Orient-Express Hotels Ltd. Q3 2008 Earnings Call Transcript

Start time: 10:00

End time: 10:56

Orient-Express Hotels Ltd. (OEH)

Q3 2008 Earnings Call

November 4, 2008 10:00 am ET

Executives

Pippa Isbell – Vice President, Corporate Communications

Paul White – President, Chief Executive Officer

Martin O’Grady – Vice President, Chief Financial Officer

Ned Hetherington – Vice President, General Counsel, Secretary

James Hurlock – Chairman

Analysts

Joseph Greff – JPMorgan Chase & Co.

Steven Kent – Goldman Sachs

Chris Woronka – Deutsche Bank

Will Truelove – UBS

David Katz – Oppenheimer & Co.

Amanda Bryant – Merrill Lynch

[Charles Rorer – Arcon Advisors]

Dan Webb – Third Point

[Chris Baylor]

Presentation

Operator

Welcome to the Third Quarter Earnings 2008 for Orient-Express Hotels Conference Call. (Operator instructions) I would now like to hand the conference over to your speaker today, Pippa Isbell. Please go ahead, madam.

Pippa Isbell

Thank you very much. Good morning, ladies and gentlemen. As the operator indicated, this is the Third Quarter Earnings Conference Call for Orient-Express Hotels. We issued our news release last night and it is available on our website at Orient-Express.com as well as on the web site of the SEC.

For anyone who has not yet seen it, the highlights are as follows: Third quarter total revenues excluding real estate grew 5%. Same store RevPAR up 9% in U.S. dollars, 1% in local currency. EBITDA before real estate of $50 million U.S., adjusted EBITDA before real estate of $51.3 million U.S. Third quarter net earnings from continuing operations of $17.6 million U.S.; EPS from continuing operations of $0.41 per common share, adjusted EPS of $0.47 per common share. And the company has taken a number of steps to reduce costs and preserve financial flexibility.

On the call today are Jim Hurlock, Chairman of Orient-Express Hotels; Paul White, President and Chief Executive Officer; Martin O'Grady, Chief Financial Officer, and Ned Hetherington, Company Secretary, to whom I will now hand over for the usual housekeeping note matters. Thank you, Ned.

Ned Hetherington

Good morning, everyone. I am Ned Hetherington, the Company Secretary of Orient-Express Hotels. Before we get started I would like to read out our cautionary statement under the Private Securities Litigation Reform Act of 1995 in the United States.

In the course of remarks to you today by Orient-Express Hotels’ management and in answering your questions, they may make forward-looking statements concerning Orient-Express Hotels, such as its earnings outlook, future investment plans, and other matters that are not historic facts. We caution that actual results of Orient-Express Hotels may differ materially from these forward-looking statements. Information about factors that could cause actual results to differ is set out in today's news release, the Company's latest annual report to shareholders, and the filings of the Company with the Securities and Exchange Commission.

That is all I have; I will now turn this call over to Paul White, Chief Executive of Orient-Express Hotels.

Paul White

Thank you, Ned. Good morning, ladies and gentlemen. Today, as well as giving you some further analysis of our third quarter results, I would like to focus on the two key topics at the top of management’s agenda in the current trading environment. Firstly, how is Orient-Express navigating this consumer-led recession and how do the short-term measures that we are taking impact on Orient-Express’s long-term strategies; secondly, how do we see 2009, a look at the booking situation, and how we continue to differentiate ourselves from the mainstream sector.

In many ways the third quarter, and particularly the balance of the high season in the northern hemisphere, mirrored that of the second quarter. In July and August, RevPAR continued to show solid growth. September, however, saw an unprecedented downturn with RevPAR dropping by 6% in local currency. We are now beginning to see booking patterns in some regions returning to those experienced a year ago, which I believe is an encouraging sign.

I commented in the second quarter about margin compression, which in the third quarter was very much as expected with margins, and that is pre-real estate, across the portfolio reducing by some 200 basis points from 31% to 29%. In some properties we have seen revenues from food and beverage outlets, spas, and other revenue sources outpace rev as we continue in our strategy to incrementally grow revenue from our in-house guests. This does, however, impact margins.

As in the second quarter the performance of our properties in the rest of the world have been strong, with Asia, Africa, and Latin America leading the way. In Europe, the Grand Hotel Europe in St. Petersburg, La Residencia in Mallorca, and Reid's Palace in Madeira all showed double-digit revenue growth, which converted to similar growth in EBITDA, this in spite of high inflationary pressures in Russia.

This said, our European powerhouses in Italy have had mixed seasons. In Venice, the Cipriani has seen revenues drop back to 2006 levels as a combination of the weak dollar, the U.S. recession, and the decline in U.K. short break business have hit the city. Some reports show Venice over 30% down in 2008 versus 2007. Similar numbers are coming out of Florence. They key thing to focus on, though, is the long-term attractiveness of these destinations. Venice will always be Venice; Florence is Florence. Our properties are phenomenal properties, well-run, and this winter we continue the works planned at the Cipriani, which will see the property with 16 new suites, adding to the 10 which came online in 2008.

Elsewhere in Italy, the Splendido saw revenues for the third quarter grow by 8%, and the Caruso in Ravello recovered from the impact of the Naples garbage crisis in April and closed the quarter with 8% revenue growth.

Returning to the third quarter was revenues in U.S. dollars were up 5%, EBITDA was down 6% on prior year at $50 million, this again before real estate. In the year to September, EBITDA pre-real estate grew by 1% to $119.4 million, which I believe demonstrates the resilience of our business model, in particular in the high season months in times when many other companies in the sector have seen EBITDA decline.

So what of our current action plans that we have? We have outlined the key items in our press release issued last night. I have implemented significant SG&A reductions, which we currently have quantified in constant dollars at between $20 million and $22 million. This is in the main driven by headcount reductions and involves leveraging off the regional structure introduced by Filip Boyen, Vice President of Operations, some nine months ago. Cost reductions include savings in back office areas like finance, in reservations, on property sales, as well as senior management in the regions.

As I have repeatedly stated in the past, our portfolio is in great physical shape and this will enable us to reduce maintenance CapEx to $12 million in 2009 from the $25 million that we expect to spend this year and overall property-related CapEx to $24 million in 2009, from the estimated $69 million in 2008. This is expected to more than offset any reduction in cash from operations in 2009. The Company today is benefiting from the investment decisions taken by management and the Board over the past five years in assuring that our assets are in great shape and that this pause in expenditure will not impact the quality of our products.

I have also taken the decision to suspend development capital expenditure for the foreseeable future, as we maintain our focus on our key priorities. Why? The important thing here is to refocus development on when we want product to hit the market, not how quickly we can develop. Opening Santa Barbara’s newest property in the low season in 2009 will be the right decision in an up cycle, as the property would have time to bed in before the high season. Economics now dictate that it is preferable to suspend this, with opening put back to either the high season in 2010 or even later. The cash impact of this and other developments suspended or deferred in the Caribbean, Brazil, Peru, and Central America will be over $60 million.

These decisions, along with the suspension of dividends, which demonstrate that the Company has left no stone unturned in ensuring maximum cash is available for investment, along with good operational management philosophies which have served Orient-Express Hotels well during previous downturns, and that I and my management team have indeed lived through, will free up cash for important acquisition opportunities which we have traditionally seen emerge in periods of stress in the industry. This has been a key element of our growth in previous years and will continue to do so in the future. The strength of our balance sheet and debt profile which sees significant repayments of debt only due in 2011 will underpin this. Martin will talk about this a little more later in the call.

Finally, moving on to 2009 and indeed the balance of 2008. The impact of the September revenues coupled with revising our expectation for the fourth quarter sees us keep RevPAR guidance in the 6-8% range. However, we are reducing EBITDA guidance pre-real estate and special license to $130 million to $135 million. I would note that the swing in the dollar versus the euro could further impact EBITDA in the fourth quarter; however, this will be partly offset by reductions in interest and depreciation.

Special items in quarter four will include the cost of the redundancy programs around the portfolio. In the circumstances, when we have just gone through a period of unprecedented volatility, we believe this is a very strong performance relative to the industry as a whole.

As I have said, in many areas bookings for 2009 as of the 30th of September are showing signs of stabilizing, with overall bookings for the portfolio already sitting at the same levels as this time last year, despite everything we have seen in the world.

In Italy, we have reduced operating days at all properties next year, thereby compressing demand and reducing variable costs and bookings that are actually stronger by 17%, but I will stress that this is very early days. The strong dollar will undoubtedly help the European properties; this said, we are still encountering weekly variations in booking patterns which are indicative of the volatile market conditions we find ourselves in.

On trains and cruises, on a revenue basis, our 2009 bookings are 5% behind the same time last year; however, we have actually reduced capacity in 2009, i.e. we will be running fewer trips on the Venice Simplon-Orient-Express by approximately 10%, which will have a positive impact on the profitability of the trains’ portfolio. Bookings for the U.K. day trains, the Eastern and Oriental Express which runs in Asia, and Afloat in France, our barge business on a revenue basis, are ahead of the same time last year.

I will now hand over to Martin.

Martin O’Grady

Thank you, Paul.

Good morning, everyone. Turning to balance sheet items, at the end of the quarter the Company has $69 million of cash plus an additional $78 million of funds available under working capital and revolving credit facilities. Taking into account of the total debt of $791 million, outstanding working capital facilities of $49 million and a cash balance of $69 million, the net debt at the end of the quarter was $770 million.

On a trailing 12-month basis, the EBITDA ratio was 5.3 times, which is unchanged from the last quarter. However, this is above the four to five times’ range where we feel more comfortable. The weighted average maturity of the Company’s debt was nearly four years. The current portion of long-term debt at the end of the quarter was $122 million. This however includes $89 million of borrowings under revolver facilities, which are technically repayable within 12 months but in reality will be rolled over as they mature. At the end of September, approximately 42% of debt was fixed and the average cost of debt, including margin, was 5.5%.

Turning to cash flows for the nine months, cash from operations was $80 million, which compared to $64 million the first nine months of last year. Investment in real estate, which is primarily Porto Cupecoy, was –

Paul White

Why don’t you stop, Martin. Operator, we seem to have rogue phone ringing in the line.

Operator

Yes, I have just located the line and muted it for you now.

Paul White

Thank you. Sorry, Martin.

Martin O’Grady

Back to cash flows for the nine months, cash from operations was $80 million, which compares to $64 million for the first nine months of last year. Investment in real estate, which is primarily Porto Cupecoy, was $26 million, and capital expenditure at the business unit level was $69 million. We have also invested a further $6 million in Cataratas and El Encanto during the course of the year. Net cash provided by financing activities over the nine-month period was $7 million and net decrease in cash was $32 million.

Central costs in the third quarter were $6.2 million compared to $7.7 million in the third quarter of 2007. The 2007 number included an exceptional $2 million of management restructuring-related costs. The full-year amount of central costs before any restructuring charges will be around $28 million.

The effective tax rate for the first nine months was 32%. For the full year we expect it will come out around 31% to 32%, but this may be affected by any FIN 48 adjustments in the last quarter.

I have taken a number of questions on debt maturity recently. For those not familiar with our filings, the debt due over the next three years is scheduled as follows: The last quarter of 2008 will be $12 million. 2009 will be $31 million. 2010 will be $51 million. The key year is going to be 2011, when $477 million, including the $89 million revolver, is scheduled. We will be working on these refinancings in 2010 and by then we anticipate the debt market will have improved. Clearly it is good news for our shareholders that we do not have to refinance our portfolio in this current market.

That said, we do have unencumbered assets in Mexico, in South America, southern Africa, and in Asia. Another interesting asset is the Grand Hotel Europe. That asset will make $25 million of EBITDA this year, and the outstanding debt is just over $40 million. Today it is very hard to raise finance in Russia, but we are monitoring the situation carefully and we may decide to take advantage of any improvement in market conditions as and when that happens.

Now, I will pass you back to Paul.

Paul White

Thanks, Martin.

Just to summarize, I think my key message today, the key message from the Company is that, you know, despite going through what was a strong high season, our focus already during the tail-end of the high season was navigating the low season month that we are going into and indeed 2009. And our focus has been very much and will be very much on preserving cash to enable this company to capitalize on what we believe are investment opportunities that will come its way.

If ever there was a time for companies to have strong long-term strategic focus coupled with the ability to be flexible in the short term, I believe now is the time. The quality of our asset base, which has durability and predictability, will underpin the value of this company over and above any short-term movements in profitability. The management team and I have been preparing for this downturn of flex short-term strategies and continue to be nimble in our approach to navigating the near-term future events.

Thanks very much.

Pippa Isbell

Thank you, Paul. I will now hand back to the operator so we can take your questions.

Question-and-Answer Session

Operator

Thank you. We will now being the question and answer session. (Operator instructions) Your first question comes from Joseph Greff from JPMorgan. Please ask your question.

Joseph Greff – JPMorgan Chase & Co.

Hi, everyone.

Paul White

Morning, Joe.

Joseph Greff – JPMorgan Chase & Co.

Paul, can you just talk about what your pricing strategy is given, obviously, some challenges right now?

Paul White

Yeah, I mean our pricing strategy really varies property to property and high season to low season. You know, we have just been through, I think Martin and myself, 50-odd budget meetings for next year. Clearly we will continue to be focused on keeping our pricing levels at the levels that they are if not above in the high seasons where we have strong demand.

But, you know, there is more flexibility on pricing, you will see, in this down cycle in the corporate properties – properties such as Lisbon, Sydney, New Orleans, Charleston, in fact, with the domestic American portfolio as a whole, than probably you saw in 2001 and 2002. A simple fact is that some of our properties in the high season achieve a 40% to 50% RevPAR premium on the nearest competitor, therefore pricing, you know, drops in pricing do not come, do not sort of produce immediate returns.

That said, the one thing, and I think I commented on this last quarter that we have noticed is there is an increasing sort of focus from clients, even the clients that are paying $10,000 a night for a Presidential Suite, on value for money. And the way we are handling that is really through value added. Giving the client just that little bit more rather than overall in discounting, and that is why I expect, which I talked about quite a bit after in the investor meetings I have post-Q2 earnings, about what we will be doing to underpin revenue going through 2009. I think, you know, value for money is going to be a term that we hear more and more used in the luxury sector, not just in the hotel industry but in other luxury industries as we move forward.

Joseph Greff – JPMorgan Chase & Co.

And you talked for next year that bookings are pacing with last year’s levels; is there a big disparity among geography there?

Paul White

Not really. I mean, I mentioned that Italy was up. It is counted in Europe by Portugal being a little bit down. Obviously at the moment we have more visibility in the rest of the world where we are coming into the high season, whereas the American properties have probably about half the amount of reservations on their books than they have at the end of the next quarter.

So I think, you know, I have always said that this time of year, you know, bookings are traditionally at their lowest level than they are at any other time of the year, but you know, what we – we tend to track week by week bookings and you know, we are having strong weeks, but overall they are sort of balancing out.

Joseph Greff – JPMorgan Chase & Co.

Great, and then one final question. Are you seeing any assets that are being offered at attractive pricing or can you just talk about what is out there as potential acquisition opportunities, and maybe how that intermingles with your strategy in terms of curbing development CapEx for existing assets.

Paul White

I think, you know, Joe, that is one of the things I am really trying to get over today. I mean if I can answer that in a sort of backwards way, I mean, a development in one of the places that I mentioned, like the Buzios development in Brazil or the El Encanto development is there and you know, I can pause it and spend the money later, whereas an opportunity that might come up in Italy or in the U.K., I have got to be in a position to act quickly on, which is really what I am doing.

I mean, you know, what we are doing is saying okay, the slight change in short-term strategic focus rather than long-term is that we are going to absolutely prioritize these opportunities which we believe will come up, and we have seen a few signs. I mean, I have seen a couple of – I mean not for us, but a couple of signs of distressed properties in the U.K. I noticed there was a few properties actually in New York that came on the market last week at lower multiples than we have seen for a long time.

So we are very much keeping our eyes open for these sort of opportunities and really what we have decided to do, you know, and you know these decisions were made obviously two, three months ago when we were still going through the high seasons, is ensuring that we preserve cash so that we can take advantage of these opportunities rather than just carrying on with the development and opening hotels in a tough market, and really, you know, absorbing the cash that we do have.

Pippa Isbell

Operator, I think we better go to the next question, please.

Operator

Your next question comes from Steve Kent from Goldman Sachs. Please ask your question.

Steven Kent – Goldman Sachs

Hi, good morning, Paul and Pippa. I guess I am still – just to Joe’s question, a little confused by all of this because on the one hand you are saying bookings are good, things are stabilizing, but then at the same time you are cutting your dividend and really pulling back significantly on CapEx opportunities that you have trumpeted many times as huge opportunities, one-of-a-kinds, and I get the idea that maybe there is some opportunities to go out and buy, but then at the same time you are talking about that you have some debt issues later on in 2010-2011. So I am not sure what we should really take away from this conference call and what you are trying to say because it seems like it is a lot of different messages. I mean, if that is what it is, then fair enough, but I guess I am confused by what I think are mixed messages.

Paul White

Okay, Steve, apologies for confusing, but let’s try and put a little bit more clarity on the situation. I mean I think that the fact that the majority of our long-term debt is only refinanceable in 2011 in today’s marketplace is an absolute positive. You know, if I was in a situation where I had the European portfolio having to be refinanced in 2009 and 2010, then you know, I think I would be thinking slightly differently.

But you know, we are already starting to see I think a little bit of a disconnect between what is going on in the debt markets and what is a consumer-led recession that we are already in. Whatever the politicians say the statistics are, we know as operators where the market is at the moment. So you know, I see that as a positive.

As far as the cost-cutting side is concerned and you mentioned specifically, you know, the dividend, the dividend is on an annualized basis $4 million a year. It is $0.10 a year. I am making some tough decisions that involve personnel, personnel that have worked loyally for this company for a number of years, and at the same time we are making decisions on moving back some of the projects, which I do believe is the right thing in this environment as I just explained to the last caller, to Joe.

We really when we reviewed the cost structure of the company a couple of months ago, one of the things that did come on the table was the dividend and we decided that that is another $4 million that we believe shareholders will agree could be better used as putting towards an investment opportunity that might come our way in Europe or elsewhere in the world. And, hence that is why that decision has been made. I mean what we are doing here is keeping to a long-term strategy, but making some moves in the short-term really to take advantage of what we believe opportunities will come our way on the investment front and this is exactly what we did in 2002, which led to us acquiring the properties, the Manwar, La Residencia, and indeed the Ritz Madrid.

Steven Kent – Goldman Sachs

So, Paul just to be clear it is definitely buy now versus build. You would much rather be a buyer and you think that there will be some opportunities there and furthermore you would be willing to put some leverage on your balance sheet to do that because you will not be able to fund all of this with the cash flow. So, am I right on that last point?

Paul White

Yes, I think buy versus build is a line I wish I’d have thought of an put in my script, but yes that is definitely the mindset of the team at the moment. And, yes if the deal is right we do have as Martin has said the opportunity to leverage off of some of the unencumbered, borrow from some of the unencumbered properties enables us to do these deals. And, we have some other options on moving deals forward as well, which could involve joint ventures or even minority positions with management. So, all of those things are open.

Steven Kent – Goldman Sachs

Okay, thank you.

Pippa Isbell

Next question please operator.

Operator

The next question comes from Chris Woronka from Deutsche Bank. Please ask your question.

Chris Woronka – Deutsche Bank

Hey good morning.

Paul White

Good morning Chris.

Chris Woronka – Deutsche Bank

How should we look at cost next year because I see what you said about the expense reduction, but I know we’ve also talked about the inflationary pressures and some of those may be mitigating, but you know, I suspect they’re not mitigating everywhere so kind of what’s the offset of this. You know you’ve outlined the $22 million in expense reductions, but.

Paul White

Yeah, there is, you’re right, but there’s a little piece missing in the jigsaw here, which let’s fill that in now. The 20 to 22 million obviously hits in the variable overheads line, not in the gross contribution line in the hotels. So, the hotels are also looking at the operating costs and one would expect rather than what has been the traditional sort of 40% saving if they drop a dollar in revenue to gross contribution, but that will be increased to 50%. In other words what we’re doing probably is we’re taking out that spare person that exists in a restaurant or behind a reception desk. The other thing is that, for example, what we’re doing in Italy is shortening the seasons and in other areas of the world where we have strong seasonality is we’re changing terms and conditions and employing more seasonal staff rather than year round staff.

So, that is variable cost management as opposed to fixed cost management. What we announced and put in the press release last night really is fixed cost management. And, there are some other things we’re exploring at the moment, which I think demonstrates management’s belief in the value of the stock and that is we’re offering programs to senior management and to the regional managers to exchange remuneration for stock and really trying to bias remuneration more towards stock performance as we go forward in the next couple of years particularly with our stock sitting at $11 to $12.

Chris Woronka – Deutsche Bank

Right and just one more quick one. Did I pick up right that you would look to sell the St. Petersburg Hotel if conditions are improved over there?

Paul White

I don’t think I said that on the call, but you know, the one thing that is clear Chris is that any substantial offer for any property as I said on many occasions will obviously be taken very seriously. And, I think the important thing in this environment or in any environment is it’s a case of can you use that cash better than where it sits at the moment. You know, the Grand Hotel is a very profitable property upwards of $25 million (inaudible 00:33:14) this year. But, yes if the right offer was there it would obviously be considered. I think in the past I said that the Italian hotels would be a struggle for us to think about selling just simply because that’s what gives the culture to the company. But, other than that, you know we will look at any opportunities that come our way.

Chris Woronka – Deutsche Bank

Okay, thanks.

Paul White

Thanks Chris.

Pippa Isbell

Next question operator.

Operator

The next question comes from Will Truelove from UBS.

Will Truelove – UBS

In terms of the cancellation of some of the development projects are there any penalty payments associated with deferring or cancelling some of those projects?

Paul White

Interestingly no, I mean the Ellen Cantho (ph 00:34:05) project was the one that probably was challenging us the most, but actually only yesterday I had a meeting with the project managers with my own team. And, it seems that there will be a carrying cost of that project at let us say between $100,000 and $150,000 per month so if we do an eight month delay, you know, maybe $1, $1.2 million in a $90+ million project. So, it is not substantial. The bottom line is that the construction industry is in the same boat as most industries at the moment and they have very much come to the table and understood what is going on here and are being very flexible.

Indeed one of the flips on this is the raw material costs are actually going down. You know, the estimates in New York of concrete prices versus only three or four months ago is that they’re down 17% now. And, we’re seeing similar issues with steel as people start to erode into stockpiles that have been built up because of the phenomenal cost of the raw material. So, the shorter answer Will would’ve been just to say no, but I hope that gives you a bit more flavor on that.

Will Truelove – UBS

And, the second question would be what do you think the estimated value is of the real estate division, I mean the one that’s basically been shut down. I mean because if you’re going to go out and buy stuff, I mean with the debt market the way it is you’re obviously going to have to need to probably sell things to raise proceeds to buy things and so where’s that sale proceeds going to come from. It’s got to be that division you probably shutdown right? So, how much is that sort of worth in your mind, or at least if you can’t give that what’s the book value of that real estate.

Paul White

Well, the book value of the real estate is quite low. I mean in the past you guys have actually put your own on the information out there, you said it’s worth $4 or $5 a share, which you know at the time was about $200 million. I think that in the long-term the value of that land will return. I think our approach to building on that land is going to be different than it might have been two or three years ago and I think it’s very much going to be small projects similar to what we’ve done in Lasimar (ph 00:36:37) and are building six or eight villas rather than building 140 or 150 condominiums. You know, this will all tie in to how we perceive this part of the business to work post this cycle. There’s a lot of questions being asked at the moment as you well know on the whole sort of viability of fractional going forward.

So, you know, yes we’ve shut back down. The land all still exists. There are opportunities maybe to sell some of these pieces of land, but they’re small numbers. In terms of how do we raise money to do acquisitions. You know, the clear message we’ve got from our banks and I’m looking at Martin as I make this sort of statement is they’re sort of saying to us it doesn’t really matter what valuation you have done on the property. It doesn’t matter what you think it might be worth in two or three years time, but we’ll lend you seven times cash flow.

Yeah, so that’s as you know most of our banks, or the great number of banks are European and Asian, but they’ve been very straightforward on this. It’s look Paul work on seven times cash flow, come to us with a deal, and we’ll be able to help you make that work. And, I think that’s, one it’s encouraging for me just to hear things in simple terms, but B, you know, this is the difference between development and acquiring existing properties. And, if I was to say we’ve got a development here and how much would you lend me on that then I actually think the banks would sort of take a sharp intake of breath whereas an existing property with existing earnings is a different story.

Will Truelove – UBS

All right, thanks so much for the clarification.

Paul White

Okay.

Pippa Isbell

Next question operator.

Operator

The next question comes from David Katz from Oppenheimer. Please ask your question.

David Katz – Oppenheimer & Co.

Hi, good morning.

Paul White

Good morning Dave.

David Katz – Oppenheimer & Co.

I just wanted to add one more issue on there. In terms of what you have, I just want to be clear on what you have planned for Cap X for next year, what you have out there on the board.

Paul White

Yeah, so essentially the difference between the $12 million that I said is essentially FF&E Cap X from the $24 million of overall hotel related Cap X is really work (inaudible 00:39:11) Cipriani this winter and the Grand Hotel Europe for next year, which is about $5 million of the Cipriani, it is $3.5 million euros so whatever that will translate to today. And, about $8 million, $7 to $8 million dollars of the Grand Hotel, which includes the continual rollout of the rooms and some work that is planned on the bar and some planning work on the restaurants.

David Katz – Oppenheimer & Co.

Got it. Okay, and I just want to make sure that I have my numbers right. I think you said net debt was 770.

Paul White

Yeah.

David Katz – Oppenheimer & Co.

Is that the right number?

Paul White

That’s it.

David Katz – Oppenheimer & Co.

So, if we look at the epidad guidance, you know, we’re somewhere about 5.8 times leverage as of the end of the year? Should that number move, what would move that number in the fourth quarter one way or the other, not much right?

Paul White

Not really, no, I mean that computes out of 5.9 times so 770 over 130 taking it to the bottom of the range.

David Katz – Oppenheimer & Co.

Right and so what kind of a target leverage level are you shooting for in the next 12 months? Where would you like it –

Paul White

Well, as I said the range we’d feel most comfortable with is going to be four to five times, but we have to be flexible and react to whatever opportunities are there.

David Katz – Oppenheimer & Co.

Got it, okay thank you very much.

Paul White

Thanks David.

Pippa Isbell

Next question please.

Operator

The next question comes from Amanda Bryant from Merrill Lynch. Please ask your question.

Amanda Bryant – Merrill Lynch

Great thanks, good morning. Just circling back on Cooper Coy (ph 00:40:52) in the quarter obviously you had five purchases that were cancelled. Now, are there any other contracts at that location or in any of your other real estate developments that could potentially close over the next two quarters?

Paul White

When you say close do you mean be cancelled or close –

Amanda Bryant – Merrill Lynch

Right be cancelled or closed and where you could actually book something for that.

Paul White

The situation is that the 69 that are left are 37.5% deposit paid. Now, they can still bail on us, but they will forgo 37.5% so our instinct is now that that’s a slightly different situation from somebody being 25% when they could more easily walk away. To walk away from 37.5% on an average investment of say $750,000 is quite a lot of money to walk away from.

Amanda Bryant – Merrill Lynch

Okay.

Paul White

We have not actually had anybody else that has come to us and said would you consider freezing up to 37.5% so I hate to make predictions on these things because I thought 25% was in gaming terms pop committed, but I think 37.5 is a slightly different scenario.

Amanda Bryant – Merrill Lynch

Okay great and so that’s of the 69 units left correct?

Paul White

Right, yeah.

Amanda Bryant – Merrill Lynch

Okay, thank you.

Paul White

That’s 69 units sold, yeah.

Amanda Bryant – Merrill Lynch

Okay, thanks.

Paul White

Okay, thank you.

Pippa Isbell

Operator.

Operator

Your next question comes from Charles Rorer from Arcon Advisors (ph 00:42:33). Please ask your question.

[Charles Rorer – Arcon Advisors]

Good morning.

Paul White

Good morning Charles.

[Charles Rorer – Arcon Advisors]

I gather from the answer to the last question that these contracts to sell are non-recourse other than the forfeiture of the deposit.

Paul White

Correct.

[Charles Rorer – Arcon Advisors]

And, it really whether they’re going to walk or not depends on whether or not the value decreased more than the unit if you were to sell it at current prices, more than the 37.5%.

Paul White

You’re absolutely right and that is what we’ve been taking a close look at is how prices overall have moved on the island. And, we do not believe that they have moved down further than the 37.5% as things stand today.

[Charles Rorer – Arcon Advisors]

In the release you talked about five units were cancelled so on those five units the 37.5% deposit was retained as a forfeit.

Paul White

No, they forfeited at the 25% level, not at the 37.5% level because that was actually quite early in the quarter.

[Charles Rorer – Arcon Advisors]

Okay. And, the last question related to the Donald branch where you guys talked about differing the $46 million commitment is there any of the money that’s been invested so far is there any need to write down any amount based on the fact that the values are not where they were or how much will it cost to defer that investment?

Paul White

The deferral will involve us putting potentially another $3 to $5 million of deposit. We’re still actually talking the actual terms with (inaudible 00:44:35) who’ve been obviously very understanding of what’s going on in the world and I think they really like us want this project to move ahead. They’ve seen the designs, they’ve seen the architects sort of rendering and it gives them the product that they want at the end of the day as well as giving us what we think is a great product. As far as right (inaudible 00:44:58) et cetera no. I mean there is nothing in that vane, in fact, we are going to end up with the core land on our books for, I think of it in the 300 per square foot versus market value of that land at the moment, which we’re told is conservatively between 450 and 500 per square foot.

So, we’ve got quite a way for that to drop before we would be, I think what you’re talking about is considering any impairments.

[Charles Rorer – Arcon Advisors]

Right. And, the last question in that area on that project is the construction financing in place yet for that project?

Paul White

Well, I’ve been working. I talked about this previously. I’ve been working on land financing and I did have term sheet. I still do have a term sheet from a major bank and I still have fairly senior sponsorship and support for the project, but until we finalize our plans for the library and know exactly what we’re going to build was still at the preliminary stage and it’s been very difficult quite honestly to push it through (inaudible 00:46:08) committee and over the last month I think I would’ve ended up with some fairly unfavorable commercial terms. So, we’re sort of holding off with finalizing that. We’re trying to finalize that until after the end of the year.

[Charles Rorer – Arcon Advisors]

And, when –

Pippa Isbell

And, excuse me, I’m so sorry, but in the interest of time may we move on to the next questioner please?

[Charles Rorer – Arcon Advisors]

No problem.

Pippa Isbell

Thank you.

Operator

The next question comes from Monday Monkee from Third Point. Please ask your question.

Dan Webb – Third Point

Hi, actually this is Dan Webb from Third Point.

Paul White

Hi Dan.

Dan Webb – Third Point

Can you explain the vote that took place regarding the treasury shares and the decision to basically to disenfranchise the majority shareholders of the company?

Paul White

Jim, do you want to comment on that first.

James Hurlock

Oh, I’m perfectly happy to. I think it’s important to understand that this structure has been in place since the company went public and any shareholder has been aware of this structure. Its purpose is to serve the best interest of the company and its shareholders by (inaudible 00:47:22) to avoid coercive or unfair offers to acquire the company and to preserve the value of the company in all of its shareholders.

We believe that our structure gives the board a unique ability to focus on long-term value. We believe there exists entities and funds that focus on short-term gains sometimes to the detriment of long-term values. We also believe that there are other entities and funds that seek to profit by market manipulation. We believe that events in the market over the past month demonstrate that our concerns are well-founded.

Dan Webb – Third Point

Are you reading a statement?

James Hurlock

No, I’m reading, I’m making an answer to your question.

Dan Webb – Third Point

No, it just sounds like you’re reading something off a piece of paper that a lawyer gave you. So, by your logic Fidel Castro has a better system than the United States because there’s not a democracy there right?

Paul White

I don’t think you need to answer that. Let’s move on to.

Dan Webb – Third Point

No, no, I have one more question. Don’t cut me off. You guys were great, hello. What about the $60 a share offer that you got?

James Hurlock

We never got a $60 a share offer.

Dan Webb – Third Point

Do you regret turning that down?

James Hurlock

We never got one.

Pippa Isbell

Operator may we go to the next question please?

Operator

The next question comes from Chris Baylor. Please ask your question.

[Chris Baylor]

Hi, I was just wondering if you could give an update on some of the specifics of the debt conveyance I guess in terms of interest expense coverage and whether or not this might have any impact over the next couple of years on financing needs?

Paul White

Yeah, I mean we’re still in good shape. We have not breached any conveyance. There’s going to be various scenarios next year clearly for any business if you hit the very bad, very low worst case scenario then you would be having some serious conversations with your banks, but right now we, touch wood, you know we’re okay. And, I would add that all of our properties have, most of them do have a group interest coverage test and those range from 1 to 2 times and today we’re at 3.4 times and we feel with that we’ve got some good headroom.

[Chris Baylor]

Great thanks.

Pippa Isbell

Next question operator.

Operator

Currently there are no further questions in the queue.

Paul White

Okay, well thank you very much.

Pippa Isbell

Many thanks everyone, have a good day.

Operator

This does conclude the conference for today. Thank you for participating. You may all disconnect. (Operator instructions)

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