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Lasalle Hotel Properties (NYSE:LHO)

Q3 2010 Earnings Call Transcript

October 21, 2010 9:00 am ET

Executives

Michael Barnello – President and CEO

Hans Weger – CFO

Analysts

Ryan Meliker – Morgan Stanley

David Loeb – Baird

Jeffrey Donnelly – Wells Fargo

Michael Salinsky – RBC Capital Markets

Dan Donlan – Janney Capital Markets

Shaun Kelley – Bank of America/Merrill Lynch

Tim Wengerd – Deutsche Bank

Josh Attie – Citi

Operator

Good day, and welcome to this LaSalle Hotel Properties third quarter 2010 conference call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Barnello, Chairman and Chief Executive Officer. Please go ahead.

Michael Barnello

Thank you, Denise. Good morning, everyone, and welcome to the third 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 third quarter, Hans and I will discuss the company's activities in the quarter, the performance of our assets, and the trends affecting them. 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 Q&A. 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. Actual 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 release are available at our website, www.lasallehotels.com. Our most recent 8-K and the yesterday's press release include reconciliations of non-GAAP measures such as funds from operations to the most comparable GAAP measures.

Third quarter funds from operations or FFO was $8.5 million as compared to $30.5 million in the prior year. FFO per diluted share was $0.12 compared to $0.49 in the third quarter of 2009. For the third quarter of 2010, it included $23.6 million impairment loss related to the sale of the Seaview Resort and a $600,000 worth of transaction cost.

EBITDA for the third quarter increased to $55 million from $48.4 million in the prior year. EBITDA for the third quarter of 2010 included the $29.2 million gain on sale related to the sale of The Westin City Center Dallas, partially offset by the $23.6 million impairment loss related to the sale of the Seaview Resort and a $600,000 of transaction cost.

RevPAR for the total portfolio grew 6.3% in the third quarter. The RevPAR growth was a result of 5.8% increase in ADR to $181.64 and a 0.5% increase in occupancy to 81.7%. Our portfolio generated $52.7 million of EBITDA in the third quarter of 2010 versus EBITDA of $49.6 million for the same period of 2009, an increase of 6.4%. The portfolio-wide hotel EBITDA margin in the third quarter was 31.4%, an increase of 44 basis points compared to the prior year.

For the nine months ended September 30, 2010, FFO was $45.8 million compared to $74.9 million for the same period in 2009, or $0.67 per diluted share compared to $1.45 per diluted share for the same prior year period. FFO included the $23.6 million impairment loss related to the sale of the Seaview Resort and $2 million of transaction costs.

For the nine months ended September 30, 2009, net loss and FFO included $5.7 million of after-tax income related to the recognition of prior termination cure payments and a $1 million fee for exchanging the Series C Cumulative Redeemable Preferred Shares of Beneficial Interest for the Series G Cumulative Redeemable Preferred Shares of Beneficial Interest, the Preferred Share Exchange.

EBITDA for the nine months ended September 30, 2010 decreased to $125.4 million from $129.2 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, EBITDA included the $29.2 million gain on sale related to the sale of The Westin City Center Dallas, partially offset by the $23.6 million impairment loss related to the sale of Seaview Resort and the $2 million of transaction costs.

For the nine months ended September 30, 2009, EBITDA included $9.5 million of pretax income related to the recognition of prior termination cure payments and the $1 million fee related to the Preferred Share Exchange. Room revenue per available room increased 2.6% for the nine months ended September 30, 2010 to $133.80 versus the same prior year period. The RevPAR growth was due to an ADR increase 0.1% to $177.46 and occupancy increase of 2.5% to 75.4%.

For the nine months ended September 30, 2010, the company’s hotels generated $127.9 million of EBITDA compared with $127.6 million for the same period last year, an increase of 0.2%. The portfolio-wide EBITDA margin was 28.5% and was limited to 58 basis point decline in the same period last year.

As of the end of the third quarter, the company had total outstanding debt of $759.5 million at an average interest rate for the quarter of 4.9%, including the $135 million outstanding on our senior unsecured credit facility. At the end of the third quarter, the company had an aggregate $333.8 million available on our combined credit facilities.

As of September 30, 2009, total debt to trailing 12-month Corporate EBITDA, as defined in our senior unsecured credit facility, equaled 4.3 times. And trailing 12-month Corporate EBITDA to interest coverage ratio was 4.5 times.

During August, the company sold 3.3 million common shares through our ATM program for net proceeds of $74.9 million. On September 1, we sold Seaview Resort for $20 million and purchased three hotels in separate transactions for an aggregate purchase price of $292.5 million, which Mike will discuss later in the call.

On September 14, we announced the Board increased the quarterly dividend from $0.01 to $0.11 per common share for the third quarter of 2010. The third quarter dividend was paid on October 15 to common shareholders of record on September 30, 2010.

On September 30, we sold The Westin City Center Dallas for $50 million. The company recognized a book gain on sale of $29.2 million for The Westin City Center Dallas and an impairment loss of $23.6 million for Seaview, resulting in a net book gain of $5.6 million.

From a tax perspective, the company recognized a tax gain of $26.5 million for the sale of The Westin Dallas, offset by a tax loss on the sale for Seaview of approximately $30.5 million, resulting in a net tax loss of $4 million.

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

Michael Barnello

Thanks, Hans. Our industry has seen quite a turnaround during the past 12 months. First, demand turned positive in December of 2009 for the first time since July of 2008 and it strengthened throughout 2010. Second, in March, the industry experienced the first month of positive industry RevPAR growth since July of 2008, an important inflection point. And third, June was the first month to reported increase in average daily rates since September of 2008, another important inflection point.

In the third quarter, the industry continued to build upon the positive momentum experienced during the second quarter. The industry demand increases in the third quarter have been some of the strongest in history, with July posting an increase of 9%, August increase of 8.3%, and an increase of 8.4% in September.

When we look at the major segments of demand, there is continued improvement above the group and the transient arenas. Groups, corporations in particular, have been gradually increasing the number and size of their meetings, the number of employees attending conventions and meetings, and their length of stays.

Group occupancy across the industry in the US continues to strengthen versus last year. Group occupancy is up 8.3% year-to-date through September 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 of the industry remained up 4.1% year-to-date through September.

On the transient side, industry occupancy continues to be positive in the third quarter, a trend that has continued since the second half of 2009. In addition, during the third quarter, transient rates across the country have remained positive through September, a trend that is expected to continue. Overall, the US industry experienced RevPAR gain of approximately 8.4% during the quarter, which is overwhelmingly made up of occupancy as rate ticked up slightly.

For LaSalle Hotel Properties, our portfolio experienced a 6.3% increase in RevPAR, with occupancy gains of 0.5% and an ADR growth of 5.8%. Overall, we are looking at our mix of group and transient business. Group rooms were up 3.9% in the third quarter compared to last year with ADR up slightly 0.7%, while transient rooms in the quarter were down 0.6% with ADR up 8.5%. For the quarter, our overall business mix shifted to 32% group and 68% transient, which is more in line with our historical averages for the third quarter.

In the third quarter, RevPAR at our urban hotels increased 12.3%, with occupancy up 1.6% and ADR up 10.5%. RevPAR at our convention hotels increased 3.3%, with occupancy up 2.1% and ADR up 1.2%. Our resorts were our weakest property type. RevPAR was down 1.5%, with occupancy down 5.5% and ADR up 4.2%.

On a monthly basis for our portfolio, RevPAR growth improved throughout the quarter increasing 3.6% in July, 6.8% in August, and 8.5% in September. When comparing our market results this quarter year-over-year, our properties in Washington DC, New York, Chicago, and West Hollywood performed close to or above the industry average. Those results were slowly offset by results in Boston 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 best performing market, up 15%. West Hollywood also had strong performance with growth of 9.3% during the quarter, with occupancy up 0.7% and rate up 10%. Our properties in Chicago also exceeded the industry average in the third quarter as RevPAR increased 10.5% due to a 3.3% increase in occupancy and a 7% increase in ADR.

In addition, Seattle posted an increase in RevPAR of 6.8%, the result of the gain in occupancy of 0.7% and an increase in ADR of 6%. RevPAR of Boston properties gained 3.6% in the quarter. Occupancy decreased 1.9% while average rate was up 5.6%. San Diego was our weakest market. RevPAR of San Diego properties declined 0.8% with occupancy down 6.9% and ADR up 6.6%. Consistently poor weather compared to normal summers made for tough occupancy story in San Diego.

Our vast performing properties for the quarter, as measured by the change in RevPAR, were the Hotel Sax, Liaison Hotel, Donovan House, Onyx, Monaco San Francisco, Grafton, Westin Philadelphia, and all of the Kimpton Hotels in DC. Our weakest properties in the quarter include the Lansdowne Resort, San Diego Paradise Point Resort, Hilton San Diego Resort, Chaminade, the Indianapolis Marriott, and the Embassy Suites Philadelphia.

Portfolio-wide revenues for the quarter increased 4.9% with RevPAR up 6.3%. Food and beverage revenues improved 3.2% in the third quarter. From a capital reinvestment perspective, we made $10.3 million of capital improvements in the portfolio in the third quarter, the largest percentage of which relates to deposits for the room renovation at the Westin Copley.

Looking forward, the most significant project commencing later this year is the room renovation at the Westin Copley as well as some smaller room renovations that will commence at the Topaz, the Rouge, Le Parc, and the Hotel Viking. In addition to the dispositions Hans mentioned earlier, we had a very active in terms of acquisitions.

On September 1, we acquired the Hotel Monaco San Francisco for $68.5 million, The Westin Philadelphia for $145 million, and The Embassy Suites Philadelphia – Center City for $79 million. Hotel Monaco, which Kimpton will continue to manage, is a AAA Four Diamond urban, upscale full-service hotel.

The property features 201 guestrooms, including 35 suites. The hotel’s restaurant Grand Café seats 190. The Hotel Monaco includes 9,000 square feet of flexible meeting and function space. The hotel sits within two blocks of Union Square and is well located relative to the Financial District and the Moscone Convention Center.

The Westin Philadelphia, which will continue to be managed by HEI Hotels, is a AAA Four Diamond urban, upscale full-service hotel. The Westin Philadelphia has 294 guestrooms, including 19 suites. The property also features three food and beverage outlets and 17,000 square feet of flexible function space. The property is located at 99 South 17th Street at Liberty Place, which is a mixed-use development with over 2.5 million square feet of Class-A office space and more than 70 retail outlets.

The Embassy Suites Philadelphia – Center City is a 288-suite, urban, upscale full-service hotel. The property will also continue to be managed by HEI Hotels. The average suite size of the Embassy Suites Philadelphia is 700 to 750 square feet. The property has 3,000 square feet of meeting space and a third-party lease for a 280-seat full service restaurant located on the lobby level. The hotel is located one block off of the Logan Circle. The nearly Philadelphia Convention Center is currently being expanded, and its new entrance, when completed, will be only four blocks from the Embassy Suites.

Subsequent to the end of the quarter, on October 6, we acquired the leasehold interest in Hotel Roger Williams for $90 million plus $4.5 million of additional costs, of which approximately $500,000 will be recognized as transaction expenses during the fourth quarter of 2010. The 193-room hotel is located at the corner of Madison Avenue and 31st Street in Midtown, New York City.

The property features a three-meal restaurant called the Lounge Roger Williams and offers 1,300 square feet of meeting and function space. The building was originally constructed in the 1930s and was converted to a hotel in 1998. The hotel continues to be managed by JRK Hotel Group. We are excited about these acquisitions as well as our ability to take advantage when we expect to be more robust transaction markets over the next few years.

Let me turn to our outlook for the remainder of 2010. From a macroeconomic perspective, our economic indicators have continued to be mixed. Unemployment of 9.6% is still historically high, and the recent economic news have left experts cautious in the timing of jobs recovery. Consumer confidence, which has improved in August, retreated in September, caused by an inexplicable link to jobs growth and international economic concerns.

Airline employments have been steady to positive throughout the third 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 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 nine months of the year. The industry continues to regain some of what was lost in 2009.

Supply growth continues to moderate, and while up 2.2% through September of 2010, it is expected to be in the 2% range for the industry for the year. We also believe based on the continued drop in the future supply pipeline, the 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 a 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. Last quarter we mentioned our concerns about Chicago and San Diego. As expected, Chicago had shown some improvement in the second half of the year despite a tough convention center calendar and an increase in supply, which unfortunately will continue short-term. San Diego continues to lag, the result of relatively weak demand in Mission Bay due to unusually poor weather.

Our resorts, which have been our worst performing segment overall, as they have struggled to decrease in mid-week business, continued to lag. As mentioned in previous earning calls, we expect this particular segment of business to be one of the last to improve.

Our quarterly booking trends have been strong. Overall bookings during the quarter improved in rate and occupancy in both the group and transient segments, an improvement over the second quarter. 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 third quarter were at a higher rate than same quarter last year. This is a continuation of the trend that started in the first quarter of 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 October 1, group pace for 2010 is up 1.5% in room rates on the books. This represents an increase from our pace in July when we were at 1.1%. 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.

Our group pace ADR, which is down 3.6% compares favorably to a rate pace down 6% in July 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. As expected, our group room rates have improved throughout the year and we are hopeful that we can build upon the recent trend and 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 October 1, transient rooms in the books for 2010 are up 2.7%, ahead of the same time last year. In addition, there has been significant improvement in rates. Our transient ADR is now up 3% compared to last year, a tremendous improvement from up 0.6% on July 1. 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 best practices that create great facilities and lower costs. Our entire team remains focused on our hotel operations. Our focus remains that of working with our operating partners to deliver industry-leading EBITDA margins in 2010 and beyond.

We remain optimistic about the timing and strength of our ongoing recovery. We are pleased with the progress made in our third quarter results as well as improvements in lodging fundamentals and are excited about the opportunities for growth in the acquisitions market.

We feel confident that we have taken the steps necessary to maximize revenues, maintain a strong balance sheet, and protect the long-term shareholder value. We believe we have positioned the company to grow and take advantage of 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. Denise?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will take our first question from Ryan Meliker with Morgan Stanley.

Ryan Meliker – Morgan Stanley

Good morning, guys.

Michael Barnello

Good morning, Ryan.

Ryan Meliker – Morgan Stanley

Just a couple of quick things here. I think first of all, can you give me an idea of what the term of the ground lease for the Roger Williams is? Could you give us some color on where 2011 group pace looks? You obviously gave us great color on 2010, but (inaudible) 2011, I think any information there will be helpful. And then lastly, it looks like your implied guidance for (inaudible) growth, it looks like relative – a decline from 3Q. I mean, 3Q is a little over 6% and 4Q flat to 4% growth. Is that just because you are expecting tougher comps as demand came back in 4Q, or are you seeing any changes in trend in that or not yet seeing in the (inaudible)? Thanks.

Michael Barnello

Okay. Let me sit back and remember all of them. As far as the term of the Roger Williams ground lease, there is 34 years remaining on the ground lease, as far as in December 2044. As far as our 2011 pace, the room rates are up 2.5% and the rate is down 0.8%. What’s interesting about the pace is – and this does take a little bit about how we’ve experienced the performance this year relatively to resorts is that the rate pace and the room pace for resorts is actually dragging the 2011 pace down even further. So if you look at our pace, it’s really a tailor to set fragments. Our 2011 pace without the resorts is actually up 3.2% in rooms and flat in rate, where as resorts are actually down 1% in rooms and down 5.5% in rates. That’s the difficult news. But the good news is, where we have the rooms actually placed for 2011 is actually much more favorable. And that’s more meaningful in a small portfolio like ours, because if we can pre-book the off-months like the first quarter and the fourth quarter higher, while the rates may look up compared to year-over-year, it’s actually a better situation because we know we can book in the stronger months. So that’s positive. The other questions were –

Ryan Meliker – Morgan Stanley

(inaudible)

Michael Barnello

Okay. As far as the outlook for Q4, couple things. We did a little better than the industry last year. So we have a little tougher comp. We have a couple of convention calendars or core. Philadelphia has a tough comparison as the San Francisco. We have Indianapolis had a great quarter last year with some one-time group business that just is not returning. In fact, Indianapolis is actually one of the major contributors for lower Q4. Resorts continue to be weak in the fourth quarter. And we are seeing a little bit displacement from the renovation we’re going to have at the Westin Copley and the Rouge to kick it off, but that’s fairly minor. So, all those things may together give you the ranges that you mentioned.

Ryan Meliker – Morgan Stanley

It sounds like then there is – it's not that you are seeing any slowdown in trends. You’ve just got some challenging comps from challenging convention calendars in the renovation.

Michael Barnello

Exactly.

Ryan Meliker – Morgan Stanley

Great. That’s what I want to hear. Thanks.

Operator

And we’ll take our next question from David Loeb with Baird.

David Loeb – Baird

Mike, you guys have done a tremendous job with margins during the downturn. I wonder if you can just talk about some of the challenges you have faced to let costs out a little bit more and how do you plan to manage through that. I expect your margins will stay higher than your peers. But it seems like you might have difficulty having the same kind of margin growth.

Michael Barnello

That’s hard to say, but here is what I will tell you relative to our expectations. We are actually very pleased with the quarter’s margins. With the 6.3% RevPAR, our expenses grew 4.2%. And as we’ve talked about in prior calls, a lot of that is the wages and benefits that were, in many cases, frozen in 2009 and were reinstated in 2010. And as you guys know, wages and benefits are 60% of the costs to run our business. So that’s substantial. As things have gotten better, a lot of things we’ve put in place last year, they don’t continue. So the furloughs that we had in a number of properties, that’s not taking place in 2010. We are seeing an increase in management incentive fees, which is a good thing, which means we are sharing and do better also.

We are also seeing a tremendous turnaround in the bonus accruals that largely went away in 2009 and they will come back in 2010 as more and more of our hotels look like they are going to beat budget and beat budget substantially relative to what we thought in the beginning of the year. When we look forward, quite frankly, this is actually pleasing us more where we are now than where we had been in the prior cycle. In fact, if you recall, in 2004, we were – our RevPAR was up almost 10% – 9.4%, and our margin growth was 68 basis points. And so we’ve gotten a lot more efficient since then. And what we’ve told folks in the past is that generally it takes 2% to 3% of RevPAR growth overall to actually maintain a stable cost structure in terms of paying for wages, benefits, etc.

And if you look at our outlook for the year in the 2% to 3% range and look at our outlook for our margins for the year, they are right about flat on either side of that. And so that’s actually been fairly consistent. The other thing that I will mention is that our margins, you know, each peak we’ve gone higher because we’ve gotten better at managing expenses and we’ve learned a lot from our operators on being more efficient. The other thing that’s noteworthy is that after the downturn in ’01, ’02, and ’03, the amount of margin that we regained from ’04 to ’07, our last peak, was 450 basis points. So it’s impossible to tell exactly how – where we will peak next time, but we are very comfortable about the peak will be higher than when we peaked in ’07, which was 31.5%.

David Loeb – Baird

That’s quite impressive. Can I ask you one more about acquisition market?

Michael Barnello

Sure.

David Loeb – Baird

You’ve been incredibly active with seven transactions this year. Where do you see acquisition pricing trends and availability of assets over the next year? Do you think that prices are stable where they are? And do you think you will see more opportunities to bid or do you think it’s going to drab again?

Michael Barnello

We think it’s going to continue. We think it will be as good as it has been the last six months and likely to get stronger in terms of the price that are available that are in a market that we would well look at. That has grown really quarter-to-quarter as more sellers, for whatever reason, are coming to market. Either they are experimenting with the sale or they really have to sell for some other pressure. And more and more of those deals are actually intriguing because they are core markets for us. So it’s a good thing. As far as pricing, it still seems there are more buyers than sellers. So pricing will be competitive for most transactions. We’ve been able to do, say, the Roger Williams off market. So it wasn’t a competitive situation, which was fortunate for us. But I think in general you’re going to see a lot of people chasing what folks think are good deals. And so in core markets with great locations, great assets, I think the pricing is going to be pretty stiff.

David Loeb – Baird

That’s great. Helpful. Thank you.

Operator

And we will now have our next question from Jeffrey Donnelly, Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Good morning, guys. Mike, I guess to start off, in Indy, I think lodging is building up pretty significantly. The Marriott product is going to open soon. How do you think about the impact that you could see in your Marriott in that market?

Michael Barnello

They are building a new hotel. It’s opening in February. Here is what we’ve seen. Our pace is slightly off in Indianapolis for next year and I’d say that’s good thing because they are all Marriott products that lodging is running. Our downturn in pace for next year is monumentally better than the rest of the market is what we are hearing. So while it is taking some of the business in Indianapolis, it is largely taking it from other hotels. That’s a good thing. On the other – the other positive is that Indianapolis is actually of course part of a terrific convention center here next year. The bookings are up some 35% next year. That’s a great thing. The JW Marriott that (inaudible) was trying to open with the expansion of the convention center. So that must be completed in the first quarter of 2011.

So while we are not excited at the new supplies coming to market, the thing that we’ve looked at, we reminded investors about, is that we bought LaSalle in 2004. In 2001, when the hotel opened, our hotel was 615 rooms and it was a shock to the market in terms of supply. But because of the convention center actually expanded the same year in 2001, what you had is you had an increase in supply, the effect of 9/11 and you had the convention center expansion and effectively it neutralized everything. So a lot of folks thought it was going to be horrific, but the market was actually fairly flat that year. So we’re not quite about the fact of supply, but at the same time, we are encouraged by the convention center and the increased bookings.

Jeffrey Donnelly – Wells Fargo

I guess to shift gears towards the East, frankly I think some folks have been somewhat skeptical-like, maybe the right word around, for key pricing of some of the Philadelphia assets. And I know you touched on in your remarks, but could you maybe a take a moment just to talk about how you think about Philadelphia, maybe broadly how we should think about this asset? Is it sort of in the, call it, the income bucket for LaSalle versus more of a growth play and maybe how we should think about things like construction costs or specific plans for the property?

Michael Barnello

Well, I’d say couple things. Philadelphia was not – never been a target market for us. And well, we have looked at Philadelphia like we looked at lots of markets over the last 12 years. And so in the past couple of cycles, the issues that we had with Philadelphia was while the compound annual growth rates for RevPAR was decent, the supply stories in the last two cycles was much worse than it was in the markets overall. So, as an example, the supply story in the 1990s was about 9%. When you look at what happened in 2003 to 2008 when the country grew 5.6% RevPAR, Philadelphia grew 8%, which actually would rank in the middle of our target markets.

So just to make a point about where we’ve taken to the market, we look at two things, the compound annual growth rate as well as the nominal RevPARs of the market. And why we look at the nominal RevPAR is because the cost structures market-to-market are fairly similar across the same, generally, amount of money to run a hotel in Chicago as Philadelphia has lost and Boston as only markets that we’re not in, at Miami, Atlanta, etc. And if our nominal RevPAR is higher than the 3% rate growth where the nominal RevPAR is higher, we will just translate to more dollars to shareholders. That’s one thing. So we look at that as a macro.

And when we look at Philadelphia at the outlook, we are pretty excited about a couple things. Supply is largely in check. We have great hotels with great locations. The Westin, which you mentioned, is located really in Maine, 17th in market. And we have an expansion of the convention center. I mean, we don’t have that happening really in any of our other major markets. I mentioned it in Philadelphia and Indianapolis, and that’s obviously a great thing. The Philadelphia convention center is expanding by 50%. It opens in March 2011, and it will do two things. One is obviously bring a lot business to Philadelphia and it’s fairly flat. It’s up a little bit for next year in terms of the conventions. Conventions for Philadelphia are 15 next compared to 11 in 2010. So that’s positive. But the real boost is coming in 2012 and beyond. So the bookings are substantially in 2012. So that’s going to be a big growth story.

And then talking about hotel itself, you mentioned the per key price. We believe we have the best hotel in Philadelphia. I mean, it was built 20 years ago as a St. Regis – I'm sorry, the Ritz Carlton. It was run as a St. Regis for many years. And the yield has been just under 10% on a trailing 12 basis. It’s actually compelling when you think that our outlook is for growth, both in terms of the Philadelphia market, which has been depressed over the last couple of years because of the downturn in the economy as well as the expansion of the convention center. So big picture, increased demand, improvement in the convention center, and supply in check list, Philadelphia is a very good story for the next cycle. As for the – sorry?

Jeffrey Donnelly – Wells Fargo

No, no.

Michael Barnello

As far as the per-key basis, we have looked at all the metrics that you would normally look at, including a per-key costs when we buy an asset. And what I would tell everyone is that we have been seduced in the past by a low per-key price where the thesis was it’s such a low price per key, how could you get hurt? And we’ll tell you. We’ve bought properties that we thought were low price per key and then we’ve sold them in a couple cases a couple years later at a lower price per key. And so you can fall into that trap. Conversely, on the times that folks have suggested that the price the price per key was high for great real estate, great markets, great locations, those have been some of our best performing assets like the Hilton Hotel, Alexandria, The Hilton Gaslamp, way back when (inaudible), New Orleans, even Indianapolis, which were paid almost $200,000 a room for, back in 2004. So it’s one metric. Everyone should look at it when they look to buy, but we’re combining income with long-term shareholder growth to make our decision whether to buy or not.

Jeffrey Donnelly – Wells Fargo

That’s very helpful. Just one last question and a follow-up though is that – you guys are certainly active in Q3 on the acquisition and disposition side. As a seller of properties, could you give us a little color on what you saw – for example, how many people are requesting information versus those that ultimately submitted bids and sort of what was the profile of the bidders that you guys saw? I mean, anything surprising about who did or didn’t show up or sort of the types of buyers that show up?

Michael Barnello

Well, we sold Seaview and Dallas this year. What I would tell you is that it’s still a robust transaction market. But I think it is – some folks have looked at it as dividing into two categories, trophies and trauma. And while we sold it was not really either. We didn’t sell trauma and I suppose they are not necessarily trophies. How we saw it, there is a big difference between core markets, excellent locations. And in those situations, the bidding is pretty intense. And in some cases, say, with the San Francisco Monaco we just bought, it went to four rounds and the folks that were involved in the process were pretty much household names that everybody thought they could close in two or three weeks, maybe a month.

When we went to sell Seaview and Dallas, what I would tell you is that the activity is still same. There is still a lot of confidentiality agreement signed. There are many tours. And we didn’t get lot of bids. But I would tell you that the difference is that the profile of the bidders is different, whereas you’re seeing a lot of the REITs kind of clamber over the core market real estate. In this case, it’s just a number of bidders that have different reasons for wanting to be in Dallas per se or in Seaview. And I guess that is (inaudible) but fact that if you look at who bought Seaview is a non-traditional buyer. I mean, Stockton College bought it with totally different plans than most hotel owners.

Jeffrey Donnelly – Wells Fargo

And just maybe a last question and I will yield the floor. Maybe this is for Hans. But as it relates to those – the dispositions and maybe just more broadly, a lot of people show up with secured financings sort of already in tow, if you will, and it looks in that trend the last 90 days in terms of the cost, in terms of secured financing on hotels?

Michael Barnello

You’re saying on the properties looking to buy?

Jeffrey Donnelly – Wells Fargo

Well, on the properties you are looking to – the properties you sold, I’m curious how people are financing with their cash buyers versus the client financing. But then more broadly, what’s been the trend in secured financing trend last quarter or so?

Michael Barnello

Well, I don’t know of the trend when we sold a couple hotels. It seemed like those were one of each. One of the buyers paid all cash. We have no idea what they did subsequent, and then a buyer had some (inaudible) on the property. So I don’t know if two hotels makes a trend, but it turned out to be one of each. As far as people who are selling, there are a number of hotels that are for sale that the debt could come with it. Sometimes they are saying it has to come with it. Sometimes they are saying it’s up to you, and sometimes there is no debt at all. That would the rarer case.

Jeffrey Donnelly – Wells Fargo

I’m sorry, I actually mean certain costs in terms of just secured financing in general on hotels.

Michael Barnello

We’re not really in the market right now, but what we are seeing and we’re hearing anecdotally is the loan-to-value is in the 50%, 60% range and in the low-to-mid 5% interest rates. So that’s generally what we’re hearing. The real question is a lot of folks come and help against is the valuations. If it’s an acquisition, it’s different. If it’s just a refinance, it’s harder agreeing on evaluation levels.

Jeffrey Donnelly – Wells Fargo

Okay. Thanks, guys.

Operator

We will now take our next question from Michael Salinsky with RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Good morning, guys. Real quickly, you went down the RevPAR for the quarter. How did Philadelphia perform? And then second of all, just as you look ahead to the fourth quarter for – just curious on how Boston and San Diego look.

Michael Barnello

Philadelphia was 3.1% for the quarter, but remember the quarter was 30 days for us. And as far as Boston and San Diego for the fourth quarter, San Diego is a little bit of tale of two cities. The downtown is doing okay. The Mission Bay is a resort property, and they are continuing to have hard time of it. So it’s a little bit softer.

Michael Salinsky – RBC Capital Markets

Okay. Second of all, as a follow-up to I think Dave’s question earlier, just looking ahead to 2011 in terms of margins, how many – are all the restaurants open fully now are is there additional way to expand that’s needed for next year? And also, as you look ahead to rehiring needs for some of the properties where you are able to cut staff, is there going to – are we looking at significantly hiring next year?

Michael Barnello

Restaurants are all open, Mike. So any kind of tough comparisons that we had in the past had gone away. That’s a good thing. As far as employee count and the plans for next year, what I would tell you is we look at it regularly. And the employee count is actually fairly stable for the past three quarters when we look at ’10 over ’09 level. So it’s a good thing. If you look at what we’ve done and what we’ve seen in the last couple of years, recall that our occupancy was down only 4 points last year. The biggest hit we took was in rate. So we still did a lot of business last year. And we are able to do it more efficiently, so with obviously a lot less employees. And the gain we had this year, which is again through nine months almost all in the occupancy side, 2.5%, again we’ve done with virtually the same staffing levels.

As we look out into the future, we do think there is occupancy growth, but if you think about where we are, we are talking about being pretty close to our occupancy peak. Our occupancy peaks is around 75%, last peak. We are not that far off on a trailing 12 basis and where we’ve been. So we do think there will be occupancy gains. We think hopefully a majority of the RevPAR gains will be in rate and obviously that’s a lot more efficient way for us to grow. And so we will be looking probably at different properties based on different needs to do some hiring, but I would expect to be fairly modest.

Michael Salinsky – RBC Capital Markets

Okay, that’s helpful. Third, in terms of – you talked about the Westin and the Rouge in terms of room refreshes and renovations and stuff in the fourth quarter. Just looking as you are starting to put together, buy these for 2011, should we expect CapEx to jump up materially? Are there any big projects we should be aware of on the horizon?

Michael Barnello

Materially, no. We have a number of projects that we mentioned in the prepared remarks. The Westin Copley is the biggest one. The other properties that are under a normal time base to room renovation levels, we are talking about the Rouge, Le Parc, the Topaz, the Viking. They are much more miner. And really the game plan, if they all go on time, the Rouge will be done by April. And as far as other projects, I mean, there is a little bit of things that are being done with the new acquisitions, but I wouldn’t call it major.

Michael Salinsky – RBC Capital Markets

And finally, just you’ve been active repositioning the portfolio. You sold a few assets, bought a few. Just (inaudible) the portfolio as you look ahead to the next several years here, whether there is further repositioning to do or just what your thoughts are for the portfolio as it is and where you’d like to move it to?

Michael Barnello

We are very excited about portfolio performance so far this year. It’s clearly surprised us and I think really everyone when you rewind to the beginning of 2010. We’re excited about what’s going on in the lodging industry overall in terms of recovery. And our belief is that the recovery is going to be strong and long really from ’11, hopefully for many years, because supply is in check, I mean, if the economies going to continue to strengthen. If we look at our portfolio, we – you guys have heard us talk about our core markets, and in those markets, we believe our hotels are in great shape and we have the right folks operating those properties.

And in the properties that were not core, we’ve sold a couple of the assets. I’ll remind everyone that all the assets that we sold since our IPO have all been assets that were purchased before the IPO. So everything that we bought after the IPO has been really a keeper for us. So again, it’s impossible to really say whether there would be changes because if things happen in certain markets where we get off first, we can’t refuse, then we’re going to act in the best interest of shareholders, but we’re really pleased with the makeup of our portfolio so far.

Michael Salinsky – RBC Capital Markets

Okay. So no plans to recycle at anything – do you think (inaudible) at this point?

Michael Barnello

Again, we – we always will look at properties every year. We do an internal hold versus sell analysis. And that incorporates not only what’s going on the property, what their outlook is for the next couple of years, the capital needs the property and we look at the demand genre if anything changed. That was one of the things that prompted to sell New Orleans back in 2003 was because we saw some shifts in the demand genres that we were uncomfortable with, and we thought it’s time to – and we get out of that market. So, could that happen to other markets? I suppose. But we look at every year.

Michael Salinsky – RBC Capital Markets

That’s all from me. Thanks, guys.

Operator

And our next question will come from Dan Donlan with Janney Capital Markets.

Dan Donlan – Janney Capital Markets

Hi, good morning. Just a question on the F&B revenues. Looking at a quarter-over-quarter, they are roughly flat but yet you had three additional hotels for just a third of the quarter. Was there something going on there?

Michael Barnello

Food and beverage revenues were up 3.2%, Dan. So what we’ve seen is, I wouldn’t point to anything in particular. You can recall that July and August were not the biggest group months for us, and our resorts were tougher. And so it just was a little tighter spend in terms of the overall F&B.

Dan Donlan – Janney Capital Markets

Okay. And then on the ground rent, it looks like your current quarterly run rate is about $8.8 million. With the addition of the Hotel Roger Williams, could you maybe give us any run rate?

Michael Barnello

You’re looking for the amount of the lease payment in the Roger Williams?

Dan Donlan – Janney Capital Markets

Well, roughly.

Michael Barnello

We’re looking up.

Dan Donlan – Janney Capital Markets

Okay. And then just property under development in the quarter, it increased by about $6 million. What was going on – what was driving that?

Michael Barnello

That was all of the renovations that we did in the quarter. So we invested $10.3 million. Some of that was deposits for the Westin Copley. The rest of that was the property under development.

Dan Donlan – Janney Capital Markets

Okay. And if possible, could you give us maybe a pro forma RevPAR number for the fourth quarter 2009 and maybe what margins were for your recent acquisitions and dispositions?

Michael Barnello

The pro forma RevPAR for Q4 2009, Dan, $122.74. Okay? And the margin would have been 27.9%. As far as the margins of deals, we haven’t given forwards. We’ve told folks what the historical were. So if you give me a second, we can pull it out. Philadelphia, the Embassy Suites, the margins trailing 12 through August was – EBITDA 39.4. The Monaco was, again August trailing 12, 17.8. The Roger, trailing 12, 38.7. And Westin – give us a second, I’m trying to pull it out. It’s pretty close to the Embassy actually. It’s about that level.

Dan Donlan – Janney Capital Markets

Okay. All right. That’s it for me. Thank you.

Michael Barnello

Sure.

Operator

And our next question will come from Shaun Kelley with Bank of America/Merrill Lynch.

Shaun Kelley – Bank of America/Merrill Lynch

Hey, good morning, guys. Just wanted to go back to Philadelphia for a quick second. I was wondering if you could talk a little bit more about maybe replacement costs in that market. I know – kind of how much do you think about that as a metric, Mike, when you are kind of looking at underwriting and how do you think about that side of kind of the market in Philadelphia?

Michael Barnello

We do look at that replacement cost, Shaun. I mean, we are clearly aware that – again, it’s one metric that we look at every time we look at a deal. At the same time, we try not to get to hung up on any one particular metric because sometimes that leads us to a bad decision, either going forward the deal or actually telling a deal. And so what we mentioned earlier is that the price point is one thing we look at. We’re also looking at the income provided as well as sustainability of such income as well as the growth opportunities we have. And so when you look at a replacement cost, I mean, we’ve talked about our portfolio being in the 400 to 450 range as a general number.

When you look at, say, the Westin and the Embassy, the Embassy, we bought for $290,000 a room. Replacement cost will be higher than that. As far as the Westin, it’s part of a mix use development, part of it attached to the biggest retail place in Philadelphia. It’s got the best location in Philadelphia. We believe it’s the highest quality hotel in Philadelphia. It’s – again, it could be any hotel that you want. It was run for many years as St. Regis. So we believe replacing it would be more significant than the $409,000 room we paid for it.

And the bigger question is, when you throw out replacement cost, is it – that’s for somebody else to actually go and build those things. I mean, we don’t think that there is a plot of land that’s available so close to lend itself to recreating the same type of hotel that we have, especially with the yields we have in place. So from that perspective, we’re very comfortable that what we bought was not only performing now, but is performing so well in turn. So it is something we look at. We’d be foolish not to. And it goes into our calculation. It’s just not the overwhelming metric.

Shaun Kelley – Bank of America/Merrill Lynch

Got it. That’s helpful. And then I guess just as we think about kind of funding for this – kind of for the acquisition opportunities going forward, you guys used the ATM program during the quarter. It looked like as one of the sources of fund as well as obviously some of the proceeds from some of the asset sales. You mentioned, I guess, earlier that you weren’t really looking at secured debt right now. So I mean, is the opportunity – if something else kind of comes to you, how do you think about funding that? Is it going to be off the line? And when do you start considering putting in maybe more permanent financing?

Michael Barnello

Well, we look at the capital stack all the time. And we look at both in terms of what we have going on currently, what if anything is maturing short-term, what our outlook is for the portfolio short-term and then to the next year or two, and then we then corporate whatever else we’ve got going in terms of acquisition and disposition. So we are constantly looking at the right balance in the capital stack. And we haven’t abandoned any one particular part of our philosophies. So we have put secured debt in the properties in the past. I expect that over the next number of years, we will do it in the future. But we’re trying to keep the outlook for the next couple of years in check with what our capital stack looks like today. And recall that we did take on some secured debt with the Roger Williams. So it had about $64 million worth of secured debt in place that we just had to assume. So even though we weren’t in the market to go and purchase that, we actually assumed it as part of the acquisition.

Shaun Kelley – Bank of America/Merrill Lynch

Got it. That’s helpful. And then I guess last question, just – maybe a bigger picture on the acquisition opportunities. We’re hearing more about some bigger deals coming kind of down the pipe maybe in some of the larger – like metro markets. Are you guys seeing that as well? And kind of like – are you starting to see private buyers start to show up in some of the conversations? Because it does sound like, to your point, maybe some of these trophy assets have been mostly re-buyers you’re competing against. So I’m kind of wondering if you’re starting to see private guys starting to show up at some of those processes as well.

Michael Barnello

There generally have been private folks involved in a number of the rounds of the bidding. So it’s just the last nine months of deals have been predominantly won by the REITs. So the private folks have done some deals this year. It’s just been minority. As far as where it will shake out in the next 12, 15 months worth of deals is really hard to say. As far as your question on other bigger deals coming to market, sure. I mean, as the economy recovers, as people have their own pressures, say, with their own properties, whether it’s a refinance or they just want to sell for personal reasons, people have been bringing more and more to market. So it’s not surprising that some of these assets have been bigger deals. And a lot of the properties that are on the market, obviously they haven’t closed yet. They haven’t (inaudible) winter. So we’ll see if it has changed or if it can be just the REITs that dominate. It’s hard to say.

Shaun Kelley – Bank of America/Merrill Lynch

Got it. Thank you.

Operator

(Operator instructions) And our next question will come from Tim Wengerd with Deutsche Bank.

Tim Wengerd – Deutsche Bank

Hi, good morning, guys. A quick question just on pro forma RevPAR. You had the three acquisitions in this quarter and the Roger Williams. For 2009, what would RevPAR have been roughly?

Michael Barnello

As far as – we took a look at taking out Dallas and Seaview for the year. And what we’d tell you is the RevPARs are actually fairly close, it’s fairly material change for a couple reasons. One, they are pretty close, but also they are fairly small assets. And we haven’t – we just gave the fourth quarter out for pro forma and we gave historical out for the four acquisitions. Does that answer your question or are you looking for something else?

Tim Wengerd – Deutsche Bank

Yes. I mean, I should be able to get very close. The fourth pro forma that you just gave out, did that include Roger Williams or not?

Michael Barnello

Yes, it did. And as a reminder, in February, when we give our fourth quarter earnings release, we will restate 2009 as far as our outlook goes – not restate it, but – I'm sorry, 2010.

Tim Wengerd – Deutsche Bank

Okay. All right. And then the other question I guess – there is a lot of meeting space at the Westin Philly. And I was just wondering if you could talk about non-room revenue at the hotel, say, last year and then also if you are seeing – you mentioned the expansion at the Philadelphia convention center, if you are seeing a difference in bookings pre and post the expansion.

Michael Barnello

As far as the meeting space and the revenues for the last couple years for Westin, we will have that at our fingertips. As far as the information on Philadelphia, the answer is yes. In 2011, the bookings are fairly flat, which is consistent with convention center expansions. People are excited about such an expansion, but no one through the first group books. If you’d start seeing it open in March in a year, I don’t want to book in April in case. For some reason, it’s delayed, or you haven’t worked out the case and service. So that’s pretty normal. If you look at 2012, the bookings are up substantially. And it’s our feeling that it’s going to continue because the meeting space is new, it’s expanded and Philadelphia is a very proximate to a lot of major markets.

Tim Wengerd – Deutsche Bank

Okay. Great. Thanks, guys.

Operator

And our next question will come from Josh Attie with Citi.

Josh Attie – Citi

Thanks. It seems like Paradise Point in San Diego and Lansdowne were big brags on growth in the third quarter? And based on your experience with those resorts in those markets, how much of a lag do you think there will be and when do you think fundamentals at those hotels start to turn? Is it a 2011 story or 2012?

Michael Barnello

Well, getting to the core of the problem there, it’s not been a leisure component. It’s been the group component, Josh. And the reason for that is that while leisure has been something that held up in the last couple of years because we can induce a lot of leisure travel with rates. And then corporate travel is the story of 2010 has come back to the country as businesses have gone back to work. We have not seen companies be as willing to put together what they will call non-essential travel. So whether it’s for product rollouts, whether it’s for incentive trips for their vast performers or fam trips, etc., that hasn’t happened as much. And that was a lot of the business that a lot of our resorts had over the course of the last cycle. And that’s very lucrative, and we clearly (inaudible) was going to come back.

The things that we need to see happen are really tied to employment. With unemployment at 9.6%, it’s our sense that corporations are not necessarily feeling that they have to wine and dine their employees quite as much as they had in the past. But as employment comes down and it gets harder and harder to hire people, there will be a focus on retention. And when there is a focus on retention, we believe, there will be more and more times spend with fam trips etc. And that will be an important part of our business. We don’t think resorts are done with, and that’s been a kind of close mix shift in terms of how people look at resorts. Couple things. There are not a lot of resorts being built really. There is nothing to be built on the resort side. That’s a good thing. So competition will not be increased.

And we do believe that employment is going to get better. We just don’t know exactly when. And we believe the people will start using resorts again. It’s just that it’s not as clear if it’s in 2011 or if it starts a little later. I’ll remind folks that part of our strategy though has been diversification between the urban resort and convention market. And as a reminder, the resorts really did very well for us after the events of 9/11. The people didn’t want to travel by plane, so they went to local resorts. So it held up very well. So we believe the resorts will come back. It’s just impossible to tell exactly when.

Josh Attie – Citi

And maybe just to give us a sense of what the upside is to those assets, when you look at Paradise Point and Lansdowne kind of peak to trough, how much was the EBITDA of those properties down?

Michael Barnello

They are down 50%, 60% in some cases.

Josh Attie – Citi

It just sounds like you think they are just later cycle assets.

Michael Barnello

It should be. That’s our belief.

Josh Attie – Citi

Okay. Thank you.

Operator

And we have no further questions in the queue at this time. I would like to turn the conference back over to our speakers for closing remarks.

Michael Barnello

Thanks, Denise. Thanks, everybody, for listening to our call. We look forward to talking to everybody in February with our fourth quarter earnings release. Thanks, everyone.

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