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Lasalle Hotel Properties (LHO)

Q2 2010 Earnings Call Transcript

July 22, 2010 9:00 am ET

Executives

Michael Barnello – President and CEO

Hans Weger – CFO

Analysts

Shaun Kelley – Bank of America

Jeffrey Donnelly – Wells Fargo

Josh Attie – Citi

Bill Crow – Raymond James

Michael Salinsky – RBC Capital Markets

Dan Donlan – Janney Capital Markets

Damian Brewer [ph] – JPMorgan

Chris Woronka – Deutsche Bank

Operator

Good day and welcome to the LaSalle Hotel Properties second quarter 2010 conference 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, Katie. Good morning, everyone, and welcome to the second 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 second quarter, Hans and I will discuss the company's activities in the quarter, the performance of our assets and the trend affecting them. We will also discuss our outlook for the remainder of 2010 for the industry and for our company. We will then open 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 reports as well as our press releases are available at our website, www.lasallehotels.com. Our most recent 8-K and the yesterday's press release included reconciliations of non-GAAP measures such as funds from operations to the most comparable GAAP measures.

Second quarter funds from operations or FFO was $35.9 million as compared to $35.6 million in the prior year. FFO per diluted share was $0.52 compared to $0.70 in the second quarter of 2009. FFO for the prior year included $5.7 million in after-tax income for the recognition of prior termination cure payments from the previous manager of the company’s Seaview Resort and a $1 million fee for exchanging Series C Cumulative Redeemable Preferred Shares of Beneficial Interest for Series G Cumulative Redeemable Preferred Shares of Beneficial Interest, the Preferred Share Exchange.

EBITDA for the second quarter decreased to $55.5 million from $59.5 million in the prior year period. EBITDA for the prior year included $9.5 million of pretax income related to Seaview and a $1 million fee for the Preferred Share Exchange.

RevPAR for the total portfolio increased 7.4% in the second quarter. The RevPAR increase was a result of 2.1% growth in ADR to $185.44 and 5.2% improvement in occupancy to 79.1%. Our hotel portfolio generated $58.5 million of EBITDA in the second quarter of 2010 versus EBITDA of $53.6 million for the same period of 2009, an increase of 9.2%. Portfolio-wide hotel EBITDA margin for the second quarter was 32.5%, an increase of 53 basis points.

For the six months ended June 30, 2010, FFO was $37.4 million compared to $44.2 million for the same period in 2009, or $0.56 per diluted share compared to $0.96 per diluted share for the same prior year period. FFO for the six months ended June 30, 2010 was reduced by $1.5 million for the transaction costs related to the acquisition of Sofitel Washington DC, Lafayette Square. FFO for the prior year included $5.7 million in after-tax income related to Seaview and the $1 million fee by the Preferred Share Exchange.

EBITDA for the six months ended June 30, 2010 decreased to $70.3 million from $80.8 million for the prior year period. EBITDA for the six months ended June 30, 2010 included the $1.5 million of transaction costs related to the Sofitel acquisition. EBITDA for the prior year included $9.5 million of pretax income related to Seaview and the $1.0 million fee for Preferred Share Exchange.

Room revenue per available room, RevPAR, was $121.60 for the six months ended June 30, 2010, which was flat compared to last year. The RevPAR result was due to the ADR decrease of 3.4% to $172.28 and occupancy increase of 3.5% to 70.6%. For the six months ended June 30, 2010, the company’s hotel has generated $77.7 million of EBITDA compared with $79.7 million for the same period last year, a decrease of 2.5%.

As of the end of the second quarter, the company had total outstanding debt of $624.6 million at an average interest rate for the quarter of 5.3%. Our $450 million senior unsecured credit facility had no outstanding balance. The company had in aggregate $472.9 million available on our combined credit facilities. As of June 30, 2010, total debt to trailing 12-month corporate EBITDA as defined in our senior unsecured credit facility equaled 3.9 times, and trailing 12-month corporate EBITDA to interest coverage ratio was 4.4 times.

On April 21, the company registered an after-market equity program. No shares have been issued under this program. We view this as an additional source of liquidity and as a possible alternative 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.

On June 15, we announced a quarterly dividend of $0.01 per common share for the second quarter of 2010. The second quarter dividend was paid on July 15th to common shareholders of record on June 30, 2010.

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

Michael Barnello

Thanks, Hans. In the second quarter, the industry experienced continued demand improvement in each month. Since demand turned positive in December of 2009 for the first time since July of 2008, it has strengthened throughout 2010. The industry demand increases in the second quarter have been some of the strongest in history, with April posting an increase of 7.3%, May’s increase of 9.6%, and a 9.2% increase in demand in June.

Earlier this year, March was the first month of positive industry RevPAR since July of 2008, an important inflection point. Since then, industry RevPARs have gained in each month of the second quarter. Importantly, June was the first month to report an increase in average daily rates, a positive 1%, since September of 2008, another important inflection point.

When we look at the major segments of demand, there is continued improvement in both the group and transient 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. Group occupancy is up 6.8% year-to-date through June 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 remained up 5.7% year-to-date through June.

On the transient side, industry occupancy continued to be positive in the second quarter, a trend that has continued since the second half of 2009. In addition, during the second quarter, transient rates across the country have turned positive, up slightly in April and then again in May and June, a trend that is expected to continue.

Overall, the US industry experienced a RevPAR gain of 6.2% during the quarter, all of which was occupancy, as rate remained flat. For LaSalle Hotel Properties, our performance was ahead of the industry at a 7.4% increase in RevPAR, with occupancy gains of 5.2% and ADR growth of 2.1%.

Overall, when looking at our mix of group and transient business, group rooms were up 13.6% in the second quarter compared to last year with ADR down 3.4%, while transient rooms in the quarter were down 0.6% with ADR up 6.8%. For the quarter, our overall business mix shifted to 39% group and 61% transient, which is more in line with our historical averages.

In the second quarter, RevPAR at our urban hotels increased 8.7%, with occupancy up 2.2% and ADR up 6.4%. RevPAR at our convention hotels increased 10.6%, with occupancy up 10.7% and ADR down slightly 0.1%. Our resorts were our weakest property type. RevPAR was down 2.3%, with occupancy up 3.3% and ADR down 5.4%. On a monthly basis for our portfolio, RevPAR increased 9.6% in April, 4.3% in May, and 8.5% in June.

When comparing our market results quarter-to-quarter, our properties in Washington DC, Boston, New York, and West Hollywood performed above the industry average. Those results were slowly offset by results in Chicago, Seattle and San Diego, as well as our resorts, which continue to suffer as groups and individuals remain cautious with their discretionary spend.

By individual markets, Washington DC was our vast performing market, up 12.1%. West Hollywood also had a strong performance with growth of 10.5% during the quarter, with occupancy up 6.1% and rate up 4.1%. Our properties in Boston also exceeded the industry average in the first quarter as RevPAR increased 7.9% due to a 3.6% increase in occupancy and a 4.2% increase in ADR.

In addition, Chicago posted an increase in RevPAR of 2.3%, the result of the gain in occupancy of 4.3% and a dip in ADR of 1.9%. San Diego was our weakest market. RevPAR at our San Diego properties declined 1.6% with occupancy down 2.5% and ADR up 0.9%. RevPAR at our Seattle properties fell 1.5% in the quarter. Occupancy increased 2.4%. Our average rate was down 3.8%.

Our vast performing properties for the quarter, as measured by the change in RevPAR, were at Sheraton Bloomington, Marriott Indianapolis, Gild Hall, the Sofitel DC, Le Parc, Amarano, and all of the Kimpton Hotels in DC. Our weakest properties in the quarter included the Lansdowne Resort, Hilton Gaslamp San Diego, the Solamar Hotel, and the Seaview Resort.

Portfolio-wide revenues for the quarter increased 7.4% with RevPAR also up 7.4%. Food and beverage revenues improved 7.6% in the second quarter. From a capital reinvestment perspective, it was a pretty quiet quarter. We made $5.4 million of capital investments in the portfolio in the second quarter. Looking forward, the only significant project commencing later this year is the room renovation at the Westin Copley.

Let me turn to our outlook for the remainder of 2010. From a macroeconomic perspective, our economic indicators have been a little more wobbly than in the first quarter. Unemployment of 9.5% is still historically high, and the recent economic news have left experts mixed on the timing of jobs recovery. Consumer confidence grew in April and May, only to significantly retreat in June caused by an inexplicable link to jobs growth and international economic concerns.

Airline employments have been steady to slowly positive throughout the second quarter. Corporate profits continue to be strong with a growing number of companies reporting an increase in sales and not simply better cost containment, as was much of the case in 2009.

Despite these mixed indicators, lodging demand has been strong as consumers have felt comparatively better year-over-year and corporations have continued to expand their travel spend. The industry is still regaining lost occupancy and has collectively started to gain some pricing power. Pricing is a function of attitude as well as capacity, and the industry is gradually regaining much needed confidence which in turn will translate into increased rates.

As mentioned previously, industry demand turned positive in December last year, a trend that has continued and strengthened throughout the first half of the year. We believe the industry will continue to regain some of what was lost in 2009.

Supply growth continues to moderate and while up 2.5% for the first half of 2010, it is expected to be in the 1.5% range for the industry for the year. We also believe based on the continued drop in the future supply pipeline, supply growth will be relatively immaterial for the 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 Hotel Properties, 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 than the industry overall. This is due to the high levels of travel into the market related to government, a smaller dependence 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 West Hollywood and Boston to continue to be relatively better performers as a result of better relative demand, limited supply, and a more favorable unemployment landscape. Though Chicago and San Diego have not shown the same level of recovery as other markets, they should start to improve in the second half of the year.

Despite a tough convention center calendar and the expected increase in supply in Chicago throughout this year, recent demand trends suggest improvements. Our resorts, which have been our worst performing segment, as they have struggled to decrease in mid-week business, are also expected to improve in the second half.

Our quarterly booking trends have been strong. Overall bookings during the quarter improved in both rate and occupancy on the strength of the group segment. And while transient room bookings lagged, transient ADR improvement made up for the declines. Our expectation for the rest of the year is for continued improvement in both lines of business.

On the group side, our 2010 group bookings during the second quarter were at higher rates compared to same quarter last year. This is a continuation of the trend that started in the first quarter this year. In addition, on the transient side, we have seen improvement in the mix of business with a continued increase in the more lucrative, corporate negotiated segments.

Specifically, as of July 1, group pace for 2010 is up 1.1% in room rates on the books. This represents a major improvement from our pace in April when we were behind 5.2%. Group booking lead-times, while still short-term, have begun to lengthen. And that, combined with the fact that much of what 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%. This compares to a rate pace down 6.9% in April of this year. While the group rate pace remains negative, we are extremely encouraged to see our 2010 group rate pace continue to improve. Coupled with big strides in group bookings, this is a positive development. Our expectation remains that group room rates improve 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 remained strong despite relatively tougher transient year-over-year comparisons. As of July 1st, transient rooms in the books for 2010 are up 1.5%, ahead of the same time last year. In addition, there has been significant improvement in rates. Our transient ADR is now up 0.6% compared to last year, a tremendous improvement from down 7% on April 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 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 only at a lower cost level.

The flexibility and aggressiveness of our independent properties 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 and improving rates. We have become increasingly optimistic with the timing and strength of our ongoing recovery. Based on the strength of our second quarter results as well as improvements in lodging fundamentals, we are updating our full year 2010 outlook as follows. RevPAR to range from positive 1% to 4%, FFO of $80 million to $90 million, and EBITDA of $150 million to $160 million.

We feel confident that we are taking the steps necessary to maximize revenues, minimize margin erosion, strengthen 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 in institutionally desirable investment markets.

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. (Operator instructions) We will take our first question from Shaun Kelley with Bank of America.

Shaun Kelley – Bank of America

Hey, good morning, guys. Just wanted to follow up real quickly, first of all, on some of the RevPAR numbers for the quarter. I actually thought that your rate increase in the quarter was pretty impressive. And just wondering if you could give us a little bit more color on maybe how you got to the up 2.3%. Is that being driven at all by mix from the new Sofitel acquisition or is that something you were able to drive in the quarter kind of independent of that?

Michael Barnello

Good morning, Shaun. Couple things. Sofitel is doing well. I wouldn’t characterize the increase in rate primarily because of the hotel though. It is one hotel. As far as overall rate, one of the things that we’ve started in the beginning of the year is that as appropriate to start being more aggressive both in the group side and in the transient side through revenue management. So I wouldn’t point to any one hotel or one segment. I would really look at the overall mix as well as the fact that our asset managers have been trying to push rate where we can throughout not only during the second quarter but during the first quarter.

Shaun Kelley – Bank of America

That’s helpful. And then maybe some – kind of one follow-up. As you think about those discussions and how you are thinking about for rate negotiations, it sounds like customers are now okay with or at least handling rate increases whereas before maybe they would have looked to go to a competitor hotel. Like, how are those kind of discussions with meeting planners looking for kind of the back half of this year and then maybe 2011?

Michael Barnello

Well, one more thing to add to your first part of your question, we have seen an increase in the mix of corporate negotiated. So while corporate negotiate is not a tremendous piece of our overall business, it has increased in the second quarter and that’s encouraging. The second part of your new question, what I would say is that we feel very confident that there will be meaningful increases for 2011. Quite frankly, it would be early normally to start at this point having discussions on 2011.

But from our perspective, we would prefer to actually wait as long as possible to have those discussions because what’s happening is those rates are increasing. And as rates are increasing with both regular transient rates as well as new corporate rates, we have better pricing power when we go talk to our existing customers about the pricing for next year. So it’s too early to give any answers on ranges other than we feel confident that we’re going to start to regain what we’ve lost over the last couple of years. And that’s probably a better question that we will have a lot more information on in the third quarter.

Shaun Kelley – Bank of America

Okay, that’s helpful. And I guess just – well, I know you don’t want to give a range. I mean, Marriott did provide a number of something like high-single digit rate increases in terms of what – where their head is at. I mean, any kind of – any perspective or thoughts on that number if that would be least realistic in your opinion based on kind of what you’ve seen so far?

Michael Barnello

We don’t have a range yet. I would tell you that we spend an awful lot of time looking at each particular account, accounts that we’d like to move, most of the accounts that actually use it during our highest periods and the accounts that we would actually be a little more flexible with and the accounts that use it on the weekend periods or the softer periods. So I think directionally, looking for as much as we can get and a message to all of our operators is to remember what we’ve given in the last two or three years and not just price off of what happened in 2009 and 2010, look back at where those corporates were in ’07 and ’08 and remind the customers of that. And so our expectation is that we will have a very good corporate negotiated season.

Shaun Kelley – Bank of America

Great. That’s very helpful. Thanks, guys.

Operator

Your next question comes from Jeffrey Donnelly with Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Hi, good morning, guys. Mike, how do you think about the idea in building at this point of time? Because I think if you subscribe to the thinking that a recovery to peak is coming at, call it, 2012 to 2014, does it make sense to be delivering products in the market at that time and getting your investment just far? Is that maybe your best path as to move forward?

Michael Barnello

Good morning, Jeff. The gate plan for the IBM Building, 330 North Wabash, hasn’t really changed. Our perspective is that we have investment in the asset, the model room is ready, the floors are vacant and cleaned up and ready to build, but we are not ready to pull the trigger on starting a development there yet. Chicago has just started to move in terms of increased demand and RevPAR last couple of months lagging behind some other markets. And supply, as you know, is still coming on line with the JW Marriott opening up in the third quarter, different rooms downtown.

So our feeling right now is that in the immediate term there is not a need for another 300-ish rooms. And so our game plan wouldn’t be start anything anytime soon. However, we obviously love the location, the asset and the ultimate price program we’ve been at, we just have no idea when we’d start that. And it’s one of the things we look at, not only our outlook for the country, but clearly what’s going on in Chicago. We’re just not ready to do it now.

Jeffrey Donnelly – Wells Fargo

I’m curious what – not to spend too much time on it. But what do you think would shift your thinking to kind of like the JW Marriott was absorbed quickly. I mean, would that be a catalyst for us?

Michael Barnello

Well, if you recall, this building is laid out so that we would have 334 rooms, which would be over 500 square feet per room. So, very large rooms. And the game plan was for a luxury property. And so it’s not just looking at the Chicago market overall, it’s looking at how the luxury segment of Chicago is doing. So when compared to that, we would like to see some significant rate growth before we would enter the market. Just recall that this redevelopment is not a normal redevelopment timeline. From the time that we actually would say go, we really could be opened within 12 to 15 months because a lot of the work is already done. So we don’t have to make the decision guessing what the next three years look like. We’ll have to just guess what the outlook is for the next year or so.

Jeffrey Donnelly – Wells Fargo

That’s helpful. Switching gears, as it relates to acquisitions, can you talk about what has happened in the financing market specifically? Are you seeing lenders show more willingness to get aggressive on underwriting with you or just even other folks were looking at deals, not the rate side per se, but maybe how they underwrite valuation or their willingness to kind of underwrite a recovery in an asset?

Michael Barnello

Well, as far as the financing for acquisitions, I don’t know we have much to comment on. When we look at our acquisitions, we are not necessarily looking at putting secured debt on clearly at the time of acquisition. That’s something we would decide at a corporate level, and most times post-acquisition. So I can’t really answer your question relative to how maybe the private folks maybe looking at that and what they are getting from the lending community.

Jeffrey Donnelly – Wells Fargo

And just one last question, maybe kind of two parts to it. I might have missed a data point you gave in your remarks about the change in transient room night demand in Q2. If you could give that to us? And then the second piece is, and you might have touched on this as well, it’s just what’s been happening with the booking window as we’ve progressed through the year? Has there been a discernible lengthening in advance bookings? I guess, where do you think we are versus maybe historical on that?

Michael Barnello

First of all, the transient, our transient rooms were down 0.6%, our rate was up 6.8%. On the advanced bookings, here is what we’ve seen – is that – we've mentioned in the remarks that the lead-times are up slightly. I don’t want to give anybody the impression they are back to more normalized booking times. It’s really relative to the most instant booking lead-times we had in the last 12 to 18 months. I think people over the last couple years thought rightly so that we were somewhat in a deflationary environment. The longer they waited for hotel rooms, the better deal they got. And in many cases, that was true.

And so what’s happening now is between the fact that occupancy has been recovering between some of the public announcements that the brands have made regarding their optimism for this year and the future has caused people, meeting planners in particular, to pick up the phone earlier to book business, making the decision probably rightly so that making – booking my business now is going to be, A, I’ll lock into the rooms and market I want, and B, there will be a lower rate than if I wait till last minute when other folks are filled up. So you are seeing a shift there and I think that’s clearly a good sign and we’re hopeful that will continue.

Jeffrey Donnelly – Wells Fargo

Great. Thank you, guys.

Operator

Your next question comes from Josh Attie with Citi.

Josh Attie – Citi

Hey, thanks. It’s Josh Attie and Michael Bilerman. As you think about your margins, your margins have held up a lot better than your peers on the way down. So, as we think about the growth trajectory over the next couple of years, does that mean that you have less margin upside? And if not, what specifically would allow you to exceed your prior peak margins? And I know there were a lot of development projects that were delivered in 2006 and 2007. So if it’s possible if you could separate that piece of it from any permanent cost savings you think you may have achieved?

Michael Barnello

Good morning, Josh. A couple things on margins. I mean, we are obviously very pleased that we’re moving margins in the positive direction. We have spent a lot of time over the last couple of years becoming more efficient. And so we think that there is really a couple categories and there are some worries. But a lot of the things that we’ve done in the last couple of years, we believe, are permanent. And we’ve talked about some of these things in prior calls, but we’ve completely changed the staffing of those hotels. Some of that does come back when you look at occupancy-driven recovery, but all the management changes, they just should stick for some period of time.

On the housekeeping efficiency programs we’ve put in place at many of our core properties, in fact most hotels, is something that really shouldn’t go backwards. We’ve been retraining the housekeepers to clean rooms where people are staying over much more quickly than if they are going to depart. We’ve also changed our amenity programs at almost all of our independent hotels. So that’s saving us money. Again, things that really shouldn’t come back. There is no real reason to go from pump dispensers in the bathrooms to bottled amenities because our guests have been pleased, the housekeepers are happy, we’re saving money, and it’s green and eco-friendly. So we look at those, there is a whole bunch of that. And by the way, they haven’t all worked for the system.

The other thing is that they are real. I mean, we are experiencing some of that even in 2010, are things that happened in the last couple of years, and we will come back. So bonuses, as people continue to beat their outlooks, bonuses are going to come back, management fees come back, the furloughs that were done last year because they needed to be done and not really being done in 2010, etc. So there are costs if you come back. When we look out at your other part of your question regarding our peaks, if you look at what happened in the last really 10 years, in 2000 we have peaked in the area of 28.5% EBITDA margin. We then peaked later in 2007 at 31.5% EBITDA margin. And last year, as you recall, we were down at 27.5%. So compare that for a second that our EBITDA margin in 2009, the worst year ever, was only 100 basis points off the prior peak. Okay?

And so our perspective is that we’ve gotten a lot better at asset management. We’ve learned a lot of things from our 14 operators that we have across our portfolio. And as a result, we are very confident that we’ve become better owners and that that should translate to better margins when we get back to the peak. So when you look at RevPAR in the future, we are very comfortable that – we don’t know exactly where it will peak, but we’re very comfortable that it should be higher than 31.5% when we’ve gotten through the recovery.

Josh Attie – Citi

And is it possible – when you look at the 2007 peak of 31.5%, is it possible to kind of quantify what the impact was of all the redevelopment projects that you had delivered around that time that maybe you weren’t fully ramped up? So would that 31.5% maybe would have been higher if those projects were fully ramped up?

Michael Barnello

We have not looked at that. That would be a really tough one to do. I mean, we try to do the redevelopment projects in the areas where the impact is the least. As you know, we have had displacement. That would be tough one to do and we have to rebuild it. The way we’ve looked at it is probably easier, as at the 31.5% back in ’07, we know we had a different staffing level across the portfolio. We know we didn’t have any of these programs that we’ve created in place between food and beverage programs, beverage management systems, the housekeeping and pump program we mentioned. All those things were in place. So, hard to quantify, but we know if we were doing those things back in ’07, it would be easy to get much higher than 31.5%.

Josh Attie – Citi

Okay. Thanks a lot. That’s very helpful.

Michael Barnello

Thanks, Josh.

Operator

Your next question comes from Bill Crow with Raymond James.

Bill Crow – Raymond James

Hey, good morning, guys. Couple of questions. Mike, you referenced the amenity program and the success you are having at the independent hotels. You had also tried to convince, I think it was Westin, maybe to adopt at least a trial of that program. Any success with the brands in getting the amenity programs installed?

Michael Barnello

Good morning, Bill. Couple things. Yes, we are still testing the pump dispensers in really all three of our Westins. We have in a number of floors. I know that the Westin folks had preliminarily talked about rolling that out. They have not made a final decision yet, but they are still considering it. In a different brand, Hilton, we have three Hiltons, but they don’t manage for us. But I know they are beta testing that in a number of hotels also. So we’re pretty confident that somebody – one brand is going to make the decision to do that. And obviously we’d hope that they would it sooner versus later, and then we could roll them out in our branded properties. But right now, the success has been largely limited to our independent properties.

Bill Crow – Raymond James

All right. Can you give us any group pace detail for next year? How is 2011 shaping up?

Michael Barnello

Yes, we can. 2011 – right now, we are down 4.8% in room nights and we’re down 2.3% in rate. Now obviously that’s obviously negative. But the one thing that we’ve looked at – because when we look at our portfolio of 32 hotels, when you look at next year, it’s primarily in about five or six hotels. So it’s important to look at which hotels and it’s also important to look at which month. And if you do look at the months that were actually stronger, we are stronger in traditionally weaker periods. And so that makes the overall year look worse than it really is because rates in worst periods will bring the overall rate down. So even though that is clearly a negative number on its face, when you dig into it, we are actually pleased with the pace that we are at right now for 2011.

Bill Crow – Raymond James

So you should – you're pretty confident you’d be solidly positive by the time we get to the end of the year? Is that –?

Michael Barnello

Well, it’s clearly hard to say. But I think with the trends moving, we’re optimistic that we have an uptick in group booking that’s good. And what we’ve told our folks is that there is a reason we’re getting more phone calls for group business that’s further out. It’s because the people are recognizing that rates are more likely to go up than down. And so our perspective is we are – in the last couple of years, you might have taken group business quickly just to have them on the books. We want to be appropriately selective when we take as to not end up with shows that we regret having whenever the quarter comes around. So I can’t tell you exactly where we’ll end up. I’ll just tell you that the trend is working for us.

Bill Crow – Raymond James

All right. And then acquisition disposition, we hear from brokers that you are active looking at both. Any commentary that you can give us, and I guess, particularly interesting on the sales side?

Michael Barnello

Not really. I mean, our position is that when we sold something or bought something, that’s when we announce it. So until then, there’s really nothing to comment on.

Bill Crow – Raymond James

Okay. And then finally, Mike, LaSalle has been a company that’s been focused on dividends for a long time. Are you getting confident enough in the outlook to start to consider raising the dividend?

Michael Barnello

Well, you guys know that the dividend is an important piece of our relationship with the shareholders and it’s obviously important to the folks here at LaSalle. However, as you know, a lot of things go into the dividend decision, including the things you just mentioned, any sales, any acquisitions, and not least which is our outlook for the rest of this year as well as the outlook for the next couple of years. So that’s a long way of saying we have a lot of things to consider. We have not forgotten about it. We know it’s important to everyone. And we just don’t have anything to talk about at this time.

Bill Crow – Raymond James

Fair enough. Thank you.

Operator

We’ll go next to Michael Salinsky with RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Good morning. Just a follow-up to Bill’s last question here. Based upon your revised guidance, will you guys need to be required a special dividend at the end of the year to add 100% of taxable net income or the revised guidance level (inaudible) maintain the current payout level?

Michael Barnello

I’d have to answer really the same way, Mike, is that it really depends on lots of things, not only our outlook, what else happens in the quarter, in the second half of the year, as well as on the acquisitions or sales, as well as our outlook for next year, because there are a lot of things that can happen with the dividend. So it’s just too early to give anything definitive.

Michael Salinsky – RBC Capital Markets

Okay. Second of all, the revised guidance you guys gave, it implies about – implies 2 – I'm sorry. The revised guidance you gave implies 2% to 8% RevPAR growth here in the second half of the year. But if you look at what you guys did in June, 8.5%, you did 9% in April, I’m just curious as to what kind of economic outlook you are looking for? I mean, what kind of economic you’ve based into that? Because it does seem to imply some swelling –.

Michael Barnello

Well, your guestimate for the second half may seem fair in terms of the 2% to 8%. I think from our perspective, couple things. We’re increasingly optimistic about the outlook for the second half of ’10 as well as moving forward. However, two things; one, the second quarter of 2010 had the easiest comparison with 2009 when 2009 was our worst quarter as it was the worst quarter for the industry. So you have that. The second thing is there is still a bunch of noise on a macroeconomic basis that we talked about in the prepared remarks relative to when our jobs growth going to come back, what’s going to happen internationally, what the effect is going to be on, not only internationally travel but how people travel domestically. So I think we’re just being cautious.

Michael Salinsky – RBC Capital Markets

Okay. Third question, during the downturn, you guys reduced the staffing levels quite significantly, some of which will need to come back. But as you look ahead to 2011 at this point, I mean, how much hiring needs to be done being that personnel costs are one of the highest expense variables there?

Michael Barnello

Well, it does depend on our occupancy. But if you recall, during 2009, we only dropped four points in occupancy. Our big drop in 2009 was rate. So if you look back and say we have to gain what we’ve lost in 2009, it wouldn’t be a lot of occupancy. Clearly, we need to hire more folks to deal with food and beverage and more folks to be in housekeeping. But we obviously may do with a lot less folks because I think what happened over the previous eight or nine years was that we just had some staffing inflation. So I can’t answer your question simply. It does have to do not only market-by-market, but hotel-by-hotel with what occupancies they improve to.

Michael Salinsky – RBC Capital Markets

Okay. Is there any plans to staff up ahead of time to potentially bring in –? One of your peers talked about staffing up to try to drive through business. Is there any – do you guys have any plans like that?

Michael Barnello

We have been talking to our operators about group sales folks really since the beginning of the year and making sure that we have the appropriate number. And we have encouraged our teams really to have an extra salesperson and so the better ones have embraced that. But because we feel like that’s easy to measure, either they are booking or they are not. And we’re comfortable that’s the right place to do it. Anywhere else, then we’re not looking at preemptively staffing.

Michael Salinsky – RBC Capital Markets

Okay. And then finally, just in terms of deal volume coming across the desk, how would you compare June and July versus February? I mean, it’s up, but I mean, to what degree has volume increased?

Michael Barnello

It looks monumentally better than it has in the past six to 12 months, or six to 18 months maybe. I wouldn’t characterize it as still a normalized volume level. If you compare the volume level to, say, ’05, ’06, ’07, it would be still down. But again, compared to ’08 and ’09 when there was virtually no transactions or nothing on the market, then it looks much better. It does seem if there is more people who are thinking about it, the brokers seem to be getting more activity, which is all good, but we still think that it’s the way to get back to a more traditional level.

Michael Salinsky – RBC Capital Markets

Okay. Thanks, guys.

Operator

Your next question comes from Dan Donlan with Janney Capital Markets.

Dan Donlan – Janney Capital Markets

Thanks. Good morning. Mike, I was just curious, what’s driving the weakness in San Diego? Is it the new supply from the Hilton or is it the convention calendar just weak? And how has the trend at summer been at your resorts there as well?

Michael Barnello

You do have – with our markets, you have couple things going on. You have downtown San Diego and you have the resorts. So I’d say a couple things. Convention center calendar wasn’t the greatest for the first half of the year. That more affects the downtown properties. And from that perspective, it also had a little bit of impact on the – with the supply, but a lot of that’s been absorbed. If you look forward, Q3 is down citywide, Q4 is actually up. So the second half is a little bit mixed. When you move over the resorts side, our resorts are group-centric resorts. We do a significant piece of business at San Diego Hilton and San Diego Paradise Point on group side. And that just hasn’t recovered as much yet. So it’s hard to look at that market just in one particular loop through one particular lens because we do have two different things going on there. But as soon as the resort market does recover, we are confident the Paradise and the Hilton will regain their share. It’s just we haven’t seen it yet.

Dan Donlan – Janney Capital Markets

And then how does the convention calendar in Chicago look for 2011?

Michael Barnello

2011 is better in citywide, but it’s down in room nights. So hopefully that actually will pick up more than they had in the past. The room night difference will actually pick up. But if you look at it, we’re talking about 32 citywides, 11 versus 27 and 10. But the room nights booked right now are down about 5%.

Dan Donlan – Janney Capital Markets

Okay. And then your EBITDA concentration in DC is high 20% range. I was just curious if there is a cutoff point as a percentage of your portfolio EBITDA that you would not really want to go above.

Michael Barnello

We do monitor that, Dan. We look at whatever the market means on a percentage basis. We have not historically employed any kind of caps on that. Obviously we get concerned as it gets bigger. But what you’ve seen in the last couple of years with DC is certainly we bought a hotel, but also DC did better and the hotels did worse. We don’t think that’s always going to be the case. So it will reverse itself just organically anyway. But no, we are not saying let’s not buy in DC because we have too much. If you look at our company, we are only focused on so many markets. And so from time to time, any one of them might be out of balance, but we don’t think it’s a reason to hold off.

Dan Donlan – Janney Capital Markets

Okay. Moving on to acquisitions, I would assume you all are currently bidding on assets, could you maybe give us some detail on how competitive that bidding is? And who are you typically bidding against? Is it mostly public competitors or has private competition kind of heated up a bit?

Michael Barnello

Couple things. The line activity is increasing. We do look at a lot of different products. And what I would tell you is that for properties in our markets, if the locations that we think have good growth story, then the bidding is going to be competitive. Who we compete against? That completely depends on the type of property. So if you compare and contrast a property like our portfolio like a Madera, a process would have a lot of different types of bidders, you know, a lot of private folks, lot of operators. And if you looked at, say, Westin Copley type of asset, you are talking about more financial type folks, more REITs. They would be some international bidders. So it’s totally dependent upon what the type of asset is.

Dan Donlan – Janney Capital Markets

Okay. And then lastly, given the chatter about economic growth slowing in the second half of this year and into 2011, have your underwriting changed at all in the last few months? I mean, are you looking for maybe a higher going in cap rate going forward NOI [ph]? Are you okay with a lower cap rate by historical standards so long as you have a reason about discount to replacement costs?

Michael Barnello

Well, when we look at our underwriting, it’s not – really 2010 is somewhat irrelevant. I mean, we obviously are concerned about what the property is doing currently, but we are looking at five, seven and ten-year scenarios. And so, no, we haven’t modified the activities the past couple months. We still have an optimistic view of what the recovery looks like. And so, A, we’re not looking at any one particular issue in one particular quarter, and we’re also looking at what those hotels or markets did in the last couple of cycles when we look at our underwriting. And so that’s why we do try to look at a couple different lenses and we look at five, seven and ten and not just one particular time period.

Dan Donlan – Janney Capital Markets

Okay. Thank you.

Operator

We’ll go next to Damian Brewer [ph] with JPMorgan.

Damian Brewer – JPMorgan

Good morning, everyone. Just one question on how attrition and cancelation trends are faring right now.

Michael Barnello

Cancelation and attrition are down. Our second quarter was down from about – in the second quarter of 2009, we had about $3 million attrition and cancelation and we had about $1.7 million in the second quarter of 2010. So, down about $1.1 million. So percentage-wise it was formally about 1.7% of our revenues and now kind of about 1%. So it’s down. I mean, it’s a good thing in some respect because it weren’t showing up. It’s obviously a bad thing because the cancelation attrition has huge flow-through impacts.

Damian Brewer – JPMorgan

Okay. Thank you very much.

Operator

(Operator instructions) We’ll go next to Chris Woronka with Deutsche Bank.

Chris Woronka – Deutsche Bank

Hey, good morning, guys. Appreciate that that absolute EBITDA margin guidance to help us with the acquisition. And I’m kind of curious if you took out Bloomington and Seaview, how much of a just roughly difference would that kind of make.

Michael Barnello

In terms of our outlook for 2010?

Chris Woronka – Deutsche Bank

Yes, or the margin or something like that. I’m just trying to –

Michael Barnello

We haven’t looked at it, and quite frankly, we probably wouldn’t give it to you anyway.

Chris Woronka – Deutsche Bank

Okay. Got you. If you guys end up selling an asset or two, I mean, should we assume that you are going to redeploy that into other assets reasonably quickly?

Michael Barnello

Like we said earlier, we really don’t comment on a sale or a purchase until we have something to announce. As far as the question of the overall capital stack, lots of things go into that equation, the deals we’re looking at, the deals we are – our outlook capitalization program and our outlook for 2011 and beyond. So it’s really hard to answer that question in absolute.

Chris Woronka – Deutsche Bank

Okay. And then just on Lansdowne, could you give a little color on what’s happening there? I know it’s not exactly part of the DC market, but close. Just what kind of is the issue there right now?

Michael Barnello

Well, we’re getting too specific about any individual property. And we tell you that Lansdowne is part of our resort category. Resorts have been a struggle for some time. And Lansdowne has been affected by that. It’s a high-end resort, which gets lot of their business from incentive travel, corporate travel. And as that’s gotten hit, that hotel has had to struggle. So we don’t believe that’s a permanent issue, both for resorts or for common centers overall. It’s just going to take a little longer period of time to actually go to the system. And as companies get more comfortable that they are not going to be (inaudible) for having those meetings or to get more comfortable that their company itself is strong enough to do it, then we’ll see more bookings. We’re just not seeing them right now.

Chris Woronka – Deutsche Bank

Okay. Very good. Thanks.

Operator

That concludes the question-and-answer session. At this time, I would like to turn the conference back over to Mr. Michael Barnello for any additional or closing comments.

Michael Barnello

Thanks, Katie. Thanks, everyone. We look forward to talking to you next quarter. Until then, keep traveling. Thanks.

Operator

That does conclude today’s conference. We thank you for your participation.

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Source: Lasalle Hotel Properties Q2 2010 Earnings Call Transcript
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