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

Q3 2010 Earnings Conference Call

November 4, 2010 10:00 AM ET

Executives

John Stander – VP, Corporate Finance

Laurence Geller – President and CEO

Diane Morefield – EVP and CFO

Analysts

Smedes Rose – Keefe, Bruyette & Woods

Ryan Meliker – Morgan Stanley

Chris Woronka – Deutsche Bank

Will Marks – JMP Securities

Jeffrey Donnelly – Wells Fargo Securities, LLC

Joe Graft – JP Morgan

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2010 Strategic Hotels and Resorts earnings conference call. My name is Christine, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. John Stander, Vice President of Corporate Finance. Sir, please proceed.

John Stander

Thank you and good morning everyone. Welcome to Strategic Hotels and Resorts’ third quarter 2010 earnings conference call. Our press release and supplemental financial were distributed yesterday and are available on the company’s website in the strategichotels.com within the Investor Relations section.

We are hosting a live webcast of today’s call, which can be accessed in the same section of the site with a replay of today’s call also available for the next month. Before we get underway, I’d like to say that this conference call will contain forward-looking statements under Federal Securities Laws.

These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors please refer to the forward-looking statement notice included within our SEC filings.

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

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

Laurence Geller

Thank you. Good morning and welcome everybody to our third quarter earnings conference call. Yesterday, we reported third quarter RevPAR growth of 7.3% and total RevPAR growth of 6%. These were driven by 1.3 percentage point increase in occupancy and more importantly, a healthy 5.4% increase in average rate. This represents the second consecutive quarter positive year-over-year operating trends where our improvement has been largely driven by rate gains, which clearly have much higher profitability flow-through characteristics.

As a company, we believe a very important operating performance metrics is EBITDA to RevPAR growth ratio with a result of over two times considered successful. This quarter, exceptionally strong adjusted performance, once again produced for us a ratio of well-over three times. And we’re very pleased with the improvements in our business and at least we’re broad-based in the third quarter, which was the first time we’ve seen three consecutive quarters of demand growth since 2007.

We saw rate in occupancy improvement in both our transient and group segments. Our 8.5% increase in transient ADR evidences the elimination of lower rated primarily intimate base bookings that were replaced with higher rate corporate business by strategic plan.

Non-rooms revenue increased 4.5% in the third quarter as F&B revenues grew by 6.8% driven by a 6% increase in banquette revenues and importantly from a consumer trend perspective, a 7% increase in sales at our outlets.

We continue our noteworthy success in containing cost and improving productivity at our hotels. This quarter we reported hotel level EBITDA margin expansion of 150 basis points. Cancellation fees which were $2.7 million in the third quarter of 2009, compared to $1.8 million in the third quarter of this year reduced margin expansions by 50 basis points.

In addition, our hotels step up their accruals for yearend bonuses in the third quarter led by sales driven bonuses and this resulted in a 40-basis point reduction in margins. So, adjusting for these two items, our EBITDA margins expanded a very impressive 240 basis points on a similarly adjusted 6.8% increase in total revenues.

Productivity improvement once again continued at our properties as hours work per occupied room decreased 2.4% during this quarter. Total hours work is an important measure for our segment of the industry and we are pleased that this quarter, total hours work declined 0.6% despite an actual 2% increase in occupied room nights.

Year-to-date hours per occupied room has declined 4.1%, while total hours work has declined 1.4% year-to-date despite an increase in occupied rooms of over 2%. We also benefit from the 11.4% decline in insurance expense and a 3% decline in real estate taxes during the quarter. These are two areas to which we continue to successfully devote significant corporate attention.

Our adjusted EBITDA per available room growth of 22.9% is a strong achievement at this nation’s stage of the recovery and all goes well for the future. We continue to be very encouraged by many macro-level indicators and trends that we track on a monthly basis.

The U.S. Department of Commerce just reported international visitation to the U.S. is projected to increase 9% in 2010, which will set a record of $60 million visitors this year and increase to nearly 83 million visitors by 2015, a 7% CAGR.

Airline activities increasingly strong, with major airlines again reporting strong double digit growth in present. All of our trend line indicators point to returning robust luxury consumption. For example, high-end retailer, Coach, recently reported a 34% increase in profit fueled by 8.5% in same store North American sales. Louis Vuitton, the world’s largest luxury goods maker reported a 24% increase in third quarter sales and Burberry, the U.K.’s largest high-end retailer recently reported an 11% in quarterly revenues.

During the quarter, we announced the contact for the sale of our InterContinental Hotel in Prague. In previous quarterly calls, we’ve discussed our strategy to become a North American centric company and this particular disposition had been as we reported last quarter a priority along that path following our sale of the Renaissance Le Parc in Paris last year.

With selling the Prague hotel for a total consideration of EUR110.6 million, nearly EUR300,000 per key, which represents an 18.1 times multiple on forecasted 2010 EBITDA. More importantly, this removes a EUR102 million mortgage from the balance sheet in addition to the attendance swap liability. This hotel has substantial deferred non-revenue producing capital cost projected in the immediate future. So, the timing of this very well executed sale is clearly advantageous to us.

Additionally, it will remove significant G&A cost as we wind down all related administrative duties. We continue our systematic divestiture of European assets. During the quarter, we successfully renegotiated our agreement with our landlord in Hamburg and brought back over EUR3 million from the escrow security deposit.

As I’ve said in the past, given our comfortable liquidity position, the goal remains to maximize proceeds from these sales. As our asset in London is outperforming our expectations and we believe we can be the beneficiary of selling this hotel into a more bullish investment market than today as cash flows continue to improve and we see evidence of strong future earnings.

2012 pretends to be a very strong year in London. With events such as the Olympics only adding to that momentum and we are carefully monitoring all trends to determine the optimum time to maximize the sale of this prime asset to achieve significant proceeds as part of our overall balance sheet restructuring plan.

As we look forward into 2011 and beyond, we’re increasingly encourage by the favorable lodging supply demand dynamics, particularly for the type of high end hotels we own in those specific high barriers to entry markets in which we operate.

During the previous supply gross cycle, development of new high end assets was often supplemented with condominium sales and facilitated by a very aggressive construction financing market. well, neither of these conditions are present today and replacement cost, which we estimate to be over 600,000 per key excluding land or say 700,000 including land for our portfolio far exceed trading values, which suggest at the minimum that any meaningful supply is at least several years away.

As we look at the coming years, we see at the most a 1% increase in total supply in our markets. While we’re in a position today to give guidance for 2011, we continue to be encouraged by the positive trends we’re seeing in our group pace for next year.

Currently, we’re up 3% in group room nights for 2011 compared to the same time last year and total revenues were 1% higher. This represents a very significant improvement from where we were at just a quarter ago. When group room night pays was down 6% for 2011. We increasingly see the group booking window remains very short term.

For example, we booked 15% of the total third quarter rooms in this quarter, which is about five times the more normalized rate. For all of 2010, roughly 50% of the group room nights currently on the books have been booked this year. This compared with roughly 20% in the year for the year or as we call it itty fitty [ph] bookings in 2007.

During this past quarter, our total market share penetration grew throughout our portfolio in both rates and occupancy with our RevPAR index improving by over two percentage points to 112%. Our index improvement is the significant achievement given our planned decision to focus on driving rates. These positive trends continue today.

We also track compression nights, which we define as nights with 90% occupancy or higher. Again, this important and positive trend continue this quarter as compression nights increased 32% compared to last quarter and with rates which are 19% higher.

So, to summarize our situation, we’re outperforming in our specific markets even with a slower demand pickup in Southern California, where we have significant representation and no representation in currently high demand growth markets such as New York and Boston. Our strategy of aggressively pushing rates continues to succeed even at the limited expense of some occupancy. However, in such cases we deliberately do that so we can increase profit through rate increases rather simply to be driven to increase lower rated occupancy.

Our intense marketing focus on the corporate individual and group travel is succeeding as is our reduction utilization of the opaque booking sites. Our strategy of reengineering our properties with a view to permanent systemic changes in starting levels continues to not only succeed, but be demonstrably sustainable with commensurate margin increases.

Our revenue to EBITDA follow-through targets in excess of two times EBITDA growth to revenue are clearly being met. Supply dynamics in our high end spaces as such we have at least several years before meaningful competitors enter our market. Whereas, we can’t predict long-term pricing elasticity, it appears that upward rate selling will only be limited by our guest propensity to consume our product with increasing price levels and other income is commensurably returning at its anticipated pace.

Given the outlook for our very limited supply with our operating systems successfully in place and rates expected to continually increase for the near future, we can look forward to high margins and high follow-throughs in line with GDP recovery in future trends.

I’d like now to turn this call over to Diane.

Diane Morefield

Thank you, Laurence and good morning, everyone. For the quarter, we reported comparable EBITDA of $33.6 million and comparable FFO of $0.03 per share on North American RevPAR growth of 7.3%. Excluding $3.8 million expense accrued for our VSP Incentive program, which I will discuss in more detail momentarily, comparable EBITDA was $37.4 million and comparable FFO was $0.06 per share.

Our 1.3 percentage point improvement in occupancy is the third straight quarter of demand growth. Our demand growth was concentrated in the highest rated segments of our business, particularly the premium transient channels, where occupied room nights increased 35%. With an ADR of $379, this segment yielded an average rate nearly $170 higher than our overall average rate of $212 during the quarter.

Occupancy gains were partially muted as a result of a deliberate strategy of reducing lower rated discount transient business often sold to a variety of internet sites. This category fell over 12%. However, this quarter, group room nights increased 4.4%.

As we’ve mentioned during the past few calls, our operating team remains focus on driving higher rates at the hotel. During the quarter, we reported a 5.4% increase in ADR driven by an 8.5% increase in the transient rate. The average rate in the discounted transient segment also improved almost 9% reflecting the continued and planned elimination of rooms sold through the opaque internet site.

Total group rate was up only 0.5% during the quarter, but this is primarily a reflection of the group nights that were put on the books last year during the depths of the lodging cycle.

Corporate group, which represents practically 60% of our total group nights, was up 5% in occupied room nights and 2% in rates. Notably, we continue to see strength in the financial services sector of corporate group booking.

In the association group segment, room rates grew almost 10% during the quarter.

RevPAR improved at both our urban and resort locations with resort ADR up 7% in the quarter, compared to 4.7% at our urban hotels indicating strength across the entire portfolio.

Let me now touch on a few specific markets. Although we have limited East Coast exposure and don’t have any hotels in the current high growth cities of New York and Boston, our hotels performed very favorably within their specific geographic markets. Our Four Seasons Hotel in Washington, D.C. continues to be a strong performer in our portfolio.

Third quarter RevPAR growth was 19.9% on rate growth of over 13%. This performance is more impressive considering this hotel did not suffer the significant decline the rest of the industry did last year. EBITDA margins were the highest ever achieved at the hotel and expanded over 680 basis points during the quarter. In addition, non-rooms revenue increased 6.5%.

Our Loews Hotel on the beach of Santa Monica has been a positive anomaly for us in another wise still somewhat sluggish Southern California market so far this year.

During the quarter, RevPAR increased nearly 19% on ADR growth of nearly 12%. The hotel ran over 90% occupancy for the third quarter, which helped drive an 8% increase in non-rooms revenue and a strong 360-basis point expansion in EBITDA margins.

Northern California is continuing its recovery. Our Ritz Carlton Half Moon Bay had another strong quarter with a 15% increase in RevPAR. This hotel which was the poster child for last year’s so called AIG effect is indicative of the return of corporate America rebooking meetings across the portfolio.

However, Mexico continues to be a concern for us with almost daily headlines of drug-related violence definitely having an impact on our Four Seasons in Punta Mita. RevPAR at the hotel declined 13.5% during the third quarter and occupancy was only 41% for the three-month period. In addition, torrential rain and a collapse bridge between Port Vallarta and the resort created additional headwinds for the hotel during the quarter.

Call volumes into the hotel seem directly link to headline activity as the violence get less press, activity tends to pick up. We mentioned last quarter that we had pushing group business at the hotel in anticipation of a slowdown in leisure travel as a result of all those negative publicity. In this initiative resulted in 121% more group room nights in the third quarter compared to the third quarter of last year.

The property is maintaining focus in booking group business and is aggressively deploying marketing resources to the Latin and South American traveler. However, we are pleased at how strong bookings are for the important upcoming holiday seasons. RevPAR for thanksgiving is projected to increase over 5% and the Christmas/New Year season, we are currently anticipating just under a 10% improvement in rate.

Our European hotels had an excellent quarter with constant dollar RevPAR growth of 41.1%. Average rate increase 10.1%, which drove 410-basis point increase in EBITDA margins. Excluding the InterContinental Prague, which is currently being held for sale, European constant dollar RevPAR growth was 18.9% and EBITDA margins expanded 450 basis points.

The Marriott Grosvenor Square particularly stood out in our European portfolio with constant dollar RevPAR of nearly 29% on an impressive 17% increase in the average rate. EBITDA increased over 42% in constant dollars for the quarter. Year-to-date, the hotel is up over 20% in RevPAR as London continues to be one of the best performing markets in the world and in many ways mimics New York’s growth characteristic.

Both of our Marriott lease hold properties had solid quarters with RevPAR up 14% and 16% in constant dollars at the Paris and Hamburg hotels respectively.

As we mentioned here last quarter, we accrue expense for our long-term incentive program known as the Value Creation Plan or VCP based on a quarterly updated third party valuation model of the plan. Due to the nature of this plan, we are required to apply variably accounting.

During the third quarter, we expense $3.8 million for the plan based on the quarter end valuations. This is a non-cash expense for the quarter and no payout would be made under the plan until 2012 and then only assuming certain targets are met.

For the full year, we are now forecasting approximately $30.5 million of G&A expense, which includes an estimated $8.4 million charge for the VCP plan and roughly, $1.8 million of severance charges taken this year. Excluding these two items, our run rate G&A has approximately $20 million, which represents a 33% reduction from our peak level of G&A.

The quarterly charges for this VCP plan will continue to fluctuate and create incredible noise in our G&A expense and bottom line earnings. It’s impossible to give an accurate estimate for this expense, so this depends on our actual stock price results, volatility in the overall stock market and in our share price and numerous the durations of potential future value of the plan in 2012.

In other words, the higher stock price estimate and performance with the result and increase in shareholder value, the higher the quarterly accrual. So, we will continue therefore to report our subgroup data VCP numbers in future quarters.

Turning to the balance sheet, as we’ve discussed with all of you, strategic 2.0 as we refer to ourselves include an unrelenting focus on restructuring our balance sheet. In addition to the focus on operations in earnings growth, our priority is to effectively restructure and refinance all of our debt maturities, particularly those coming due in 2011. the updates on these priorities include, as Laurence mentioned, the sale of the InterContinental Prague Hotel by yearend would eliminate a EUR102 million mortgage for the balance sheet as well as a flap liability that was valued at approximately EUR9 million at quarter end.

Based on our 2010 projections, this hotel was highly levered at nearly 17 times net debt to EBITDA. Our negotiations on the restructuring of the debt due in January 2011 on the Hotel del Coronado continued to progress. We remain in very proactive discussions with all of the existing lenders and we will provide more information as in when appropriate.

And although the Fairmont Scottsdale mortgage debt totaling a $140 million in CMBS and $40 million of Mezzanine does not mature until September 2011, we are proactively working on this refinancing with the various stakeholders. We are fully covering the current debt service and this is in essence of free option period for us to work on a solution for this asset.

Other fall 2011 maturities include the two InterContinentals in Chicago and Miami and we are very confident we can successfully restructure this along in the first part of 2011.

We also continue to prioritize the ultimate payment of our accrued preferred dividend. On our focus on increasing operating cash flow is critical to bringing us closer to covering the quarterly dividend and as we have continually stated, a liquidity event such as an asset sale or appropriate line availability will be the likely solution to paying the catch-up dividend. We will provide balance sheet updates as we continue to achieve our key objectives in this area.

And as I did last quarter, I’ll outline our projected interest expense for the year given all the balance sheet activity we’ve had to date. For the full year, we still expect our reported interest expense to be in the $90 to 95 million range including approximately $40 to 45 million of non-cash interest expense, which is primarily related to the amortization of swap financing cost that were paid in earlier periods.

Year-to-date, we have excluded $9.8 million non-cash market to market interest rate swaps for comparable FFO.

Finally, as we have done in the past quarters, let me give you a sense of what we see for the fourth quarter. We expect fourth quarter RevPAR to grow between 5% and 7% with the EBITDA margins expanding between a 100 and 200 basis points. This implies full year RevPAR growth of 3% to 5% with 50 to 100 basis points of margin expansion on adjusted for cancellation fees. This obviously takes into account our first quarter results, which had negative RevPAR of minus 4.3% and EBITDA margin contraction of 180 basis points.

So, with that, we’d now like to open up the call for any further questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Smedes Rose of KBW. Please proceed.

Smedes Rose – Keefe, Bruyette & Woods

Hi, thanks. I wanted to ask you a couple of things. What is the availability now on your credit line?

Diane Morefield

We only have roughly $35 million outstanding on the line and the current gross line availability is in the $250 million range.

Smedes Rose – Keefe, Bruyette & Woods

Okay. And then I just wanted to understand, so you talked about the VCP a little bit. So, that would be the reason that your SG&A cost, I think, probably to most estimates were higher. But then you also talked about accruals for future sales, I think at the property level is that being – is that also included on the corporate line or is that included on the property line?

Diane Morefield

It’s on the property line.

Smedes Rose – Keefe, Bruyette & Woods

Okay. And is that based on just future bookings, I guess that will be – and so, you’re going ahead and accruing for it now or?

Diane Morefield

Yes.

Smedes Rose – Keefe, Bruyette & Woods

Okay. Thank you.

Diane Morefield

You’re welcome.

Operator

And your next question comes from Mr. Ryan Meliker of Morgan Stanley. Please proceed.

Ryan Meliker – Morgan Stanley

Good morning. I just …

Diane Morefield

Hello?

Ryan Meliker – Morgan Stanley

I’m sorry, can you hear me now?

Diane Morefield

Yes, we can. Thanks.

Laurence Geller

Yes. We can. Thanks, Ryan.

Ryan Meliker – Morgan Stanley

Great, thanks. I was just hoping that you guys can talk a little bit about some of these positions and particularly becoming a more of a North American-centric company. Obviously, Prague seems to be, if not completely out of the way now, certainly very close. Is there a next step, is there another property that you think you’ll focus on next.

Laurence Geller

Yes.

Ryan Meliker – Morgan Stanley

And if so, do you have a timeline on that maybe one then maybe Hamburg, I don’t know. The only thing that I want to get your input on was obviously we’re seeing – everybody that we talk to tells us that it’s the REITs that are the incremental buyers today. They’re the ones driving prices up. There aren’t a lot of REITs that are really interested in European assets for obviously the tax challenges that come with them. I want to know if you thought about potentially selling you North American properties given where values are today. Thanks.

Laurence Geller

Thanks. Let me tell you about. It’s a very good question. So, let me start with the European sales. I mentioned that we’ve brought back EUR3 million of Hamburg, let me talk about that. We have a lease in Hamburg, when we sold the property; we let EUR5 million of cash essentially in escrow to secure our lease hold obligations that was only the recourse the company had.

The company has been essentially paying its rent without any need for those guarantees. So, by reducing – taking EUR3 million back from the guarantee was a significant negotiation leaving us 1.9 million essentially to guarantee our lease hold obligations. This probably does not make us a lot of money because it was leased up fairly high in different times. So, we’ve probably taken out a lot of the value already in that EUR3 million situation.

As far as buying these assets, everybody has there on view on pricing. If you look at the incremental earnings we’re driving and likely to drive those GDP increases, in our high-end sector, you’ve got so much growth to go that I would argue some of the multiples being paid actually aren’t terribly high. So, I hear the noise people are paying too much for this or that asset and I haven’t examined some of the second tier assets that have gone. But I mean a cap rate of three or four times might be very low when you look at our EBITDA expansion.

So, the real answer is no. we have not been on the market at the moment in the U.S. having said all of that, we are a spirited entrepreneurial group as well as a corporate organization and if something came over the transient with an incredible number that our re-buy analysis would make us lie on the floor laugh, we take it.

Ryan Meliker – Morgan Stanley

That makes sense. And then, so is there no timeline right now for any additional dispositions London or anything else in Europe?

Laurence Geller

No. as I mentioned in London, we think the 2012 – there are two things happening, the credit market is still behind us, behind the U.S. in Europe for asset purchases. The London asset there are certain issues we’re trying to make more value out of by working on. In the meantime as Diane mentioned, a 42% increase in EBITDA does give you somewhat of a trend line that we shouldn’t sell that too soon.

2012 looks like our space on trends we’re seeing as a fairly good year providing the credit market loosen up in a proportional way to the U.S. So, we’d be looking to sell into that market. So, anytime we can see getting a 2012 price will be sellers.

Ryan Meliker – Morgan Stanley

Sounds good, thanks.

Operator

And your next question comes from Mr. Chris Woronka of Deutsche Bank. Please proceed.

Chris Woronka – Deutsche Bank

Hey, good morning.

Laurence Geller

Good morning, Chris.

Chris Woronka – Deutsche Bank

How should we think about cash interest expense for next year given that I think a few of those swaps may burn off and I guess assuming you don’t do anything between now and then?

Diane Morefield

Chris, we’re not giving 2011 guidance yet. So, I think it’s a little premature to be able to answer that question for you. We will talk more about some of the drivers for 2011 guidance prior to our next earnings call and as you know we have a number of maturities maturing in 2011, so we’re going to have to make a lot of assumptions about refinancing.

Chris Woronka – Deutsche Bank

Right, okay. And then I thought as an interesting data point, you gave out on kind of the in the year, for the year and in the quarter, for the quarter bookings. Can you maybe tell us either what percentage of expected group business for next year you now have or maybe looking at it a different way, kind of what percentage of your – how many room nights you have on the books now relative to say 2007 or 2008, just to kind of see this progression.

Laurence Geller

Okay, really good questions. First of all, we probably got and I’ll give you a range. But we’re probably over 50% closer to 60% on the books already of our anticipated amount next year. What we are looking at is we’re still, and this is good news and bad news, and it’s all the same. We’re looking at being about 20% down so far in group nights for this year on 2007.

Why do I say that’s good news? Because it shows you what we’ve got, the potential to grow into in the next couple of years. So, we’re pretty pleased about that. What we aren’t pleased about is the recent interest and the recent acceleration of interest in 2011 and 2012 business at the hotel level for group. For us that’s an important measure as we look at the prospects, the definites and the tentatives, that becomes a very important measure of corporate confidence.

If we’re seeing that from corporate group bookings, it gives us confidence to be fairly bullish on how we attack individual corporate rate negotiations as we the sense of corporate America to travel again. So, a fairly good news all around on that.

Chris Woronka – Deutsche Bank

Okay. What’s your opinion on the Scottsdale on the impact of Las Vegas and is it a temporary problem or is it longer than that. I mean how do you effectively compete with Vegas in terms of the rooms that they’re putting out there and the rates they’re putting out there. And do you see from your Fairmont asset any improvement in those trends in the next couple of quarters?

Laurence Geller

You’ve asked two separate questions. We obviously have seen [inaudible], have seen a tremendous competitive streak in Scottsdale and Phoenix from Las Vegas. I would say that if I was sitting owning assets in Tusan or Palm Strings or Palm Desert, I’d be seriously depressed because it may well have permanently changed that market, whereas in Scottsdale, we are very pleased with the pickup against it.

It certainly has impaired the market. It has forced a competitive pressure on building facilities such as incremental meeting rooms. But we’re not – the last few months particularly we’ve seen an increased in prospects, tentatives and definites in Scottsdale. We are going to believe – I do believe personally and I have no empirical for it that there will be some permanent impairment in Vegas.

But having been around for four cycles with Vegas, watching Vegas, as Vegas absorption tends to increase and it will certainly is, there’s not enough cranes out there to affect it. We’ll see less of an impact as pricing goes up in Vegas, but it has become a tremendous competitor.

Chris Woronka – Deutsche Bank

Okay, very good. Thank you.

Diane Morefield

Welcome.

Operator

And your next question comes from Mr. Will Marks of JMP Securities. Please proceed.

Will Marks – JMP Securities

Thank you. Good morning, Laurence. Good morning, Diane. I don’t think in your prepared remarks you’ve talked about the St. Francis, which I guess is your largest assets by room. The RevPAR was OK, but still below. I think San Francisco was up about 11% in the quarter, but the total RevPAR was certainly much weaker than that ad I can understand F&B levels were generally lagging. But maybe you can comment on that asset.

Laurence Geller

Yes. Well, certainly, I got to tell you we are really pleased with the forward booking process and what we’re seeing at this property. The leisure business, obviously, is third quarter business there and that has an impact on our other spends as you clearly with various sites.

We’re looking forward to – as we’re looking forward in forward pace, the St. Francis looks like it’s going to have a fairly healthy period of time ahead of it. We’ve had some catching up to do in the city because of lack of compression this year though, but it’s in pretty good shape.

Will Marks – JMP Securities

Okay. Thank you. And a couple of other things, the Punta Mita, you talked so much about getting out of international, getting out of Europe and what are the pros and cons of selling that asset?

Laurence Geller

Well, it’s a question I’m pleased you asked because it’s more complex. We’ve always seen Punta Mita really as an extension of an American tourist resort. It’s almost exclusively in a high 90% an American destination driven by the North East California or in Texas largely and that’s been our process there.

Yes, I would say it would be terribly difficult to exit a property like Punta Mita and get any respectable shareholder value at this time given the hyperbole and the media attention, which is I have to say is dramatically overstated for most of the tourist markets in Mexico in general and for us in particular. So, I think when you look at it on the Northern border, in the towns on the Northern border where the activity is, it’s a heck of a long journey down to the tourist resorts from there. But that’s the impression.

So, at the moment, the cons would be I don’t know if we get a price of any respectability and the pros will be something we didn’t have to worry about that. But it’s not something we can think about today because there’s no market.

Will Marks – JMP Securities

Okay, thanks. And just one final question, big picture. You mentioned the valuation on Prague and I know we’ve seen some other high multiples, 18 multiple. I think the – was it the St. Regis in Aspen. Can you point to any other deals that have happened or maybe you can speak for [inaudible], if you’re seeing some other 15 to 20 multiple luxury hotels and deals taking place.

Laurence Geller

I haven’t seen very many luxury hotels trade because the sellers know what they have and they can see these trends where EBITDA has the potential to certainly double in many cases. So, I haven’t seen a lot. The second tier hotels, I’ve noted numbers from the TelCorp [ph] acquisition of the Boston property, Samsung’s acquisitions of the Miami property and some of the recent spate in Philadelphia, for example, is a very strong multiples.

But I don’t view them as silly because it reflects the confidence that people have in A the upside of the markets and I’m delighted with the sales numbers they’re getting there because if they’re getting multiples on that, it just make sound values even higher because we go such high barrier to entry markets with such upside. So, I don’t see this pricing as overpriced at the moment. I’m not at all critical, but I haven’t seen luxury hotel sell at a time because the sellers ain’t given them away. They know what we got.

Will Marks – JMP Securities

Okay, thank you very much.

Operator

And your next question comes from Mr. Jeffrey Donnelly of Wells Fargo. Sir, please proceed.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Good morning, folks.

Diane Morefield

Hi, Jeff.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Yes, actually a few questions. Laurence, I was just curious concerning the European hotels, I suspect I know the answer. But do you think that these assets could be sold more efficiently ultimately as a portfolio or you’re just better to do on one-off?

Laurence Geller

Not a chance. Jeff, if I had thought – if thought, we have done that, we have done it. It’s not a chance. There all so very distinct with their issues and let me just give you as a seller over an asset. Prague asset has got a market that’s readily [ph] oversupplied with an asset that needs capital expenditure. Hamburg is at least which has little income to us met up to this payment. Paris is a lease to a German institution, which is very profitable, but there aren’t many buyers that would buy a lease in Paris and the Prague hotel, let alone in London, which is a lease whole property and a very unique group of buyers. So, no, actually you get less than more.

Jeffrey Donnelly – Wells Fargo Securities, LLC

That’s helpful. I was trying to be sure. Ritz Carlton had recently rolled out a guest rewards program. I’m just curious what you’re thought is on that and maybe how much of an impact that could have on Ritz largely?

Laurence Geller

Jeff, it’s a question which I’m more than delighted. I have been arguing as has this company since we saw the beginning of the downturn for Ritz to have a very aggressive free from traveler program. They had good size properties, makes it right, makes the business and in a downturn, it’s a protector, in an upturn it has cost. But as we are on a slow growth to the upturn, we have been very certain that we think it’s the right thing to do.

It was hotly debated within Marriott. They reached out very – Marriott reached out to a number of owners, thought about it very carefully and we are very much a proponent of it for Ritz. I would say however that that is specific to Ritz. It wouldn’t necessarily go to our other high end company such as Four Seasons, which has a different mix of business and different size of properties.

So, I say uniquely to Ritz, it’s a very good thing. I don’t think we can estimate the impact going forward. We’re not to that stage where we have sufficient compression nights that we can say we’d rather not take that business.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Is that because you don’t think it’s applicable to Four Seasons because you’re just a nature of their guest mix, maybe it’s more leisure transient and maybe then corporate.

Laurence Geller

Its more – it’s a nature of guest mix. It’s much more individual bookings. It’s much more high-end people that have a slightly different set of demands rather than points. Four Seasons guests have got recognition issues and it’s a slightly different demographic on some of the user base and the smaller properties.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Right. And not to dwell on Marriott, they’ve been aggressively re-launching this or launching it with autograph collection. I guess I’m wondering you think it’s a threat to branded luxury hotel performance because it arguably heightens distributions of what I would call a typically more upscale luxury hotels and I think Marriott was telling folks that’s once its introduce it increases the RevPAR index of those hotels by about eight points after its been introduce. So, I guess I’ve got to come out of somebody’s hide and I wasn’t sure what you’ve heard.

Laurence Geller

First of all, with a handful of autographs out there, it’s a hard to make a prediction of eight points and I can only that he who lives by the crystal ball inevitably ends up eating ground glass. So, that as far as I’m concerned.

However, as I see Marriott, they’re very systematic about it. They’re fairly thoughtful about the impact to their other hotels. I don’t see this much as a threat. I do see that the big change are going to have to be a lot bigger to pay to the technology needed in the future on marketing to absorb these costs. So, I would say this isn’t limited to them to Marriott. I will say you will have to see expansion in this type of methods amongst the other chains. What we will monitor, we will protect our rights. We will not be threatened by it.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Yes. One last question, on the short – how much success I’ll have here, but I know you’re not giving guidance for next year. But I’m curious are you willing to comment on maybe the guidance of some of the major brands that have already given for next year. I mean do you think that’s representative of some of the trends that you’ve been seeing or is your experience varied because you’re really at a different price points?

Laurence Geller

We have no peer group amongst the REITs to look at. So, when you look at Marriott and STAR World [ph] given their various mixes, they both make sense. For us, remember we have a portfolio differentiation. We aren’t in New York, we’re not in Boston, where you’re still going to see – we think there’ll be substantial growth in those markets next year. But we also hope we’ll see Southern California next year.

I don’t think their projections are out of line. I can only say that if the confidence that comes from, if there’s a rebound in corporate and consumer confidence and let’s hope that these elections call for something like a resetting of taxes use or whatever is perturbing people, I think that those numbers might be light. But it really goes to corporate and consumer confidence and GDP, but it always has.

Jeffrey Donnelly – Wells Fargo Securities, LLC

Okay, great. Thank you.

Diane Morefield

You’re welcome.

Operator

(Operator Instructions) And your next question comes from Mr. Joe Graft [ph] of JP Morgan. Please proceed.

Joe Graft – JP Morgan

Hey, guys, most of my questions have been asked and answered. And this is sort of a guidance related question for 2011, but as you look at over the next 12 months, the markets that you’re in, what markets do you see performing stronger on a relative basis, relative to one another. Thank you.

Laurence Geller

Okay. And look, I still think New York has room to grow. It fell so slow, but it’s coming back strongly. So, I think New York is a very strong market and I still feel Boston and Washington a very, very strong market.

In general, I think those markets will probably outperform the rest of the country on a macro basis. I’m hopeful that California will get some growth in jobs, particularly Southern California. When we see job growth in Southern California, you see an immediate recharging of activity of outside of hotels where we could expect really significant growth as with most of the industry.

Generally, corporate America is going to be on the move on next year. you look at the airline trends and you look at our trends, I’m fairly optimistic we can have a good year and the best thing about it is I do believe on a macro level, rates will start to increase. I hope that following us and I believe the change have got – this is a priority. We’re certainly being aggressive and we are not seeing the price resistance that was feared.

So, I think that the big news next year will be the markets will get more compression nights and you’ll get much more rate.

Joe Graft – JP Morgan

Thank you.

Operator

And your next question is a follow-up from Smedes Rose from KBW. Please proceed.

Smedes Rose – Keefe, Bruyette & Woods

Hi, thanks. I’m just wondering could you tell us what the cancellation fees were in the fourth quarter of 2009. I mean was it a significant number and would you expect it to skew your kind of the follow-through that you talked about for the fourth quarter.

Laurence Geller

I don’t know how it will affect the whole quarter, about a couple of million bucks, [inaudible].

Smedes Rose – Keefe, Bruyette & Woods

Okay, thank you.

Operator

This concludes today’s question-and-answer session. I’ll hand the call over to Laurence Gellar for closing remarks.

Laurence Geller

Thank you very much. As you can see, we’ve had very satisfying quarter and we are consistently seeing indicators of a sustained recovery. We are convinced we’ve got very well-founded reasons for optimism in general and for our company in particular.

Our assets are in great physical and competitive condition in irreplaceable locations. We’ve implemented systemic and sustainable changes to the operations that are clearly again demonstrating upside, both the profitability and values and we’ve got unusually benign supply dynamics in our markets.

We’ve improved our balance sheet and it’s our priority to continue to do so. In short, we’re performing in line with our plans and expectations and intend to continue to do so in a very thoughtful and disciplined manner. So, again, I thank you for your time and I thank you for your support.

We look forward to speaking to you next quarter when I hope that the trends we see today and the renewed post midterm election confidence will be mirrored in continuing improving results for our economy, our industry and above all for our company. Thank you.

Diane Morefield

Thank you.

Operator

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect. Good day.

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