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Strategic Hotels & Resorts (NYSE:BEE)

Q4 2009 Earnings Call

February 25, 2010 10:00 AM EST

Executives

Ryan Bowie – VP and Treasurer

Laurence Geller – President and CEO

James Mead – EVP and CFO

Analysts

David Loeb – Baird

William Marks – JMP Securities

Smedes Rose – KBW

Bill Crow – Raymond James

Jeff Donnelly – Wells Fargo

Ryan Malakar (ph) – Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the Strategic Hotels & Resorts fourth quarter 2009 earnings conference call. My name is Maria and I will be your coordinator for today. At this time, all participants are in listen-only mode. After the presentation, there will be a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference Mr. Ryan Bowie, Vice President and Treasurer. Please proceed.

Ryan Bowie

Thank you and good morning, everyone. Welcome to Strategic Hotels & Resorts fourth quarter and full-year 2009 earnings conference call. Our press release and supplemental financials were distributed yesterday. They are available on the company's website in the Investor Relations section. We are also hosting a live webcast of today's call, which can be accessed in the same section of the site with a replay of today's call available for the next month.

Before we get underway, I would like to say 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 statement notice included within our SEC filings.

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

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

Laurence Geller

Thank you, Ryan. Good morning and welcome to our year-end 2009 earnings conference call. For the fourth quarter, our North American RevPAR declined by 13.9% resulting in an FFO per share loss of $0.05 and EBITDA of $32.5 million. Full-year RevPAR declined 22.9% resulting in an FFO per share of $0.30 and EBITDA of $120 million.

The Lehman Brothers collapse in September of 2008 signaled the true beginning of the serious downturn in lodging demand. So although operating metrics in the fourth quarter of 2008 were down and group cancelations for 2009 was significantly increasing, the momentum of the recession was only then beginning to build and it continued to accelerate at an unprecedented pace at least through the first half of 2009. As a result, we expected year-over-year declines throughout 2009 and additionally through the first quarter of this year. However, given that economic indicators such as 5.7% fourth quarter GDP growth and lodging indicators such as pickup and call for demand, group cancelations returning to normal levels and definite 2010 group bookings on pace at least to meet 2009 results, we are increasingly optimistic about sustained growth in demand for our portfolio. The question is how soon will raising economic activity drive increased demand for high-end lodging.

Our experience in this sector is typically the growth lags by six months to nine months. Statistically the economy began a new cycle of growth in the middle of last year. However, it would appear that consumer confidence, credit availability, capital investment and employment have not yet clearly turned the corner. So today, we cannot count on the same historical benchmarks as predictors of future demand. As a result, we believe it be neither prudent nor appropriate to provide guidance for full-year 2010 at this time.

Our current group pace is up slightly to last year when we adjust for 79,000 group room cancelations that happened between February and April of 2009. Our average rate for contracted room nights is off about 5% from last year, primarily reflecting aggressive rate cutting during 2009 and the change in complexion of our group business with a somewhat heavier emphasis on the association business. However, unlike last year, where meeting plan has reduced their room blocks, they are now beginning to fill these blocks or even add attendees to their meetings as well as incrementing their non-rooms business.

Our corporate transient occupancy accounts for roughly 19% of our total occupied room nights. And the contracted rates for these rooms are approximately flat to last year. Importantly this rate was achieved while limiting certain add-ons such as complimentary breakfast and free Internet thus increasing the true net rate achieved. So while we are relatively satisfied with the absolute results in the rate challenged environment, we are pleased with the leading indicator it appears to provide. Based on prior cyclical experience, our current experiences and the indicators we are currently seeing, we incur with the majority of our industry colleagues in believing that forecasted economic demand will eventually drive occupancy by the second half of this year.

On the macro level, given that high-end properties with the hardest hit segment of the industry and suffered both the longest and steepest decline, high-end hotels and resorts logically have the most significant growth ahead, especially given the benign supply environment. Simply stated, we have the opinion that the rebound in the high-end lodging sector will be greater than in other sectors, while the sustainable operating cuts we have made will provide consistent and strong margin improvement.

Let me give you some examples of properties in our portfolio that are positioned to outperform in 2010. Our two hotels in Mexico, one of which we sold last quarter will drive on our results. Both properties was severely impacted by the unnecessary overreaction to the H1N1 virus scare which resulted in an EBITDA loss to us of $2.2 million. Demanded our Four Seasons Punta Mita is recovering well from the H1N1 virus scare and the recession, but hasn’t yet returned to last year’s levels.

Occupancy is expected to be approximately four points low in the first quarter of 2010. However, we do view Punta Mita is the leading indicator of luxury spending. For example, over the 10-day Christmas and New Year period, average rate was up 18% to $1,428. Per occupied non-room spend was up 20% increasing to $1,250. Interestingly, there were 11 folios paid for over $60,000 for that period compared to only four in the prior year. And bookings for next seasons 10-day stay are already up 6% compared to the same period in 2009 and those rates are up 11.5%.

Our two Ritz-Carlton hotels were particularly and unfairly hit by the political hyperbole and cynical rhetoric which exacerbated the trends away from luxury group meetings. RevPAR in Half Moon Bay and Laguna Niguel were each down by almost 30% last year. We are already seeing a modest improvement in booking trends of these hotels and believe they will get a disproportion share of upside as the recovery accelerates. More importantly, our year-to-date market share penetration results for both of these properties indicate significant gains consistently above 20% over their competitive sets.

At the end of 2008, we spoke about our five 2009 objectives that I have reported on regularly in each subsequent quarterly call. First, to outperform on the top line against national luxury measures, we have succeeded as evidenced by a consistent 400-basis point out performance over the Smith Travel luxury set.

Second, was to redesign our operations so as not only to maximize profit retention against losses in revenues during this downturn, but is importantly to create sustainable margin increases for the coming recovery in growth cycle. Our margin performance met our objectives during the past year with a 45% loss in hotel EBITDA against a 23% loss in RevPAR driven by a 16% decline in average rate. During the year, we cut an additional 943 employees or 16% full-time equivalence and implemented new sustainable expense initiative that we anticipate should reduce expenses ongoing by approximately $28 million on an annual run rate basis and substantially improve margins as the cycle progresses.

Third, was to reduce our corporate overhead. We are now at a run rate of $23 million going into 2010 which is a 24% reduction from 2007. Fourth, was to cut capital spending and amend our line of credit to provide a durable source of liquidity to carry us through the recession. At the end of the year, we had $152 million of liquidity. And finally we stated an objective to sell selected hotels. We closed on the sale of the Four Seasons Mexico City and the Renaissance Le Parc in Paris and raised proceeds of approximately $105 million to supplement our liquidity position. We were very pleased with the levels of interest in these properties and the results of our sale execution in what was a challenging and very credit constrained environment.

Having met all of our specific objectives, I would generally categorize 2009 by our intense focus on improving liquidity and restructuring operations. In 2010, we plan to continue to add to these goals and make ongoing and substantial strides in improving the structure of our balance sheet. Because we have no maturities in our wholly-owned properties until late 2011, and because all of our properties currently cover debt service, we’ve had the time to methodically address our balance sheet activities in both logical and measured steps.

The first was the amendment of our line of credit and then the sale of hotels to improve our liquidity. As a result our focus in 2010 will include first with regard to our European portfolio. We do not currently feel that having an operation in Europe would drive sufficient value for our shareholders in this environment. As the initial and significant step of our plan for Europe, we sold the Renaissance Le Parc in the fourth quarter and are undertaking the steps today to methodically exit from the remainder of Europe in an orderly process designed to maximize proceeds. This will not be an easy task give the current volatility in the financial markets in Europe and some of the complexities inherent in our European portfolio. However, exiting Europe will ultimately benefit the company by improving liquidity and will allow us to further lower our corporate overhead as we come at – as we become and evolving to a focused North American centric organization.

Secondly, we are executing plans to extend property debt maturities where possible. Of the total 1.3 million of consolidated property debt, approximately 64% is with life insurance companies and other lenders with whom we can potentially deal with directly without the complications inherent in the CMBS structure. We recently announced the restructuring and extension of maturity until 2015 of our Intercontinental Prague loan without the need for an infusion of corporate cash or guarantees.

And fourth and finally, we are focusing on our corporate debt and seeking strategies to gain additional term. We are fortunate to have a world structured line of credit with an extension option at the end of the year would extend the maturity to March of 2012, and our 3.5% exchangeable notes do not mature until April of 2012. With supplies limited across our North American portfolio, our continued outperforms in market share, strong with margin improvements with sustainable built-in savings and improving GDP statistics, we feel that a low high-end hotels have taken a disproportionate hit compared to other lodging segments. As the economic improves, our operating metrics will show relative out performance for an extended period and our ongoing strategies to enhance the structure of our balance sheet will result in significant strengthening.

With that I will turn the call over to Jim.

James Mead

Thank you, Laurence, and good morning, everyone. Fourth quarter RevPAR declined to 13.9%, bringing our total decline in RevPAR for the year 22.9%. The story of the fourth quarter was the same as for the full year, we lost high rated group activity and a very profitable food and beverage business that goes along with it, and partially replaced it with discounted transient activity. This pushed our average daily rates and non-rooms revenue down. For the full year, our occupancy loss was limited to 5.9%, however we lost 15.9% in rate and 26% in food and beverage revenues.

Top line results were disproportionately influenced by our resorts which include the Ritz-Carlton in Laguna Beach and Half Moon Bay and the Fairmont Scottsdale, which in the past have been heavily corporate meetings driven. In addition, the H1N1 virus substantially impacted our business at both properties in Mexico. RevPAR these five properties declined by 31% during the year. One point of light during the year was our Four Seasons in Washington DC, which lost only 2% of RevPAR and great total RevPAR by almost 6% as a result of the success to our new Bourbon Steak restaurant with first year sales of $8.4 million.

Just to give you some overall context for the year, if we were to look at 2007 as the peak of the last cycle and 2009 as the trough of the current cycle, for our portfolio, RevPAR has fallen about 26% peak to trough due primarily to a large change in business mix. We started in 2007 with about 50% of our group – of our room nights in groups and 50% in transient categories. In 2009, that mix changed to 40-60 groups to transient. And within the transient mix, the discounted segment rose from 19% of total rooms to 31% of total rooms. This also illustrates the opportunity as we grow into the next cycle and regain the corporate bookings that will inevitably displace the lower rated business that had to become our staple for the past year.

Turning to expenses, our EBITDA margins declined 550 basis points during the quarter and 710 basis points for the year. Our asset management teams and our property management continued their aggressive posture towards costs. As we progressed through the year, the team’s trimmed costs and increased property productivity having eliminated 2 million labor hour last year, payroll and related costs were down 5% on a per occupied room basis despite a 3% increase in average hourly wages, showing significantly improved productivity as total hours worked per occupied room fell by 9%.

In total, our staffing has been reduced by 27% today as compared with peak levels in 2007. But more importantly, this includes a basic restructuring of property level staffing, in particular at the executive and salaried levels. Salaried staffing has been reduced by 20% since the peak in 2007 and we haven’t agreed upon property-by-property program for re-staffing as our occupancy returns in the upcoming growth cycle.

Again to give you context, a total of $96 million in expenses were reduced from operations during 2008 and 2009. Our plan for re-staffing triggered by increases in occupancy identified specific positions that will be rehired as occupancy grows. So we get back to the same occupancy level as we had at the peak in 2007, about a quarter of these total expense reductions or $28 million would be eliminated. In other words, if the current organizational plan were in place in 2007, we would have improved our peak EBITDA margin by about 300 basis points.

Our European portfolio continues to hold up better than the United States as RevPAR declined only 2.7% in the fourth quarter and 11.2% for the full year on a constant dollar basis. EBITDA margins contracted 40 basis points and a 150 basis points respectively. Marriott Grosvenor Square in particularly is performing very well with first quarter occupancy forecasted to be up 15 percentage points and RevPAR up 22%. During the fourth quarter, we recorded impairment and other charges of $49.8 million that included a $27.7 million write-down of development opportunities in Mexico and $26.5 million in our 45% investment in the Hotel del Coronado.

For the full year, the company recorded a total of $130.8 million in impairments. These non-cash charges have been excluded from reported comparable EBITDA FFO and FFO per share metrics. In the fourth quarter we sold two assets, the Four Seasons Mexico City and the Renaissance Le Parc hotel in Paris, generating $105 million of proceeds. At the end of the year, we had $133 million drawn on our line of credit, net available unrestricted corporate cash and available liquidity of approximately $154 million.

Although we will not provide guidance today for the full year of 2010, I will provide some indications of the current first quarter. Again referring to our peak to trough analysis, we expect the first quarter of 2010 to be the low point of the current cycle. We would expect improvements as we move through the remainder of the year. There are a couple of reasons for this including that increasing activity around short-term group bookings which began – which we began to see in the fourth quarter will likely translate into business beyond the first quarter of 2010, which also our seasonally weakest in our major markets such as California and Chicago.

Just to give you a flavor of what we are seeing so far in the quarter. We had 55 compression nights against 37 last year at the same time. Compression nights are defined as nights with greater than 90% occupancy portfolio wide and indicate our ability to drive rate at the properties. So far this year, we have doubled our group room production for meetings taking place in 2010 from the same timeframe last year. There have been no material cancellations in the first two months of 2010, which is significant as compared to last year when we collected $6.7 million in cancellation fees or over a four times the typical average. And we continue to hear anecdotes from our properties that they are hosting more site visits for potential group meetings. Currently, our forecast is a 5.5% to 7% decline in the first quarter 2010 RevPAR.

With that, we would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Loeb with Baird. Please proceed.

David Loeb – Baird

Hi Jim, thanks for the color on the first quarter. I want to just ask about margins in the – really in the first quarter, but relative to the Laurence’s remark about cancellation fees particularly in February through April and you mentioned $6.7 million of fees, what’s going to be margin impact when those are not in the numbers when you are comparing real revenue against cancellation fees?

James Mead

We are not giving you a forecast for EBITDA or comparably, but – or FFO. But I will say that cancellation fees by themselves we expect to reduce our margins, excuse me, the loss of cancellation fees we expect to reduce our margins by somewhere around 200 basis points.

David Loeb – Baird

And that’s in the quarter or the year.

James Mead

That would be for the quarter. So that $6.7 million was very significant in terms of income for last year and the good news is not that we don’t get cancellation fees in the first quarter, that would be a sign for us as we expect that the quality of the pace reports that we have is higher than we have last year at this time.

Laurence Geller

David if I could just add to this, as far as I see – as we see it, the – this is we have experienced – we are experiencing the same sort of trends on group bookings that we have seen in previous cycles where we are getting people out signing newer the time of it, so they can avoid signing – so they don’t take the risk of cancellation fees, so this necessarily shortens the booking cycle. And that’s what we have seen in previous two downturns and so we are least following that pattern.

David Loeb – Baird

Yes, that’s very helpful. Thank you Laurence. Laurence also for you, on Europe, what – you said it’s going to be a challenging process and take time, what’s your best estimate of how long it will take to continue to sell those assets?

Laurence Geller

We haven’t given an estimate of timing. We are marching through the process in a very methodical way. I cannot help but comment that the current unease in Europe over Greece and potential Spain et cetera is permeating everybody’s sense of confidence, particularly in the credit markets. So I can’t say what that will actually do to the time process, but we are marching through it very methodically in a very, very process oriented driven fashion. And I think the exceptional results we achieve both in Mexico and at the Park in Paris of the sale are indicative of the way we go about things.

David Loeb – Baird

So is it safe to assume that’s a multiyear process?

Laurence Geller

It’s not safe to assume anything David.

David Loeb – Baird

Okay.

Laurence Geller

We look it, if we can execute quickly, we will. It’s – we have no motivation for staying in Europe longer than is practical not to maximize proceeds. We – it is our intent and the markets – and the market trend lines, if you look at it in the trend line say have buried out to become a very focused North American centric organization as quickly as possible.

David Loeb – Baird

Great, thank you for your catering all that.

Operator

Your next question comes from the line of William Marks with JMP Securities. Please proceed.

William Marks – JMP Securities

Thank you. Good morning, Laurence. Good morning, Jim. I wanted to first ask, Jim, you had a comment about compression, I wasn’t sure if I got it right, but it’s about 55 compression nights. Can you just repeat that exactly what that was?

James Mead

Sure. That’s nights at a hotel where the occupancy is 90% or greater.

William Marks – JMP Securities

I thought you said 55 for the quarter.

James Mead

55, we had 55 year-to-date in comparison with something like 37 last year at this time. It’s just a snapshot indicator that we have had. These compression nights, the number of compression nights in the year are very substantial measures of our ability to actually move rate.

William Marks – JMP Securities

Well that’s every 55 is every night of the year.

James Mead

55 in different hotels.

William Marks – JMP Securities

Sorry, thank you.

James Mead

So we have got however of many hotels and we had 55 nights in total.

William Marks – JMP Securities

Got it.

Laurence Geller

Over the initial six-week period.

James Mead

Right.

William Marks – JMP Securities

Right, okay. I was confused. And you are comparing that to 37 last year, is that right?

James Mead

That’s correct. Again it’s a data point, it’s not necessarily a trend, but it’s a data point.

William Marks – JMP Securities

Right, okay. And the second question unrelated. Can you just update us on the St. Francis? How it’s doing? You have a big loan at your largest hotel. Any update would be helpful.

James Mead

First of all to clarify, we got a call from an analyst yesterday asking about the loan on the St. Francis. There is a loan that’s on the other Westin hotel that went into a new bunch of special servicing not our hotel, so just to be clear. Our hotel is performing, it’s covering interest, it’s at a – it’s a $220 million mortgage with the life company. We are very comfortable with that property.

Laurence Geller

Will, on a macro basis, the – this year will have less city wide in San Francisco than last year. And it is – we so – we expect less compression there. It’s also still suffering from – we still have risk. I don’t think it’s suffering, but we are at risk from a union activity there by an unresolved contract negotiation, city wide contract negotiation.

William Marks – JMP Securities

Right, okay. All right, again I just had the – I had the same call from someone about the St. Francis in special servicing, so that is why I asked the question.

James Mead

There is someone who has called all the analyst.

William Marks – JMP Securities

I guess so. I feel naïve for interpreting it that way. But anyway thank you. That’s all from me.

James Mead

Thanks Will.

Operator

Your next question comes from the line of Smedes Rose with KBW. Please proceed.

Smedes Rose – KBW

Hi good morning. I got that call too on the St. Francis. The Unions phone bill will be higher this month. Just out of curiosity is that that contract is it with – I mean is it with Starwood I guess if it’s a Westin branded hotel or is it with you guys?

Laurence Geller

I am sorry. The contract –

James Mead

The Union contract.

Smedes Rose – KBW

The Union contract at the St. Francis.

James Mead

Would be with their manager, which is Starwood – which is Westin for Starwood.

Smedes Rose – KBW

Okay. Yes, and I was hoping if you just give some color on two items, one would be just your thoughts about CapEx spending this year. And you talked a little bit about the San Francisco market, but could you maybe just touch on some of the other big markets herein like Chicago and any thoughts on Washington, obviously a great year last year, but maybe I guess top comps and also I would imagine we are getting hit by the weather pretty badly there in the first quarter, but any thoughts on those issues?

James Mead

Let’s start – well, I will to do the CapEx and then turn the market question over to Laurence. As far as CapEx goes, we have an annual reserve for all of our properties around $45 million. We also budget to spend the reserve, but the target is to spend less than that this year. Although, we are going to be very careful about not causing particularly in a rising market a deferred maintenance issue for our properties. So I would expect from your perspective that we spend the entire reserve for the year.

Smedes Rose – KBW

Okay.

James Mead

As far as out-of-pocket owner money, it’s going to be very small.

Smedes Rose – KBW

Okay.

Laurence Geller

Okay. Let me deal with the markets. Let’s deal with Washington first of all. We expect Washington to have a good year. Yes, you have the unusual event of the inaugural period, but if you will remember also, where we were somewhat disappointed by the time they took the administration to come to grips with how they would go to organize, so that the foreign delegations was which we had hoped to have in the first quarter were very slow to arrive, but we didn’t see those really until the middle of the second quarter, so it’s not all one sided, and we are seeing very strong growth there.

Great customer acceptance of the product we put in there resulting in the stronger performance. I have a – as far as the snow is concerned, I suspect we can’t be responsible for the weather, but I will tell you one little anecdote which pleased us very much, so when the snow storms hit Washington, the management team immediately sent an email blast out to all their DC and area customers resulting in the spa and restaurant being immediately filled for the next few nights, because we basically said we are opened for business, come join us. And so that hotel is fairly good.

Chicago is a more challenged situation for us. It’s the cycle year anyway for conventions, the weather has been a challenge, but the reality is it’s a bigger issue for the city of sighting more concerns and that is McCormick Place. How the city and the state will come to grips with the cost structure primarily on labor relative to Orlando and Las Vegas and the risk for the longer-term for Chicago remains – for the city as a whole remains in whether or not they lose city wides.

For that reason, our two hotels led by the asset management team have taken a very aggressive stance not to rely on that and even perhaps to risk not being able to accommodate it and looking for our own meetings in there, generating our own meetings and our own services, so we have adjusted the marketing program accordingly to compensate. I personally think Chicago will be a tough year this year, but the results of these marketing activities all do very well for the future.

Smedes Rose – KBW

Okay. Thank you.

Operator

Your next question comes from the line of Bill Crow with Raymond James. Please proceed.

Bill Crow – Raymond James

Good morning, guys. Laurence you talked about asset sales in Europe, what’s your view on asset sales in North America.

Laurence Geller

Bill, it’s hard to say. By talking to the four major brokers in North America, which is probably the high – the best, they are all seeing increased activity during this quarter, contracts being worked, office being accepted, and they are all talking of a very similar pricing increment of 10% to 15% from the beginning of the fourth quarter of last year. So whereas I haven’t seen very many results, we have seen a few in our sector as you know some of the very big properties two or three of them. But if that holds true and intellectually it should do, we will see some sales, but it really is driven by a lot of money chasing very few assets.

Bill Crow – Raymond James

Well, exactly. And what is your personal – your company’s appetite to sell in North America given that there are a lot of assets or a lot of people with money looking for assets?

Laurence Geller

A good question, Bill. It is a – it’s our focus to say to exit Europe here in a profitable manner and to be a North American centric organization, we are however entrepreneurial enough that if we get a disproportionately high offer for one of our assets, many of which are truly iconic, we will analyze that, and not – and it’s for us is just money, it’s a point of indifference on the re-buy analysis, would we buy at the price we are being offered or would we sell it, and that’s as simple as that.

Bill Crow – Raymond James

Right. But you have to kind of market or let people know, I guess you are getting bids anyhow even though you are not –

Laurence Geller

I would tell you you don’t have to do very much marketing today to get the phone calls that you get and I get.

Bill Crow – Raymond James

Laurence, just – and we know we can’t forecast the next three months, so I will take your answer with a large grain of salt. But when do you think your portfolio can get back to the ’97 or excuse me 2007 peak?

Laurence Geller

You know the argument would say somewhere between 2012 and 2014 depending on the market. 2013 is probably the safest bet. 2012 looks fairly – it’s how long is a piece of string. And as I have told you before Bill, if you tell us what GDP will be each quarter, we will tell you what lodging demand will be.

Bill Crow – Raymond James

Well, and are you using that – and actually you defined it better, but are you talking about RevPAR or let’s talk EBITDA from the properties. You think you can get there 2013, 2014.

Laurence Geller

EBITDA given the sustainable margin improvements, we are optimistic that that we will see a return to EBITDA that was before we will see the RevPAR getting into the same levels. So it’s – logically it flows from that comment.

Bill Crow – Raymond James

Yes. Jim, if I can just follow-up in your discussion with the cancellation fees, just help us a little bit better understand the impact to EBITDA and the FFO in the first quarter, given what’s booked – what’s on the book so far, it’s a net losses – I mean a net negative, is it the full $6 million or if you don’t – getting more can fees you can’t really offset that with more bookings, is that fair because RevPAR is –

James Mead

I would expect, I guess what I will expect – what I will expect is is probably we will be about two-thirds of that lower than last year. So if we were at $6.7 million, maybe we are $3 million or $4 million of cancellation attrition fees in the first quarter of this year. I mean, again, we are – you are asking a really detailed question and we have no way to really know what that number will come out to be.

And as you know, we don’t – you don’t book cancellation fees in the period of the cancellation, you book them only as you collect against the cancellation. So the $6.7 million we had a year-ago was probably for cancellations that began in the prior quarter. And so – and then we didn’t have much in the way cancellations in the fourth quarter of this year. So I guess what I would say is – look, this is – again, I throw it out as another data point Bill. I don’t know want to (inaudible). The reason we are not providing guidance today is because a lot of these things are tremendously unpredictable.

Bill Crow – Raymond James

No, I understand that. I appreciate that. Now the can fees they will go into room revenue line.

James Mead

They go into other income, other income in our financials.

Bill Crow – Raymond James

Very good.

Laurence Geller

And Bill, and Bill when you look – when – as you look at – as we try and do the various modeling exercises here, obviously the lack of cancellation profitability if you will is somewhat offset by the cost improvements we are having is with some of the incremental revenues. So it’s not – my only caution is it’s not a purely linear drop in profitability.

Bill Crow – Raymond James

Yes, no, I appreciate that.

James Mead

As long as you got this call going, still everybody can hear, I guess what I would say just to give you a little bit better guidance, because I know this is going to be troubling for everyone is that if we lose 200 basis points from the loss of cancellation fees, I would expect that the first quarter which would be lower than the last year’s first quarter will probably lose another 200 basis points to 300 basis points in margin as well.

Bill Crow – Raymond James

That’s helpful. Terrific. Thanks guys.

Operator

Your next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed.

Jeff Donnelly – Wells Fargo

Good morning, guys. Laurence, I guess maybe sticking sort of Bill’s line of questioning earlier. Could you kind of take us beyond 2010 for a moment? A lot of (inaudible) right now are talking about certainly RevPAR getting left bad and turning positive and that should inevitably hope the – it hopefully will lead to better EBITDA. But as you think about 2011 and 2012, I am just curious what concern do you have that the brands are going to reinstitute I guess what I will call a catch-up on brand standard is that we are sort of put to the side in 2008, 2009, and 2010, and that someone could hobble the owners just as they are getting their legs again and in fact the brands are putting demands on you to spend your first incremental dollar of profitability when you realize that. Have you had any kind of conservations with brands about that or is it just too early?

Laurence Geller

No, we started having these conservations with the brands very early in 2009 about exactly the same thing, which is why when Jim referenced – and labor is obviously a one of our biggest issues rather than size of the soap in the bedroom. So – bathroom. But what Jim referenced these trigger points, we have gone hotel-by-hotel, brand-by-brand, and made agreements with them on what happens with the staffing and how staffing comes back. We have systemically changed the organizations especially at the top end of these organizations. And so there are jobs to be replaced on that.

We – so we have agreements with it and the most interesting thing that’s happened and I think this is I can’t speak for the brands, I can speak for our hotels within the brands that although we are down significantly in staffing, the price value relationship and the customer commentary or the guest comments against the price value are up not down, and that would argue that these changes are good for everybody and will sustain.

So I am going to say that I don’t think this is being an incredibly chasing experience for everybody in the lodging industry from hotel owners, to operators and analysts, et cetera, to see what’s going on here. And I think we have for the first time in two decades seen a systemic change that will lead to systemic long-term operation and productivity improvement and that’s higher margins.

So this has been – if you look for the silver lining, this is the silver lining that the change you can’t predict what a change is going to come up we are based on consumer research. But based on our agreements, on our hotels, we are very satisfied, these costs are sustainable, and are really and focusing mostly on labor, the rest we will deal based on as it comes up, and we will do consumer research, and argue (inaudible) on it. But for the most part, labor is the key.

Jeff Donnelly – Wells Fargo

Yes, actually I was thinking is beyond the labor. I mean do you expect that many other hotel brands and maybe this doesn’t quite apply to you guys as much as maybe some of your competitors, but that the Marriotts and Starwoods and the Four Seasons of the world are going to rollup the next plasma TV and great room and what have you and more of a capital investment to distinguish themselves. Do you anticipate that or are you really think the brands are understanding of where the owner is?

Laurence Geller

Look, but first of all, I hope brands continue to look for unique selling propositions and obviously we will look at it. I don’t see – and – but these things take years to rollout. I don’t see anything in the woodworks. If one looks at the Holiday Inn in recent experience, how long it took for them to plan for this upgrade in product improvement, so I don’t see that at all.

I do – let me just make one comment that I think is going to change is we are beginning to see a trend that we have been focusing on towards differentiated of marketing experiences at the hotel based on electronic distribution, et cetera. So I think that there will be branding changes organizationally which will change marketing methods in these hotels. What does that mean? I think it’s better for the hotels, it’s cheaper for the hotels or you get more bank for the same dollar of expenditure.

Jeff Donnelly – Wells Fargo

That’s helpful. And the 50, I think you mentioned in your remarks that how a mixed shift could benefit great growth this year. Are you able to help us any estimate that potential a little bit by – I don’t know can you tell us maybe what you think your company-wide guess net flows in ’09, the percentage of corporate leisure transients and group and maybe where you I guess a guess those percentages could shift to in 2010.

Laurence Geller

I don’t know where it will shift to. I will say that as a macro – and Jeff I will come back to you if we – when we saw those rather than shuffled through papers now. But what I will say is that the – I do believe that we will see a dimension in the second half of the year from association business to back into corporate group business which is the trend we are seeing anecdotally at the hotels now from site visits and conversations with our meeting brands and intermediaries.

Jeff Donnelly – Wells Fargo

And actually there is two last questions, one is really more of a housekeeping item. I guess on Washington DC, because it’s somewhat of a difficult market to forecast in Q1 because of the Niguel comp and the snowfall. Are you guys able to give us some sense of what I mean loss room nights were in Q1 thus far maybe because of snowfall or the rate impact of the Niguel comp?

Laurence Geller

I can only give you – I guess is that in volume of dollars it probably – we are banding it around in a unstudied manner here, the number of around $0.5 million of revenue impact caused by the weather. But it’s really – we haven’t got to that level of displacement yet and that is as I mentioned mitigated somewhat by the restaurant sales where our profitability is running around the 20% net on revenue there.

Jeff Donnelly – Wells Fargo

And then just the last question was actually (inaudible) St. Regis Monarch I think was on the market and there is some talk about getting significant offers, I just don’t recall, you know where that stands, because I guess I am curious, does that serve as a good indication of where asset pricing is coming out on these types of assets. Do you have any color on how that’s underwriting – underwritten with the pricing implications likely?

Laurence Geller

We are told we hear the same as you. We haven’t – but we are told that the pricing is coming in at around on gross value of just under $700,000 per room there.

Jeff Donnelly – Wells Fargo

Okay, thank you.

Laurence Geller

That sounded total just, so I really just don’t know.

Jeff Donnelly – Wells Fargo

Okay, thank you.

Operator

Your next question comes from the line of Ryan Malakar (ph) with Morgan Stanley. Please proceed.

Ryan Malakar – Morgan Stanley

Good morning, guys. I just had a quick question regarding somewhat you talked about with your compression demand. You said year-to-date you got about 55 room nights across your portfolio that you know fall into that greater than 90% occupancy. I think as we are looking at that’s coming out every week, we are seeing that – certainly seeing an increase in occupancy at the higher-end segments. And I am wondering when you look at those 55 room nights, where is the rate relative to say the 37, I know it might may not necessarily be comparing apples-to-apples, but your best guess in terms of where rate is for your high occupancy nights this year versus last year, are we down 10%, are we down 15%, trying to introduce whether we are looking at trade up because compression of rates is coming so much that people are willing to trade up from more than limited service properties to some of your type of properties or whether we are just seeing more demand coming in for your properties? Thanks.

Laurence Geller

Given the rate on those rooms is up about 5% on last year, but you were breaking up a little bit and I think you asked – but did you ask about what it is against 2007?

Ryan Malakar – Morgan Stanley

No, I was just looking versus last year.

Laurence Geller

No, it’s up 5% and we are beginning to see the – a beginning to see trade-ups now from room categories which will affect the rate as well, not – so it’s not just bare pricing, it’s freed up pricing. So you are seeing the mix within when it to a concierge room or to an upgraded room, we still haven’t seen the rebound fully in the suites business, but I hope we will see that during the next couple of quarters, start seeing some signs there. But you are just beginning to see a trade up everywhere. The good news is that these stigma of luxury has stopped and also as you all know, the financial service industry is starting to travel again which is last minute booking and that’s always a good pricing for us.

James Mead

We did a little analytics around just as Super Bowl did to just confirm our view that or to confirm our view or to check our view at the brand – the brands are not impairing the price of our product. And what did we do, we had the Super Bowl in the first quarter in Miami and we had with – in 2007 we had it. So we had it at the peak of the markets and we found that – in fact the pricing they were charging for our rooms, our hotel in Miami was higher this year than it was at the peak in 2007. So that gives us a little bit of flavor around the sort of mentality of the brands that we are dealing with and that they have – they are not inhibited, in turn psychologically inhibited in terms of charging for the product when they have a scarcity of it. So –

Laurence Geller

And given – and I always look at it as an indicator not just the room rate, but the non-room spend which is contractually obligated, that was significantly up on 2007. So then we are seeing less timidity about spending than we saw last year. It’s not fully returned, but my – there is a willingness to go up and to spend up.

James Mead

Again another data point for us.

Ryan Malakar – Morgan Stanley

Great, that’s great news and really helpful. Thanks a lot.

Operator

(Operator Instructions). We have a follow-up from the line of David Loeb with Baird. Please proceed.

David Loeb – Baird

Hi Jim, just want to clarify; I think I heard you right about the margins. I think you said in addition 200 basis points to 300 basis points of margin deterioration. So I just want to make sure you are saying overall that that we could be seeing 400 basis points to 500 basis points as opposed to overall 200 basis points to 300 basis points.

James Mead

That’s correct. Let me clear again, we are talking about the first quarter with RevPAR down 5.5 to 7. We expect to get somewhere between 400 basis points and 500 basis points of margin deterioration of which 200 basis points was from the loss of cancellations – cancellation fees.

David Loeb – Baird

That’s what I thought. Thank you for clarifying.

Operator

At this time, there are no further questions. I will now turn the call over to Mr. Laurence Geller for closing remarks.

Laurence Geller

Thank you very much. This downturn has been and still remains challenging and clearly volatility remains high. However, we now see consistent indicators of recovery and we have well founded and grounded reasons for optimism in general and through our company in particular.

We have got irreplaceable locations, assets in great physical and competitive condition, we have implemented systemic and sustainable changes to the operation that will have significant upside both to profitability and values and we have unusually benign supply dynamics in our markets. We are improving our balance sheets and we are increasingly confident of our ability to meet the challenges ahead in the goals we have set and we fully intent to continue to execute our plans in a thoughtful and discipline manner.

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

Operator

Thank you for your participation in today’s conference. Ladies and gentlemen, you may now all disconnect. Have a great day.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Strategic Hotels & Resorts Q4 2009 Earnings Conference Call

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