LaSalle Hotel Properties Q3 2009 Earnings Call Transcript

| About: LaSalle Hotel (LHO)

LaSalle Hotel Properties (NYSE:LHO)

Q3 2009 Earnings Call

October 22, 2009 9:00 am ET


Michael Barnello – President and Chief Executive Officer

Hans Weger – Chief Financial Officer


Ryan Meliker – Morgan Stanley

Chris Woronka – Deutsche Bank Securities

Michael Salinsky – RBC Capital Markets

Bill Crow – Raymond James

Patrick Scholes – Friedman, Billings, Ramsey & Co.

Andrew Wittman – Robert W. Baird & Co.

David Kath – Oppenheimer & Co.

Daniel Donlan – Janney Montgomery Scott

Jeff Donnelly – Wells Fargo Securities,


Welcome to the LaSalle Hotel Properties third quarter 2009 conference call. (Operator Instructions). At this time, I would like to turn the call over to Mr. Michael Barnello, President and Chief Executive Officer.

Michael Barnello

Welcome to the third quarter earnings call and Webcast for LaSalle Hotel Properties. Here with me today is Hans Weger, our Chief Financial Officer. Today, Hans will provide some detail on financial performance in the quarter and I will follow and discuss the company's activities in the quarter, the performance of our assets and our trends relative to those of the industry. We will then open the call up to Q&A. Hans?

Hans Weger

Before we begin, I'd first like to make the following remarks. Any statement that we make today about future results and performance or plans and objectives are forward-looking statements as 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 report as well as our press releases are available at our Web site, Our most recent 8-K in yesterday's press release include reconciliations of non-GAAP measures such as funds from operations to the most comparable GAAP measures.

Third quarter funds from operations or FFO was $30.7 million as compared to $39.9 million in the prior year. FFO per diluted share was $0.49 compared to $0.99 in the third quarter of 2008. EBITDA for the third quarter decreased to $48.4 million from $60 million in the prior year period.

RevPAR for the total portfolio decreased 19.7% in the third quarter. The RevPAR decrease was a result of 17.6% decline in ADR to $167.36 and a 2.5% drop in occupancy to 79.4%. Our hotel portfolio generated $49.5 million of EBITDA in the third quarter of 2009 versus EBITDA of $67 million for the same period of 2008, a decline of 26.1%.

The portfolio-wide EBITDA margin in the third quarter was 30.8% and was limited to a decline of 388 basis points compared to the prior year despite a 19.7% drop in RevPAR. For the nine months ended September 30th, 2009, FFO was $74.9 million compared to $97.1 million for the same period in 2008, or a $1.45 per diluted share compared to $2.41 per diluted share for the same period in the prior year.

FFO for the nine months ended September 30th, 2009 included $5.7 million in after-tax income for the recognition of prior termination cure payments for the previous manager of the company's Seaview Resort and $1 million fee for exchanging the 7.25 Series C Cumulative Redeemable Preferred Shares of Beneficial Interest for an equal number of 7.25% Series G Cumulative Redeemable Preferred Shares of Beneficial Interest, the Preferred Share Exchange.

EBITDA for the nine months ended September 30th decreased to $129.2 million from $155 million for the prior year period. EBITDA for the nine months ended September 30th, 2009 included $9.5 million for pre-tax income related to the Seaview Marriot or the Seaview Resort and the $1 million fee for the Preferred Share Exchange.

Room revenue per available room decreased 18.8% for the nine months ended September 30th, 2009 to $123.98 versus the same prior year period. The RevPAR decline was due to an ADR decrease of 14% to $173 and an occupancy decline of 5.5% to 71.7%.

For the nine months ended September 30th, the company's hotels generated $125.4 million of EBITDA compared with $167.9 million for the same period last year, a decline of 25.3%. The portfolio-wide hotel EBITDA margin was 28.2% and was limited to a 346 basis point decline from the same prior year period.

As of the end of the third quarter, the company has total outstanding debt of $660.2 million at an average interest rate for the quarter of 5.1%. During the third quarter, we retired all outstanding debts on our $450 million senior unsecured credit facility. The company has an aggregate $470.5 million available on our combined credit facilities.

As of September 30th, 2009, total debt to trailing 12-month corporate EBITDA as defined in our senior unsecured credit facility equaled 3.8 times and trailing month corporate EBITDA to interest coverage ratio was 4.2 times.

On September 15th, we announced a quarterly dividend of $0.01 per common share for the third quarter 2009. The third quarter dividend was paid on October 15th to common shareholders of record on September 30th, 2009.

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

Michael Barnello

In the third quarter, as a result of the continuing weak economic environment, the lodging industry remained challenged. While the rate of decline and demand slowed during the quarter, it did so at the expanse of average daily rates. Specifically, demand declined 5% for the third quarter as compared to an 8% drop in the first half of 2009. While demand is yet to turn positive, the slower rate of decline is certainly encouraging.

When we look at our major segments of demand, our weakness remains most pronounced on the group side as corporations in particular have dramatically reduced the number and size of their meetings, the number of employees attending conventions and meetings and the length of stays.

Overall, group occupancy across the industry in the U.S. appears to be stabilizing at a level down around 20% from last year. While the industry generally went into the year with a decent group pace, the actual number of group rooms nights recognized was lower due to high levels of cancellation, attrition and lower in the year group bookings. However, group rates have remained relatively strong due to such a large percentage of the business being contracted before the year began.

In contrast, we've seen less weakness on the transient side with industry transient occupancy running slightly positive in the third quarter, a trend that has followed through in October as well. With less corporate and business travel, there is greater dependence on leisure, government, AAA and other discount customers. As a result, average daily rate on the transient side across the industry has seemingly stabilized down between 15% and 17% compared to last year.

For LaSalle Hotel Properties, we saw higher occupancies in the industry during the quarter, while ADR performance was lower. We benefited significantly from our investment concentration in Washington, D.C. and the relatively better performance of several of our recently renovated and repositioned hotels.

Unfortunately, these benefits were more than offset by very weak performance across our resorts in our hotels in West L.A. and Chicago markets.

Despite the challenges of the third quarter, the positive trends materialized earlier in the year continued. First, the end of month for the month transient booking improvement over last year continued throughout the third quarter.

Second, transient bookings in the month for the year have now exceeded last year's same period bookings for seven consecutive months since March. Third, largely as a result of very strong transient bookings in the third quarter for 2009, our total bookings, meaning our group and transient combined, in the quarter, exceeded those for last year for the first time in 2009.

Lastly, in September and for the first time in 2009, group bookings in the month for the year exceeded last year's same period bookings. While these are all short-term occurrences, they are indeed positive developments.

In the third quarter, RevPAR at our urban hotels declined 16.5% with occupancy up slightly 1.1% and ADR off 17.4%. RevPAR at our convention hotels fell 18.5% with occupancy down 3% and ADR dropping 16%.

Our resorts were our weakest property type. RevPAR was down 26.5% with occupancy falling 8.7% and ADR down 19.5%. These results demonstrate our ability to replace some of the room rent lost from lower group business with leisure customers by offering value packages and discounts through our proprietary channels as well as through third party Internet channels.

Overall, when looking at our mix of group and transient businesses, group rooms were down 16.9% in the third quarter compared to last year with average daily rate down 11.4%, while transient rooms in the quarter were actually up 6.1% with ADR down 20.1%.

Our urban hotels benefited significantly from our D.C. hotels having a RevPAR decline of just 1.6% in the quarter. In addition to D.C., our properties in Boston beat the industry average in the third quarter. RevPAR fell 13.4% due to an only 1.4% decline in occupancy and a 12.1% reduction in ADR. Chicago and West L.A. were our weakest markets. Chicago suffered from very poor convention attendance and widespread discounting while West L.A. continued to be hurt by significant reduction in movie, television and music productions.

RevPAR fell 26.1% Chicago with occupancy down 3.1% and ADR falling 23.7%. RevPAR at our West L.A. properties declined 27.8% with occupancy actually up slightly at 0.1% although ADR fell 27.9%. RevPAR at our San Diego properties fell 22.5% in the quarter dragged down by the relatively weaker performance of our resorts which suffered from weak group business and significant transient discounting. Occupancy declined only 0.8% while average daily rate was down 21.8%.

On a monthly basis for our portfolio RevPAR declined 14.3% in July, 21.1% in August and 23.6% in September. September's comparisons, of course, were impacted both by two Jewish holidays as well as an extremely late Labor Day which resulted in a lost week of travel as leisure travelers were in back to school mode and businesses were not ready to resume travel.

Our best performing properties for the quarter ,as measured by the change in RevPAR, were led by Donovan House and Liaison Capitol Hill both benefiting from the repositioning of relatively better D.C. market. In fact all of our other D.C. properties including the George, Madera, Topaz, Rouge, Helix and the Hilton Old Town Alexandria were better performers.

The Westin Copley, Hilton San Diego Resort and Westin Dallas also performed well on a relative basis, all significantly outperforming their competitors in the quarter. Our weakest properties in the quarter included the Sheraton Bloomington, Seaview Resort, San Diego Paradise Point resort and Lansdowne Resort all struggling due to substantial drops in group business as well as the Hotel Sax, Westin Michigan Avenue and all of our properties in West L.A. which suffered from weak markets.

Portfolio-wide revenues for the quarter declined 16.8% with RevPAR down 19.7%. Food and beverage revenues declined less than RevPAR down 12.4% partly due to increases of three properties, Liaison Donovan House and Gild Hall. All are updated restaurants opened and owned by us when they were not open last year.

As we look at the expenses of operations we and our operators continue to be very effective in the third quarter in controlling cost despite the dramatic revenue decline we've experienced. As a result of the aggressive efforts of our asset management team and those of our operators we were able to reduce operating expenses through the house profit line by 12.5% through the quarter.

The declines in the portfolio's EBITDA margins were limited to 388 basis points for the quarter versus the third quarter last year and 346 basis points for the first nine months of 2009. Portfolio-wide hotel EBITDA margin was 30.8% in the third quarter and is 28.2% year-to-date.

Turning to our capital initiatives, we made $6.3 million of capital investments in the portfolio in the third quarter and have now invested $22.1 million year to date. We are currently forecasting to invest between $28 million and $32 million of capital in the portfolio this year.

As mentioned last quarter, the only notable product now under way is the complete room renovation of all 462 rooms at San Diego Paradise Point. Total investment is estimated at $7.5 million with $4 million in 2009 and $3.5 million in 2010. All the rooms are expected to be complete by the beginning of April 2010.

Forecasting the performance of the lodging industry and our own performance for the remainder of this year continues to be particularly challenging. This is due primarily to the difficulties of forecasting the path of the economy and its impact on travel. Visibility has improved more recently but we continue to be far from comfortable in providing a reliable forecast of the lodging business or our own performance.

From a macroeconomic perspective, three of the four indicators we use, employment growth, corporate profits and airline enplanements to forecast demand, continue to be negative while consumer confidence has improved.

We're encouraged though that the rate of decline and employment, enplanements and core profit continues to be slowing. In fact, the U.S. airlines posted the smallest drop in air traffic in 14 months during September.

These are necessary steps on the way to achieving positive numbers sometime in 2010. We did see continued improvement in our fourth indicator, consumer confidence, in the third quarter; same as the second quarter although it did take a slight step backwards in September.

We believe the industry demand for rooms and meetings will continue to be down in 2009. Although both the recent demand trends and results of the fourth quarter of 2008 suggest the fourth quarter will likely be the best quarter in 2009.

Supply growth likely peaked at the beginning of the year at 3.4% and appears to be on the way down. Due to the rapid decline in hotel rooms under construction already this year supply growth should fall off significantly in 2010 and be relatively immaterial for the next five to seven years, likely setting the stage for a strong and long recovery as demand returns with economic growth.

The industry will continue to struggle with average rate in 2009 due to significant fall off in demand, additional supply and lower overall occupancy levels. Generally speaking, the industry continues to be negatively impacted by our placement of the highest paying group and transient customers primarily corporate and retail with lower rate discount, third party Internet associations, SMERF and government business.

As the business travel recovers over the next 12 to 24 months this should improve the cost of mix and begin to offset some of these declines. We expect to continue to benefit for the rest of 2009 from having over 20% of our EBITDA in the D.C. market which we believe will continue to perform substantially better than the industry overall.

This is due to the higher levels of travel into the market related to government, a smaller dependence related to corporate demand, substantially increased global visibility and a metropolitan region that has continued to grow employment with significant government employment growth in the region now forecasted.

However, the strength of the D.C. market is being offset by the weakness at our resort properties and our hotels in Chicago and West L.A. markets which we expect to continue to be weak performers for the remainder of 2009.

We should also benefit from better relative performance at our recently redeveloped and repositioned hotels. This includes Liaison Capitol Hill, Donovan House hotels in D.C., Gild Hall in New York, Hotel Sax in Chicago, the Alexis in Seattle and the Hilton San Diego Resort.

When we examine our group pace data we see the trends continue to be negative. As of October 1 group pays for 2010 is down 17.1% in room rates on the books with ADR down 4%. We continue to be negatively impacted by corporations choosing to reduce or eliminate meetings. We also continue to experience high levels of group attrition and cancelation although the percentage seems to have stabilized.

On the other hand, transient demand trends have begun to improve. As of October 1, transient rooms and books for 2009 have improved to a positive 1.7% ahead of the same time last year. This compares to the negative 7.4% pace as of April 1 and the negative 0.4% as of the end of Q2.

While some portion of this improvement in occupancy has likely come at the expense of ADR, transient average rate on the book compared to the same time last year only deteriorated 60 basis points since July 1 as compared to the 210 basis point improvement in transient rooms on the books.

Transient ADR as of October 1 is now off 17.9% from last year. That compares to 17.3% lower ADR as of July 1. We're hopeful that these stabilizing transient demand trends will continue and improve throughout the remainder of 2009.

We continue to relentlessly pursue and implement additional best practices that create greater efficiencies and lower cost. With the labor reductions made late last year, combined with further ongoing reductions including those from process and service re-engineering, we're well positioned to mitigate margin erosion from revenue declines throughout 2009.

Our entire team is focused on our hotel operations as demonstrated by our Q3 EBITDA margin declining only 287 basis points when you exclude the impact of property taxes. We continue to strive to give the guest what is important to them by tailoring the services to the guest versus giving everyone everything while at the same time continuing to maintain customer satisfaction but at a lower cost level.

The flexibility and aggressiveness of our independent operators and franchise operators, coupled with the 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 sum it up 2009 continues to be an extremely difficult and challenging year. We feel confident that we're taking the steps necessary to maximize revenues, minimize margin erosion, strengthen the balance sheet and protect long-term shareholder value.

We believe we've positioned the company to grow and take advantage of opportunities as they arise. Our hotels are of high quality and they're in institutionally desirable investment markets. The majority of our hotels are unencumbered by debt and we have $470 million of low cost funds from our unsecured credit facilities available to provide any necessary additional equity as well as capital for future investment opportunity.

Our properties are in excellent physical condition and we continue to invest in them through the normal cycles. We have inconsequential debt maturities through 2011. We have a low 3.8 times debt to EBITDA ratio. We've been through a very difficult environment before and our team will continue to be effective in facing the challenges and taking advantage of the opportunities that lie ahead.

One last item, on October 6th we announced the hiring of Al Young as our Chief Operating Officer. Al joins us from Caribbean Property Group in New York City. Before that he spent seven years working at LaSalle Hotel Properties in both Asset Management and Acquisitions.

Al possesses both the right mix of industry talent and specific market knowledge, as well as being a terrific fit for LaSalle culture philosophy perspective. We look forward to having him start in November and having everyone get a chance to know him better over time.

That completes our remarks. Hans and I will now be happy to answer any questions you may have.

Question-and-Answer Session


(Operator Instructions). Your first question comes from Ryan Meliker – Morgan Stanley.

Ryan Meliker – Morgan Stanley

A couple of really quick questions here for you. I'm wondering if you can provide color on two different things for me? First of all, some of the other hotel retails out there have talked about the idea that we need to see occupancy growth of X percent before we see any type of pricing power return to the hotels.

I'm wondering if you have an idea of where you see – I know it's not going to be specific to your properties, but maybe market level occupancy, where that needs to be or how much that needs to come back before prices start to turn positive.

And then the second question was you mentioned September was the first month where year-over-year group bookings were positive. I'm wondering if you can give us any color on where those rates are coming in? Are we talking down 5%, down 15%, up 5% on those year-over-year group bookings that are occurring today?

Michael Barnello

As far the color on the occupancy it's a valid point. We look at the industry overall. Most folks are expecting that the industry is going to end up with about a 55% occupancy, which is down dramatically when compared to the last 20 years. The worst occupancies have been in the 59% range. So the comment that we need to regain occupancy before we get pricing power, in general, makes senses.

However, it's too simplistic to apply any kind of simple number to either market or a comp set so that we have a simple number to figure out what's going to happen in our markets before we can raise rates. But it is fair to say that we do have to regain occupancy which will come through increased demand before it can do that.

And it really has to do with a number of things. It has to do with where the day of the week compression is coming because if you do look at what's happened, we have seen significant fall off in midweek business and we need to get that back. So that's going to through also different channels. We're picking up in the leisure, the SMERF, association, government channels, but we really need to get that high end retail and the business traveler back before we can start charging more on the rate side.

And we look at our submarkets, some of our submarkets actually have very healthy occupancies. I mean, year-to-date Washington, D.C. is almost 76%, lower Manhattan 73%. So they have good occupancy but they need to get the mix of travel back before they can start charging more.

As far as the trend on the group bookings, the group bookings for September that were higher than in the year for the rest of the year, I'd say two things. One, first of all, there wasn't a lot of the year left. So while it's encouraging it's always for a short period of time. And second, the rates are significantly lower than last year.

Ryan Meliker – Morgan Stanley

Can you give us a little more detail on what significant is? I mean are we talking down 5% or down 20%?

Michael Barnello

They're down more 20%, 25%.


Your next question comes from Chris Woronka – Deutsche Bank Securities.

Chris Woronka – Deutsche Bank Securities

I think you've done a really terrific job, your operators have, of taking the costs out this year. How do we think about – if occupancy theoretically is a little bit higher next year the balance of your continuing to take some costs out versus some higher variable expenses on occupancy, and then how do you look at inflation on some of the things that might not be in your direct control?

Michael Barnello

Well, obviously there are some things that will have to increase. I mean when you look at payroll expense, that's our biggest expense and in some respects that is out of our control. So if we're – if even if we're a non-union hotel in a union market, and the union experiences increases, we generally match those increases, again, in general. So that's a big piece of our expense line.

Other things that are looking like they will increase are health insurance benefits, things like that, but our focus really, Chris, has been to try to – we'll save where we can, either through re-bidding or to do something different overall so that we're actually not comparing the same process year-over-year. We're actually doing it in a different manner.

So I know it doesn't answer your question exactly, but we're very aware that some things have to go up, and when the demand comes back, we obviously can't continue to cut, especially if the increases are coming off in [Seaside], which we think are likely.

Chris Woronka – Deutsche Bank Securities

That's helpful. Then I apologize if I missed it, but the big drop in SG&A in the third quarter was something specific?

Hans Weger

Hey, Chris, you're talking about the G&A at the corporate level?

Chris Woronka – Deutsche Bank Securities

Yes, the corporate G&A.

Hans Weger

Yes, that was primarily driven by John stepping down, and so there was a net impact there of some reversal of accruals related to equity compensation that had not vested. And so the run rate going forward is more – it will continue to be more in that $4 million to $4.5 million rate per quarter. And you just had the reversal of the non-equity grant, the [inaudible] equity grants.

Chris Woronka – Deutsche Bank Securities

And then one final one on the property tax line, is it – I think you were up about almost $1 million year-over-year. Is it fair to assume you didn't get any rebates that maybe you have in the process of litigation?

Hans Weger

Correct. There was no material change in the property tax [stuff] and we continue to accrue.


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

Michael Salinsky – RBC Capital Markets

Good morning. There's been a lot of talk out there about distressed opportunities, investment options. Can you talk about what the acquisition pipeline really looks like at this point, whether you've actually put out bids or what you expect – when you expect to begin deploying capital?

Michael Barnello

Good morning, Mike. Yes, there is a lot of talk about distress, and you can't open the paper or look online without seeing an article about it. Unfortunately, the analogy we keep using is we feel like we're at the aquarium looking at the fish, but we can't get to it. So all the noise about distress for the properties that we would like to look at in our markets has not materialized.

Yes, there are some properties that are for sale, but they either – they're not in our markets, or they don't fit because of the cash flow problems they have, or they have other problems that we wouldn't look at those assets.

So we do think that it'll take some time for the lenders to take control of the assets, and they need some kind of catalyst before they can actually start selling those assets. And if you'd asked us six months ago, we would have thought that there's be more by now, but unfortunately everything is taking longer than anybody expected, and so we expect it to start happening sometime in 2010, although we'd be guessing as to tell you when.

Michael Salinsky – RBC Capital Markets

Second question – a question more for Hans, in terms of the secured market, how is that – have you seen any thawing in that from the second quarter to third quarter? Where's pricing right now in terms of the terms, LTVs, things of that nature?

Hans Weger

To be honest with you, right now we're not in the market and so I don't have any specific information. But if you look at the overall credit market and the anecdotal comments that I've picked up in conversations in general that yes, you are seeing some better pricing there.

But it's still not on high leverage, or even medium leverage. They're still very concerned about the cash flows because the uncertainly in 2009 and for 2010. So I think it's more available, but I don't think that pricing's moved significantly.

Michael Salinsky – RBC Capital Markets

Okay, so the pricing has not moved then significantly. Then finally, several of your peers who reduced the dividends are having to pay special dividends here in the fourth quarter or first quarter to maintain REIT status. Is your expectation that you're going to have to pay a special dividend at some point to maintain REIT status and any sense as to whether you'd pay that? And if you do have to pay one, would you pay that in a combination of stock, or would you look to pay that in all cash?

Hans Weger

We've not provided any outlook for this year and so obviously that comment would provide some type of guidance on that part. So at this time, we aren't providing that. I will say, though, that there are multiple ways of handling the dividend requirements, and we'll evaluate those with the board and determine the best course of action that we believe for the shareholder value in the long term.


Your next question comes from Bill Crow – Raymond James.

Bill Crow – Raymond James

Mike, could you walk us through some of the markets, as they look for next year, not necessarily specific to your assets, because I know you're not giving guidance, but talk about some of the group trends in Chicago, San Diego and Boston in particular. And then is there any way to quantify the headwind that D.C. is going to provide in the first quarter of next year?

Michael Barnello

Good morning, Bill. Looking at our markets, unfortunately most are negative with a couple that look kind of flat. And unfortunately the only one that looks positive from a citywide and group pace perspective, again from a city perspective, is Dallas, which is a smaller market with only one asset for us.

But if you look at our bigger markets, Chicago looks down. Seattle is down. San Diego is down, and when I'm talking down, I'm talking about the citywide – number of citywides and the number of rooms booked up to the year.

Bill Crow – Raymond James


Michael Barnello

Indianapolis is also down. Now D.C. is flat and Boston is a little mixed, and by mixed I mean is that we have an increase in the number of room nights. We have less citywides, and if preferable, I'd rather have the opposite. I'd rather have more citywides if – and the single rooms, but if I had to have less I'd rather have more citywides. It spreads it out over a bigger period of time. So there are significant headwinds.

The one thing that I would say, again for all the markets, is that when we do look at what has picked up in the year for the year, relative to what was booked, it's a substantial decrease. So Chicago has some pretty good stats. They have been saying for the first half of the year because the data comes out afterwards, that they had picked up something like 70% of what was booked for citywides. San Diego was about the same, 68% to 70%.

So that's somewhat encouraging when you look year-over-year, because even though the paces are down compared to 2009, you have to look at what actually showed up. And so hopefully we don't have the same wash factor in 2010 as we did experience in 2009.

Bill Crow – Raymond James

Right, right. At D.C., as far as the ability to quantify any sort of comp challenges in the first quarter related to the inauguration?

Michael Barnello

Well obviously, as we've said before, the inauguration meant a lot for us. I mean it was about $3 million from revenue in our first quarter that was attributed just to the five-day period during the inauguration. And despite requests, I don't think that's going repeat in 2010. So we do have a headwind from a D.C. perspective.

On the other side, though, we do think D.C. is one of the strongest markets. And it's gotten so much attention because of good reason, because of all the problems that they're trying to tackle in D.C., that we do feel like D.C. is going to be a strong market, year-over-year, and obviously just can't compare in January.


Your next question comes from Patrick Scholes – FBR Capital Market.

Patrick Scholes – Friedman, Billings, Ramsey & Co.

I wonder if it's possible that you can give any type of color on 2011 group pace? I think you said it was – pace was down 17% for 2010, but any early indications as to what 2011 pace is looking like?

Michael Barnello

No, we don't have a good feel in 2011, but just to give you one tidbit, group is down to 30% of our mix. So when you look at it that way, obviously that 30% in the year, if any year for the year, and then it becomes less than what's booked in 2010 and even less in 2011. So even if we did have some data, I'm not so sure what you could glean from it because it's too far out.


Your next question comes from Andrew Wittman – Robert W. Baird & Co.

Andrew Wittman – Robert W. Baird & Co.

Hey, I just want to do one other question on the acquisition market that you're seeing. I just wanted to understand your willingness to go outside of your core markets, and I guess you identified San Francisco. Pricing distress might solve a lot of evils and so I guess I wanted to kind of handicap that. Are you willing to go outside or are you really still laser-focused in on your handful of markets?

Michael Barnello

The markets that we have targeted, the [A] markets, were done so after a lot of research that they performed better over time when you look back at the data. And so that's still the case. We still believe that and that becomes – it is still our focus.

As you know, resorts can be outside of those [A] markets but they tend to be coastal and, quite frankly, they tend to be near those markets because we like drive to resorts that are near a major airport. So, I guess I would tell that the strategy still remains the same. We're still focused on those [A] markets because we think that there'll be opportunities there and we think we can outperform. So that's really what we're sticking to.

Andrew Wittman – Robert W. Baird & Co.

Just in terms of future bookings, just wanted to try to get a handle on, you know, fall usually has traditionally brought corporate rate negotiations for corporate transient travelers. We're getting into that. Can you just give us a little bit of an idea of what your expectations are as we head into that season?

Michael Barnello

A couple things, corporate negotiated is not a big piece of our business. When we look at our entire year, the corporate negotiated year in, year out is 10% to 12% of our overall business, so just to frame it up. What folks are saying, and this has taken longer this year than in prior years because people are negotiating and renegotiating, is that a lot of the management teams are looking at flat or slightly down decreases for next year.

Some companies have requested two-year deals. We have only seen a couple of our properties with a small number of groups that have actually entertained such a discussion. But it sounds like early things are about flat to slightly down.

Andrew Wittman – Robert W. Baird & Co.

And then just one other kind of question related to that is we're starting to hear some chatter about the OTAs, the Internet channels, seems that competition there for the OTAs has really increased. There's a lot of fixed pricing now. They're allowing room cancellations. It seems like that market is getting much more competitive. We've seen other franchise companies starting to really back away from those OTAs because they're playing so much hardball with negotiations.

I'm just thinking, with your insight into that having relatively more unbranded properties, are you starting to see OTAs trying to drive where your revenue management systems are going? And how is that affecting your business today?

Michael Barnello

Our Internet business, as you might imagine, is up. Overall, we're up about 19% through the Internet versus last year and about half of our transient business comes through the Internet, and that's with third party and property sites. So it's not just the OTA; it's also the proprietary hotel Web sites. But, it's up.

And for our independent properties, that's, in some respects, the distribution channel. So that's different than the branded properties who obviously have their own system and they're looking at these outlets as incremental business.

A number of the brands are negotiating now with those OTAs to figure out what the pricing is going to be, what the commission is going to be for 2010 and beyond. You were mentioning, your issue talks about what the OTAs are looking for relative to distribution. Some of the, I guess the strife between some of the franchise companies and the OTAs is that the OTAs are looking for last room availability and complete access to the inventory.

And so I guess from our perspective, we would like to see the franchise companies stay strong on this issue, because obviously if they're turning over all their inventories to the OTAs from a franchise perspective, then it's a higher cost channel for us than to just keep going directly through the brand site or the hotel site independently.

So as far as what's going on next year, I know a lot of the independent companies, they tend to negotiate now or towards the end of the year and those percentages actually are much higher than the brands to begin with and they haven't finalized those for next year.

Andrew Wittman – Robert W. Baird & Co.

So in terms of the effect on LaSalle, it still sounds like there's going to be a certain amount of allocated rooms to the OTAs but it still sounds like you intend to keep the vast majority control over your rate negotiations and of the rooms that you make available to them.

Michael Barnello

That would be the goal, Andy. But let me tell you that every management company, every brand is different. So in some respects, what the big brands choose to do we can only weigh in with our thoughts on that, but they do what they do. And then, the inventory is either partially committed or fully committed.

Again, the independence, it's actually done on a property management basis overall, so Noble House or Kimpton will do what they do with Expedia or others and we'd hope it would just be partial inventory. But on the pricing side, they already have the parity which I know is one of the problems that are being talked about. But parity already exists at I believe pretty much all of our management companies.


Your next question comes from David Kath – Oppenheimer & Co.

David Kath – Oppenheimer & Co.

I wanted to just talk a little bit about CapEx for next year. One of the things we try and think about is management's commentaries about what's a level that's sustainable or unsustainable, sort of what the new normal will be. And as we look into next year, I think there's somewhat of a consensus that flat to down is, for at least a good portion of the year, is what we're looking at.

And so how much confidence do you draw from the prospect of a recovery, and whatever guidance you can help us in looking at our model. And then I have one other quick one also, please.

Michael Barnello

From the CapEx, we've said that maintenance CapEx is in the area of $25 million, $20 million to $25 million for the portfolio. I would agree with you that next year looks like a tough year and as a result, we have to keep a watchful eye on what we invest in the properties.

That said, what we've consistently done is make sure we maintain our properties even through downturns. It makes no sense to let the properties deteriorate because the guests notice it and then we end up paying for it with our bottom-line.

So we have not gone through our budgets which include the capital budgeting process and we will have, obviously, serious discussions with every one of our properties about what needs to be done both from a maintenance perspective, life safety perspective, as well as an ROI perspective. And then we'll make the choices to what we think makes sense to invest in.

Thankfully, our properties are in great shape because we've invested in most of those really from '06, '07 and '08, we invested a lot of money on virtually all the properties, so that our needs are not great. Nonetheless, there are a lot of projects that we have to consider and we'll make those decisions in the fourth quarter in the beginning of 2010.

The one thing we are considering when we look at the CapEx, David, is that in some respects, the CapEx is on sale. I mean, just like the construction costs are down to the extent we actually do a room renovation on a property, we are seeing significant savings in the price per room on a reno.

So an example, the one project that we're doing in San Diego at Paradise Point, that renovation of all 462 rooms is coming in about $7.5 million. That's about $16,000 a room, whereas we originally priced it about a year ago about $19,000 to $20,000 a room with the same scope.

So we are looking at that and keeping in mind that if we're going to do something and the choice is to do it in 2010 or later, we are balancing what the cost is today versus what the cost could be when everybody else starts renovating.

David Kath – Oppenheimer & Co.

And then if I can just follow up and sort of beat the horse one more time and I'm aware of your aquarium analogy and I've used it and credited it before, but what we are hearing from some of the other similar companies is some chatter, and we would call it all anecdotal, that there has been some rationalization of the bid and ask for hospitality properties very recently, over the last month or so. Is that something that you would say you've observed?

Michael Barnello

David, no, we haven't. Again, the same trickle that's out there continues to be out there. I mean, there are properties, don't get me wrong. There are properties out there. For one reason or another they're either not fitting our criteria or the bid and the ask is too high. We've heard some of the same chatter that you're hearing and all I can say is that what somebody finds attractive may be different than what we're looking at.

But in the markets that we're looking, with the quality properties that we're looking, we have not seen the flood gates open relative to those properties and certainly relative to a bid and ask, so we're hoping it happens. Obviously we would like to find assets that we can acquire and grow with but we're not going to rush to do so and we're not seeing a big movement towards that.


Your next question comes from Dan Donlan – Janney Montgomery Scott.

Daniel Donlan – Janney Montgomery Scott

Good morning. Just a quick question, I was wondering if you could maybe break out the ADR declines in the quarter for your branded versus independent properties or if you could just provide color on that as well?

Michael Barnello

Well let me pull that up. Give us one second. The independent properties are in the 20% range drop in ADR. I'll give you some color and only a slight drop in occupancy about 1.5%, whereas the branded properties drop is about 15% and the occupancy is down 3.5%, about 3.4%.

The one thing that I would caution you on with this is that there was a swing in the second and the third quarter relative to the Seaview becoming, going from Marriott to an independent. And so what happened is a lot of that rate was already booked for the third quarter and so it is what it is, but when you look at it, it does tend to taint that brand independent comparison.

Daniel Donlan – Janney Montgomery Scott

And then just some – you mentioned that you had three restaurants opened this quarter that were not open last quarter. Is that going to happen again in the fourth quarter?

Michael Barnello

Let's see, with Liaison, no. That opened up in the third quarter of 2008 as did the Gild Hall – restaurant had opened up in the third quarter of 2008. But with Zentan which is the Donovan House that opened up in June of 2009, so it'll just be one restaurant from now on.

Daniel Donlan – Janney Montgomery Scott

And I guess from a margin standpoint looking at the fourth quarter margins for F&B revenues, that's a percentage of total room revenues, I think it was about 50%. Is that a margin you think that you guys can hold in the fourth quarter?

Michael Barnello

Well I will tell you this. The margins were down about 180 basis points still on food and beverage and I will tell you that we contracted to other segments when we increase food and beverage, especially in an outlet side, it's not easy to lower the margin – to increase the margins or save expenses because the outlets have the lowest margins when you compare it to say banquets and catering.

So from that perspective, the increase is something that will likely cause a slight decrease in profitability overall when you look at the margins. Now that said, you're talking about a couple of restaurants that it's not a ton of revenue, and certainly they're going to be less when you're talking about one restaurant for one quarter.

But look at the food and beverage margins overall, Dan, obviously there's a lot of pressure on with us with our operators to do what we can do best in order to right size and right price all of the menus. So between menu changes, between portion control between putting systems in place like beverage control systems, we're hoping that we can continue to move the needle on food and beverage costs, but it remains to be seen.


Your next question comes from Jeffrey Donnelly – Wells Fargo Securities.

Jeff Donnelly – Wells Fargo Securities

Good morning guys and I guess welcome to the CEO seat, Mike. I guess beyond just market focus is there any changes I guess that you might be anticipating to make versus the way the company was previously run either in its I guess financial philosophy or again, market exposures or maybe in the segments that you pursue?

Michael Barnello

Good morning Jeff. No, not really. I mean when we talked about this before, you have to rewind 11.5 years. So when we started in 1998, John, Hans, and I spent a lot of time creating this strategy, shaping the structure and then agreeing on all the tactics that we would employ when we bought properties and what kind of managers we used and what kind of markets we went into. So that was fairly agreed upon.

Now, nonetheless, does that mean that we always do the same thing in every cycle? Obviously what's happened the last two cycles has caused us to think a lot about how to run the business in the future. But that's not a strategy shift that has to do with my position changing.

It's more a situation relative to what are the kind of things that you need to do to make it through these types of recessions if these are the types of recessions that we're going to live through in the future? So but we still like the same markets, we still like the same types of assets and still full service.

We still like the diversification that we get from brands and independent operators and multi-operators. Diversification through geography and types of property whether it's resort, convention or urban. So that's all the same stuff.

Jeff Donnelly – Wells Fargo Securities

And then I guess to move on I guess as it relates to group business, the implication of some of your comments that I guess that even if group demand improves from what is probably a trough level now in 2009, I guess it implies that we could see the achieved rates in the future continue to roll down from what was on the books already in 2009 because again, you mentioned it was booked in a prior period. Are you able to quantify for us what that gap is effectively in group business between what's on the books this year and what I guess as a market might have been for 2009?

Michael Barnello

We've spent a lot of time trying to figure that out because unfortunately it's imperfect. When we look at what was on the books, say, the beginning of 2009, and then when we compare to what actually showed up, they'd have to take incredible notes and try to be accurate with what showed up, what was increased and what didn't show up because of they went to other – either came to our hotel through a disguised transient bubble or just didn't show up at all.

And so that's the problem that we're having with comparing '10 to'09. We know that '09 didn't show up as well and we always have some wash factor in 2010. I guess we feel better about what's out there in 2010 because certainly for us for the property – for the business that booked in 2009 for 2010, our gut tells us that those people are serious and they're really going to show up. They know what the world looks like.

So presumably we have accurate wash factors associated with that business, but we don't know. Now as far as the rates, obviously there's incredible pressure on the rates and that's going to continue for a while until all of the management teams in our comp set can feel strong enough that they can start charging more.

And it'll also happen until – continue to happen if we put pressure on the rates until many planners find out that they can't get the locations they want at the rate they want because it's been booked.

So sadly, until we get an increase in the group demand side, the price is going to be an issue. And we said earlier, somebody asked a question relative to our group even though our group bookings were up they're down, the rate's down greater than 20%, 25%. The – unfortunately we'll see that issue for a while.

Jeff Donnelly – Wells Fargo Securities

And I say, to put a finer point on, I mean do you think it's possible though when you look at just the group segment total revenues, not necessarily just rates, but the total revenues from that segment that I guess if you think of it as maybe there's going to be an improvement in demand for group in 2010 or 2011 versus 2009 because maybe '09 was artificially compressed.

And there's still some business on the books in future years, but it was arguably put on the books at a better time. But rates will be weak. I guess I'm trying to think the interplay of those pieces, is it possible that group revenues could be flat to positive or do you think it's actually sort of somewhat assured that it's down in future years?

Michael Barnello

Well, if by future years you're talking about 2010, I mean we've told you that look at it this – the rate is not down as much, right? So our group pace is down 17% but the rate is only down about 4%. So from that perspective I think if you're looking for encouraging signs that's a good sign. And I do believe that a lot of it will be more in the year for the year than we've ever experienced for two reasons.

One, we're going to have capacity because those rooms aren't booked and, two, I think a lot of people are waiting until the calendar year turns before they start booking for 2010. So I don't know. I think it's too early, Jeff, to make the conclusion that it's going to be flat. It really has to do with macro issues. What happens with the business traveler? What happens with corporations? What happens with unemployment?

If all those things start to trend our way then people are going to feel a bit better about business travel and then subsequently group travel because that's the last piece that comes back. So I guess what I'm saying is that we'd like that to be the case, but right now that's not the trend we're seeing.

Jeff Donnelly – Wells Fargo Securities

Just then one last question – actually, it was just specific to the Donavan House Hotel. Can you give us maybe a little more detail on how that particular hotel maybe has been ramping up from when it first opened and I guess where it stands today? I guess I'm thinking as to how that relates since you guys don't provide more of a same store metric I guess.

How that hotel in particular has either helped or hurt your reported RevPAR in margins in 2009 or even this quarter?

Michael Barnello

Well, first of all it's helped us, both from a margin prospective and from a RevPAR perspective. I mean the ramp up has been strong. Obviously it's helped by location, not only being in D.C. but the location of the market that it's in. The Don House is on a great trajectory. We've had a huge increase in RevPAR index and we expect it to continue.

And part of that is just because of the normal ramp up. A part of that, Jeff, is the fact that we did not have a full service restaurant until much longer than we thought. We initially thought we'd be open, well, really last year but then we had thought by inauguration we'd have the restaurant open. And we did not end up opening it really until June and in all three meal periods towards the end of June.

So what that had caused is a lot of the business that we're going after, the diplomatic business, a lot of the embassy business, they won't consider you until you actually have a full service restaurant. But since that time we're getting a lot of action on people who are looking at the property for next year.

And so the European Union, a lot of the members that are coming in November to see the hotel, and we're hoping that that's going to be a good fit for our business. The reaction so far has been terrific and the people we have working the property have done a great job getting that.

So we're encouraged by that and we think that will continue in '10 and even '11 because the ramp up, as you know, is going to be slower.

Jeff Donnelly – Wells Fargo Securities

I don't think a hotel would have yield – to share with me what the year-over-year of RevPAR has been at that hotel?

Michael Barnello

We don't give out the individual stats, Jeff.

Jeff Donnelly – Wells Fargo Securities

Well, that's fair. Thought I'd ask.


(Operator Instructions). Your next question comes from Bill Crow – Raymond James.

Bill Crow – Raymond James

I just wanted to touch on a couple of items that had been mentioned previously, Mike, any difference in your view towards Marriott as opposed to John's? We're hearing that they're one of the leaders in cost cutting this down turn maybe a little different philosophy on their part as well.

Michael Barnello

Well, as you know we only have one Marriott franchise property which is managed by White Lodging. So we don't have any Marriott-managed properties anymore. So unfortunately we're not as up to date with their operating changes they've made.

Bill Crow – Raymond James

Mike, I was thinking more in terms of future acquisitions, whether you would consider Marriott-managed properties for future acquisitions?

Michael Barnello

As you know, we have had really philosophical issues with Marriott-managed over the years. And while it's a terrific company and they have 3,000 something hotels across the world, we have not had a cultural and philosophical fit with Marriott from a managed perspective. So that's not something that we're anxious to get back in business with.

Bill Crow – Raymond James

And then there's been a lot of conjecture that boutique and the independently branded hotels would be disproportionately weak in this downturn. How have the RevPAR index numbers gone? How have they trended between for I guess your independent hotels relative to the market competitors?

Michael Barnello

Interestingly when people make comparisons of brand and independent that's a macro comment, and we always like to fine tune ours down to that we have a 31-hotel portfolio. So when you look at it from our view, we're very comfortable with independent strategy.

And that comment has not been the case if you look at of our 31 hotels that comment has not been the case. If you look at of our 31 hotels, 14 of 31 have increased their index in 2009 and of those 14, four have been brand and ten have been independent. And on the opposite 17 of 31 have gone down and six of those have been branded and 11 of those have been independent.

So I don't think you can make a judgment on whether your index is going to go up or down relative to whether it's a brand or independent. First of all, it depends on who you're comparing yourselves to. Comparing yourself to all independent or all brand then the analogy to what's happening is irrelevant.

But we go back to the fact that when we buy a hotel, we have to underwrite whether we think it makes sense as a brand or independent, if the choice is available. And then if so, who is the right set to compare ourselves to. And in almost all cases when we have independent properties there at least are some brands in the set.

And then we have a goal for what they should be tracking ultimately. And so I think it's too simplistic to say that one or the other outperforms in an upturn or downturn. I think when we look at our portfolio we're very comfortable with what we have and there's no doubt in my mind that the independent management company strategy has helped us significantly in the margin side. And as you can see on the RevPAR side we're right in the same level as many folks relative to how that has performed.


At this time we have no further questions. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Michael Barnello

We look forward to hearing from everybody at the next quarter call.


This concludes today's conference call. We thank you for your participation.

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