TWST: Will, as you look back over the year, how has business been in the lodging sector relative to your earlier expectations?

Mr. Truelove: I would say that the lodging portion is pretty much in line with what we thought. There were difficult comparisons the first half of this year, with the Hurricane Katrina related comparisons. Urban hotels continue to outperform the industry averages by about 250 basis points in terms of same- store growth rates. That is about what we thought as well. I would say the area that we have been the most disappointed with is probably the non-hotel-related portions of the lodging business. Primarily, the timeshare business has been a continual disappointment, but not because of a demand or fundamental issue. I think it is more just the missing of earnings because of GAAP-related issues. That has probably created more headwind than anything else in terms of our outlook.

TWST: Rod, how has the group done from a business perspective relative to your earlier expectations?

Mr. Petrik: I think from a business perspective, the performance that we have seen has been in line with our expectations. When we look at where occupancy is for the year, it is in line with our expectations. We are past the recovery point of the cycle and the expansion phase. Occupancy has stabilized. Rates still continue to go up at somewhat decelerating rates.

TWST: All in all, it sounds like a pretty positive environment.

Mr. Petrik: From a business perspective, it is.

TWST: What about from a market perspective? How has the group done relative to your expectations, Rod?

Mr. Petrik: I think in the first half of the year, we obviously had a strong run up in share prices, primarily driven by all of the M&A activity. Certainly the crisis that we have seen in the debt markets in the second half of the year has caused some upheaval in the deal market. I think any stocks that are real estate related have been painted with a broad brush and have been negatively impacted.

TWST: From a market perspective, Will, has the group done what you thought it would?

Mr. Truelove: I totally agree with Rod. The first half of the year was fantastic, but that market was very conducive to M&A. It was almost a discussion of how many hotel companies would be left standing in the public marketplace. Since the summertime and the credit market meltdown, you have had a complete retraction in the names. Beyond that, I think that the market does also perceive that not only are the takeout premiums gone, but, as Rod mentioned, we are also in somewhat of a decelerating growth environment. It is still good growth but just not accelerating as fast. Concerns are about earnings going forward. When you combine those two, the market action has been far different from what we anticipated. While I would say the business environment has fallen in line with what we thought, I would also say that we completely missed this year's market reaction.

TWST: Where do we go from here? What is the outlook for the balance of this year and looking forward into next?

Mr. Truelove: Given that the business fundamentals came in about as we expected, and I think next year will be very similar to this year, there really has to be a catalyst for having the market focus more on fundamentals staying strong in the lodging business, although it is a decelerating environment. I am not sure what the catalyst is from now until year-end. I think you have to have a clear outlook on the economy. About half of the investors think we are going to be in a recession, but the other half don't. I think once we get that cleared up, and we have a more clear earnings outlook on the timeshare business, we might see a catalyst to move these stocks fundamentally higher. Until then, I have a hard time finding a strong catalyst near term to jump-start these stocks.

TWST: Rod, how about your take? Is there anything that can change the current position?

Mr. Pertrik: When I look back to 1998, the last time economists were projecting a recession, the hotel stocks were one of the first industries that sold off. The recession didn't come in 1998 and it didn't come in 1999. The lodging stocks limped through that period. Then you got into 2000, which was the most profitable year in the industry's history. The industry got back some of its multiples, but didn't get back to peak pricing. I think we are going to go through a similar period of time, until we get on the other side of the next economic downturn. With the selloff in the names, I think most of them have been oversold. I think when the credit markets get back to some sense of normalization, you will see a pickup in activity in the deal market and there will be a sense of where real estate values are. I think that level is going to be higher than the current share prices. I think you can have some upside in the names from here, but I don't see much of it until next year. Again, in hindsight, we are going to look back at this Hilton Blackstone (BX) transaction and say, "That was peak pricing in this past cycle."

Mr. Truelove: That is a great point that Rod brings up. I think if Hilton debt that the investment banks have lent to Blackstone for the acquisition is syndicated out, then you will have a pricing of what debt could cost for the lodging industry. I think that is what the private equity market players are waiting for. They need to know what it is going to cost them in terms of debt. No longer can you get a deal without financing preconditions; that is gone. You have to know what the debt is going to cost you before you enter into negotiations. Once that debt prices, and given the selloff that we have seen in the hotel stocks and that the fundamentals have been basically what folks have expected, I would expect deal volume to pick up. You probably won't see the highflying valuations that you did in the first half of this year, because the debt market has completely changed. I think you could see some more M&A activity, probably, early next year, but you do need that debt to have a price. That is what the private equity guys are waiting for.

TWST: We haven't seen a drying up of interest in doing deals; it is just a question of knowing what it will cost to do them.

Mr. Truelove: Correct. Until you know what it will cost to do it, you can't even negotiate.

TWST: You both touched on a slowing environment. Is that just because it has been so good that it can't get any better or is it because the economy seems to be slowing a bit?

Mr. Truelove: Probably it is a little bit of both. We are facing extremely difficult comparisons. We had some fantastic years. It is rate driven at this point, primarily. You are starting to see some new supply come on, but not much, which is putting a little damper on. It is just that later in the normal lodging cycle, these are the kinds of things that happen. It is almost an expected trend that you would see in this part of the cycle. As Rod mentioned earlier, you are no longer on the expansion side of the lodging cycle.

TWST: If we equate it to a baseball game, where are we? Are we in the middle innings at this point?

Mr. Truelove: We are probably around the bottom of the sixth or top of the seventh.

TWST: Rod, what is your take? Where are we in the cycle for this industry?

Mr. Petrik: I think we are about four years into this up cycle. Historically, if you go back, the up cycles can last anywhere from seven to 10 years. I think 10 is abnormal, but we saw that in the last cycle. I think we have two to three years left with solid fundamentals, unless the economy falls off the table. When you look at performance, a lot of the weakness is in the economy sector of the market. While that can make up almost half of the hotel rooms out there, you have very little exposure in the public companies, particularly from an ownership perspective. Quite frankly, with all the M&A activity we have seen in the last year, all of the mid-scale without food and beverage, the select service brand, and the extended stay brand portfolios have all pretty much disappeared. That's primarily due to cheap debt that drove cap rates down 200-300 basis points for that asset class. Today, limited service is almost unfinanceable other than on a one-off basis. Most of the public REITs that own lodging assets are primarily focused in the upper upscale arena right now. That sector is doing quite well. We don't see a lot of backoff on the demand side. Yes, you do have the decelerating fundamentals, but when you look at a lot of these financial center markets, you have strong occupancy Monday through Thursday, so you are not going to move your occupancy too much at this point in time. As Will has mentioned, it is all rate driven. You don't have occupancy gains; you just have rate gains. When you are looking at RevPAR projections for next year of anywhere from 5% to 7%, some are talking 6% to 8%, from a historical perspective, that is very strong RevPar growth.

TWST: Will, what is your take on that?

Mr. Truelove: One of the main differences between this cycle and the last cycle has been what some people used to refer to as the RevPAR multiplier back in the last cycle. Historically in the 1990s, you would say that whatever RevPAR growth was, you could double it and that is what your EBITDA growth would be, so it would be multiplier of 2. You don't hear too much about it anymore, but the multiplier number has definitely shrunk to around 1.5 or something less than that. Cost increases have been accelerating much faster in this lodging cycle than in the last cycle. Even though we are getting fairly high RevPar growth, it is all coming from the rate side of the equation. We are not seeing massive changes in the margins, as you might expect. It looks like we will get back to peak margins in probably a year or two. Given the kind of growth rates we are seeing on the rate side, you would think that the margins would improve much more quickly.

TWST: What is holding them back?

Mr. Truelove: A lot of it was wages, which is the vast majority of the costs. You also had energy costs spike and property expenses.

TWST: It has been a combination of things.

Mr. Truelove: Yes, a combination of things. The hotel managers have done a very good job of trying to extract as many efficiencies as they can, but unless they start putting the maid service on roller-skates to change the rooms faster, there is really not much left to do.

TWST: That has topped out, but they have been able to make that up with rates?

Mr. Truelove: That is correct.

TWST: As we look forward, Will, are they going to be able to continue to raise rates?

Mr. Truelove: As long as you have demand and you are sold out Monday through Thursday, the next thing left to do is raise rates. It is just the simple, basic economics. If you have extra demand and there are no more rooms, you are just going to raise the price until there is no longer a line at your front desk. Right now, with the kind of occupancies that we have and the limited amount of new supply, rate growth is going to remain pretty consistent, we think, especially in the urban markets where very little new supply is coming on line. To Rod's point, those tend to be in the upper upscale luxury category. That is what is primarily in the public marketplace. I think too much focus is put on the US industry, which is primarily a lot of limited service, suburban hotels, and not enough focus is placed on urban hotels. The urban hotels are much more representative of the public market, whereas the US industry, while interesting, is probably not the most representative of the public market.

TWST: We have a real dichotomy going on here.

Mr. Truelove: Yes, a little bit. I think the US industry probably gets more headlines and influences the way people perceive the US lodging markets. For example, right now year to date, you are seeing RevPAR growth of over 8% in urban locations versus 5.7% year to date in the US. That kind of major differential, which is benefiting the public hotel companies, isn't really seen in the headlines. As Rod suggested, there are many economy hotels out there that are underperforming and bringing down the US average, but they aren't really affecting the public companies. I don't think investors quite see that.

TWST: They haven't quite sorted that out yet.

Mr. Truelove: Yes, because of the headlines.

TWST: Rod, what is the outlook for new facilities coming on line?

Mr. Petrik: I think with most of the numbers that we see coming from different services, you are looking for supply growth at around 2% a year in 2008 and 2009. When you drill down into that number, and you look at a lot of major urban centers, that number is barely over 1%. The problem is, you have a pretty good look at supply and in urban markets, the entitlement process can take two to three years, development can take another two of three years. The crystal ball is pretty good looking out about five or six years. In some of the suburban and airport locations, you can get product built, let's say, inside of two years total. That dichotomy presents itself again on the supply side. There is very little supply coming on line in urban centers. Most of it comes on the outside. Part of that is that it is just easier. It is easier to get land. It is easier to build. Generally, you are building smaller hotels, so they are easier to finance. Even in the urban centers with supply running at 1% or 1.2%, the question is demand. We do a pretty good job of forecasting supply as an industry and a terrible job of forecasting demand. As long as supply and demand grow at similar rates, you can stay in the expansion phase of your cycle for an extended period of time. If all of a sudden the economy does go into a tailspin, you'll see a drop in demand that is going to lead to increased vacancy. While you can still push rates for a while, it will point to the peak in the cycle.

TWST: Will, what is your take on the supply side of the industry?

Mr. Truelove: I will reiterate what Rod said. You have a fantastic outlook the more urban you get. The more urban you get, the more relevant it becomes to public hotel companies, because that is where they tend to own or manage the hotels. That is where all the volatility is on the income statement. When you start talking about the suburban highway stuff, the franchise companies, like Marriott (MAR), Choice (CHH), Starwood (HOT), or even Hilton when they were a franchise business, are benefiting there from the supply in the suburban hotels. That is their franchise development, but the urban long-term kind of story seems to be very low supply growth for the past couple of years. We just don't see it really putting much of a dent in the operations. For the hotel owners and operators it still comes down to demand. That is why I think that the concerns over next year's economy, whether or not it is going to be a recession, have really put a lid on stocks in the near term.

TWST: For a while, we saw a lot of hotels being converted to condos. Has that trend changed now with this heavy demand?

Mr. Truelove: I was never really sure how many were really doing it, if it was a broad-based thing or if it was that you had a lot of old hotels that required a lot of cap ex convert into a hot condo market. You didn't see a lot of new hotels that didn't have a lot of cap ex requirements doing that. I know it got a lot of headlines, but I don't know how prevalent it was. I think it was more of a here and there kind of thing. If you have a hot condo market and a hotel that has lots of cap ex and a good location, I would convert it as well. I think given the strength in the lodging market for the next few years, I wouldn't anticipate that being a major trend, outside of maybe New York City where prices for condos are still extremely high.

Mr. Petrik: Actually, at the later end of that cycle with the conversions into condos, there are two deals that I have seen in the past few weeks, one in Atlanta and one in Miami. They are actually doing the reverse. The current owners bought the hotels with the intent to convert them into condominiums, residential, I believe. They just missed the market and are now putting them back up for sale to be hotels again.

TWST: What goes around comes around.

Mr. Petrik: Exactly. It was a game of musical chairs and the music stopped.

TWST: From what you both have been saying, the growth in this space is really in the urban rather than the suburban or exurban markets from the public company perspective. Is that accurate, Will?

Mr. Truelove: I would definitely say so. Outside of the urban areas, you get into what basically are the franchisers, and they benefit from supply growth. They are not as heavily reliant upon their same-store internal growth rates. So they have basically the best of both worlds. For example a Starwood, which will franchise hotels in suburban markets, benefits from that supply growth. They are not all that worried about the internal growth rates out there. Yet, they own and manage hotels in downtown urban areas where they are benefiting that way. The public hotel companies have all morphed into very efficient businesses. The hotel REITs, primarily now the ones that are public, all own in major urban locations. Those that have some suburban tend to sell them and try to move even more urban. They have all ended up becoming very similar because those are the strategies that work in the long run and that seem to be working this time around as well.

TWST: Rod, are we going to see any change in that pattern?

Mr. Petrik: Will just mentioned Starwood. You still have Starwood and Marriott in the public arena. We lost Hilton last month. Obviously, the focus there is going to be international, so we are going to see a lot more international growth from a real estate perspective. I think you are going to see the REITs become more aggressive internationally. We have seen it in Host (HST) with their joint venture. You see Strategic (BEE) making some investments. I think you will see you more resources and more international. I don't think it will be quick. I think it will come slowly. One of the main reasons is that Europe is more expensive than the US as far as their pricing. For US REITs, without currency in their stock right now, it is tough for them to go in and be competitive. When you look at Asia, most of the opportunity is on the development side. The lodging REIT isn't necessarily a great vehicle for development. They may be a potential purchaser down the road when deals that are being developed today are completed and stabilized. I do see the US REITs becoming a little more active overseas, but I think that will be a slow process.

TWST: Is that because they don't have the expertise?

Mr. Petrik: I think that is part of it. If you are not already operating in those markets, you don't want to dive in too quickly. I think it is also just the opportunity, waiting for the pricing to pull back a little bit in Europe and waiting for more product to actually get built in Asia.

TWST: Will, as we look out over the next couple of years, is the growth going to continue to be at the high end of the market for these public entities?

Mr. Truelove: I believe it will be for the most part. As Rod mentioned, it is easier to build in the suburban locations. You can get it done much more quickly. If we assume the demand holds up for going forward, the supply is going to be the problem. Where will supply come first? That is just where it is easy to build and open. You are going to see a dichotomy based upon the differential growth rates in the supply rather than the demand. By definition, those hotels that have less exposure to new supply, because of their location, will continue to outperform later in the cycle.

TWST: Will, as you look at this space, public companies are fairly limited at this point. Private money is on the sidelines. Will private money and interest in this space come back?

Mr. Truelove: As I mentioned earlier, I think the private money is interested. They just need to know what it is going to cost them on the debt. With a blank screen right now for debit pricing, it is very difficult to do. If you have the Hilton debt syndicated, that is probably going to be the best indicator for what it will cost to get additional lodging deals done on the debt side.

TWST: What is the timing of that?

Mr. Truelove: It would be a complete guess, but I would hope that maybe by the end of this year some of that debt will get syndicated.

TWST: That is not that far away.

Mr. Truelove: Probably not. With that new pricing to plug into your spreadsheets, the private equity guys could have a number in their minds by January or February. You would probably just want to wait for a full year of results to come out before you would want to do a deal.

TWST: It is a modest time horizon.

Mr. Truelove: I would say about five months.

Mr. Petrik: When you talk about private equity, they really are on the sidelines. There were perhaps a dozen or so small to mid-sized private equity funds, whether they were lodging specific funds or real estate funds that have a heavy bias toward lodging assets. Most of that money was raised in the first half of this year. Again, the debt markets went into a tailspin. For a couple of these funds, if you had raised $250 or $300 million, back in May, you thought you were going to buy $1.5 billion in real estate. Today, $250 million might get you $1 billion. Their appetites have come in a little. One thing is for sure; they are not giving the $250 million back. When you raise it, you are going to spend it. They are standing in line, waiting for debt to come back, but sooner or later it is going to placed. That is why we think there is going to be another small round of M&A activity. It isn't going to be another Hilton deal, or at least I don't think so. I think there will be a few more small deals and the price on large individual assets will be very competitive. A couple of the large lodging REITs have told me not only are they not winning any of these bids for the few assets that are coming to market, but they are not even coming close to winning a bid. One of the REITs said that the spread between their bid and the winning bid is the widest that it has been in five years. There is still a very active market. You haven't seen much movement in cap rates. Logic would tell you cap rates are going up, but with so few transactions taking place in the market, I haven't seen it yet. I think you will see it. I think you will see a 25 or 50 basis point move in cap rates for institutional assets. Maybe in the suburban stuff it will go a little bit higher. As of this interview, we haven't seen it. Limited service will probably have the biggest uptick. These assets went from being 10% cap rates to 7% with aggressive CMBS debt available. With the CMBS market dry, they are probably going back to 10% caps. Companies like Innkeepers and Equity Inns were very fortuitous in selling.

Mr. Truelove: Following on that thought, wouldn't you also agree, Rod, that with the volatility of the equity markets around the hotel stocks and with the fundamentals probably having come in, as you and I would have expected, it could lead to lodging executives being more receptive to buyout offers going forward, just to get away from some of that volatility in their own personal wealth categories? Would you agree with that?

Mr. Petrik: Yes. I think that the farther you move into this cycle, to the extent that you see pricing anywhere near what they believe to be NAV, I think they are more apt to take it today. When all of a sudden you saw deals, going back to the EOP deal, the Archstone transaction, the Hilton transaction, and all of this really aggressive real estate pricing for major deals, everybody's concept of what they were worth went up. There might be a little bit of pullback. There is a dose of reality thrown into the market. I do think that you have some management teams that would be willing to sell their company and not ride through another cycle.

TWST: The time is right. We just need to move farther down the time horizon.

Mr. Petrik: Or select the companies. I think somebody like a FelCor (FCH), which has been around for a decade may be more apt to sell than a DiamondRock (DRH), which just went public a couple of years ago, yet both have been speculated at times to be targets of private equity.

TWST: Rod, as you talk to investors at this point, what is the level of interest in the space?

Mr. Petrick: It is very mixed. You see a lot of non-dedicated investors. Particularly, as Will had alluded to, a number of these investors are investing with a recession in mind, believing that a recession is going to come. If you are investing for a recession, you are not going to be heavily weighted in lodging names. You also have investors who are still fearful of the consumer even though on the lodging REITs side consumer business probably makes up less than 20% of their business. When you get to the C-Corp, you see some pullback in the timeshare business. That has been the ongoing concern with these companies. When you look back earlier last year, the focus was in the opportunities internationally, particularly in Asia and the growing economies of China and India. Today it is fear of the consumer and the pullback in timeshare business. Fear and greed move the market. I think the predominant sentiment in lodging is fear. You are seeing that when we talk to investors.

Mr. Truelove: I would like to follow up on that. As I mentioned earlier, you really need to find the catalyst to let people believe not only that the current lodging environment is actually pretty good as you alluded to, but also that it is not falling off a cliff. What is that catalyst going to be? Could it be more M&A activity coming out? That is possibly one catalyst. It could be the belief that the economy is not going into recession. Perhaps the consumer picking up would be a good catalyst. As Rod alluded, the consumer side really does not move the needle that much for the lodging companies, it is mostly business travel. But, because investors believe it matters, it matters. Perception is reality unfortunately. I think those are the kinds of things we are trying to look for. Finally, with all the problems timeshare earnings have had recently, it looks like they could have a significant rebound in 2009. Perhaps as we approach later next year and we see a significant recovery in earnings in timeshares, just because of the timing issues, maybe that will be what does it. That is probably the hardest part of this job, trying figure out which is the catalyst to get the market to realize what the lodging fundamentals really are.

TWST: Will, you both mentioned the weakness in timeshare. What is going on? Why has that become a problem all of a sudden?

Mr. Truelove: Rod, do you want to go first?

TWST: That was a quick passing of the paddle.

Mr. Truelove: It gets my blood boiling when I hear timeshare, so I will just pass for a moment.

Mr. Petrik: Timeshare has been remarkable in its growth over the last 10 years. Part of it is, it defies logic. If you were to ask me, "Why has timeshare been so successful?" or say, "Explain the business to me," I probably can't. I will tell you this, when you go to a market like Orlando, where all of the big three, Starwood, Marriott, Hilton, have a presence, when you go to their sales presentations, they are powerful. They are pre-marketing vacations. I can't explain why things are going so strong. Therefore, I can't tell you why things have, I don't want to say fallen off the table, but they have certainly pulled back. I think Marriott's business is going to be relatively flat. Again, it is tied to the consumer. I think that when you look back over the last 10 to 15 years, timeshare has been a positive surprise. I don't think it has been one of those discretionary spending points that have pulled back. I think it is because what you are doing is pre-selling vacations. Americans have this inalienable right to take a vacation. You just haven't seen the pullback. Where I have been surprised is the growth in the interval business, which are the Ritz Carltons of the world, with three and four week intervals, and the residences, the branded luxury living. The Four Seasons, Ritz, St. Regis, and the like continue to do fairly well in a very troubled housing market.

Mr. Truelove: If you listen to the hotel operators, they will tell you that timeshare demand remains quite strong. A lot of investors, including myself, always have a difficult time. Because we hear so much about the slowdown of the consumer, it is always amazing to hear about this very discretionary, maybe not a gigantic purchase, but it is somewhat meaningful, $15,000 to $25,000 that it continues to do well according to the operators. What tends to happen, though, is the accounting rules around timeshares are very complicated, and it has also been somewhat of an inventory management thing. As Rod alluded to, timeshare growth and demand for the last 10 to 15 years has been very good. You saw a lot of the hotel operators, with lots of free cash flow, start building larger and larger and more concentrated developments for timeshare. Their timeshare numbers became more and more about the development of a select number of sites. To get the premier pricing, you tend to be in high demand, very difficult to build locations, for example, Hawaii or Vegas. Because it is so difficult to build and there is such high demand, sure enough, any kind of delays or problems, or if you run out of inventory because you sell it so fast, the year-over-year comparisons become quite difficult. We have seen delays because of either archeological finds in Hawaii or it has been difficult to get the approvals for the next phase of development from community people in the local area or what have you. That has pushed back a lot of their earnings, apparently, into 2009. 2008, from an earnings perspective, given the timing of the inventory, looks to be somewhat weak; it tends to be much more in 2009. That is why I said you could see a surge in timeshare earnings in 2009. It is not because demand apparently has fundamentally shifted, it is more of an inventory management situation as well as an accounting issue. I would say that because of the volatility in earnings, it makes it rather difficult to value it like any other traditional public company that has more stable earnings. Whereas I think it might be a great business, I am starting to think that it may not be a good business for the public companies to be in. There might be another way of doing it to smooth out the earnings, somehow, someway.

TWST: Will, given the environment, what are you telling investors to do in the space at this point?

Mr. Truelove: I would say to the dedicated investors that understand the lodging space, that know it is not all about the consumer, they should start trying find the best owners of real estate that they can. I think it is on sale at this point. I am also telling people, if they have to choose, to choose operators with less timeshare. Given the volatility and the concerns around that business, go with something that is easier to forecast. We like the lodging REITs. We like Host Hotels, particularly. It is a great investment. They own some of the best real estate around. We have a buy rating on that. We like, on the more C-Corp side, Choice Hotels, which is a pure franchiser. They post great quarters, great results. There is very limited volatility around their numbers because they don't have the timeshare. If you want to play in the lodging space, the easy answers are the ones that don't have the timeshare. You might find value in those, such as Starwood and Marriott, that do have the timeshare, but the results can be quite volatile. I think that is where it is a little more difficult play right now. I think those stocks are cheap and offer great valuations, but it is probably going to be more of a bumpy ride.

TWST: Rod, where are you pointing investors?

Mr. Petrik: On the REITs side, we like Host Hotels and we like LaSalle (LHO). We think that they have two of the highest quality portfolios in the space. We believe that multiple will track RevPAR. Historically, those two companies have had the highest RevPAR in the lodging sector. Strategic has certainly entered that arena. A lot of those assets have been bought, and bought at relatively high prices over the last few years. Host and LaSalle would get the nod on the REITs side. On the C-Corp side, our favorite name is Marriott. We think the selloff in the stock recently due to timeshare has been overblown. We love the international opportunities; they are 20% of the business. We think that the bottom line can grow at almost 50% per year on the international front over the next two to three years. The opportunities in Asia, again, and particularly in India and China are very attractive. As you see a pickup in supply, obviously Marriott gets more than their fair share in new starts, with very competitive product, particularly in select service for those local developers looking for brands. When we talk to lenders, to the extent that you can get a construction loan it is very helpful to have a major brand like one of those.

TWST: How about the other side of the coin, Rod? Are there any names in the space that worry you at this point?

Mr. Petrik: From the REIT perspective, we have been sitting here for the last couple of years going through this and at some point, if a stock drops low enough, there will be some private equity that will come in and correct the pricing. We do not have any sells in the space right now.

TWST: Will, how about your take? Do you think there are any names investors should be wary of?

Mr. Truelove: We obviously prefer some over others, but we don't have any names with sell ratings either. I think the industry's strength in the stage we are still in, still bodes well. I think if we got very late in the cycle or started seeing a turn for the worse, then we would probably be more apt to see stocks with sell ratings. At this stage of the cycle it is very difficult to put a sell rating in. As Rod mentioned, with stocks that do sell off, there is the private equity call option almost.

TWST: They are sitting on the sidelines with all of that money we talked about earlier, just waiting.

Mr. Truelove: Exactly. How far is it really going to drop?

Mr. Petrik: Two names have been mentioned. I mentioned Marriott and Will mentioned Choice. I don't follow Choice, but I think that the key will be as we move further in this cycle. To the extent that you have a deceleration in the fundamentals, particularly when you look at real estate, when you look at supply and demand, increase in supply from a logic perspective is not good, if you own real estate. However, if you are one of the franchisers, it is very positive for you. I think as you move forward in the cycle, the franchisers, the management companies, the Marriotts, the Choices of the world are going to benefit, and it is going to be to the detriment of the real estate owner. I think we are going through that process. It is one of the reasons that when you look at companies like Hilton and Starwood, over the last few years, they have become very aggressive in selling their real estate in a very strong real estate market and shifting their income to a more franchised and management based business.

Mr. Truelove: To follow up on Rod's point, if you are really worried about the end of the cycle, Choice would be a good defensive play on the C-Corp side. If you did have to be on the real estate side, there is actually a lodging REIT called Hospitality Properties Trust (HPT) that does have some minimum rent guarantees, which is fairly unusual in the lodging space. It offers a fairly high dividend yield. That could be a defensive play if you need to be in the real estate arena. There are some choices to be had, even if you believe in a decelerating lodging environment.

TWST: Even in a tough environment, there are ways to make some money.

Mr. Truelove: That is correct. You will find a bull market somewhere.

TWST: Rob, do you have any comments to wrap up?

Mr. Petrik: I think that the third quarter results were solid. The fourth quarter looks pretty good. Consensus RevPAR in 2008 looks to be about 5%-7%, high by historical standards and group and convention business up around 10%. However, right now, it is meaningless. Lodging executives are being barraged by the same media reports as the rest of us. They are expressing concern with the overall economy. If we slide into a recession, all bets are off. Most real estate companies are on the sidelines waiting for opportunities. To me that translates into they believe pricing is coming down. For the last four years, lodging assets have traded in the 11-13 times EV/EBITDA multiple range. Some assets and companies went off at 13 times plus. I believe we'll see pricing go to the bottom end of that range. However, non-dedicated investors may wait for the next cycle to hop back on the lodging bandwagon.

TWST: Will, do you have any wrap-up comments?

Mr. Truelove: I wish that the lodging names were considered more as business services instead of consumer discretionary stocks. I think the label of consumer discretionary really hurts them because so much of our time is focused on consumer sentiment and perceptions of reality whereas many of these names do not have that much exposure directly to consumer travel. Business travel has remained quite strong. It is anticipated to be strong again next year. Yet these names just can't seem to get any traction because of fears about the consumer. It is somewhat unfortunate. Overall, we are still bullish on the fundamentals. We are just waiting for the market to perceive the stocks differently.

TWST: That could take some time.

Mr. Truelove: If ever.

TWST: Thank you. (TJM)

Note: Opinions and recommendations are as of 11/2/07.

ROD PETRIK Stifel, Nicolaus & Company, Inc. One South Street Baltimore, MD 21202 (443) 224-1306

WILLIAM TRUELOVE UBS Investment Research 1285 Avenue of the Americas New York, NY 10019 (212) 713-8825