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Strategic Hotels & Resorts Inc. (NYSE:BEE)

Q2 2009 Earnings Call

August 6, 2009 10:00 am ET

Executives

Ryan Bowie – Vice President and Treasurer

Laurence Geller - President and Chief Executive Officer

James Mead – Chief Financial Officer

Analysts

William Marks - JMP Securities

David Loeb - Robert W. Baird & Co.

Smedes Rose - Keefe, Bruyette, Woods

William Crow - Raymond James

Stephen Grisanti – Bank of America

[Ray Fosse] – Newbrook Capital

Carl Flornore – Individual Investor

Operator

Welcome to the second quarter 2009 Strategic Hotels & Resorts Earnings Call. (Operator Instructions) As a reminder, ladies and gentlemen this conference is being recorded for replay purposes. I would now like to hand the conference over to Mr. Ryan Bowie.

Ryan Bowie

Welcome to Strategic Hotels & Resorts second quarter 2009 earnings conference call. Our press release and supplemental financials were distributed yesterday. These are available on the company's Web site at strategichotels.com within the Investors Relations session. We are also hosting a live Web cast of today's call, which can be accessed from the same section of the site with a replay of today's call available for one month.

Before we get underway, I would like to say that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which the company operates, in addition to management's beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statements notice included within our SEC filings.

In the press release and supplemental financials, the company has reconciled all non-GAAP financial measures to those directly comparable to GAAP measures in accordance with Reg-G requirements.

I would also like to introduce the members of the management team with us here today, Laurence Geller, President and Chief Executive Officer, and Jim Mead, Executive Vice President and Chief Financial Officer.

Laurence Geller

Over the past several months we have been tracking positive demand trends and a continued strengthening in a variety of the metrics we track which augers well for the future. However, the unusual nature of this downturn provides very few analogies that we can rely on to guide us. As a result, we continue to have limited visibility into the future and it's clear we face a very challenging economy and lodging environment as evidenced by our second quarter results, which continue to be distressed by weak corporate and group demand.

Let me start by what we saw during the quarter. Strategic's results were heavily influenced by a 30% fall-off in group activity during the quarter. The impact of H1N1 virus, which resulted in the EBITDA decline at our two Four Seasons in Mexico, of $7.0 million, or 82% from last year, and a loss of rate as our operators increased the room nights booked through discounted transient channels by 48% as they attempted to fill in the gaps in group business. Consequently, we reported a $0.03 loss in comparable FFO per share on $34.0 million in comparable EBITDA, a $0.55 decline from the second quarter of 2008.

The U.S. portfolio is suffering from a sharp year-over-year decline in group meetings demand led by our Ritz-Carltons in Laguna Miguel and Half Moon Bay, but unfortunately not only to continue to reflect the national drop in group demand, but also the lacking effects of an undesirable, and frankly, unfair luxury taint caused by the government's comments earlier this year.

By the end of the second quarter group rates were off 12% to last year. In contrast, transient rates, on average, were down 27% with an increased emphasis on the usage of discounted transient channels and promotions, which appear to have successfully helped induce demand throughout the industry.

We continue to work with the brands in an effort to insure that these discounts provide adequate profits over the variable costs of delivering rooms. Despite multiple indications of expanding demand across many segments, we believe we are likely to see continued reaction to what now looks like some over aggressive, and in our minds, unnecessary competitive discounting for the remainder of the year, with its impact lingering into 2010.

Both of our Four Seasons in Mexico were severely impacted by the negative publicity and business climate caused by the H1N1 virus and the resulting Draconian Mexican government overreaction.

RevPAR was off by 58% at the two properties for the quarter. However, Mexico City continues to be an important, vibrant financial business center of Latin America and call volumes have now returned to levels prior to the H1N1 virus. We expect things to return to relative normalcy as the year progresses.

Given the lead time from booking to arrival, we will have to wait to see the extent of the impact on Punta Mita as it continues into the high season, which runs from November to April.

Currently we are estimating 80% occupancy over the Thanksgiving period, although at rates that average $250 less than last year. In prior years we would ordinarily be fully booked for Thanksgiving by this time.

For the Christmas period we are presently fully booked at the hotel with 10-day minimums at rates 5% higher than last year for the hotel. Although the villa rentals, where we share revenues with their individual owners, remain yet to be fully filled.

Europe, on the other hand, held up substantially better than the U.S., with our RevPAR declining only 10.8% on a constant dollar basis. This performance in particular highlights the relative competitive strengths of our specific Paris and London locations.

As we have done consistently for the past few quarters, let me give you a brief update on our progress against our stated strategic initiatives.

In each quarter since the beginning of the recession, our U.S. portfolio's RevPAR results exceed the Smith Travel luxury averages and in the second quarter did so by 160 basis points. These excellent results are in part due to our properties quality and physical positioning in the markets but also, importantly, our continued promotion of innovative marketing strategies with our branded operators. Our asset managers are having great success in working with the brands through aggressively developed and roll-out cost-effective marketing programs, in particular through email and Internet.

For example, we've just introduced our new lifestyle Web site that will direct potential travelers to our hotels, regardless of brand, based on their desired experience. In another recent example, and based on our internal research and urging, Four Seasons is marketing to customers through channels they've not previously utilized, such as Travelzoo.

We ran our 1-2-3-4 promotion at Punta Mita that provided a $1,234 credit against hotel spending, or roughly half of the typical one-room spend when a four-night minimum stay was booked for the summer at the rack rate.

This 1-2-3-4 promotion was a great success during its three-week run and has led to bookings, which should generate $2.0 million of gross revenue and are estimated to yield approximately $900,000 of EBITDA through the end of the year.

A 24% decline in our average transient rates and a 20% decline in overall room rates drove a 690 basis point gross operating profit margin loss in the U.S. From our perspective, this was a commendable result, considering that our earlier fits of cost cutting benefitted the comparable period last year and, importantly, that we have 10% less revenues in the higher-margin room side than our publicly quoted peers.

Since implementation of our expense contingency plans in 2007, total North American operating expenses per occupied room have declined by 4%, a direct benefit of the ongoing vigilance in cost management exercised by our team. We have reduced 1,300 people, totaling a 20% reduction and full-time equivalence that contributed to a decline in total compensation by 14%, despite increases in benefits costs that have outpaced inflation.

Compensation and benefits clearly have the most significant impact on the cost side of our business and we continue to achieve improvements in labor productivity. During the second quarter total wages and benefits declined 16% in comparison to last year and productivity increased with an 80% improvement in total hours worked per occupied room.

Our operating systems were, in addition, highly successful and quickly and efficiently cutting costs at our Mexican hotels almost simultaneously with the onset of the H1N1 scare. Cuts during the quarter lowered our operating expenses by 40%.

In Europe, margins declined only 230 basis points, reflecting in particular the implementation of labor management systems in our Marriott hotels.

We are on track to meet our objective in the reduction of corporate overhead and this quarter reported corporate expenses of $5.5 million, a 28% reduction from last year. We continue to seek more aggressive measures to further reduce these costs.

As we discussed during our last quarter call, we are publicly marketing with Fairmont in Chicago. That process continues, as so do our efforts to negotiate sales of other properties which will generate meaningful liquidity to the company.

Asset sales remain extremely difficult to execute in this environment, however, they remain a high corporate priority and we are very focused on achieving one or more successful executions, as clearly such transactions are a very efficient way of bolstering our liquidity.

Let me leave you with a few words on the future. This is unquestionably a difficult, volatile, and complex economic and operating environment. However, we now have three consecutive months of improvement in leading indicators and economists have reported that there is a broad base of economic factors that could lead to near-term growth, albeit at perhaps a slower recovery pace than other times.

We will continue to closely monitor these signals as we progress through the year. We know that historically there is a lagging relationship between GDP growth and hotel activity as a result of the lead time in booking groups, meetings, and their related activities. That's the customer that generates approximately half of our revenues in normal times.

Plus, the corporate rate-setting cycle for 2010 is coming out now while room rates are at their current low levels.

Although we are increasingly optimistic that the decline has bottomed out, visibility into the future nevertheless remains clouded. So let me just report on what we're seeing right now as far as demand in concerned.

Our group revenues based on detriment group bookings for the remainder of 2009 are down 34% from the same time in 2008. This decrease is heavily influenced by a 44% reduction in our results, in particular our Ritz-Carltons and Fairmont Scottsdale. And this is compared to our U.S. older hotels, which are down 20%.

Our 2010 revenues, based on definite group bookings, are down by 15% but at a 5% higher average rate that the same time last year. To give you a sense to what that means again to prior peak levels, in aggregate group definite revenues were down about 14% compared with this time in 2007.

In the second quarter the rate of occupancy decline lessened each month. Calls made to our reservation centers for transient reservations, although 28% below the same time last year, continue their weekly improvement, which we have seen since the beginning of the year.

In June, for the first time this year, current group production for future months in 2009 increased compared to the same time last year and our 90-day outlook for transient business continues to be positive.

In the past month our properties are reporting that inquiries and prospects for group booking have increased, as have conversions into definite business for 2009 and beyond. These increases are showing continued growth, as is our research demonstrating the willingness and desire to use lodging projects in general. And by the way, we think the recent demand pattern throughout the U.S. has clearly demonstrated that.

Although we hesitate to draw too many conclusions at this stage, we can make some observations. First, the overall trend of group activity appears to moving in tandem with the generally more positive economic indicators and expectations of higher GDP growth than previously forecasted.

Second, the complexion of bookings suggest that we may be through the worst in terms of a bias against high-end resorts, which we deem to be an indication of future business confidence and a sign of the receding sensitivity to holding a meeting at a property with a high-end image.

The recent bill entitled Protecting Resort Cities from Discrimination Act of 2009, introduced by Senate Majority Leader, Harry Reid, clearly demonstrates the recognition of the government's unwitting damage to the meetings business in general and resorts in particular.

And finally, the increased velocity of group booking activity appears to be a continuing trend now, rather than a blip.

I would like to briefly comment on the cost side. This downturn is different from other prior downturns in one remarkable way. Business at our hotels is no longer business as usual. After 9/11 our hotel operators efficiently slashed costs and cut services to protect hotel operations.

However, we believe it was because of the relative speed of the v-shaped nature of the recovery that allowed costs to be generally re-introduced in direct proportion to growth. The end result was that margins never recovered to their peak that was achieved prior to 2001.

As such, profits per room on an inflation adjusted basis in 2007 were 10% less than 2000. The rigorous and empirically-based processes that we've gone through with our operators are significantly different this time around. We have heavily-weighted cost cuts to those that were considered fixed.

For example, executive committees that were seven or eight people, are now five or six. Hourly productivity standards are being more stringently tightened. Basic standards and operating processes have been systemically changed and we feel as much as 25% of the cost structure does not have to be reintroduced, and should not be, while we are asset-managing our properties.

If we are able to achieve these targets, and we firmly believe we can, our margins could significantly outperform peak margins from prior cycles. So whereas we're working extremely hard to navigate this unusually difficult environment, we are increasingly convinced that demand will continue its nascent growth pattern and that our segment of the lodging industry will experience improved performance in the coming quarters.

This, coupled with our productivity enhancements and minimal anticipated future supply in our markets of approximately 1%, gives us good reason to be optimistic about our future.

Now let me turn the call over to Jim.

James Mead

Laurence described the overall operating and market context of the quarter so what I would like to do is to turn to a couple of items, additionally, that we put in our earnings release.

First of all, our financial results for the quarter included a non-cash charge related to capital programs and goodwill. During the quarter we continued a reassessment of all of our capital programs in the context of changed consumer preferences, and our expectation of the timing of marketing recovery.

And determined that we should write down $7.9 million in costs. After this charge we will carry $5.4 million on our balance sheet in planning costs for certain entitlement processes in Chicago and California, which we have determined to have a probability of success and which when completed will be enormously valuable, and capital improvement projects that we have determined to be either essential or which could, when markets improve, be executed over a short period of time and provide substantial cash returns.

In addition, we did an internal evaluation on the carrying value of our properties and impaired goodwill by $41.9 million, as was indicated by the continuing weakness in hotel operations. After this write-off, we will have $80.0 million in goodwill remaining on our balance sheet.

Next, we announced the joint venture on our H5 land development site, neighboring our Four Seasons in Punta Mita, Mexico. With a changed marketplace and limitations on availability in financing, we had previously set a strategic objective to reduce our future land-related funding obligations and to bring in an experienced developer and planner as a partner. This week we signed a partnership agreement with a Punta Mita master planner, DINE, that originally sold us the 50-acre oceanfront H5 land parcel.

As a result, we will no longer have a final purchase price payment obligation of $17.5 million and we will receive the first $12.0 million of distributions from the partnership and continue to have a 50% interest thereafter. Importantly, we will have no future obligations to fund development activities. We are pleased to have succeeded in our objective and to have DINE as our partner.

Finally, turning to liquidity, as you heard during the call, our Four Seasons hotels in Mexico are being impacted by the global recession, in addition to the scare caused by the H1N1 virus. These hotels are two of the five hotels that underpin our corporate line of credit facility and the cash flow from these hotels is one determinant of availability under this $400.0 million line.

Our credit covenant computations after the second quarter continue to support borrowing of $398.0 million. In other words, at the end of the second quarter we had approximately $140.0 million available under the line of credit. In addition, our fixed charge coverage, as measured by our credit agreements, is 1.4x, substantially in excess of the .9x minimum coverage stipulated in the line of credit agreement. Based upon our internal forecasts, we expect that availability under the line will decline during the remainder of the year, in part because the markets have been declining and the credit facility metrics are on a trailing four-quarter basis, and also as a result of Mexican business disruption.

If not so already, the H1N1 virus scare will pass. However, ramping up operations in a recessionary environment, particularly in Punta Mita, where leisure travelers plan considerably in advance, provides uncertainty in the pace of recovery of our Mexican business.

So we expect the Mexican results will have an impact on our borrowing capacity and we will watch these properties and the line of credit metrics carefully as we progress through the year.

In closing, I would like to remark that we are making substantial progress towards all of our goals. Our exceptional asset management team and the variety of systems that we are employing are resulting in terrific relative results. We have accomplished our early goal of substantially reducing our overhead costs and continue to rework and redesign our corporate organization to bring about more efficiency.

As I've just said, we've been successful in laying off land development risks and future funding requirements at H5 in an economically-smart transaction, and despite the temporary weakness in Mexico, our line of credit was amended to give us runway to build the additional liquidity we need to address future requirements.

As a reminder, at the end of the second quarter, we had a 1.4x fixed charge coverage and $140.0 million of availability, and no maturing debt on our balance sheet until late 2011.

We additionally continue to benefit from support of lending banks, great relationships based on respect from our brands, and an outstanding team of professionals in the company.

Thank you and now we will open it up for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Marks - JMP Securities.

William Marks - JMP Securities

Looking ahead, I know you are trying to help us with this, but maybe we can quantify it more. On first quarter, we obviously have an easier comp. If we assume today's markets, roughly what do you think the RevPAR would be down in the fourth quarter? Can you give us any feeling for that?

Laurence Geller

No. We are trying to avoid giving these forecasts. As you can see, the volatility is so high at the moment. I just don't know. I personally, as you can tell, am fairly optimistic about growth occurring. It's the rate of growth I can't forecast for the end of the year. And the end of the year is mixed with social business as well, so it's a harder one for us.

William Marks - JMP Securities

On asset sales, how important are these asset sales, to you? You don't necessarily have to sell them but maybe you can talk about it a little more.

Laurence Geller

There are asset sales that fit in with our long-term strategic objectives and there are asset sales that can provide us liquidity by being substantially over their debt levels or over their pay down on the line of credit levels.

There is no question that we have said, and continue to say, that we want incremental liquidity for both contingency purposes and just to be prudent, because ultimately we would like deleverage so we can restructure to take advantage of growth sometime in the future. And we know we have to deleverage to do that.

So asset sales are very important and a very efficient way of raising liquidity. They're probably the cheapest way in the market. And as we are seeing improvements in the overall economic environment, with GDP forecasts this week being increased, so are we seeing increased interest in our type of asset sales.

Remember, the scale and size of our assets mean that we are not a commodity seller. We don't have commodities like other assets. I mean, these are big-ticket items. So it is a narrow universe. But the amount of interest that has been raised over the past weeks just continues to grow and it makes us, again, optimistic that we can execute sooner or later against our stated plans and objectives.

William Marks - JMP Securities

Are there any assets where you're throwing in the towel? Where you can start handing it back to a bank.

Laurence Geller

We obviously follow these very carefully and we know what non-recourse means, and we we're not going to chase money down the hill. At the moment, we do not, absent one property in Europe, the Prague Hotel where we have concerns for next year, we do not have any assets that mandate us thinking about that.

I am going to tell you, though, we think about it all the time and do an evaluation literally as regularly as the circumstances change these days. We are not unaware of it, we have been following what our peers have been doing and we are monitoring this one. So it's an appropriate question because it's part of our business plan.

James Mead

May I just remark also that our interest rates at the property level are very, very low, so we have very few properties where we have concerns over recovering interest, at the property level. So we're not really funding losses at assets right now, at least in a material way.

William Marks - JMP Securities

Any thoughts on the Hyatt IPO? I know that's not honestly a question appropriate for you but Laurence, you always have some thoughts on various issues outside the company.

Laurence Geller

Hyatt is near and dear to me and Pritzkers, Dominique[?] and Penny are very close friends. It's a big and bold IPO. I only got through half of the 4,000 pages last night and I wish them all the luck in the world. For them it makes sense.

What I will say, though, the underlying sentiment that I would get is to do it at this time means that they and their underwriters, which I think is Goldman, JP Morgan, and Deutsche Bank, must be as optimistic about the future as I am.

Operator

Your next question comes from David Loeb - Robert W. Baird & Co.

David Loeb - Robert W. Baird & Co.

Are there any cross-acceleration provisions in any of your covenants, debt preferred, etc.?

James Mead

The property-level debt that we have is all non-recourse, non-cross collateralized. The line of credit obviously has some constraints around the amount of non-recourse U.S. that we can walk away from, as would be typical. But again, when you think about a line of credit lender, they typically don't want you to chase a property downhill and would prefer that you cut your losses if that were the case.

So in the convertible debt that we have, cross is basically to the line of credit. It's a very simple structure that we have.

David Loeb - Robert W. Baird & Co.

I appreciate your candor about the credit facility availability. Can you give us any idea about where you think the trough availability might be in the next couple of quarters? Because it seems like you're going to have three more quarters of likely more difficult comparisons on those two Mexico hotels.

James Mead

I think the comparisons, the numbers, will decline. The availability in our line will decline some but it's really very difficult to read the tea leaves. For example, yesterday we just heard that we got a $700,000 property tax reduction at our Ritz-Carlton in Laguna Niguel, which is one of our borrowing base assets.

A couple of things like that, which we're working on, make a world of difference in terms of the metrics of the credit agreement. So it's very difficult to answer your question with any kind of real accuracy.

David Loeb - Robert W. Baird & Co.

As you put that all in the pot, are you thinking this a couple of million dollars at worst, or could it be tens of millions or more?

James Mead

I honestly can't answer your question. I think that we just need some time to watch the numbers and see how things go. As I said, there are tremendous number of things that can happen on the positive side and I think we just need to give it a little more time to see how things go to really get a better read on whether or not there is any issue there.

David Loeb - Robert W. Baird & Co.

Any color on how Mexico is performing in July?

Laurence Geller

Mexico City is continuing to rebound, actually slightly fast than I would have said last month. I'm really pleased with the booking pace. As we mentioned, we're back to pre-H1N1 levels.

Punta Mita is very interesting. The astounding success in driving $2.0 million of incremental revenue, which will give us about $900,000 of EBITDA, indicates that there is a very strong desire now to return across the borders of Mexico. Price-sensitive and value-sensitive and it's package-oriented, but that's the best news I've heard because it's not a systemic feeling not to go to Mexico. So the scare seems to have gone away and it's a pricing issue. I can deal with pricing. We will make profitable projects out of that.

So I think Punta Mita, I'm much more optimistic about it once we saw the success of the 1-2-3-4 promotion, which we dreamt up with Four Seasons and they boldly put it across Travelzoo and three weeks, I say that was pretty unique. It told us a lot and it's given us a lot of excitement about doing more of these pioneering and innovative projects.

David Loeb - Robert W. Baird & Co.

Clearly a trade up on price but you're creating more EBITDA even by selling those rooms at lower prices?

Laurence Geller

And the beauty of promotions is, I think I mentioned in my comments, I feel that there has been indiscriminate price lowering across the industry. I think we've been chasing down indiscriminate, the lowest common denominator in the markets, and I think some of the brands have been indiscriminate by slashing across every segment of the 20 segments we price against.

But the one thing against promotion and package, rather than just rate slashing, is that it is not difficult to build back up, as demand comes, to the rates because you haven't cut the rates. So the sensible nature of what has happened this summer is that it's packaging.

If demand keeps coming back, now it isn't going to come in a v-shape we know, then pricing will revert back quicker than it did in the 2001, 2002, 2003, 2004 period.

David Loeb - Robert W. Baird & Co.

Are you concerned about the absence of corporate bookings for Punta Mita and Mexico City? It seemed like Punta Mita in particular was a high-end corporate destination. And we've talked about that for a year, but what's your thoughts on that?

Laurence Geller

Our meetings business really was a very small, tiny amount of Punta Mita. It actually filled in the shoulders. What we will do is we will package the shoulders with leisure if meetings doesn't come back.

Mexico City, the booking patterns are reversing to normal. So I have no concerns about that pattern.

Operator

Your next question comes from Smedes Rose - Keefe, Bruyette, Woods.

Smedes Rose - Keefe, Bruyette, Woods

Besides the Fairmont in Chicago do you actually have assets that are formally listed with brokers or are you sort of more going after one-off investors or special situations, given the nature of your assets?

Laurence Geller

I have to answer this slightly carefully because there is a lot of corporate confidentiality involved. The answer to both of your questions is yes.

Yes, there are assets listed with brokers, and yes, we those brokers are targeting, very carefully, qualified buyers.

Smedes Rose - Keefe, Bruyette, Woods

In your remarks you mentioned that group rates were actually up for 2010 by about 5%. What sort of percent now of your group business for next year is already booked, of maybe where you would be in more normal times?

Laurence Geller

I'm not sure I know what normal times are anymore. We haven't set the 2010 budgets. But the same booking patterns as 2007 are occurring now, just less demand. But it is following the same type of pattern.

What we haven't done is set the allocation in group rooms yet. That we will be doing in the coming month, two months, I suspect.

Operator

Your next question comes from William Crow - Raymond James.

William Crow - Raymond James

On the asset sales, any increase or change in activity level over the last 30 or 60 days? It seems like the debt market is starting to thaw out a little bit and just wondering if there's any change there.

Laurence Geller

There has been a significant increase in the volume of inquiries we have been getting. And let me divide that into two, to answer a question you perhaps didn't ask.

We are obviously seeing the distress buyers coming in here and looking for the 20% ROI yields, etc. but who are debt-driven. And they're one type of buyer. What we have seen is an increase of unusual buyers, private buyers, families, foreign buyers. And foreign buyers from all over the world coming at us, very serious, very well-qualified, and very professional.

So it all adds up to that, my optimism that things are moving on many levels. Because this is exactly what happened in the early 90s and exactly what happened in 2000, the end of 2000. This type of activity where you have the distress buyers on the one hand and then the people who want to buy long-term, unique assets for different motivations that short-term ROI.

William Crow - Raymond James

Given swine flu and everything else with the economy, can you imagine an upcoming quarter over the next 18 months where RevPAR would be down more than what we saw in the second quarter?

Laurence Geller

If you had asked me this question this time last year, I would have got it a thousand percent wrong. The answer is, yes, I can paint a scenario, that Iran would start throwing nuclear bombs around or doing something daft, but I can't see what could happen, however, the only thing I would ask all the bankers on the phone, if you're bank's going to fail, if we get a whole new series of bank failures, we're back to square one. So you tell me?

William Crow - Raymond James

Jim, I think you said that all of your assets are now covering their debt service, you're positive cash flowing on each of the assets. If you were to mark to market the interest rates, what percentage do you think would fall behind their debt service coverage?

James Mead

I think other than the Intercontinental Prague, we are not making any material, other than seasonal, contributions to properties. That remains to be seen. We've got at least one circumstance where we're kind of on the margin.

To answer your second question, I haven't run those numbers. Coverages right now are very, very strong for the most part, at the property level. And you know that interest rates are just unbelievably low, with LIBOR where it is today.

I don't have an answer for our second question. I think that we've looked at a financing gap analysis but the good news is we don't have to really concern ourselves with that, until our first on balance sheet maturity, which isn't until August of 2011.

William Crow - Raymond James

Which asset?

James Mead

The Westin St. Francis is our first maturity in August of 2011.

And I think that's a long time from now so we certainly, as probably the rest of the market, are hoping we get improvements, not only in liquidity and availability but as well in the operating results.

William Crow - Raymond James

Can you remind me when the CMBS loan on the Del matures?

James Mead

The Del Cornado loan matures in January of 2011.

William Crow - Raymond James

So that's coming up relatively quickly, at least in today's terms.

James Mead

That's correct. And that will be a challenging one but I think that there is—again, you need to differentiate these situation in the marketplace.

With our assets, generally speaking we think that there is value support. There are other circumstance that I read about with some other companies that the value just doesn't at all support the outstanding loan. And in particularly in the case of the Hotel Del Cornado, we also have some great partners with KSL and KKR.

Operator

Your next question comes from Stephen Grisanti – Bank of America.

Stephen Grisanti – Bank of America

Of the $69.0 million of cash flow on the balance sheet, what portion of that is at the hotel, so it's not trapped at the operating companies?

James Mead

That $69.0 million is generally at the properties. And it's comprised of money in the drawers to one month of salaries and payroll for each property and things like that.

Stephen Grisanti – Bank of America

I've been operating under the assumption that the interest rate swaps that you've entered into are all at the holding company, or at least they're not individually structured at the individual operating companies. And the reason I ask that question is I'm trying to get a sense of where the cash is coming from to service the incremental debt service associated with those interest rate swap agreements. Do you have a figure you can give me in terms of cash that you received from the operating companies during the quarter that was given up to the holding company, as a means to service those interest rate swaps?

James Mead

Just to be clear, all the cash at our properties flows up to the holding company. In certain cases there is a lock box which traps interest and then the excess is available to us to pull. But all the cash from the properties just drills up to the holding company, which services the corporate debt, which is our line of credit, our convertible debt, and our interest rate swaps.

Stephen Grisanti – Bank of America

So you received $13.0 million in the quarter from the operating company?

James Mead

The number would be much larger. I don't have the cash flow statement in front of me but it would be much larger and it would service the debt and the excess would come out of it.

Stephen Grisanti – Bank of America

And I'm correct in assuming that the interest rate swaps are all at the holding company, aside from—

James Mead

That's correct.

Stephen Grisanti – Bank of America

What were the three main ratios for your credit facility, at the quarter end? I believe the covenants are 80% total leverage, 1.15 fixed charge and 1.3x is the availability.

James Mead

We don't disclose the total leverage number but it's based on an appraisal that we have done annually and the last appraisal was in March or so of this year.

Our fixed charge coverage was 1.3x. And what was the other you were looking for?

Stephen Grisanti – Bank of America

Just the total leverage. I believe it was 80%.

James Mead

We don't disclose the total leverage number.

Stephen Grisanti – Bank of America

With respect to the interest rate swaps, did those have any impact on the leverage ratios? The leverage or the fixed charge coverage ratios.

James Mead

They do and you would see in the financial statements the GAAP valuation of those interest rate swaps, it would go into our leverage as liabilities.

Stephen Grisanti – Bank of America

But that moves around with market rates. The actual cash flow that you have to pay on a quarterly basis is something like $18.0 million or $19.0 million.

James Mead

That goes into fixed charge.

Stephen Grisanti – Bank of America

With regard to the Cornado JV, do you receive any regular cash disbursements, in terms of your JV interest from that venture?

James Mead

We have received cash from the JV and we are the managing partner, in effect, of the group so we determine when cash is distributed. I don't know how routinely we do that.

Laurence Geller

We do it quarterly. We do a routine determination on a quarterly basis, as a matter of board, led by our recommendations.

Stephen Grisanti – Bank of America

And did you receive any cash this quarter from that venture?

James Mead

We did not pull any cash from the venture. The venture right now has $40.0-some odd million in it right now.

Stephen Grisanti – Bank of America

It mentioned in your quarterlies book, the one for this current quarter and for the previous quarters, that you weren't posting any collateral with regard to your interest rate swaps. Do you envisage any change to that, because the liability is somewhat sizeable. $93.0 million as of June 30. And who is your counterparty on those swaps?

James Mead

The swaps are governed by contracts in place and we are not required to post collateral.

Stephen Grisanti – Bank of America

So there is no escalator that would require you to post collateral, no matter how out of the money or in the money they were?

James Mead

That's correct. And secondly, the counterparties are generally among the bank lenders to the company. We have a 21-bank group. So they are some of the larger bank lenders.

Operator

Your next question comes from [Ray Fosse] – Newbrook Capital.

[Ray Fosse] – Newbrook Capital

Can you spend some time on the timing of these assets sales? What I'm trying to figure out is what has changed since the Q1 call when you said you entered discussions to sell some of these assets?

James Mead

I don't think we can be more definitive about the time when the markets are difficult to navigate right now. But we will announce something when we have something to announce.

[Ray Fosse] – Newbrook Capital

Can you talk a little bit about what you are seeing in terms of prices now, because I know last time you said the bid and the ask were way off. So I'm just curious what has changed besides just the rate of inquiries in July?

James Mead

We're going down some discreet processes. I don't think there is a general market commentary that would relate to our specific discussions. Just to clarify, I don't think we said the bid and ask were wide previously. We just continue to move down the process of looking at some selected asset sales to increase our continuancy here at the company.

Again, we'll have more to discuss on that I'm sure, in future quarters.

[Ray Fosse] – Newbrook Capital

How much equity do you think is in some of these properties, because it doesn't look like the market is giving you any credit right now for the equity in these properties.

James Mead

As a management team, we certainly feel there's value in our properties. And I don't think that we're in a position to quantify that specifically for you.

[Ray Fosse] – Newbrook Capital

What is the objective of the stake that the Vector Group took in you recently? I think they took a 7% stake in the company.

Laurence Geller

I hope they see good value in the company.

[Ray Fosse] – Newbrook Capital

But is it beyond just being passive?

Laurence Geller

They have filed a 13-D which I think describes their activities.

[Ray Fosse] – Newbrook Capital

What I'm curious about is have they held discussion with you about something else?

Laurence Geller

We routinely don't comment on discussion we have between investors and management.

Operator

Your next question comes from Carl Flornore – Individual Investor.

Carl Flornore – Individual Investor

Since the election the Washington, D.C. property, have you maintained renting that high price room?

And the other question, do shareholders have an opportunity to get a plastic card or something so that we can go to the hotel and check in and get a preferred rate?

Laurence Geller

I didn't really catch your first part, let me answer the second part.

No, we don't do that because the brands operate—if you're on one of the brands frequent traveler programs or on their rewards programs, they perhaps have those cards. But as shareholders, we don't have control over that type of the operation.

And I'm so sorry, could you repeat the first part of your question?

Carl Flornore – Individual Investor

Your Washington, D.C. property was so successful during the inauguration. Has it held up since then?

Laurence Geller

It's held up tremendously. Its market share is growing in the market. It is a superb reflection of market repositioning and it's meeting our financial objectives.

Carl Flornore – Individual Investor

The brand Four Seasons here, I saw a presentation on Microsoft's TV show. And they talk about being an operator rather than being an owner. I guess we're the owner of the Four Seasons and not the operator?

Laurence Geller

Correct, sir.

Carl Flornore – Individual Investor

And they took the position of how valuable it was being an operator versus an owner. How do we benefit being an owner?

Laurence Geller

We benefit from having what we deem some of the finest brands in the world on our assets and we work collaboratively with the management companies to maximize the value for the property. And it's a win-win situation. They provide the brand and the intellectual capacity and we provide ownership and intellectual capacity. It works terribly well.

Carl Flornore – Individual Investor

Do we operate any hotels?

Laurence Geller

No, sir.

Carl Flornore – Individual Investor

We're the manager of the hotels?

Laurence Geller

No, we are simply managing the manager's activity. If you would like to chat about this separately, if you would call me, I'll chat and sort of give you our business methodology rather than keep everybody on the call.

Operator

This will conclude our Q&A session for today.

Laurence Geller

Thanks everybody for the questions. They are very thoughtful.

This downturn has been, and still remains, challenging. However, as we saw the first seeds of decline and acted on it in August 2007, we now feel that the seeds of recovery seem at last to be growing and we've got well-grounded reasons for optimism in general and for our company in particular.

We've got irreplaceable locations, assets in great physical condition, well positioned to compete, systemic changes to the operations that will have significant positive upside to the profitability, and unusually benign supply in our specific markets.

We know we've got much work to do in every aspect of our business but are increasingly confident of our experienced and seasoned management team's ability to meet the challenges ahead and execute our plans in a continued thoughtful and disciplined manner.

So thank you for your time today and your support. We look forward to speaking to you next quarter when I hope our optimism of today will be mirrored in improving results for our economy, our industry, and our company.

Operator

This concludes today’s conference call.

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Source: Strategic Hotels & Resorts Inc. Q2 2009 Earnings Call Transcript
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