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LaSalle Hotel Properties (NYSE:LHO)

Q4 2008 Earnings Call

February 20, 2009 9:00 am ET

Executives

Jon Bortz – Chairman, Chief Executive Officer

Hans Weger – Chief Financial Officer

Analysts

Michael Salinsky – RBC Capital Markets

Dennis Forst – Keybanc

Patrick Scholes – Friedman, Billings, Ramsey & Co.

Bill Crow – Raymond James

David Loeb – Robert W. Baird & Co.

Operator

Welcome to the LaSalle Hotel Properties fourth quarter 2008 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Jon Bortz, Chairman and Chief Executive Officer. Please go ahead, sir.

Jon Bortz

Welcome to the fourth quarter and year end 2008 earnings call and webcast for LaSalle Hotel Properties. Here with me today is Hans Weger our Chief Financial Officer. In addition to providing the financial results of our fourth quarter and our full year, Hans and I will discuss the company’s activities in the quarter and the year, the performance of our assets and the trends affecting them.

We’ll discuss the status of our reinvestment program and our capital requirements for 2009. And while we’re not in a position to provide a specific outlook for 2009 for the industry or for our company, we will discuss in detail the trends we’re seeing and what we’re doing both comprehensively and specifically to mitigate declining revenues in 2009 and position the company for the economic recovery and the opportunities to come. Hans?

Hans Weger

Before we begin, I’d first like to make the following remarks. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties over which the company may have no control.Factors that may cause actual results to differ materially are discussed in the company’s 10-K for 2008, quarterly reports and its other reports filed with the SEC.

The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Our SEC reports, as well as our press releases, are available at our website www.lasallehotels.com. Our most recent 8-K and yesterday’s press release include reconciliations of non-GAAP measures, such as funds from operations to the most comparable GAAP measures.

Two thousand eight funds from operations or FFO was $117.1 million as compared to $123.4 million in the prior year. FFO per diluted share was $2.90 compared to $3.07 in 2007. FFO for 2008 includes a negative impact from the $4.3 million settlement expense related to the Meridian litigation.

FFO for 2007 includes the negative impact from the $3.9 million non-cash write-off on the initial issuance cost of the Series A preferred shares due to their redemption in March 2007. Excluding these two events, FFO for 2008 would have been $121.4 million for 2008 versus $127.3 million for 2007 or $3.01 per share in 2008 as compared to $3.17 per share in 2007.

EBITDA for 2008 was $192 million as compared to $237.8 million in the prior year period. EBITDA for 2008 includes the negative impact from the $4.3 million settlement expense related to the Meridian litigation. EBITDA for 2007 includes a $30.4 million gain on sale of the LaGuardia Marriott. Excluding these two events, EBITDA would have been $196.3 million in 2008 versus $207.4 million in 2007, a decline of 5.4%.

RevPAR for the total portfolio decreased 1.7% in 2008. The RevPAR decrease was a result of a 1.2% decline in occupancy and a 0.5% decline in ADR. Our hotel portfolio generated $209.8 million of EBITDA in 2008 versus $217.6 million in the prior year, a 3.6% decline. Hotel revenues were 0.7% lower versus the prior year period, while expenses were held to an increase of 0.7%.

FFO for the fourth quarter was $20 million versus $29.8 million for the same period of 2007 or $0.49 versus $0.74 for the same period last year. EBITDA for 2008’s fourth quarter was $37 million versus $48.5 million in the prior year. RevPAR for the fourth quarter decreased 11.9% to $124.88.

Occupancy fell 6.6% to 65% and ADR declined to $192.15, a 5.7% reduction from the prior year. The company’s hotels generated $41.9 million of EBITDA for the fourth quarter compared with $51.9 million for the same period last year. Hotel revenues fell 9% compared with hotel and expenses declining 4.5%. Excluding pre-opening and severance payments, our expenses decreased 5.5% versus the prior year period.

As of December 31, 2008, our trailing 12-month corporate EBITDA, as defined in our senior unsecured credit facility, to interest coverage ratio was four times and our total debt to trailing 12-month corporate EBITDA equaled 4.7 times.

This recession is more severe and protracted than any of us expected. Because of this and the lack of visibility, we continue to take significant steps to improve liquidity and strengthen our balance sheet.

First, due to the excellent current condition of our portfolio and the recent renovations, redevelopment and repositioning of a large portion of our portfolio, we are able to limit capital investments in 2009 at our properties to those related to life safety, critical capital maintenance and a few minor necessary projects, most of which commenced in 2008.

Second, we continue to work aggressively with the operators to lower cost and minimize impact to our guests. We have been very successful since we commenced these efforts in the fall of 2007, but as additional declines in occupancies occur, we would expect to make additional reduction in cost. The experience we and our operators gained in 2001 and 2002 have been and continue to be of great value in our efforts.

Third and finally, the company announced a reduction in our common dividend to $0.01 per quarter. The board’s decision with management’s recommendation was based on the continued rapid deterioration in the economy and a total lack of visibility from both the economy and the lodging sector. This reduction in the dividend will provide significant additional liquidity in 2009.

The first quarter dividend will be paid on April 15, 2009 to common shareholders of record on March 31, 2009. As is customary, the board will continue to evaluate the appropriate dividend payment on a quarterly basis.

By taking these difficult but necessary steps, we expect to further strengthen our balance sheet, provide additional liquidity, position the company for the challenging times ahead and allow us to take advantage of attractive future investment opportunities.

On February 2, 2008, the company repaid the maturing loan secured by the Westin Dallas and Sheraton Bloomington Minneapolis South with borrowings from our line of credit. Through December 2010, the company only has $43 million of non-extendable debt maturities, $31 million maturing in September 2009 secured by Hilton Alexandria Old Town, and $13 million maturing in July 2010 secured by the Le Montrose Suite Hotel.

If the credit markets remain unfavorable as these loans mature, we plan to use the significant capacity on our senior unsecured credit line to extinguish these obligations. Currently we have $175 million available under our senior unsecured credit facility and $11.5 million available under our LHL credit facility.

Additionally, 21 of our hotel properties, which generate approximately half of our EBITDA, are unencumbered by debt providing significant opportunities for additional future capital liquidity if needed.

Looking forward, due to the rapidly decline in economic environment and the lack of visibility in our business, we are unable to provide a specific outlook for 2009. However, we are providing a 2009 outlook for the few line items where we do have some clarity. Participating lease revenue for 2009 will be zero as we now lease Le Montrose, the sole remaining hotel previously leased to a third-party to a LaSalle Hotel lessee beginning January 1.

We are forecasting corporate general and administrative expenses of $18.5 to $19 million, of which approximately $7.3 million is non-cash amortization of equity grants. We expect interest expense of $39 to $40 million, which excludes $2.7 million of capitalized interest, $0.4 million of distribution is to preferred unit holders, $26.4 million of dividends to preferred shareholders, and a weighted average of approximately $41 million fully diluted shares and units for the year.

Based on the performance of the Seaview Marriott Resort and Spa in 2008, the company expects again to terminate its manager agreement with Marriott. Based on the preliminary conversations with Marriott, and unlike prior years, we do not currently anticipate Marriott to cure this termination.

The company expects and is planning to retain a new management company to operate the property in April of 2009 as an independent resort. If in fact, Marriott does not cure the termination, the company will recognize approximately $9.5 million of prior termination cure payment as income in the second quarter of 2009. With this said, as a reminder, these are preliminary discussions and there is no guarantee that Marriott will not cure the termination.

I would now like to turn the call over to Jon to discuss the recently completed quarter.

Jon Bortz

As a result of the worsening economic environment, industry demand from both business and leisure customers turned decidedly lower in September and declined substantially in November. Bookings for both group and transient have followed these negative trends and generally worsened throughout the quarter. Notably, industry-wide demand fell 5.1% in the quarter as compared to a 1% decline in the third quarter.

November was the worst month down 7.8%, and while December demand dropped only 3.6%, the demand falloff worsened again in January declining an estimated 8%. As a result of this significant demand decline, industry-wide average room rates eroded rapidly with October down 0.5%, November down 2.5% and December falling 3.2%.

Not only has the industry lost pricing power, but customers of all kinds, business and leisure, are shopping for discounts. For LaSalle Hotel properties, we saw slightly worse demand in ADR declines in the fourth quarter than the industry. As a result, RevPAR declined 11.9% in the quarter.

In general both group and transient were weaker than expected as was average rate. The shortfall was spread throughout the portfolio with our urban hotels impacted the most, versus our expectations, as business demand fell off more quickly and substantially than leisure.

For the year, industry-wide demand declined 1.6% with occupancy down 4.2% to 60.4%. By contrast, our portfolio-wide occupancy declined 1.2% to 73.1% while average rate for the year in our portfolio declined 0.5% to just shy of $200 at $199.75. Our RevPAR decline at 1.7% represents an out performance of both the industry and the upper upscale segment primarily as a result of our urban hotels, where RevPAR for 2008 declined just 0.2%.

For the year, ADR for our urban hotels was up 0.5% while occupancy declined by 0.8%. RevPAR at our convention hotels declined 2.4% for the year, while our resort properties suffered a 3.3% RevPAR decline compared to 2007.

In the fourth quarter, RevPAR at our urban hotels fell 10.8% while it declined 11.8% at our convention hotels and 14.6% at our resort properties. Our properties were weak across all markets, with the weakest major market being Boston where our hotels experienced a RevPAR decline of 15.5%, then Chicago with RevPAR down 14.1%, then Los Angeles and San Diego down 13.3% and 13.1% respectively.

Seattle was down 6.1%, while Washington D.C. declined 9.8% in the fourth quarter suffering before the election but then benefiting after the election. On a monthly basis for our portfolio, RevPAR declined 11.2% in October, 14.6% in November, and 9.4% in December.

For the quarter, group performed relatively better than transient as compared to last year’s fourth quarter benefiting from our group up strategy, which we began back in mid-2007. For the year, Seattle was by far our strongest market with RevPAR climbing 17.5%, primarily as a result of the 33.3% increase at the Alexis, which benefited greatly from its redevelopment and repositioning.

Of our major markets, our hotels in West LA grew RevPAR 2.1% for the year with ADR up 5.5%. RevPAR at our hotels in Boston declined 1.8% with occupancy flat at exactly 80% and rate down 1.8%. RevPAR at our D.C. properties declined 2.5% for the year, with a market underperformance solely related to the negative impact of the deflagging, redevelopment and repositioning of the liaison, as most of our other D.C. hotels picked up share in 2008 and actually grew RevPAR.

Our best performing properties for the quarter, as measured by RevPAR growth, were Guildhall in New York up 17.8% benefiting from its repositioning, the Indianapolis Marriott up 6.4%, and the Alexis and Hotel Madera, with both also delivering RevPAR gains.

Our weakest properties in the quarter included the Chaminade Resort in Santa Cruz, Sheraton Bloomington, and San Diego Paradise Point, all of which were impacted by significant declines in group business. The Onyx in Boston was also one of our weaker performers negatively impacted by declines in corporate transient business.

For the year, our best performers were led primarily by our redeveloped and repositioned properties, including the Alexis in Seattle, Hotel Viking in Newport, Hotel Sax in Chicago, and Lansdowne Resort, as well as our West LA properties, including Le Parc and the Grafton on Sunset.

Portfolio-wide room revenues for the quarter declined 11.7%, while food and beverage revenues declined only 3%. Total revenues portfolio-wide fell 9% in the quarter.

For the year, total portfolio-wide revenues were down 0.7%, with food and beverage revenues increasing 1.2%, primarily reflecting improved performance at many of our redevelopment properties, as well as relatively flat group rooms for the year. These numbers for the quarter and the year exclude Donovan House, which reopened April 1st last year and was closed for redevelopment in 2007.

On the cost side, we believe we and our operators were extremely effective in the quarter despite the dramatic fall off in revenues. Through very aggressive asset management efforts working very closely with our operators, we were able to reduce portfolio-wide operating expenses by 4.5% in the quarter.

Reductions in operating expenses would have been greater by 103 basis points, but for the impact of $600,000 of severance costs from the management and staff headcount reductions made in November and December, and pre-opening costs of $600,000 from our repositioning projects.

More specifically in September as part of the budget process, we asked our operators to work with us to prepare plans at each of our properties that would substantially reduce management and staff in the event demand turned substantially lower. At our request, our operators implemented those plans completely in November and December, reducing salaried associates and managers by 15% or 130 individuals and hourly staff by 14% or 584 persons.

In general, there was no impact in the sales or marketing areas. Clearly, we’re not happy with these reductions since they obviously have a significant negative impact on the lives of good hardworking people and their families, but they were necessary to bring labor costs down in conjunction with lower occupancy levels and revenues.

Our operators also agreed to freeze management wages for 2009. We estimate that these efficiencies in operations will reduce total compensation throughout our portfolio in 2009 by approximately 8% or over $17 million.

As we move forward though 2009, we will continue to identify management and staff efficiencies depending on business levels. In addition to the staffing and wage actions, the properties also made significant operational changes, some that are of note our re-bidding contracts with third party vendors to get reduced pricing or simply demanding reductions in cost.

Reduced operational hours of food and beverage outlets including room service, as well as reduced and simplified menus, replacing or eliminating certain enmities or services that most guest are unwilling to pay for, and a relaxation of a long list of brand standards at our branded properties.

Turning to our capital initiatives, during the year we completed substantially all of our renovation, redevelopment and repositioning projects. In all, we invested $87.6 million of capital in the portfolio, which includes $6.9 million of predevelopment cost for the conversion of our portion of the IBM building in Chicago.

Having invested $278 million in our portfolio since 2006, our hotels are in terrific condition both physically and competitively. For 2009, in total we expect to invest between $24 and $28 million, which includes roughly $10 to $12 million related to capital projects completed in the 2008 but not yet paid for at the end of last year, as well as several minor projects started last year running into early this year.

Included as well is roughly $3 million related to predevelopment activities for the future redevelopment of the 330 North Wabash property in Chicago. Due to the excellent condition of our portfolio, we’re able to limit additional capital dollars primarily to life safety projects, the replacement of furniture fixtures and equipment and other capital items, including soft good projects at five to six of our hotels, and other capital items that break or wear out, as well as some minor brand requirements.

Now let me turn to our outlook for 2009. Forecasting the performance of the lodging industry and our performance this year is particularly challenging at this point. This is due entirely to the difficulties of forecasting the path of the economy and its impact on travels.

Since there is so much uncertainty at this time about the economy, we are unable to make a reliable forecast for the lodging business or our own performance. We will, however, discuss what we’re seeing. First, from a macroeconomic perspective, all of the indicators that we use to forecast demand continue to trend downward with many at historic lows.

These include consumer confidence, employment growth, corporate profits and airline enplanements. We’ve yet to see any positive turn in any of these indicators. We believe that industry demand for rooms and meetings will be off significantly in 2009, particularly in the first half of the year.

We also know that supply growth will peak in 2009 probably around midyear in the 3.5% range. Supply growth should fall off significantly by the second half of 2010 and be relatively immaterial for three to five years thereafter, likely setting the stage for a healthy recovery as demand returns.

The industry will struggle with average rate in 2009 due to the significant fall off in demand, additional supply and the fear and uncertainty that have resulted. The industry will be negatively impacted by our replacement of the highest paying customers generally corporate and bar and rack both group and transient replacing with lower rating discounts third party internet, association, Smurf and government.

However, we expect to benefit in 2009 from having 20% of our EBITDA in the DC market, which we believe will perform substantially better than the industry overall. This is due, not only to the inauguration, but to higher levels of travel into the market related to government, a very active legislative year, a smaller dependence on corporate demand, substantially increased global visibility, and a metropolitan region that has continued to grow employment.

We also expect to benefit from better performance at our recently redeveloped and repositioned hotels, at least relative to their specific markets. While this relative performance and ramp up won’t be anywhere near where we would like to be due to the economic environment, it should still add relatively to our performance overall. This includes the liaison and Donavan House Hotels in DC, Guildhall in New York, Hilton San Diego resort, Hotel Sax in Chicago, and the Alexis in Seattle.

Our efforts to enhance the top line of our properties also include our current and prior efforts to group up, raising prices for food and beverage, parking and other services, recon tracking for audio visual services and achieving significantly better participation terms at a number of our larger properties, leading the markets in service charge percentages for group and social food and beverage, and pursuing business aggressively through all channels, which our independent properties particularly adept at achieving.

When we examine our group pace data, 2009 turned negative in last year’s fourth quarter after being up substantially all year due to our group up strategy. As of February 1st, group pace is now down 7.5% in room nights on the books with ADR up 0.5%. We expect group pays to continue to worsen, at least over the next few months.

Transient trends also continue to deteriorate. We currently have 12% fewer room nights on the books for 2009 at a 7.2% lower rate than the same time last year. Transient books mostly within 30 days with not much booked more than 90 days out. So while transient booking trends have been poor, they certainly could turn around more rapidly than group due to their short-term nature.

In January, our portfolio-wide RevPAR declined approximately 4.3%, far better than the industry which declined between 15% and 17%. Our performance was substantially enhanced by our high concentration in Washington DC, which has benefited greatly since the election.

RevPAR at our DC hotels rose 56.9% in January. The four days of inaugural activities in DC added approximately $3 million to our room revenues, as compared to last year, accounting for 1,260 basis points of benefit to RevPAR in January for the entire portfolio. That equates to almost 70 basis point of additional RevPAR for our company for the year. We expect February portfolio-wide RevPAR to decline somewhere in the mid to upper teens and are unable, at this point, to have a credible forecast for March.

On a more positive note, we’re encouraged by the signing this week of the largest economic stimulus package in history. Recent developments in the debt markets have also been positive, and we expect massive additional actions by the Federal Reserve and treasury department to have a significant positive impact.

Finally, we believe the huge decline in oil, gas and most other commodities is also a significant positive and should ultimately provide some lift to consumers and businesses. From an operating standpoint, we continue to aggressively pursue implementing and finding new best practices that create greater efficiencies and lower costs.

With the labor reductions made late last year, we are well positioned to mitigate margin erosion from revenue declines in 2009 and will make further cuts as necessary throughout the year. Our entire team is focused on our hotel operations.

The flexibility and aggressiveness of our independent properties and operators, coupled with cooperation of our branded operators and the extensiveness of our best practices program, should continue to allow us to deliver industry leading EBITDA margins in 2009.

To conclude, 2009 will certainly be an extremely difficult and challenging year. Nevertheless, we feel confident that we're doing everything possible to maximize revenues, minimize margin erosion, strengthen the balance sheet, protect long-term shareholder value, and position the company to grow and take advantage of opportunities once clarity returns and the economy begins to recover.

Our hotels are of high quality with replacement costs estimated at $400,000 or more per key. They're in institutionally desirable investment markets, and a majority are unencumbered by debt providing substantial additional liquidity should that be required.

Our properties are in excellent physical condition and we can afford to minimize capital investments and utilize excess operating cash flow to reduce our debt and strengthen our balance sheet. We've been through a very difficult environment before and our team is well prepared for the challenges ahead.

That completes our remarks and Hans and I will be very happy to answer any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Patrick Scholes – Friedman, Billings, Ramsey.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

Did you say on the call what your total January, including DC, RevPAR results were?

Jon Bortz

We said that RevPAR was up 4.3% in January. I'm sorry, down 4.3%, that's for the whole portfolio.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

And then a couple of other questions on actually the fourth quarter results, it looks like food and beverage was actually up about 5% year-over-year. Was that because of some of the newer hotels had finished renovations and had some new groups in there?

Jon Bortz

It was partly due to food and beverage at our recently re-positioned hotels that was up both at the outlet level and at the group, banquet and social level. It was also because of improved performance at some of our renovated ballrooms, including the Westin Copley and the Lansdowne Resort, as well as the Hotel Sax and Westin Michigan Avenue in Chicago.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

I've also noticed in the last two quarters participating lease revenue has been down substantially. Remind me what's driving that.

Hans Weger

The reason why that was down was in June of 2008 the lease related to San Diego Paradise Point was brought into LHL after it ended before it was with Noble House and now it's an interim lease back to LHL.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

So that's the lower level is a better run rate, obviously, to go with going forward.

Hans Weger

But going forward it's going to be zero. On January 1st we brought Le Montrose into LHL so now we actually lease all 31 hotels to LHL. So they will be no forward third-party lessee rent coming through.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

Just two last quick questions here, I think you mentioned in the past that you'll pay out a special dividend at either the end of the year or the beginning of next year based on potential profitability. How should we look at that as a percentage of CAD?

Jon Bortz

In terms of what we would pay out in order to meet the REIT requirements?

Patrick Scholes – Friedman, Billings, Ramsey & Co.

Yes. I mean historically it's been somewhere between 70% and 80%. What percentage should we think about for this pay out?

Hans Weger

To be honest with you, the correlation there really doesn't exist because there's so many different things that impacts what taxable income is, and there's other things related to earnings and profits that also come into play. So that's not a relationship that we can point to.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

My last question is along the same line, any help whatsoever as far as thinking about tax gains or losses by quarter for this year? I know it's very volatile, but any general rules of thumb to use for this year?

Hans Weger

Here's what I can tell you is that we have the 31 leases and so that should give you an idea of what that number would be. It all depends on how each individual property does, as well as how each individual property does at the food and beverage room and retail, so it's a very difficult formula. There's no real guidance that I can give you there.

The one thing I can say is that historically the way the flows work, because of our quarters, is that the first quarter has a tax benefit the second quarter has a tax expense that normally offsets that, then the third quarter has a tax expense and the fourth quarter has tax benefit. But there really is no way for you to estimate what that number would be.

Jon Bortz

Keeping in mind it's also a non-cash item.

Hans Weger

Because of the loss carried forward and also that because we have 31 properties and we have leases coming up every year, we do have to set it up on third party type of leases. So that you can also not assume that if you have a decline in RevPAR EBITDA that you’d have a larger tax benefit. You actually could have a situation, because of the changes in leases this year, that you could actually have a flat tax expense or tax loss. Again there's really no way for you to estimate that.

Operator

Your next question comes from Bill Crow – Raymond James.

Bill Crow – Raymond James

A couple of questions here, if Marriott chooses not to cure, does that change in any way your thought processes on selling that asset?

Jon Bortz

No. Well, yes and no. Our objective was, as you recall, Bill that we had stated numerous times was that really culturally there wasn't a good fit between us and Marriott from a management and operations perspective. And so our objective was to ultimately sell that property.

In the near-term, it's probably not salable anyway in either case. So at this point our objective is to continue to hold it and we'll see how it does with the new independent operator, and with our ability to be better heard at the property level, as it relates to objectives and performance of the property. So for the time being, you should assume that we are going to continue to hold the property.

Bill Crow – Raymond James

Switching to the IBM redevelopment in Chicago, could you update us on your thinking of when you might kind of fully restart that redevelopment? Have you thought about reducing the scope of the project given the economy? And is there any potential, maybe this is for you, Hans, a potential for write-offs given your investment of potential longer term performance of the asset?

Jon Bortz

Really nothing to update you at this point, we're continuing with pre-development activities, which involve the completing the plans, model room and we're installing some heating and air conditioning into the vacant space so that it doesn't freeze or heat the upper floors of the office building. Other than that, Bill, there's really nothing else to comment on.

Hans Weger

As far as the potential of evaluation issues, there's very detailed GAAP ways of handling that and we continue to maintain and follow through with our policies. And at this point in time, there is no impairment issue related to that property, and we will continue to do the quarterly review of both our plan of the property and a valuation that would be associated with that plan that we have to do in accordance with GAAP.

Bill Crow – Raymond James

Jon, can you highlight two or three markets that might outperform this year and two or three that might be your underperformers this year based on group bookings, etc?

Jon Bortz

Sure. I think at this point, based upon what we know and our total lack of visibility and inability to forecast as we stated, we look at things on a relative basis. Clearly, DC will be a significantly better market than many of the other cities in the U.S. Certainly within our portfolio, we expect it to be the best performing market.

Indianapolis has a great convention calendar. We have very good group bookings. We’re not sure how the races will impact the business, since there is obviously a lot of corporate sponsorship related the two main races, and those corporations, in general, aren’t doing so well these days. But in general, Indianapolis is a much steadier, more stable market, as is our property there is our best performing property in the market.

I think Dallas downtown will probably continue to perform better, as well probably a good part of Texas, in general, at least that’s what we’ve been seeing. Then Chicago has a better convention calendar, we’re just worried that a lot of the conventions aren’t going to have the attendance and sponsorship that they’ve historically had.

So right now we’d say probably that Chicago’s more likely than not to be weaker than the industry. That Boston will probably be a little bit weaker than the industry, perhaps. Clearly, New York will be the worst market in the U.S. perhaps. But for Hawaii, we don’t really follow Hawaii, but we know it’s been very bad.

For us, probably West LA with the slowdown in the movie TV production businesses, music business and some additional supply that came from hotels that have been closed that are reopening, that market will probably be weaker than the overall industry.

Bill Crow – Raymond James

In San Diego, Jon, has the thought that the new Hilton opening would actually provide incremental demand for your property, is that reversed now given, is it now just too much new supply given the demand?

Jon Bortz

It’s a little too early to tell, Bill. So far we really have only seen benefit we really haven’t seen a detriment from it. It’s a very good year in San Diego from a convention calendar perspective, and a significant portion of the conventions are in industries that are least impacted so far from the recession.

The other thing is that San Diego is a market that continues to benefit from its great weather and its ability to actually induce demand, leisure demand, and weekend demand into the market based upon discounted pricing.

We’re seeing an ability to generate the demand in the market we’re going to pay for it a little bit in rate. We wish we could do that in some of the other markets where rate doesn’t really bring in any new demand it just makes it cheaper for the customer base.

Bill Crow – Raymond James

One final question, as we think about the quarter layout, I know you’re not giving guidance, but with March benefiting from the calendar shift and April paying the price for that. How should we think about RevPAR first quarter, second quarter based simply on the calendar issues?

Jon Bortz

For us it will be worse because our first quarter, at least relative to the industry, will be substantially better than the industry, as evidenced by our January performance and the outlook we gave for February. We do think March does benefit to some extent, though maybe not as much for us because of the resort component where we actually benefit from the holidays in our resort properties to some extent.

Our view right now is probably that the second quarter for the industry is probably just as likely to be as bad or worse than first quarter, but it’s really hard to guess at this point, Bill.

Hans Weger

Before the next question comes, one thing to clarify about the Seaview termination payment is that if Marriott does not cure, we recognize the $9.5 million in income. That is to LHL, which is our taxable REIT subsidiary, so that payment would be tax affected and we would have a non-cash tax expense associated to that $9.5 million.

Jon Bortz

Which doesn’t affect its increase to EBITDA but does impact the FFO.

Operator

The next question comes from David Loeb – Baird.

David Loeb – Robert W. Baird & Co.

Hans, you answered part of my question, which is about that recognition. How is that treated for the covenant tests, is that counted as EBITDA?

Jon Bortz

The EBITDA test starts with net income, so yes.

David Loeb – Robert W. Baird & Co.

Relative to the covenants, I understand perfectly why you would not be negotiating with the banks until you need to because negotiating implies that you have to pay for a waiver. But at what point will you begin actual negotiations if it looks like you’re going to come pretty close to covenant violation?

Hans Weger

David, we are a very relationship-oriented company both with our lenders, investment bankers, analysts and everyone else. We are in consistent dialog with them and updating them. So the one time that we would talk to them about that would be just depending on what issues were arising and if there were an issue and how we would forecast. So there is really not a timeline that I can give you on that because there’s no assurances or reasons for us to have to talk to them about actual asking for waivers.

David Loeb – Robert W. Baird & Co.

Jon, I wonder if you could talk just a little bit about the board’s attitude concerning dividends. Assuming that there is no covenant requirement that limits your ability to pay dividends, and I know that you’re obviously not providing guidance and there’s really good reason for lack of visibility, etc.

But under the scenario where you have no taxable income, what would be the board’s attitude about that $0.01 a quarter common dividends, special dividend and maybe, most importantly, preferred dividends?

Jon Bortz

Let’s take the $0.01 a quarter dividend for the common shareholders. The selection of that $0.01 a quarter had nothing to do with any estimate of taxable income. It has totally to do with allowing the company to show up on the screens of investors to be held in income funds if they should so choose because we pay a dividend.

I think as it relates to any kind of special dividend, that’s clearly an issue the board will look at depending upon whether we need to pay any special dividends, based upon our taxable income. And other things that you can do, if necessary, to bring dividends forward from next year to qualify for any taxable income you might have this year, that’s an election that you can make.

There are a lot of different levers you can pull. I would say our focus, in general, is on strengthening the balance sheet and retaining and creating as much liquidity as possible.

I think philosophically as it relates to the preferreds, I think our view is that’s an important part of the long-term capital structure of the company and it would be our objective to protect that relationship and our ability to access the preferred market in the future should that market come back to a rational level, which we expect that it will some day.

Hans Weger

To give you a little bit more information on the financials. The taxable income for ‘08 is approximately $65 to $70 million. The first initial taxable income will have to be paid out and the preferred dividends do count against that payout.

As you sit back and look at the capital structure and what we have are payments this year, is that you’ll have interest payments of approximately $40 million, you have the CapEx if you use the mid-point around $25 million, and you’ve got the preferred dividends of approximately $26 million. Then you’ve got the common dividend that was paid in January.

So you’re looking at around $95 million of cash that goes out the door. So when you start looking at what EBITDA is there is a reduction in debt overall and that adds additional protection to our commitment to the preferred capital structures. We do believe it’s an important part of our overall capital structure.

Operator

Your next question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Going back to David’s question, maybe looking at it a different way. At what level of earnings erosion or EBITDA erosion would you begin to push up against those covenants on the line?

Hans Weger

Well, as we looked at various scenarios, the first covenant that would cause issues would be the debt to EBITDA, which right now is at six times coverage.

Jon Bortz

And we’re at 4.7.

Hans Weger

And currently we’re at $4.7 million. We have $960 million of debt outstanding and so if you go in and look at the numbers at where we stand today and take the 960 divide it by the 6, it gives you a number. And in EBITDA you also get that to add back the non-cash equity awards so that your EBITDA actually increases by the $7.3 million that we have this year.

And then you also have to keep in mind, as I mentioned earlier, depending on what EBITDA you chose for the year, after that $95 million is being paid out, everything else would also reduce your debt. That’s the way that I would look at it is that you really have to look at what your EBITDA projection is and add the $7.3 million for the non-cash expense related to the equity grant and that will give you a sense of where that number is. And that income, as we mentioned before, does include the Marriott.

Jon Bortz

There’s also a netting of the debt of cash of unrestricted cash.

Hans Weger

So to the extent that you have cash on the balance sheet up to 0.5% of the total assets, you can deduct that from your debt.

Michael Salinsky – RBC Capital Markets

Okay. In the past, during the last downturn you guys were able to really preserve margins a little bit better than some of your peers, given the severance we’ve seen and other cost containment actions you guys have taken. What’s your thoughts in terms of flow through. If RevPAR is down 20%, what do you expect margins to be down?

Jon Bortz

Let’s look at history just for a minute to try to give you some guidance. In ’01 RevPAR for us was down 12.1%, total revenue was down 9.5%, and our EBITDA margins declined or were limited to a decline of 260 basis points. If our performance in 2009 were at similar levels, based upon what we’ve already done to the run rate of our expenses in the portfolio, we believe that we should be able to meet similar performance or do better.

Once we get beyond that kind of level of 12 and 9.5, it’s really going to depend upon a further ability to reduce costs, what else happens with some non-controllables like energy, which I would say is partly controllable, and expenses like property taxes, which is probably the only expense line item in our portfolio in 2009 that we expect will increase next year.

And we have appealed most of our non-California properties, and in many cases are litigating the assessments on many of those assessments in many cases that we’ve gotten for prior years, and in some cases for what we’ve already seen for ’09.

So it’s hard to give you any kind of rule of thumb, Mike, beyond kind of what history tells us with an understanding that we are very good at this, we believe. We have operators who are working very closely and cooperatively with us, and we think we will continue to be successful in being able to reduce costs as occupancies, in particular, decline, if they do.

Michael Salinsky – RBC Capital Markets

Two final questions, first, do you still have full capacity with the joint venture with LaSalle? And secondly, can you talk a little bit about preliminary group booking pace for 2010 at this point?

Jon Bortz

As it relates to the joint venture, yes, we still have full capacity. We’ve made no investments yet. We do continue to talk regularly with LaSalle investment management and, at this point in time, we’re monitoring the markets. We’re reviewing properties that become available, but we’re not actively pursuing any at this point of time due to a lack of really visibility to underwrite anything in the marketplace.

As it relates to 2010, we currently are down 1.9% in room nights. We are up 3.7% in rates and that constitutes about 225,000 group room nights, which if we assume roughly 800,000 group room nights, I’m not suggesting there’s a budget there or anything it’s just in a ballpark number, that’s about 28% on the books. So it’s declined a little bit over the last three to six months, as you would expect, but it’s still reasonably positive.

Operator

Your next question is from Dennis Forst – Keybanc.

Dennis Forst – Keybanc

One question on taxable income for ’07, you gave us a range in ’08, Hans. What was the ’07 number so we get an idea? And I wanted to see if you had a depreciation number. You gave us interest and corporate overhead and such do you have a depreciation number for ’09?

Hans Weger

Are you talking about for GAAP purposes, or taxable depreciation?

Dennis Forst – Keybanc

Yes.

Jon Bortz

Which one, for taxable or for GAAP?

Dennis Forst – Keybanc

For taxable net income that was comparable to the 65, 70 in ’08.

Hans Weger

I don’t have it, but my recollection is it’s just a few million dollars higher.

Dennis Forst – Keybanc

And then do you have a depreciation estimate for ’09?

Hans Weger

At this point, we don’t have it right now.

Dennis Forst – Keybanc

It will go up somewhat because the two leases that go back to LHL.

Hans Weger

No. That wouldn’t impact it because the assets are actually held by LHOP, which is the REIT.

Dennis Forst – Keybanc

So you were already depreciated?

Hans Weger

Those were already on the books. The depreciation should go up slightly because the Donovan House opened up so those got put on board, and then any dollars that we spent last year that would start amortizing out also over the time. So a deprecation, in theory, should go up somewhat in 2009 versus 2008, but not a material amount.

Operator

There are no further questions at this time. Mr. Bortz, I’ll turn the conference back to you for any additional or closing remarks.

Jon Bortz

Let me thank everybody for joining us for the call and we look forward to bringing a little more clarity to what’s going on in the industry and our view of 2009 two months from now in April when we report our first quarter results. Thank you.

Operator

That does conclude our conference call today. Thank you all for your participation.

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Source: LaSalle Hotel Properties Q4 2008 Earnings Call Transcript
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