolio, 4 Hyatt Place hotels and 1 Radisson. The impact of these renovations, primarily from reduced occupancies because rooms were out of service, was significant as RevPAR was up 8.6% on a comparable basis for non-renovation hotels and was down 5.3% at comparable renovation properties. Average daily rate growth was 4.9% in the fourth quarter of 2011,…

Thanks, John. First, let's review fourth quarter operating results for our hotel properties. Revenues for our hotel portfolio increased $18.6 million or 6.3% versus the prior year. Our strongest performing portfolios were our Marriott No. 1 and Marriott 234 portfolios, with revenue increases of 14.6% and 7.9%, respectively. RevPAR for our IHG portfolio increased 3.9% quarter-over-quarter. As John noted, revenue growth at our number of our hotels this quarter was negatively impacted by renovation activity. Both gross operating profit, or GOP, and cash flow margins increased in the 2011 fourth quarter for our hotel portfolios as a whole, but results were mixed on an individual portfolio basis. In total, GOP increased by $10.7 million or 11.1% quarter-over-quarter, and our consolidated GOP margin percentage increased 150 basis points to 34%. More importantly, net cash flow available to pay our minimum rents and returns increased by approximately $15 million or 28% versus last year. The largest increases in cash flow were in our Marriott No. 1 and IHG portfolios, which produced increases of 51.8% and 29.2%, respectively, quarter-over-quarter. The improvement in net cash flow for the IHG portfolio of $6.1 million was due entirely to the cash flow benefit resulting from the temporary elimination of the requirement to escrow FF&E, as property level cash flow was negatively impacted by renovation activity at 18 hotels during the quarter. Net cash flow for our Hyatt and Carlson portfolios declined a total of $819,000 or 15.9% from the 2010 quarter. Turning to coverage of our minimum returns and rents for the 2011 fourth quarter. Our Marriott No. 1, Marriott 234 and IHG portfolios each had coverage of around 0.7x, which was a significant improvement from coverage of about 0.5x for each portfolio in the 2010 quarter. During the fourth quarter, we applied the remaining $247,000…

[Operator Instructions] And we have a question from the line of Jeff Donnelly with Wells Fargo.

I guess we'll just start-off. I just wanted to get a better understanding of, I guess, the thinking around not proceeding with some of the sale of the non-core hotels. Is that because of the hiccup that we saw in the credit markets, that it could take a little longer? Or is it maybe because you guys had a little, I guess I'll say, price discovery and just found the prices weren't what you thought, or maybe you'd be better off taking on the renovations yourselves and then putting them back out? I just want to get a better understanding of that.

I'm just going to say yes.

All the above?

I think that there was -- definitely there was some price discovery. I think that, that price discovery was impacted by the dislocation in the credit markets. So it's not -- it's probably easiest to finance a portfolio of Marriott hotels than maybe any other select service grouping, but it is still a challenge to do that. And the groups that were bidding on the portfolio were not really willing or able to come to the pricing that we found satisfactory. So we have -- there's still a couple of parties that are taking a look. But if I had to put odds on it today, I would say that we'll probably keep those hotels in the Marriott 234 portfolio and renovate them. The only thing I would not say yes to is that last part. I think once we crossed the bridge that we're going to keep them in and fix them up, then we're going to keep them in for the longer haul. Timing was different when we renegotiated the agreements earlier last year. We were also about to redo our revolving credit facility and didn't want to have a lot of capital commitments out there when we were trying to redo our revolver. But now that we've got the revolver done, we're more confident about our ability to raise the capital for the renovations. And we're pretty confident that, once the capital is put into the properties, they'll perform pretty well based on the results we've seen at the ones that we've done already. So I think we'll probably keep them for the longer-term if we keep them.

Yes, I'm curious just given that -- maybe the opportunity that's kind of created in the marketplace, meaning like the pullback in the credit markets. Since your core business does what used to be sort of a sale/leaseback, sort of a form of almost providing 100%, you could argue, like LTV-type financing. I guess, given that maybe it's difficult to get max proceeds right now in the market, have you guys ever contemplated being like a mezzanine or participating second mortgage lender to hoteliers in this environment, and trying to help portfolio borrowers get proceeds that they want won't at maybe spreads that are attractive for you guys?

We've looked at -- we've considered that a couple of times. And we've decided it's not really our core business. There's a lot more monitoring that needs to take place if you're a lender, and being in a mezzanine position after being an owner for 17 years is just not as attractive to us. So I don't see us going in that direction.

And for the New Orleans hotel, I'm sorry, but can you remind us what is entailed in getting the ground lease there extended? Is that an easy thing? Is that going to be difficult? I guess, how are you thinking about it?

We don't really know yet because we haven't engaged in that process. Longer term, it is our plan to try and acquire the land under the hotel, but we haven't actually engaged in any of those sort of discussions at this point. So it's -- in theory, that's all it should take is entering into the discussions and agreeing on a price. But how hard or easy that'll be remains to be seen.

And just one last question is, just over time, I think HPT has kind of absorbed a little more operating risk than it did, certainly, a decade ago. Has there ever been any contemplation of maybe reworking its -- I guess call it fee arrangements with RMR? Because I think when they were set up and it was much more of a sort of, I'll call it, stable portfolio and it was sort of paid for off of asset value is one thing, but now that there is more operating risk, I don't know, I'm just wondering does the pay-for-performance structure make more sense? Or does RMR have like the asset management folks it needs, given that you guys are taking a little more operating risk on? Does that come up in the Board meetings at all? I guess, what thoughts do you have there?

Well, I would say that we're not currently contemplating changing the fee arrangements. We don't think that -- there has been -- clearly, there have been changes over time as REIT rules have changed and our business has morphed a little bit. But our transaction structure is still a very -- it's still a very structured transaction with security and subordination fees. And so I think it's -- although it's changed, it's probably stayed more the same than it's changed. And so, we regularly have discussions with our Board members where we compare our advisory fees, together with our other G&A costs, to the costs that our competitors and other healthcare and triple-net REITs pay in terms of their own G&A costs, and we think our returns have generally been good. And those costs for us relative to our peers and other REITs have been very fair. So I think we'll continue to do business the way we have.

[Operator Instructions] Our next question is from the line of Dan Donlan with Janney Capital Markets.

Just wanted to talk a little bit now about the Marriott properties not -- staying in the portfolio. What does that mean for your CapEx plans for those assets, as well as the ones that you had planned to renovate anyways? Where does that additional capital come from? Because I believe you were going to use the sale proceeds to then renovate the ones that you were going to keep?

Well, I'd say a rough estimate today of what the capital requirement would be on those other 20 hotels is in the $40 million to $50 million range. And I guess I'll let Mark speak to the where does the capital come from for that.

Yes, Dan, maybe it makes sense to step back and take a look at all of our uses and anticipated sources of cash for the year. So I said, we have $185 million out on the revolver today. We've got about $79 million of convertible senior notes that are puttable to us in March, and we've got $101 million of senior notes due mid-July. So we've got about $180 million of debt coming due this year. For Marriott 234, we expect to fund, as I mentioned, $75 million this year. We've funded $4.5 million already through today. So let's say, we have $71 million left there. IHG, I said we were going to fund $227 million this year. We've funded $18 million through today, so about $209 million left there. And $75 million of improvements at TA, which brings us to, call it $355 million of capital fundings. We've got the host deposit that we'll have to give back at year end, assuming there are no defaults under that lease, which is $50.5 million. So that brings you to total uses of about $585 million. On the sources side, we've got the sale of St. Louis, which will hopefully close in the first half of the year and bring in roughly $35 million. We've got, obviously, free cash flow that we generate during the year. For 2011, we generated free cash flow before CapEx fundings, above the FF&E reserves, of about $100 million. So that brings you -- if we put all of that on our revolver, that'd take the revolver to about $635 million. As John mentioned, there could be -- there will be incremental money to the extent we keep the 20 Marriott hotels in, and there's probably incremental -- there is incremental capital to the extent we convert, rebrand any of the 42 InterCon hotels. So you add all that up, and we could be fully drawn on our revolver, which is not a position we obviously want to be in. We want to maintain liquidity. So I think the next thing that we're looking at -- we did the preferred offering, and I think the next source of capital that we're looking very seriously at is the bank term loan market. That market remains very strong. And so, that's probably the next avenue that we're going to go down.

Okay. Very, very helpful. And then can we talk a little bit about that -- with you potentially keeping these new Marriotts, do they -- how does that change with -- does the contract change at all? And can you use, I think, the deposit that you guys have with Marriott? If those hotels fall short of the minimum rents, does that go against those cash flows as well?

The agreement when we restructured it in the middle of last year with Marriott on that transaction contemplated the possibility that we might not find an acceptable selling price. And so, we really don't need to change any features of the agreement to keep those in. And to the extent that there are shortfalls in the portfolio's cash flow relative to our returns, the guaranty is available to cover the shortfalls regardless of whether the 20 are in or out.

And we have a question from the line of Philip Martin with Morningstar.

Just following up on a previous question. Arguably, HPT has had a business model with higher operating risk. How does this translate into higher returns for you? Can you characterize that for us a bit, especially in light of an environment right now, where there's going to be some potential opportunities out there which will carry more risks, but potentially pretty attractive return potential? Just trying to understand that a bit more.

Well, it's our plan to grow the historical -- it's our plan to grow our business in 2 ways. One is with a more structured transaction, which we've historically done. And I think in those transactions, we'll get a minimum return that's perhaps at a slightly higher level than something in the -- generally in the sort of 8% range. And then a participation in upside after our manager receives his or her fees, with some credit support and like typical -- similar to what we've typically done. And then we have the Sonesta affiliation. And we intend to grow the Sonesta brands. And we're trying to identify hotels in attractive markets that are available for -- unencumbered by branded management or that can be acquired unencumbered, so that we can convert them to the Sonesta brand and grow that brand over time. And we think that, that will be -- there'll be some more risk because the properties -- our returns will ebb and flow as a cycle changes. But it's not going to be the material component of our portfolio, so we think it'll provide nice growth characteristics during positive times in the cycle, and hopefully not that much downside during the more challenging times in the cycle.

Philip, I think it's also important to remember, as we've migrated from the triple-net structure to the TRS lease/management contract structure, we've also been able to build in the opportunity or built the opportunity into our contracts to participate in cash flows above our minimum returns, whereas in the triple-net environment, all we could earn were percentage rents. So there's clearly more upside potential in the management contract structure for us than there was in the triple-net structure.

Okay, and that partially answers my next question. You feel -- certainly, the environment in the last several years and even going forward is a bit different, to say the least. And do you feel you are getting paid as much for taking incremental risks today as you were? And it sounds like the structures you now have in place are different and allow that, but do you feel you're getting the same premium and the same risk premium?

I guess we feel like we're achieving an appropriate balance of risk and reward. I mean, we feel like we're at an early stage in the recovery right now. It's been a couple years, maybe, of the recovery, but because the economy has been recovering slowly, it -- we think there's still quite a bit of growth, either because in the next couple of years performance is going to really ramp up or because it's going to be a little bit longer cycle this time. But we feel like we've structured our agreement so that our downside is as covered as we can get it, and our upside is as attractive as we can get it. So we think we're doing reasonably good deals.

And the incremental opportunities that you're pursuing or at least seeing, I'm assuming these are more of a value-add nature. And would that be fair -- a fair characterization, and is that where your interests primarily lie?

We're actually seeing a combination of properties that need renovations and, in that respect, are value adds, as well as hotels that are and have been reasonably well maintained, where owners are either just looking to exit the business or looking to align with a different capital partner or try out -- maybe it's an independent and maybe willing to align themselves with a new or a perceived new smaller brand to see if that might create different opportunities. So I think we're prepared to fix up hotels if they're well located and fit where we want properties. But certainly, strong cash flowing hotels that are available are attractive to us as well. And we're seeing both.

Yes. And obviously, the risk/reward profiles are extremely different. And -- well, it's something I can -- I'll follow up with you on. But my last question, in your prepared remarks, you mentioned varying degrees of certainly year-over-year RevPAR and cash flow growth and operating performance. But what portfolio or assets have done or have been the most stable operationally during the down cycle? Marriott 1, 234 or IHG? Can you just give us a little sense of that?

That's a tough one. I mean I think select service hotels have lower fixed costs, and so they've tended -- this last downturn was pretty severe and all the hotels saw performance decline dramatically. The select service hotels, I think, were able to react a little bit better to that, at least initially, by -- because they had lower fixed costs and they have a more variable structure to their costs. But if you take, for example, a Candlewood Hotel, if you only have, say, 10 to 15 full-time equivalent employees and the economy goes to hell, there's only so much -- you need to keep staff in the hotels. There's only so much you can cut after a point. So I think our hotels, all sort of hung in there pretty well and are going to come back.

Yes, and to John's point, I think if you look at the 2 pure select service portfolios, the Marriott No. 1 and Hyatt portfolios, that they -- if you look at it on a purely coverage basis, although their coverage went down significantly along with everything else, they probably held up the best.

And we have a follow-up question from the line of Dan Donlan with Janney Capital Markets.

Just curious, John, what type of disruption are you anticipating for 2012 from the various renovation plans that you guys are doing at some of your assets? And how much of that do you think spills over into 2013?

Well, I guess I would say that we've studied closely the periods when the hotels do better and worse, and we've made great effort to try and renovate hotels that have very weak occupancies during January and February, to do the renovations then, and in hotels that are maybe in, say, the Phoenix area, just to use an example, where it's 150 degrees in the shade in the summer months, we've tried to schedule renovations in those parts of the country during the summer where they're likely to displace less business. And so, while there will be displacement and there will be negative effects. The RevPAR forecasts that we mentioned in the prepared remarks and the margin increases that were mentioned, those numbers were developed by our operators contemplating the renovations. So overall, our expectation is that 2012 will still be a year where we see somewhere in the 5% to 8% RevPAR growth and a couple hundred basis point margin improvement. And so our coverages in each of our portfolios are expected to improve. How many, if any, get to 1x coverage by the end of the year, given all that's going on, is a question mark. But we feel good, at least at this point in the cycle, that we're going to still have a good year despite all the disruption. I hope that answers the question.

Okay, very helpful.

[Operator Instructions]

It looks like we don't have anymore questions, so I would just like to thank everybody for joining us on today's call, and we look forward to seeing many of you in New York next week. Thank you.