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LaSalle Hotel Properties (NYSE:LHO)

Q1 2010 Earnings Call

April 22, 2010 9:00 AM EST

Executives

Michael Barnello – Chairman and CEO

Hans Weger – CFO

Analysts

Bill Crow – Raymond James & Associates

Dan Donlan – Janney Montgomery Scott

David Loeb – Robert W. Baird

Ryan Meliker – Morgan Stanley

Michael Salinsky – RBC Capital Markets

Patrick Scholes – FBR Capital Markets

Jeff Donnelly – Wells Fargo

Chris Woronka – Deutsche Bank

Josh Attie – Citi

Operator

Good day and welcome to the LaSalle Hotel Properties first quarter 2010 earnings call. This call is being recorded. At this time, I would like to turn the call over to Mr. Michael Barnello, Chairman and Chief Executive Officer, please go ahead, sir.

Michael Barnello

Thank you, operator. Good morning, everyone, and welcome to the first quarter earnings call and webcast for LaSalle Hotel Properties. Here with me today is Hans Weger, our Chief Financial Officer.

In addition to providing the financial results of our first quarter, Hans and I will discuss the company's activities in the quarter, the performance of our assets and the trends affecting that. We will also discuss our outlook for the remainder of 2010 for the industry and for our company. We will then open up the call to questions and answers. Hans?

Hans Weger

Thanks Mike, good morning. Before we begin, I would first like to make the following remarks. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements 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 2009, 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 website, www.lasallehotels.com. 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.

First quarter funds from operations or FFO was $1.5 million as compared to $8.6 million in the prior year. FFO per diluted share was $0.02 compared to $0.21 in the first quarter of 2009. EBITDA for the quarter decreased to $14.8 million from $21.3 million in the prior year period. FFO and EBITDA include $1.5 million of transaction cost related to the Sofitel acquisition.

RevPAR for the total portfolio decreased 9.8% in the first quarter. The RevPAR decrease was a result of an 11.1% decline in ADR to $154.96 and a 1.4% increase in occupancy to 61.9%. Excluding the impact of the inauguration in 2009, RevPAR for the portfolio decreased 6.4% in the first quarter of 2010. Our hotel portfolio generated $19.2 million of EBITDA in the first quarter of 2010 versus EBITDA of $26.1 million for the same period of 2009, a decline of 26.6%.

The portfolio-wide hotel EBITDA margin in the first quarter was 16.3% and was limited to a decline of 395 basis points compared to the prior year despite a 9.8% drop in RevPAR.

Our hotel management team were able to reduce operating expenses 4%, despite the 1.4% increase in occupancy, demonstrating their continuing to find ways to reduce cost. This highlights that the reductions we have seen should continue if the fundamentals improve, which will provide for stronger earnings growth.

As of the end of the first quarter, the company had total outstanding debt of $635.6 million at an average interest rate for the quarter of 5.1%. The company has an aggregate $462 million available on our combined credit facilities.

As of March 31st, 2009 total debt to trailing 12-month corporate EBITDA as defined in our senior unsecured credit facility equaled 3.8 times and trailing 12-month corporate EBITDA to interest coverage ratio was 4.4 times.

On February 1st, 2010 the company retired the $12.8 million mortgage on the Montrose hotel using proceeds from our line of credit. On February 2nd, the company and LaSalle Investment Management mutually agreed to terminate a joint venture, originally signed in 2008. The joint venture had not acquired any hotels and had no assets or liabilities.

On March 1st, we acquired the 237 rooms Sofitel Washington DC, Lafayette Square. Opened in 2002, the Sofitel is in excellent physical condition. The purchase price of $95 million equates to $400,000 per room and represents the multiple of 14.8 times 2009 EBITDA.

In March, the company sold a total of 6.2 million common shares including the exercise of the underwriting over allotment option, resulting in net proceeds of a $109.1 million. This equity offering was used to pay down debt which provides a company capacity for future acquisitions. On March 15th, we announced a quarterly dividend of $0.01 per common share for first quarter of 2010. The first quarter dividend was paid on April 15th, 2010 to common shareholders of records on March 31st, 2010.

On April 21st, the company registered an at-the-market equity program. Currently, there is no immediate plan to utilize the program. We do this as an additional source of liquidity and as a possible out turn as to future underwritten equity offerings. If the program is used, the proceeds would be used for acquisitions, retirement of debt, redemption of preferred shares or other general corporate purposes.

I would now like to turn the call over to Mike to discuss the recently completed quarter, as well as our outlook for 2010. Mike?

Michael Barnello

Thanks Hans. In the first quarter, the industry experience continued demand improvement in each month. Since demand turned positive in December of 2009 for the first time since July of 2008, it was increased sequentially in January, February, and March as well. After posting a demand increase of 8.8%, March is the first month of positive industry RevPAR since July of 2008, an important inflection point.

When we look at the major segments of demand, there are signs of improvement in both the group and transit arenas. Groups, corporations in particular have been gradually increased in number and size of their meetings, the number of employees attending conventions and meetings and the length of space.

Group occupancy across the industry in the US appears to be stabilizing compared to last year. As a result of a strong March, group occupancy was up 0.9% for the quarter as compared to all of 2009 when group occupancy dropped 18.4%. However, group rates which had remained comparatively strong in 2009, since much of the business was booked before 2009, have been impacted as a result of the weak rates booked during 2009 for 2010. As a result, group rates for the industry were up 7.6% through March, whereas group rates were only up 6.1% for all of 2009.

On the transient side, industry occupancy continued to be positive in the first quarter, a trend that has continued since the second half of 2009. While the transient ADR across the industry remains negative compared to 2009, comparison has improved recently.

For the LaSalle properties, comparisons to the overall industry in the quarter are difficult as the results of our significant investment concentration in Washington. As a reminder, in January of 2009, our DC hotel RevPAR increased approximately 57% compared to 2008 only to decrease about 40% in January of 2010.

Overall, we are looking at mix of group and transient business, group rooms were down 11% in the first quarter compared to last year with ADR down 12.3%, while transient rooms in the quarter were up 10.4% with ADR down 9.6%. For the quarter, our group and transient mix shifted to 32% group and 68% transient versus 37% group and 63% transient in the first quarter of 2009.

When comparing our market results quarter-to-quarter, our properties in Boston, Seattle, New York, and West Hollywood performed above the industry average. However, those results were more than offset by not only the DC hotel performance, but also our results in Chicago and San Diego, as well as our resorts, which continue to suffer as groups and individuals remain cautious with their discretionary spend.

In the first quarter, RevPAR at our urban hotels declined 7.7%, with occupancy up 7.1% and ADR up 13.8%. RevPAR at our convention hotels fell 7.8%, with occupancy down 1.1% and ADR dropping 6.8%. Our resorts were our weakest property type. RevPAR was down 19.1% with occupancy falling 7.7% and ADR down 12.3%.

In both urban and convention markets, these results demonstrate our ability to replace some of the room rates loss from lower group business with both short-term group and with leisure customers by offering value packages and discounts through our proprietary channels as well as through third-party Internet channels.

Our urban hotels were significantly off as a result of our DC hotels, which had a RevPAR decline of 14.9% in the first quarter, compared to the first quarter of 2009, which had the benefit of inauguration. Chicago and San Diego were our weakest markets outside of DC.

Chicago has suffered from a very poor convention business and widespread discounting. RevPAR fell 14.8% in Chicago, the result of ADR falling 11.2% and occupancy down 4%. RevPAR in our San Diego properties declined 13.6%, with occupancy down 1.9% and ADR down 11.9%.

Our properties in Boston beat the industry average in the first quarter as RevPAR fell slightly 0.4%, due to a 10% increase in occupancy and a 9.5% reduction in ADR. RevPAR at our Seattle properties fell 0.6% in the quarter. Occupancy increased 14.5%, while average rate was down 13.1%. West Hollywood had the strongest performance with growth of 5.1% during the quarter with occupancy of 12.1% and rate down 6.2%.

On a monthly basis for our portfolio, RevPAR declined 16.9% in January, 10.9% in February and 3.9% in March. And while still negative, the results are an improving trend.

Our vast performing properties for the quarter as measured by the change in RevPAR were led by Le Montrose, Le Parc, Amarano, the Onyx Hotel, Harborside Hyatt, Gild Hall, and the Hotel Deca. Our weakest properties in quarter included the Westin Michigan Avenue, Lansdowne Resort, Chaminade, and the Hotel Solamar. The San Diego Paradise Point resort also had a weak quarter not only as a result of the group business, but was slightly impacted as a result of the completion of the rooms renovations.

Portfolio wide revenues for the quarter declined 8.7% with RevPAR down 9.8%. Food and beverage revenues declined 6.9% in the first quarter.

As we look at the expense of our operations, we and our operators continued to be very effective in the first quarter in controlling costs, despite the dramatic revenue declined we experienced. We continue to be very proud of the achievements our asset management and hotel operations team had in the cost containment arena.

On the capital initiatives perspective, we made $2.2 million of capital investments in the portfolio in the first quarter. We completed our previously discussed room renovation of all 462 rooms at San Diego Paradise Point. Total investment was approximately $7.5 million with approximately $1 million in 2010.

Now let me turn to our outlook for the remainder of 2010, from a macroeconomic perspective, our economic indicators continue with the positive trends we have been seeing earlier in the year, while unemployment of 9.7% is still historically high, the recent improvement in encouraging.

Consumer confidence bounced back in March after making the big retreat in February to 10-month lows. Airline enplanements have been on the rise in March after losing some ground in February, at least partially due to poor weather conditions. And corporate profits continue to improve with the growing number of companies, reporting an increase in sales and not simply better cost containment.

These recent positive inflections in our macroeconomic indicators bode well for the interim term. In the short-term, industry still suffers from the crisis of confidence, one caused by a severe drop in the overall occupancy to depths not seen in decades. This pricing is a function of attitude as well as capacity. The industry needs to rebuild occupancy in order to subsequently rebuild rates, a process that’s happening gradually, but will take some time.

As mentioned previously, industry demand turned positively in December last year, a trend that is continued throughout the first quarter. In fact, the increase in demand improve in each subsequent month during the quarter. We believe the industry will continue to regain some of what was lost in 2009.

Supply growth continues to moderate and while up 2.9% for the first three months of 2010, it is expected to be approximately 1.5% for the industry for the year. We also believe based on the continued drop in the future supply pipeline, the supply growth will be relative immaterial for next three to five years beginning in 2011, likely setting a stage for a strong and long recovery as demand returns with economic growth.

For LaSalle properties, when we look at the markets and segments, we expect to continue to benefit for the rest of 2010 from having such a significant percentage of our EBITDA in the DC market, which we believe will continue to perform better in the industry overall. This is due to the higher levels of travel into the market related to government, the smaller dependents on corporate demand, substantially increased global visibility and metropolitan region that has one of the lowest unemployment levels in the nation.

In addition, we expect our properties in Boston to continue to be relatively better performance as a result of a better relative demand, limited supply, and a more favorable unemployment landscape. However the strength of these markets is offset by the weakness at our resort properties and our hotels in Chicago and San Diego.

Resorts continue to struggle with the decrease in the mid-week business, typically the highest rated business, as a result of corporate cutbacks. And as in prior cycles, we believe this segment will be one of the last to recover.

Chicago and San Diego has suffered from tough convention center calendars and in the case of Chicago, continue to increase supplies. The positive short-term booking trends that materialized during 2009 have continued and some others have improved. We continue to see increase in the following: in the month, for the month transient, in the month for the year transient, group bookings in the quarter for the quarter, transient bookings in the quarter for the quarter.

As far as new developments for the first time since 2008, our 2010 group bookings during the first quarter were at a higher rate in the same quarter last year. While this is clearly too early to call the trend, it is positive even nonetheless. In addition, on the transient side, we have seen improvement in mix of business with an increase in the more lucrative corporate negotiate segment.

Specifically as of April 1st, group pace for 2010 is down 5.2% room rates on the books. This represents a major improvement from our pace in February, when we were behind 14.5%. Group bookings have indeed become more short term and that combined with the fact that much was on the books in 2009 did not actually materialize provides optimism for stronger group occupancy.

What remains concerning is our group pace ADR which is down 6.9%. This compares to a rate pace down 7.2% in February this year. While the group rate pace remains negative, we are extremely encouraged to see for the first time since the beginning of 2009, our group rate pace has improved.

Coupled with big strides and group bookings, this is a positive development. Our expectation remains that the group pace narrows in terms of room rates throughout the year and we are hopeful that we can build upon the recent trend and the narrow the group rate gap as well.

As mentioned earlier, transient demand trends have continued to improve. As of April 1st, transient rooms in the books for 2010 had improved to be a positive 9.9% ahead of the same time last year. This compares to being ahead 5.5% on February 1st. While transient ADR as of April 1st is up 7% from last year, it is an improvement from down 14.6% on February 1st. We are hopeful these improving transient trends will continue and improve throughout the remainder of 2010.

On the expense side, we continue to pursue and implement additional best practices that create greater efficiencies and lower costs. Our entire team remains focused on our hotel operations. We strive to give the guests what's important to them by tailoring the services to the guests versus giving everyone everything, while at the same time, we continue 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 extensiveness of our best practices program, should continue to allow us to deliver industry leading EBITDA margins in 2010.

As we look at the remainder of 2010, our expectation remains that of rebounding occupancy from gradually improving rate, a combination which puts pressure on margins. As such, we are maintaining our previously issued 2010 outlook for FFO of $48.5 million to $62.5 million and EBITDA of $113.5 million to $128.5 million. Although trends are positive, due to the uncertainty of the pace of recovery in the economy and subsequently the lodging sector, we are not providing a quarterly breakdown of our outlook.

We feel confident that we are taking this test necessary to maximize revenues, minimize margin erosion, strength in the balance sheet, and protect long-term shareholder value. We believe we have positioned the company to grow and take advantage of the opportunities as they arise. Our hotels are of high quality and they are institutionally desirable investment markets.

The majority of our hotels are unencumbered by debt and we have $450 million of low-cost funds from our unsecured credit facilities available to provide any necessary additional liquidity as well as capital for future investment opportunities. Our properties are in excellent physical condition and we continue to investment in them through their normal cycles.

We have no debt maturities until April 2012; we have a low 3.8 times debt-to-EBITDA ratio. We believe the worst part of the cycle is behind us and that continued improvement and recovery lie ahead. Our team will continue to be effective in facing the challenges and taking the advantage of opportunities throughout the year and beyond.

That completes our prepared remarks. Hans and I would now be happy to answer any questions you may have. Operator?

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator Instructions). And we will take our first question from Bill Crow with Raymond James & Associates.

Bill Crow – Raymond James & Associates

Good morning, guys. Couple of questions from me this morning. Mike, last quarter, you provided RevPAR guidance that calls for a 100 basis points deficit relative to the industry this year. In the first quarter of the industry, according to the star reports, was down about 2.1%, upper upscale down just about 1%. If we take DC inauguration out, you were down 6.4%. Are you in a position to make up that gap throughout the year or should we expect that you are going to lag the industry more than what you had expected just a month or two ago?

Michael Barnello

Our expectation is still the same. The impact that we had of 100 basis points for the year, Bill. And if you recall last year, it was obviously exacerbated in the first quarter. So you are experiencing that delta for the whole year, but you are experiencing it at one quarter.

So our expectation is still that that we have a tough comparison to the industry, clearly because of the inauguration, and then also because of our resort waiting and our markets – our hotels in Chicago and San Diego. But we still feel good about the Delta for the year.

Bill Crow – Raymond James & Associates

That's helpful. I know you have only asset managed the Sofitel for a very short period of time, but any takeaways from that regarding the relationship with the core and availability to implement cost cuts or identifying any areas of weakness? And any talks with the seller of that asset about other Sofitels?

Michael Barnello

The relationship is strong. As you point out, it’s new. So for the six weeks that we have owned the property, we are very pleased with what’s happened. They have seen improvement in a lot of metrics, RevPAR index, certainly March was strong in DC and they took the full advantage of that. We are very pleased with how they are trending for 2010. And we have brought a lot of investors through the property and a lot of folks were pleased. So overall, we think things are going as well as they can be.

And your second part of your question, we are talking to lots of potential sellers, not just the guys who sold us the Sofitel and when we are ready to announce something, we will. But until then it's just talks.

Bill Crow – Raymond James & Associates

Well could you maybe, I don't know, quantify or characterize that – you say lots of potential sellers, has the activity picked up and what are your anticipation for asset trades throughout the year? Not necessarily for you, but the market?

Michael Barnello

Picked up. The answer would be yes; they have picked up slightly, but remember where they were in the last couple of quarters. They – the transactions were virtually not existent. And so there was a – there is very few trades even throughout the whole first quarter for the industry. So discussions have picked up.

I would caution everyone to not read into that that this translates to an avalanche of deals, it’s just that we are still in early stages; brokers seem to be talking to more potential sellers about potentially bringing their hotels to the market. But as far as the number of properties we are seeing, it’s still slight – when you look at a more normalized history.

Bill Crow – Raymond James & Associates

Great, thanks guys.

Operator

And moving on, we will take our next question from Dan Donlan with Janney Montgomery Scott.

Dan Donlan – Janney Montgomery Scott

Hello, good morning. My customer's curious, could you break out the ADR and occupancy declines or increases for February and March?

Michael Barnello

Sure, why don’t you hold one second while we pull that up. Okay, February, well, the occupancy was down 1% with ADR up 10% and March occupancy up three quarters of point and ADR was down 4.5%.

Dan Donlan – Janney Montgomery Scott

Okay. And looking at your average occupancy levels in 2006 and 2008, the second and third quarter, the delta never exceeded 40 basis points. But in 2009, the delta was about 470 basis points. Do you expect that delta to narrow back to the norm in this year?

Michael Barnello

Well, we haven’t really looked at that way comparing to what happened in ’06 and ’08 from a quarter-to-quarter basis. Remember, in ’06, we also acquired a number of properties, we had acquired seven properties through 2006.

And then obviously a lot of things have happened between renovations that we have done in ’07 and ’08, and obviously with the economy changes in ’07, ’08, and ’09. So I am not so sure if we would draw any comparison to what happened in those quarters what will happen in 2010. I think a couple of things are happening, I think we are seeing a bit more positive trends relative to the recovery.

The things we are also looking at is that, if you look at March, April, and May of ’09, the demand drops were the worst in ’09, during those three months. And so comparisons to March, April, and May of 2010 from a demand perspective are easiest. So I don’t know that I would thusly draw a quarter-to-quarter conclusion that from what we did in ’06 or ’08 tracks 2010, but we are feeling better about the trends.

Dan Donlan – Janney Montgomery Scott

And then just from the cost cut standpoint, are more of these occurring at the independent hotels or is it the branded or is it a little bit of both?

Michael Barnello

On the cost containment, I would say it’s still both, but the majority of the programs having put in place at some period throughout 2009, Dan. So – and because every hotel didn’t do everything and they didn’t all put them in place in January 1st, 2009 we see various programs are having their one-year anniversary at different times throughout 2010. So we are still getting the benefit of that.

As an example, the pumps that are amenities in the bathrooms didn't even get started till about April of ’09. So even in the first properties are not going to lap until April of 2010. Things like the housekeeping program got implemented throughout all of 2009. And so again lapping will be all 2010, that’s a lot of the programs.

As far as a lot of new initiatives, it’s been – there hasn’t been as many new initiatives because I feel like we were pretty intense and the operators and our asset managers did a great job working with the teams to be as thoughtful as they can with what’s needed to be done on the cost side last year.

Dan Donlan – Janney Montgomery Scott

And then with respect to acquisitions, I know with the Gild Hall and the Westin Copley purchase, you guys either issued operating partnership units or some type of preferred units. Are you seeing any type of demand from potential sellers for using that type of – can you guys use that type of currency, do you think, for future acquisitions?

Michael Barnello

We always ask the question and we have done so since the IPO with every deal we have acquired. And as you point out, really only a couple of folks have actually taken us upon those offers. So it’s really hard to say.

Every individual asset is different between the ownership type, between how many owners there are, and between what their own particular desires are for taking units or stock and what their own tax issue – implications are. So it’s really a hard one to say, but we still have that as a potential tool to do future acquisitions with.

Dan Donlan – Janney Montgomery Scott

Okay, thank you.

Operator

And we will take our next question from David Loeb with Robert W. Baird.

David Loeb – Robert W. Baird

Hi Mike, I have two for you. First, on your acquisition appetite, I want to kind of ask a big picture question. As you are looking at opportunities, what kind of long-term return hurdles do you have in evaluating those?

Michael Barnello

We have an underwriting on a five and seven-year basis on leverage David for double-digit returns. However, as that gets there, is obviously different depending on just the particulars of the deal, whether it’s a deep turnaround or whether it’s a more – I won’t stay stabilized, but more of a market type acquisition. So we feel pretty comfortable that when we look at five, seven, and 10-year leverage returns that we are – we can get to those double-digit levels.

David Loeb – Robert W. Baird

And double-digit, would you buy something that would give you a long-term 10? Or do you really want more like 11, 12, 13?

Michael Barnello

Look, we are looking for double digits. I mean, When you ask us what we want, obviously we want – the higher, the better. But double-digit return is what we are comfortable with.

David Loeb – Robert W. Baird

Okay. And one other, Marriott came out this morning and was very positive, much more positive on RevPAR. It seems to me you are taking a little more conservative outlook than what they are saying. How do you account for that? Is that mix or are there other factors, geographic locations, property type?

Michael Barnello

Well, a couple of things, we are very pleased with the trends that we have seen. You guys are seeing lot of the same trends, and we pointed out a number of things on our prepared remarks. I guess a couple of things.

One, we mentioned earlier that the demand we are seeing now, a demand in March of 8.8% increase is tremendous, but it is against the comparison that it was equally down in March 2009, and that’s the same phenomenon in April and in May. So the demand comparisons become tougher in the second half of 2010.

Second, as we look at our pace, we mentioned – we are still down 5.2% in rooms and 6.9% in rate. And when we do look at quarter-to-quarter, it’s about the same each quarter, second quarter, third quarter, and fourth quarter. So each quarter has been improving and that’s good, but still we have ground to make up.

And so when we looked at what’s happened to our portfolio, what’s happened that we have seen the bookings, we just felt comfortable leaving the outlook where it was.

David Loeb – Robert W. Baird

Okay, great. Thanks, very helpful.

Operator

And moving on, we have a question from Ryan Meliker with Morgan Stanley.

Ryan Meliker – Morgan Stanley

Good morning, guys. Just a quick question. I don't know what you can comment on it or not. But just in terms of the acquisition disposition market, obviously you recently purchased the Sofitel. I also read that you were publicly marketing properties through Eastdale and Hodges Ward Elliott, the Seaview, the Bloomington Sheraton, and the Westin in Dallas, can you comment as to what it is about those three properties that makes you think that now's a good time to sell? And is it just that they are not core properties to your portfolio or is it more about you think that there is optimal buyers in this situation?

Michael Barnello

Good morning, Ryan. Since we have been public, we have from time-to-time evaluated the value of certain hotels in the market and sometimes we have outdone that and sometimes we haven’t. However, we only comment on transactions, both acquisitions and dispositions, once they are announced.

Ryan Meliker – Morgan Stanley

Fair enough, thanks guys.

Operator

And we will take our next question from Michael Salinsky with RBC Capital Markets

Michael Salinsky – RBC Capital Markets

Good morning. Just going back to the guidance question here, you talked about lagging the industry by 1%, yet the Marriott numbers seemed significantly higher there. Is there anything else that you are concerned about, or is it just really the tougher comparisons in the second half of the year? It just seems like there is a very, very wide gap there between where were your prior guidance was and where the Marriott numbers are.

Michael Barnello

Well, a couple of things, if the industry does better, we are going to clearly take the – get the benefit of that. The thing that we are struggling with, we mentioned earlier, is that resorts which is a big component of our overall portfolio as well as our properties in Chicago and San Diego are in for a tougher year. And although we believe in the long-term viability of all those categories, 2010 looks tough for those markets. And we showed how they really performed in the first quarter.

So it’s really a situation that has to do with the makeup of our portfolio and then go back to the industry. We feel very comfortable that if the trends continue and the industry does better, we will do better also. And as far as whenever another competitors puts out, I mean that’s their own numbers, and so we don’t want to speculate onto why they came with those numbers, and that’s a good question for those guys.

Michael Salinsky – RBC Capital Markets

Okay, that's fair. Second of all, just curious, you talked about transaction, you are seeing improving. How are pricing trends? Are you seeing bids getting increasingly aggressive given the limited supply or have you seen any – basically have you seen any change in pricing relative to the first quarter?

Michael Barnello

Well, again, we are talking about a very small number of transaction. The one thing that we are hearing whether it’s properties that we are looking at or not, we hear anecdotally from the brokers is that the number of confidentiality agreements that are being signed is sometimes really high, sometimes 50 to a 100 confidentiality agreements being signed and the number of bids you are getting on properties could be 20 to 30 written offers.

So that suggest that competition for acquisitions continues to be strong and that the number of potential buyers, current outweighs the number of potential sellers. So we see that going on, but that’s – that that’s just anecdotal information that we are hearing in the market.

Michael Salinsky – RBC Capital Markets

That's very helpful. And finally, Hans, a question for you. We have seen some strengthening as of late in the unsecured and secured and preferred markets. Just curious today, as you are talking with the bankers, where are you seeing pricing in terms for secured debt product?

Hans Weger

Well, at this point and time, we don’t – we really don't have the market. And then the conversations with the various lending institutions, we are hearing that there is improving terms both on the variable as well as the fixed rate.

But until you talk about a specific asset, you really don’t have a quote. It’s still a situation where good assets with good cash flows, with good sponsorship gets it, but we have no debt maturities till 2012.

Our leverage is around 3.8 times, our line of credit is completely available before we pay LIBOR plus 70. So at this time, I don’t have a good number to give you other than that we are hearing in the 30,000 foot conservations that things are improving at this time.

Michael Salinsky – RBC Capital Markets

Okay, fair enough, thanks guys.

Operator

And moving on, we have a question from Patrick Scholes with FBR Capital Markets.

Patrick Scholes – FBR Capital Markets

Hi, good morning. I would like to know how the – your new Sofitel hotel – Sofitel EBITDA margins compare with your existing portfolio?

Michael Barnello

Well, we don’t give out exact information on individual properties. But as we discussed last call, we think that the core folks have been doing a pretty good job on the margins overall. And in the short period of time that we have owned the property, we are very pleased with the flow through they have and the outlooks they have for 2010.

Patrick Scholes – FBR Capital Markets

Okay. I mean, is it safe to say that the margins, not the year-over-year increase, but actual the margins themselves are a bit higher than your existing portfolio or a bit lower?

Michael Barnello

Let me just leave that we are pleased with where they are and we are hopeful that working together, we will see improvements throughout.

Patrick Scholes – FBR Capital Markets

Okay, thank you.

Operator

And we will take our next question from Jeff Donnelly with Wells Fargo

Jeff Donnelly – Wells Fargo

Good morning, guys. A few questions. Mike, actually, on the acquisition disposition side, we had a conference call the other day actually with the still principals. And they were commenting that it’s somewhat of a seller's market for hotels right now. The comments were that market's awash with cash, multiples are high, and most owners actually don't expect a full recovery of EBITDA till 2013 or 2015. If I pair that with your somewhat more cautious outlook, does that lead you to think that now is maybe is a better time to be a seller of assets than being an aggressive acquirer?

Michael Barnello

Well, I think it depends on your long-term view and what properties you are talking about and what your outlook is for those properties. Certainly some folks have had that prospective and you are seeing more people get comfortable with the idea that maybe they should be taking their properties to market. So I think you are going to see an increase in the volume quarter-to-quarter and throughout the year.

At the same time interestingly enough, Jeff, what I would tell you is that some folks that were thinking about selling whether it was the end of 2009 or during the first quarter of 2010, they have also become emboldened by the recent demand improvement, whether it’s for the country or in their particular market and they have decided just to wait things out. So it’s hard to say, it’s going to depend on the particular needs of that particular seller. That’s the only way we will know what’s going to come on earth.

Jeff Donnelly – Wells Fargo

And I guess to flip it around. I know that in an incredibly short period of time has elapsed since you underwrote the Sofitel in DC. But looking at the shift in, not to bring it back to Marriott, but looking at the shift for example in their outlook and there seems to be growing optimism, even in the past 90 days, on the pace of recovery that's going to happen here in the US market. Does that lead you to think that maybe you are underwriting on Sofitel may, in fact, prove to be a bit more conservative than you thought even just, let's call it 90 to 120 days ago?

Michael Barnello

It might surprise to you know that we don't compare our underwriting months-to-months. So I don’t know how that would compare to any other transactional gap. I will tell you this if we look at all of our acquisitions every year, we will compare our actual to underwriting. And as you might imagine, some years are higher and some years are not.

And so I will go back to what I said earlier, we are very pleased with the folks of the Sofitel, we like the relationship we have with the team and with the company, and we are very pleased with the performance in March and their outlook across the year, and so we feel very good about our purchase.

Jeff Donnelly – Wells Fargo

And just two last questions on bookings. First, are you seeing, and I apologize if you have mentioned this in your remarks, but are you seeing any lengthening in your advanced booking window or is it just, there's more activity, but the actual advanced booking period isn't expanding?

Michael Barnello

There is more activity and let me give you some numbers that we didn’t mention in the prepared remarks. But our bookings for the first quarter was up almost 90% in the quarter on the group side for the year and the rate improvement was 4.7%, so we are feeling very good about it.

It’s still short-term, Jeff, so until that period lengthens, that’s when you actually get the pricing power, because as you know, when a meeting planner's booking for the next couple of weeks and if there are holds in any particular hotels meeting space, they are glad to get business on the books, and they are also glad to give discounted pricing.

So to the extent we can get meeting planners to start booking further out and we are all going to be better often and pricing will hardened, so we are looking to that. But now it is still short term.

Jeff Donnelly – Wells Fargo

And last question, do you have any details available on the number of, I guess I will call them sellout nights that you have done in Q1 for your portfolio versus say last year or even versus the peak in 2007?

Michael Barnello

Yes, we look at that in a number of levels. We look at it as true sellouts. And for the quarter, we are up 22%. I think what would have probably even been better is if February wasn’t so hard hit by the horrible weather we had in DC and we have such a big component of our portfolio is DC, so we are actually down in February. But January and March were up tremendously on the compression days. We look at it again on sellouts, and we look at high sales also. But when you just look at sellouts, we are up 22%.

Jeff Donnelly – Wells Fargo

Do you know whether that would be roughly versus your peak? I am trying to figure out how far off you are from that period of time.

Michael Barnello

I don’t, I don’t know what that will be.

Jeff Donnelly – Wells Fargo

Okay, thanks.

Operator

And moving on, we will take our next question from Chris Woronka with Deutsche Bank

Chris Woronka – Deutsche Bank

Hi, good morning, guys. The question I had is on healthcare costs. Have you guys tried to take a stab at what that might be, say next year, as some of the legislation comes closer to going into effect and you guys prepare for that?

Michael Barnello

Obviously we are concerned about where healthcare costs are going. We have seen the articles that you guys are seeing, every one of our insurance providers has put together their briefing what their thoughts on what could happen this year and the next four, five years. But it’s really too early to say. Nothing has changed on a concrete level and so anything right now is just – is just speculation.

Chris Woronka – Deutsche Bank

Okay. Can you tell us roughly what percentage of total health insurance is of the expense base?

Michael Barnello

We have looked at this earlier, I think it’s about – our total premium is about $9 million for the whole year and that would be split. And that's the higher – higher piece, that is, even though we have a smaller number of union hotels, it's a higher percentage of the union hotels.

Chris Woronka – Deutsche Bank

Okay. I got you. And then, if you think about acquisitions, just kind of curious as to how guys underwrite, you mentioned the kind of the longer-term targets, but how do you kind of physically underwrite what the next five years are going to look like, since we live in somewhat of a unstable world and knowing that there's all that capital kind of chasing some of the same assets. What do you guys do differently than everyone else or just how do you model?

Michael Barnello

Well, we mentioned that we are looking for targets. It’s fairly complicated and unfortunately it’s very specific to the assets. So what is the asset we are buying, which market is it in, are we making any change, is there a management change, is there a repositioning change, is there complete renovation change? And then we clearly look at the market’s history, how the markets performed in different periods from 1988 to 2008 or 2009, and then even sub segments, sub periods within that.

And then we also interject with whatever the supply had been in prior periods with what our supply outlook is for the next five years and that’s been cut with our projections. So it’s very different, I mean a property that is going to change in brand, in management and repositioning is a very different story than a property that is more of a market type improvement. So unfortunately there is no pat answer for that.

Chris Woronka – Deutsche Bank

Okay, that’s helpful. Thanks.

Operator

And we will move on to our next question from Josh Attie with Citi.

Josh Attie – Citi

Hi, thanks. So I am really struggling to understand the RevPAR guidance. The full year is down 5%. The first quarter you were down about 10% and that implies that you are down 3% for the next three quarters. And it's probably 900 basis points below Marriott guidance for the next three quarters of up 6% to 7%. I guess how do you bridge that gap and what do you attribute most of that difference to?

Michael Barnello

Well, you are comparing one company of 32 properties to a company of 3500. So there is a little difference in size. But going back to what we said was we are very happy with the positive trends we are seeing on the booking page side and even spotting on the rate side in our group booking pace. But the comparisons to again March, April, and May of last year on the demand side are the easiest and the second half demand comparisons become tougher.

Our rates are still down, our group rates are down for the year, our transient rates, even though they are transient business on the books is actually up, up almost 10%, but our rates are still down 7%. So when we look at that, we factor that into our outlook. Same time, we have mentioned that we have some markets that have a tougher road in 2010, Chicago.

Chicago is still experiencing one of the biggest supply increases in the entire country. And demand is actually – finally picked up in March in Chicago, but it was done in January and February. So – and we have a tough convention center year.

And then our resort portfolio, resorts, we are still struggling to get mid-week business, even though companies are feeling better and individuals, business travelers are feeling better, the – the corporate mid-week group is one of the last groups to recover. And we will see a pickup in that. We just haven’t seen it yet and that’s why resorts are down so much.

Josh Attie – Citi

I guess when you think about the comparisons, the comparisons versus 2008 get more difficult in the back half of 2009. But if you are just to compare all of 2009 versus 2007, the full-year RevPAR is probably – the comparison actually isn't that much difficult. It's actually about the same. RevPAR's down, call it 17%, 18%, versus 2007, for all of 2009. So I guess when you are talking about difficult comparison, you are just looking at what it was versus ‘09?

Michael Barnello

That’s one thing we are looking at. And I understand what you are saying is, look at the two-year – that you have to look at the two-year difference in the demand, that is something to look at. So look, again, we are happy with the trends. The trends have also been short-term Josh.

I mean, March was up I think more than anybody thought was going to be. And hopefully that will continue, but that’s been – it’s been six or seven weeks of improvement. And we want to make sure before we do anything to our numbers that we are confident that the recovery has taken full hold.

Josh Attie – Citi

Right. So I guess if look at the last six weeks are kind of up in the low single digits, but the guidance would assume that it goes back to down low single digits for the rest of the year versus the last six-week trend.

Michael Barnello

Yes. Again – we are – again, we are happy with the trends we are seeing. It's just that we have no comfort that that's still the velocity of how they are going to continue for us in the year.

Josh Attie – Citi

Okay, alright, thanks a lot.

Operator

And at this time, we have one question remaining in the queue. (Operator Instructions). And we have a final question, at this time a follow-up from Ryan Meliker with Morgan Stanley.

Ryan Meliker – Morgan Stanley

Hi guys, just one more thing. Talking about your group pace rate, having seen some improvement from down 7.2% to down 6.9%. I guess I am trying to figure out, I am trying to grapple with the idea of historically, group rates have run across the industry and not specific to LHO, running about an 11% discount to transient rates. And we haven't been seeing that, largely because the transient rates have fallen so much. Do you think we will ever get back to that 11% discount? Do you think one of the reasons that we are not there yet and we are not really that close is because when we see the compressed booking windows, group demand isn't really getting the discount the transient that it would if they were booking six months out or a year out?

Michael Barnello

Well, ever, is a long time. So I wouldn’t want to speculate on that. And as far as our mix, I mean we haven’t tied the two together, Ryan, where we have looked at what percentage the group rate is relative to the transient rate and they have made any kind of guesstimates about that going forward, we tend to look at it, market-by-market and property-by-property.

Because you know, even within our portfolio, we have a very different look of hotels between an 82-room Hotel Madera and an 800-room Westin Copley. And those are not only different hotels, different markets, different group mix, et cetera.

There are some markets that historically have had higher group rates than transient. If you look at market like New Orleans, that’s generally been the case, Indianapolis has been the case. So I don't know that I can draw any macro correlation that would tie into the comment you made.

Ryan Meliker – Morgan Stanley

I guess ask it another way, are you seeing stronger group rates that are being booked near-term versus those that are being booked further out, or no, are they being booked the same type of rate in the quarter for the quarter versus late in 2010 or early 2011?

Michael Barnello

Let’s start with that. The group rate that we booked in the quarter for the year was up 4.7%, so – and that was the first time we have seen that since 2008, so we are very pleased with that. But then we broke it out, Ryan, and we looked at where our group rooms are for the second quarter, third quarter and fourth quarter, it not as you might have think.

So we are up a little bit in the second quarter, but we are still down in rooms in the third quarter, 7%, we are down 9% in the fourth quarter, and with down rates in all three quarters. So it seems to me that there is it’s fairly even.

We are getting better rates and we are getting more groups booked and that’s – those are great signs, partially because there were less rooms and books to start with and there is more availability, but up is up. But as far as seeing sequential improvement, we will look at Q2, Q3, and Q4, where we have not seen it yet in terms of the bookings.

Ryan Meliker – Morgan Stanley

Right. That helps, it's helpful, thank you.

Operator

And it appears there are no further questions at this time, sir. I would like to turn the conference back over to you for any additional or closing remarks.

Michael Barnello

Thanks Jenny. Thanks everyone for listening. And we look forward to seeing you and talking to you next quarter on our next call. Thank you.

Operator

Again that does conclude today’s conference and we thank you for your participation.

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