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Strategic Hotels & Resorts, Inc. (NYSE:BEE)

Q4 2013 Results Earnings Conference Call

February 26, 2014 10:00 AM ET

Executives

Jon Stanner - VP, Capital Markets and Treasurer

Rip Gellein - Chairman and CEO

Diane Morefield - Chief Financial Officer

Analysts

Bill Crow - Raymond James

Chris Woronka - Deutsche Bank

Ryan Meliker - MLV Company

Smedes Rose - Evercore Partners

Lukas Hartwich - Green Street Advisors

Andrew Didora - Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Strategic Hotels & Resorts Earnings Conference Call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Jon Stanner, VP, Capital Markets and Treasurer. Please proceed sir.

Jon Stanner

Thank you, and good morning, everyone. Welcome to the Strategic Hotels & Resorts’ fourth quarter 2013 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the company’s website in the Investor Relations section.

We’re hosting a live webcast of today’s call, which can be accessed by 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 that this conference call will contain forward-looking statements under Federal Securities Laws.

These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to management’s, beliefs, and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking 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. Rip Gellein, Chairman and Chief Executive Officer; and Diane Morefield, our Chief Financial Officer. Rip?

Rip Gellein

Thank you, Jon, and good morning, everyone. We are extremely pleased to report a terrific year of operating and financial results for Strategic with RevPAR in 2013 growing nearly 9% in our same-store portfolio and our full year corporate EBITDA and FFO metrics coming in ahead of consensus estimate [Technical Difficult] guidance range.

We were equally excited about 2014 which we believe is shaping us to be another strong year and are initiating full year RevPAR growth guidance range between 5% and 7%. This guidance includes approximately 100 basis point adjustment for expected renovation related displacement for which Diane will provide detail shortly.

During the call today, we will discuss our 2013 result, how we’re interpreting those results in the context of our broader strategic direction and how the trends we’re seeing in our business translate into our 2014 guidance.

We’ll also provide with an update on our two asset dispositions, including our intention to redeploying the capital and continuing to significantly strengthen our balance sheet. I’ll then walk through the details of our 2014 financial guidance and capital.

As you know our strategy is predicated on only a world-class portfolio of unique hotel assets in gateway cities in high barrier [Technical Difficulty] resort destinations. [Technical Difficulty] continues to create tremendous value throughout the portfolio at the levels evidenced by our industry-leading results both relative to our publicly traded peers and to our individual competitive sets for each hotel. [Technical Difficulty]

During the year and our EBITDA margins expanded impressive 210 basis points [Technical Difficult] New York. However, this was more than just writing a tailwind for the strong market as our total U.S. portfolio increased its RevPAR penetration within their competitive sets by 2.5% during the year, finishing 2013 an impressive RevPar index of 114 compared to 111 in 2012.

[Technical difficulty]

Diane Morefield

Operator, can you hear us.

Rip Gellein

Operator, can you hear us any better.

Operator

[Technical Difficulty] Actually every other word, I can’t hear you at all now.

Rip Gellein

We’ll call back in 2 minutes from other conference call. Sorry, everybody.

Operator

Please standby.

Diane Morefield

Yes. We will call back in a minute.

Operator

Please standby. Please standby, your conference will resume momentarily. Please standby. Thank you for your patience, your conference will be resume momentarily. Thank you so much for your patience, your conference will resume momentarily.

Rip Gellein

Good morning, everyone. I’m sorry that we had a little technical difficulty. So I’m going to start, I’m going to start over. Just that everybody -- we don't know what you heard. So I’ll just -- I'll start from scratch and go quickly. But what we’ve said was we’re extremely pleased to report a terrific year of operating financial results for strategic RevPAR in 2013 growing nearly 9% in our same-store portfolio and our full year corporate EBITDA and FFO metrics coming in ahead of consensus estimate and at the high end of our guidance ranges.

We’re excited about 2014 which we believe is shaping up to be another very strong year and are initiating fully RevPAR guidance ranges between 5% and 7%. This guidance includes approximately 100 basis points adjustment for expected renovation-related displacement for which Diane will provide detail shortly.

During the call, we will discuss our 2013 results, however, interpreting those results in the context of our broader strategic direction, how the trends we’re seeing in business translate into our 2014 guidance. We’ll also provide you with an update in our two asset dispositions including our intentions for redeploying that capital and continuing to strengthen our balance sheet.

We’ll then walk through the details of our 2014 financial guidance and capitals. As you know, our strategy is predicated on only a world-class portfolio of unique hotel assets in gateway cities and high barrier-to-entry resort destinations. Our asset management team which we believe is best-in-class continues to create tremendous value throughout the portfolio with the hotel level evidenced by our industry-leading results, most relevant to our publicly traded peers and to our individual comp sets for each hotel.

For example, RevPAR in our total North American portfolio grew 8.8% during the year and our EBITDA margins expanded an impressive 210 basis points, excluding any benefit from guarantee payments we received from Marriott at the Essex House in New York. However, this was more than just writing a tailwind for the strong market as our total U.S. portfolio increased its RevPAR penetration within their comp sets by 2.5% during the year finishing 2013 in an impressive Rev index of 114 compared to 111 in 2012.

In total, 10 of our 16 North American hotels finished the year with double-digit RevPAR growth which helped drive 21% increase in comparable EBITDA and 65% increase in comparable FFO per share in 2013.

We’re in the final stages of the comprehensive de-leveraging phase of our strategic plan with two asset sales expected to close in the first half of 2014. As most of you know, we are under contract to sell the Four Seasons Punta Mita and adjacent La Solana land parcel for $200 million and expect to close that transaction within the next week or two.

We also have a select -- we have selected buyer in the midst of final due diligence for the Marriott Grosvenor Square in London. We are committed to this disposition and expect to close in the first half of this year. Proceeds from both asset sales will be used to further de-leverage the balance sheet including redeeming some of our higher cost preferred equity.

Diane will provide you with more details on our capital redeployment strategy but importantly assuming we close on both dispositions as described, we should comfortably be within our targeted 4 to 6x net debt-to-EBITDA range and expect to move toward the lower end of that range with organic cash flow growth over the next couple of years. These activities ultimately should put us on the path to reinstating the common dividend and though we are not committing to a date at this time, we would reiterate that it remains a corporate priority.

In terms of outlook, we agree with what you heard on most of the calls this quarter that the fundamental of the industry remain quite strong and that in many ways 2014 looks like a better version of 2013 albeit with a more difficult year-over-year comparison.

In the context of rather tepid GDP growth and a slower to recover group segment of business, the demand growth we’ve seen across the industry particularly in luxury and upper upscale sectors has been impressive. Roughly half of our hotels are at or above previous peaks though the composition of that business has obviously shifted throughout the recovery.

Transient demand in our total U.S. portfolio finished 2013 15% higher than our previous peak year of 2007 while group demand was still 12% lower compared to that same period. In total, occupancy is essentially flat to peak but average rates are 5% higher. So RevPAR is roughly 6% above its previous peak which is roughly double our comp set.

Our assets have also benefited from some of the creative capital investments we’ve made in recent years. For example, at the Fairmont Scottsdale Princess we invested approximately $25 million in 2012 and ‘13 to add a new ballroom, enhance the food and beverage outlets and introduce a new wellness spa concept.

The results have been quite impressive. Group room nights at that hotel increased 20% in 2013 compared with 5% growth in the comp set. This helped drive us 15% increase in group market share penetration and a 47% increase in EBITDA year-over-year.

Most importantly we’re yielding a 19% cash-on-cash return on the invested capital ended first four year of implementation. Likewise, we invested roughly $30 million at the InterContinental Miami in 2010 and ‘11 which repressed and rethemed nearly every square inch of that hotel.

Again the results have been outstanding as the properties achieved a 12% RevPAR CAGR since 2009 outpacing the market by 120 basis points. And we’ve increased our EBITDA that property from just under $7 million in 2009 to $17.3 million in 2013. We’ve detailed these projects in several other case studies in our updated investor presentation which we will be posting to our website shortly and would encourage all of you to review.

Supply growth in our markets for our type of hotel is generally well contained with the pipeline for all future years of competitive new supply, our portfolio and our markets less than 2% of existing rooms, which is well below both our historical averages and anticipated demand growth. Given the many challenges of building these hotels in high barrier-to-entry markets we expect the supply growth to be limited through at least 2017.

As you would expect, we’re keeping a close eye on certain markets particularly in New York, Chicago and DC. Supply growth in New York has been the headline but much of this is in the limited service segment as only 6% of city’s pipeline is in luxury and upper upscale segment. We also believe that some of the supply increase could be partially offset by residential conversions given the strength of the Manhattan residential market.

2014 will be the fourth full year into the recovery and we’re obviously starting to face more difficult year-over-year comparisons in our operating results. However our forecasted growth for the year is strong. Once again, we remain optimistic on the outlook for the industry in general.

Our group pace for ‘14 is currently up 6% room nights, 3.1% in average rates which translates into a 9.3% increase in group room revenues. As of January 31st, 76% of our budgeted group room nights look definite on the book which is essentially the same as it was at this time last year.

In the group business, it’s been the laggard in this recovery. Our portfolio has been somewhat of an outlier in the industry with nearly 5% REIT growth in 2013. And very importantly spending on a per occupied room night basis, increasing a robust 10% which we believe is solid proof of our group segment’s increasing willingness to spend. So with strong forward bookings and robust transient travel, we look forward to a really solid 2014.

With the completion of our de-leveraging strategy within sight, we are positioned now to opportunistically evaluate selective acquisitions that need our qualitative and quantitative investment criteria. More specifically we’ll target high end assets consistent with our existing portfolio, located in gateway cities in key resort definition.

We generally prefer complex assets with multiple revenue streams that provide operational upside for our asset management team to extract to revenue management initiatives, the implementation of cost control systems in the execution of accretive capital expenditure programs.

We’ll continue to focus on North America. We’d like to diversify our portfolio by adding assets on east coast. So we remain bullish on certain west coast market such as San Francisco, Seattle and even Southern California. We would also consider the right assets in markets in Mexico and Canada.

Our financing strategy will mirror our commitments to a prudent capital allocation strategy targeting acquisition financing on a leverage neutral basis over a reasonable contract. Most importantly we’ll only pursue opportunities where we can generate a return and exceeds our cost of capital and we’re optimistic that there will be attractive value creating acquisition opportunities in this market.

We continue to believe the fundamentals of our business point to a sustained recovery and that could extend beyond what we’ve seen in past cycles. As I mentioned supply growth remains muted particularly in our markets and our asset. The significant discount between trading values and replacement cost only serves to discourage potential development and that we've seen some supply in certain markets, it remains at historic lows and is almost nonexistent in resort markets.

The improving group business dynamic for our assets in our markets provides another compelling catalyst for operational and valuation growth. And the capital markets as most of you know are wide open, providing attractive financing alternatives at low interest-rate to fund growth.

So in summary, we believe the fundamentals of our business remains strong. Our balance sheet is becoming significantly strengthened. Our stock is trading at a multiple premium to our peers and as a result, we plan to be disciplined and look to acquire assets where we have the ability to create significant shareholder value.

With that, I will turn it over to Diane.

Diane Morefield

Thanks, Rip and good morning, everyone. As Rip highlighted, we are really pleased with our fourth quarter and full year 2014 financial results. Fourth quarter comparable EBITDA was $58.3 million, a 31% increase over last year and FFO was $0.14 per share, a 132% increase.

For the full year, comparable EBITDA was $213.2 million, a 21.5% increase over 2012 and comparable FFO was $0.43 a share, which was a 65% year-over-year increase. Our full year results were near the top end of our guidance ranges, which we actually raised on our third quarter earnings call last year. And we also came out came out above consensus street estimates.

RevPAR in our total North American portfolio increased 9.6% during the quarter, primarily driven by a 6.1% increase in average rates and a 2.2% increase in occupancy. Transient rooms increased nearly 5% in the quarter, which were offset a bit by a 1% decline in group business.

The declining in group nights was primarily related to a softer city-wide calendar in Chicago, with only nine city-wide conventions in the fourth quarter of 2013 compared with 12 in the fourth quarter of 2012. However, this decline is partially offset by a 16% increase in association business in the portfolio, primarily at our resort property.

Group ADR increased 6.2% during the quarter, led by our highest rated corporate group segment with a 7.5% increase in ADR. We had a particularly strong quarter at the Four Seasons Washington, DC, both group rate was up over 28% as the hotel hosted the IMF Meeting in October.

To give you good statistics, the hotel was full during the IMF, with a minimum five night stay at an, $1,800 ADR. Fairmont Scottsdale Princess also had a great quarter where group rate increased to 11.5%, primarily driven by a shifting mix of business towards higher weighted group customers.

Our transient ADR increased 4.7% during the quarter, also driven by our highest rated premium segment where rates increased 6.4%. We saw particular strength in our resort properties where rates increased 6.5% in the fourth quarter.

For example, at Four Seasons Jackson Hole, we benefited from a strong early ski seasons and increased the premium rent rate over $100 during the fourth quarter of 2012 to $840 a night. On the expense side, hours worked for occupied room was flat year-over-year. This is particularly impressive, considering outlet covers increased 7% and banqueting covers increased 4%, compared to the fourth quarter of 2012.

This helped drive our reported 460 basis points EBITDA margins expansion in fourth quarter. However, as you will recall, we have an NOI guarantee in place of Marriott at the Essex House. And the accounting rules require us to recognize a full guaranteed payment in the fourth quarter, which skewed the margin expansion.

In 2013, we received $12.8 million in guarantee payments compared to $1.4 million for sub-ownership period in 2012. Excluding these payments, EBITDA margins still expanded to 180 basis points during the quarter and we again achieved an EBITDA growth to RevPAR growth ratio of 2 times.

For the full year, RevPAR in our total North American portfolio increased 8.8%, again driven mostly by rate improvements with ADR growth of 6.1% in 2013, and occupancy increased in just under, 2 percentage points.

Transient room nights increased 3% during the year, as we continue to see a healthy shift of business out of lower rated segments and due to higher rated segments. For example, room nights in our lowest rated contracts segment declined 28% during the year, as hotels like the InterCon Miami were able to eliminate certain airline crew business and replace it with higher rated customers.

Negotiated transient room demand, which is primarily the corporate traveler, increased 7% in 2013. Total group room nights increased 1.6% with particular strength in the resort portfolio. A 6% increase in average rates was again led by a 6.1% increase in transient ADR, and a 5% increase in group rates.

RevPAR to urban hotels increased nearly 10% in 2013, and our resort portfolio grew just under 8% year-over-year. EBITDA margins adjusted for the Essex House guarantee payment expanded 210 basis points as hours worked for occupied room declined year-over-year despite the increases in occupancy and outlet activity.

Much of this improved productivity is related to the ongoing labor restructuring of the Essex House, where we reduced FTEs by 130% during the year, and hours worked for occupied rooms declined 26%.

For our portfolio, total FTEs are still down 14%, compared to peak operating standards and management FTEs are down 20%, demonstrating our ability to maintain labor cost savings despite a strong rebound in topline performance. And for the year, our EBITDA growth to RevPAR growth ratio was an impressive 2.2 times.

Regarding our transaction activity, specifically our disposition activity, we want to let you know how we are thinking about that capital redeployment. As Rip mentioned, we are nearing the completion of the sale of the Four Seasons Punta Mita for gross purchase price of $200 million, from which we will net approximately $180 million after taxes.

Assuming a successful close, we intend to redeem our 8.25% Series A Preferred with the [Technical Difficulty] million near the end of first quarter. The fully payment is approximately $6.6 million from both dividends from the last few quarters of the year and currently we saved $8.8 million annually in preferred dividend beginning next year.

The remaining proceeds will be used to reduce the outstanding balance on our revolving credit facilities. Pro forma for the sale of the Four Seasons Punta Mita, the Preferred Series A redemption and the line reduction, our net debt to EBITDA was forecasted to be 5.3 times, and net debt preferred to EBITDA was 6.1 times based on the midpoint of our 2014 guidance range.

This represents nearly a full time reduction in our net debt towards leverage level and the elimination of the relatively expensive preferred dividend is accretive to our 2014 earnings by roughly $0.02. We will also continue to make progress on the sale of Marriott Grosvenor Square in London and have selected a buyer and we are working it through the due diligence period.

But we are not in a position to give you specific pricing or advanced timing guidance at this point. We anticipate the transaction will close in the first half of the year and we will intend to redeploy the capital to continue to delever the balance sheet. With both sales, we would expect to be comfortably within our targeted ranges of 3 to 5 times of net debt to EBITDA, and 4 to 6 times of net debt of preferred to EBITDA.

The Grosvenor Square sale has been a fully marketed in transaction and the pricing, while attractive will reflect the shorter term nature of the ground lease, which has historically increased cap rates between a 115 to 200 basis points compared to a freehold trade. The exchange rate is working in our favor with the British pound depreciating nearly 10% in the last year.

We currently have a $104 million outstanding on our revolving line of credit and another $81 million in letters of credit, leaving us with a $185 million in line availability. These numbers have the full any proceeds from the asset sales, which will further increase our liquidity position.

We have $73 million of unrestricted cash combined at the corporate hotel levels and two encumbered assets, so our balance sheet is in a good position today and on an even better trajectory. Given the strength of the debt markets, we are also currently evaluating potential refinancings that will further enhance our balance sheet and reduce our cost of capital.

Turning to guidance, we did announce our guidance ranges yesterday in the press release, which reflect a 5% to 7% RevPAR growth and 4.5% to 6.5% total RevPAR growth in 2014, for those are same-store in total U.S. portfolio.

These ranges are reduced by roughly 100 basis points for displacement related to renovation activity in certain hotels, including guest room renovations at the Westin St. Francis, Hyatt Regency La Jolla, Loews Santa Monica and Ritz-Carlton Half Moon Bay.

Our EBITDA margins are expected to expand between 120 and 200 basis points, which reflects the 20 basis points impact from the renovation displacements. We project comparable EBITDA in the range of $220 million to $240 million, and FFO in the range of $0.53 to $0.63 per share, which is a 26% to 27% increase over comparable FFO per share in 2013.

Our corporate G&A expenses are forecasted to be between $22 million and $24 million, excluding cost associated with the defense against the Orange Capital activist campaign. Capital expenditures are expected to be in the range of $75 million to $80 million, including $40 million of hotel level contractual FF&E expanding. The remaining $35 million to $40 million represents owner-funded capital projects largely related to the various room renovations.

Interest expense is forecasted to be approximately $85 million to $90 million, including roughly $8 million of non-cash interest. Our corporate guidance has been the sale of Four Seasons, Punta Mita, a redemption of the Series Preferred A in the first quarter, but no additional acquisitions dispositions or capital raising activity have assumed in this guidance, including the sale of the Marriott London Grosvenor Square at this point.

With that, we'd now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Bill Crow from Raymond James. Please proceed.

Bill Crow - Raymond James

Hey, good morning guys. Nice quarter.

Rip Gellein

Thanks Bill.

Bill Crow - Raymond James

Couple of topics, Rip. On the acquisition front, have you made progress in narrowing potential acquisitions? Do you have a pipeline? I know you don’t give details, but if you could just talk about what you're seeing out there?

Rip Gellein

Well, we’ve pretty careful Bill, but we're in -- virtually everything is on the market publicly and obviously, we look at things that are off market. We are pretty optimistic that there are -- if we stay disciplined, there are still some -- there is some good potential opportunities out there or sort of a logical buyer of assets of this kind. So, we're seeing some fair traction, but obviously we're not going to talk about any individual assets.

Bill Crow - Raymond James

You've mentioned the improvement in the RevPAR index, 214. Could you identify which assets if any, are still below a 100 that might provide the greatest opportunity?

Rip Gellein

Maybe, Marriott Lincolnshire. I think, yeah. I think that’s the only one that's below a 100 at this point.

Bill Crow - Raymond James

Okay. And then, Diane, maybe you could provide some granularity on the renovation disruptions. You've identified the assets there. A couple of renovations are already going on. If it's a 100 basis points across the portfolio for the full year, one can assume it's pretty significant in the first half of the year. Is that a good way to think about it, and should we expect that those particular assets to, for example, have negative RevPAR growth in the first half and then recover in the second half of the year?

Diane Morefield

Yeah. It's -- certainly the biggest displacement comes from the Westin St. Francis and as you know that runs -- occupancy was up [88%]. So it doesn't matter when you do that it’s going to affect occupancy, but it is -- that renovation is going on now, so that would be more towards beginning of the year. The other property, while not as material again, most of them are going on towards the end of the year. But of course that we only give full year guidance, so it's accounted in our full year guidance but there is no negative RevPAR growth that we anticipate.

Bill Crow - Raymond James

Okay. And then finally for me, could you just remind us, Diane, the amount remaining on the Marriott guarantee in the Essex House? How we think about it in 2014 and 2015? Is it similar amount to 2013 for both years or is it’s --

Diane Morefield

The Marriott guarantee sort of in two buckets of $40 million in total, $20 million is a straight guarantee, the other $%20 million is they can earn part of it back over certain threshold. Again, we announced $12.8 million that’s paid this past year, 1.4 the previous year. So we don't anticipate exhausting the full first $20 million in 2014 but we may still be dipping into it at some level. But -- so the Essex House guarantee for this year remains $21.5 million in total. So to the extent, there is any shortfall in the actual operations, we will top off with the Marriott guarantee.

William Crow - Raymond James

So it will come down from the $12 million last year to $3 million or $5 million or whatever the number is, the maximum, it sounds like would be what $6 million or $7 million?

Diane Morefield

Yes, it's probably in the $3 million to $4 million range that we're projecting.

William Crow - Raymond James

Yes, perfect. All right. Thank you.

Diane Morefield

You're welcome.

Rip Gellein

Thanks Bill.

Operator

Our next question will come from the line of Chris Woronka from Deutsche Bank. Please proceed.

Chris Woronka - Deutsche Bank

Hey, good morning.

Rip Gellein

Hi Chris.

Chris Woronka - Deutsche Bank

Just a quick question on Chicago. Well understood about the citywide’s being down and I know there’s also some new supply there. How do you guys, kind of happen to have the bird’s eye view there. How do you view that market maybe this year and even in the next year? Is this going to get a little better or a lot better just any color you have there? Thanks.

Rip Gellein

Well, the citywide are essentially the same this year over last year but in 2015, they get significantly better. So we're optimistic going into '15. Obviously there is supply but given the location of our hotels we are optimistic that it's getting better.

Chris Woronka - Deutsche Bank

Okay. And then just on Lincolnshire, again understand the issues with the lease there. Is there any option or thoughts to maybe changing out taking the flag off that hotel maybe to save franchise fees. Is there really anything at all or is it pretty much steady state until it can be sold?

Rip Gellein

Well it’s pretty much in the steady state. We have a management contract on the hotel. So it's been through some tough time. We are obviously -- in other words, partnering with Marriott to bring it back as quickly as we can. But it's suburban asset that's had its challenges but we invested $5 million in the rooms. And we also extended, I don't know if you know this we extended the land lease out to 99 years. So we think that's enhanced value, so as it comes back -- that's obviously a non-core assets that we look to move when it stabilizes.

Chris Woronka - Deutsche Bank

Okay, got you. And then just finally on a Grosvenor Square if we do assume that it sells by in the first half. You guys have mentioned there is, I think about $1 million of savings between taxes and SG&A. Does that -- is that in your guidance and is that kind of -- do we recognize that rate away and you can clarify that? Thanks.

Diane Morefield

Again Marriott Grosvenor Square is not in our guidance because we don't have a specific time for when it may -- the sale might close, as we have given guidance on price. It is about $1 million in friction costs between the taxes we pay in the U.K. in G&A but again none of that is in guidance until it closes. Once it closes and on subsequent earnings call, we will update how that impacts guidance.

Chris Woronka - Deutsche Bank

Okay, got you, very good. Thanks.

Rip Gellein

Thanks Chris.

Operator

Our next question will come from the of Ryan Meliker from MLV Company. Please proceed.

Ryan Meliker - MLV Company

Hey, good morning guys, nice quarter. Just a couple of quick ones here, first of all Diane, can you talk a little about the balancing act going back and forth with the decision to redeem the preferred equity obviously. It's got a high coupon and that's not been attractive but it also reduces some optionality. If you guys ever do decide here willing to sell the company at some point in the future. How did those two factors weigh in your decision to go ahead and move forward with that?

Diane Morefield

Well, I think the decision with the proceeds from asset sales to redeem the preferred is actually pretty straight forward. Now the series A has 8.5% coupon. It’s the high cost of capital. The capital markets now, particularly if you go with street debt or convertible debt is much lower than that and while that’s the permanent layer of capital, we feel it. It crows out cash flow to reinstate a common dividend. And again, it’s just too high cost for layer of capital on the balance sheet to just retain it.

Rip Gellein

We actually think -- Ryan, we actually think strengthening the balance sheet is the very best think we can be doing here and we think that this significantly strengthens our balance sheet, given the capital markets the way they are, reducing the cost of capital that we have. We think that all-in-all really does enhance the shareholder value which is the goal, right.

Ryan Meliker - MLV Company

Sure. And then so should we assume that -- assuming that the London sale is executed that the debt that you will be repurchasing is more likely to be preferred than actual straight-up debt given the high interest rate?

Diane Morefield

I think when we do close London, we’ll net about $85 million of proceeds after paying off the mortgage debt specific to the asset, so anywhere from $80 million to $85 million. But we will analyze at that point depending on corporate opportunities, whether we use that for another Series A. There will still be a little bit out on the line probably in the range of $30 million. And again if there is growth opportunities or other use, we’ll just have to evaluate it when we have those proceeds. So I don’t think you can assume that level in Q4.

Ryan Meliker - MLV Company

Okay. That’s helpful. And then if we could just touch based on the acquisitions a little bit, I am assuming you guys are focused on luxury type assets primarily in North America. Is that correct?

Rip Gellein

That would be correct.

Diane Morefield

Correct.

Ryan Meliker - MLV Company

So obviously we saw a very aggressive, at least what I consider a very aggressive bid for your Punta Mita asset. It certainly doesn't look like the cost of capital that you guys have would compete with buyers of that nature. What's going to differentiate you? How are you going to be able to reconcile those challenges? Is it going to be non-gateway markets that you are looking at high end assets? Is it going to be assets that need material repositioning that you see a lot of upside in that a more long-term buyer, that's more focused on a trophy cap rate doesn't necessarily want to put that time and effort into? How can we reconcile your cost of capital with being able to grow with these types of assets given what you’re competing with?

Rip Gellein

Well, we understand the question and obviously for those sort of the luxury buyer, that’s going to pay a very high price, that’s not what -- that’s not we’re going to go compete with, but we do see assets that we believe have substantial upside, we think where they are complex as we said in our opening comments. So we’re seeing some opportunities out there that we believe we can potentially acquire that gives us a good return based on cost of capital. But, are we going to be the top bidder for at a three cap on a luxury asset some place? No, you’re not going to find us going to do that.

Ryan Meliker - MLV Company

Are you willing to move outside of the major gateway markets?

Rip Gellein

No, not really. No, we will stay consistent with the strategy, but we’ve talked about major markets on the East Coast, we’ve talked about Mexico and Canada as well. So we’ve got -- there are fair number of things out there for us to look at.

Ryan Meliker - MLV Company

All right. Fair enough. Thanks a lot.

Rip Gellein

Thanks.

Operator

Our next question will come from the line of Smedes Rose from Evercore. Please proceed.

Smedes Rose - Evercore Partners

Hi, thanks. I was just wondering if you could update us on where you’re I guess with your kind of non-core assets, either condos at the Essex House or (inaudible) in Mexico if you're moving forward with the sale of those items and kind of what sort of total cash proceeds you think those could yield I think as you move to continue to delever?

Rip Gellein

Sure. We sold four of the condos at the Essex House. We’ve got several that remain for sale, so we are anxious to continue to move those, but the market in New York obviously is quite good. So we are optimistic about that. We are in discussions on the land in Mexico and we would like to move that out. We sold Lakeshore Athletic Club. We’ve got some land that we’re looking at both. At the Loews Santa Monica, we have an adjacent piece of land that we’re looking at how potentially to develop that in a way that is additive to the hotel. I think that…

Diane Morefield

And I think not that is particularly material.

Rip Gellein

Yeah, but that’s really small so, but we will move that piece of land in Mexico as soon as we’ve got a rational buyer here.

Smedes Rose - Evercore Partners

Okay, thanks. And I was wondering, you mentioned moving back towards paying a common dividend. Is there any kind of -- do you have a sense of when you might be required I guess just from a tax perspective to reinstate a common dividend, or is that -- would that still be quite some time away?

Diane Morefield

Yes, we are not required for two reasons, one is we still have NOLs carry forward, and secondly, the preferred dividend is on top for the dividend test given we still have pretty significant preferred dividend. We are not going to be forced to from a restructuring standpoint as part of the obviously corporate priorities to get back (inaudible) at the right time.

Smedes Rose - Evercore Partners

Great. Okay. Thank you.

Rip Gellein

You bet.

Operator

Our next question will come from the line of Lukas Hartwich from Green Street Advisors. Please proceed.

Lukas Hartwich - Green Street Advisors

Hey, thank you. Hey, guys, can you maybe just talk a little bit more about how bigger appetite is to do acquisitions?

Rip Gellein

Yeah, let’s be clear, we will be very disciplined about it, but we do believe that that now that we have strengthened the balance sheet to the degree that we have. And given our abilities to extract value, we think that we are optimistic that we will find some good opportunities going forward, but we don’t feel some huge requirement to do it. But we are optimistic about our abilities to both add value to key assets as well as to be the source for some of these assets where people need or want to sell them because we are an obvious. We’ve got -- now we’ve got a strong balance sheet, we’ve got -- we’ve trade at a relatively high multiple. All of those are assets for us to buy as long as we buy it at the appropriate price and get a good return for our shareholders.

Lukas Hartwich - Green Street Advisors

Right. Thank you. And then another question, can you update us on your thoughts on the ramp up of Essex House?

Rip Gellein

Yeah, we’ve been quite pleased. The rate is up about $46 year-over-year. EBITDA was up $10 million, a little over $10 million year-over-year, excluding some of the severance costs that we had. So we are actually quite pleased, we’ve got more to do, but we are -- and our group business is up. It was de minimis when we bought the hotel, so it’s taken us a little while to bring that up to speed, but that’s coming as well as event business for the hotel, but overall we are pleased.

Lukas Hartwich - Green Street Advisors

Do you have a targeted stabilization timeframe?

Rip Gellein

Probably ’15.

Lukas Hartwich - Green Street Advisors

Great. Thank you.

Rip Gellein

You bet.

Operator

And our next question will come from the line of Andrew Didora from Bank of America. Please proceed.

Andrew Didora - Bank of America Merrill Lynch

Hi, good morning, everyone. A lot of my questions have already been answered, but just had one for Rip. I guess, Rip, are you seeing any high-end luxury portfolios on the market right now, or is it all pretty much single asset deals at this point in time? Thanks.

Rip Gellein

There is the potential for portfolio deals, but most of what we’ve seen in the last several months have been one-off assets.

Andrew Didora - Bank of America Merrill Lynch

Okay, thanks.

Rip Gellein

You bet.

Operator

And with no more questions, I would now like to turn the call back over to Rip for closing remarks.

Rip Gellein

Thanks everyone for joining the call. It’s a fun call to have great results, and we look forward to delivering more of them the next time we chat. Have a great week. Bye.

Operator

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect. Have a great day.

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