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Executives

Jon Stanner – VP, Capital Markets and Treasurer

Laurence Geller – President and CEO

Diane Morefield – EVP and CFO

Analysts

Will Marks – JMP Securities

Joe Graft – JP Morgan

Smedes Rose – KBW

Bill Crow – Raymond James & Associates

Chris Woronka – Deutsche Bank

Ryan Meliker – Morgan Stanley

Larry Raymond – Big 5 Asset Management

Jon Evans – Edmunds White Partners

Strategic Hotels & Resorts (BEE) Q4 2010 Earnings Conference Call February 24, 2011 10:00 AM ET

Operator

Great day, ladies and gentlemen, and welcome to the fourth quarter 2010 Strategic Hotels & Resorts earnings conference call. My name is Dama [ph], and I will be your coordinator for today’s event. (Operator instructions)

I would now like to turn the presentation over to Mr. Jon Stanner, Vice President, Capital Markets and Treasurer. Please go ahead.

Jon Stanner

Thank you and good morning everyone. Welcome to Strategic Hotels & Resorts fourth quarter and full year 2010 earnings conference call. Our press release and supplemental financials were distributed yesterday, and are available on the company’s website in the Investor Relations section.

We are hosting a live web cast of today’s call, which can be accessed in the same section of the website 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 a guarantee of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors please refer to the forward-looking statement notice included within our SEC filings.

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

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

Laurence Geller

Good morning and thank you for attending our call. 2010 was a pivotal and very successful year for our company in terms of our operating performance and our balance sheet restructuring. At this time last year, we highlighted our predictions for 2010, which included residual negative growth for the luxury hotel segment in the first quarter, and importantly a convergence to positive operating metrics for our company in particular, and the segment in general during the second quarter, with demand continuing to grow throughout the year.

The year progressed as anticipated with our RevPAR growth in the subsequent three quarters of 7.3%, 7.3% and 8.1% respectively, and occupancy rate, EBITDA, and EBITDA margins all being positive in the second quarter. An overriding caveat we made at that time was that the recovery of the hotel industry was and remains reliant on GDP growth.

We consistently executed our stated operating and balance sheet strengthening strategies, and we will continue to do so throughout this year having already started the year with four important strategic transactions. For the year, North American hotel EBITDA margins expanded a healthy 200 basis points, once adjusted for real estate taxes and cancellation fees. Our change in EBITDA to change in RevPAR ratio for the full year, which we measure each quarter was an outstanding 4.6 times adjusted for real estate taxes and cancellation fees.

We consider a ratio of two times or greater to be successful. For the year, we improved our RevPAR index by 2.8% to 110.7, which we consider to be our very best measure of market share. We continue our insistence on keeping out the fixed cost that was removed during the downturn, and stopping them returning to the cost structures of our hotels. As a result, our full-year 4.6 times EBITDA to RevPAR percentage change is a testimony to the success of these efforts, and a 70 basis point improvement in the guest satisfaction scores at our hotels reinforces that while we were able to keep costs to a minimum, we could improve, not sacrifice the guest experience.

These two crucial metrics augur [ph] well for the sustainability of our productivity gains that are driven by our internal systems, and we firmly believe are indicative of a continuing and a systemic shift to improved margins. Our relentless focus on successfully strengthening and restructuring our balance sheet was at the forefront in 2010. We announced early last year our intent to exit Europe, and achieve significant progress towards that goal during the year, including the closing on the sale of the InterContinental Prague in December, and we negotiated a restricted cash release of approximately $4.2 million from the Marriott Hamburg, which represented over 60% of our restricted cash leasehold guarantee.

As a result of our methodical exit process from Europe, we are delivering our balance sheet through the retirement of asset specific debt, as was the case for Prague, and the use of net sales proceeds to reduce our corporate level debt. Other significant balance sheet recapitalization activities last year included the 350 million equity offering in May at $4.60 a share, the 180 million redemption of our convertible unsecured bonds, and the refinancing and maturity extension of 318 million of debt on the Fairmont Chicago and Westin St. Francis in San Francisco.

As we continue our disciplined focus on improving our balance sheet, this year has begun favorably with 4 significant announcements. Diane will expand on the financial metrics associated with these transactions, however, I would like to give you some color behind them. We close the recapitalization of the Hotel del Coronado in February, investing $57 million into a new partnership with Blackstone and KSL. This recap significantly delevered the deal [ph] by over 200 million in total. And we remain as asset manager of this iconic hotel, and continue to have a meaningful equity investment of 34.3% of the total.

We are delighted with the addition of Blackstone as the new majority partner, as we have worked with them often and successfully in the past, and we are equally delighted with our continued relationship with KSL as partner and hotel operator. Together with KSL we have significantly enhanced and improved this asset physically and operationally. The significant operating and development upside of this property make this asset well worth keeping, and we are really delighted with the restructuring results.

We previously announced a letter agreement to acquire the Four Seasons Jackson Hole and the Four Seasons Silicon Valley in an all equity transaction with Woodbridge, the investment arm of the Thomson family, as in Thomson Reuters. And earlier today, we executed a purchase and sale agreement. This transaction accomplishes several strategic objectives. We are obtaining two great assets at terrific prices, we are deleveraging the balance sheet through not only a stock for asset trade, but through a PIPE investment in our stock. We have another strong and experienced long-term investor in our stock, and for Woodbridge and the Thomson family, this represents an unusual opportunity for them to trade two quality assets for shares in a unique portfolio, and diversify into a company, which it knows well, and has high earnings growth capability.

Strategic hotels has been the asset manager for these two hotels for the past two years, and we clearly understand these assets intimately. Concurrent with the hotel acquisitions, Woodbridge will also be investing 50 million in equity through a PIPE in strategic common stock. We believe that this is a strong vote of confidence by an extremely well-respected and sophisticated long-term investor, who is making an $145 million equity investment in this company.

As we think about it, the $50 million PIPE investment essentially matches the del Coronado investment made earlier this month, and replaces a line of credit debt with equity. These hotel investments are being made at an opportune point in the lodging cycle with significant upside potential in NOI and very attractive key metrics. In addition we feel that we use an appropriate, but certainly not common method, to augment our organic growth with external growth, while importantly delevering the balance sheet.

In our earnings release yesterday, we noted that our Marriott Champs Elysees Hotel in Paris is under contract. We entered into a sale leaseback of this hotel in 2003 with our Elysees interest being the excess cash flow over the index and profit participating lease payments to a major German real estate fund. Just prior to year end, we signed a contract to sell our position. Although there is still some de minimis risk to the closing, we believe that the final closing conditions will be met, and the sale is anticipated to close by the end of April.

The sale is consistent with our ongoing exit of Europe and the amount we will generate far exceeds any previous third-party estimates, and validates our patient and disciplined approach to disposition timing in order to maximize proceeds. In January, we sold our 50% interest in the purchasing company BuyEfficient for $9 million to our partner Sunstone. While small in terms of proceeds, exiting this non-core investment was yet another step in narrowing our focus and continuing to deleverage our balance sheet.

Finally, last week we executed an amendment to our line of credit facility to increase overall capacity and liquidity at the corporate level. This is yet another reflection of our excellent working relationship with our banking partners. Our liquidity is now at a very strong level, and post the completion of the Woodbridge and Paris could well leave us cash positive with the full capacity of our line untouched.

As I did last year at this time, let me provide you our broad outlook for the continued operating recovery in our portfolio in the high-end luxury segment. Other consumer luxury trends are consistent with our views. All of this is premised on the growth trend in GDP, which seems to have a strong foothold at this point, although the impact and volatility of geopolitical events on our economy such as the current turmoil in the Middle East and North Africa cannot be underestimated.

As we look forward into 2011 and beyond, we are increasingly encouraged by the favorable lodging supply and demand dynamics, particularly for the type of high-end hotel we own in those specific high barrier to entry markets in which we operate. With virtually no supply in the ground in our geographic markets, replacement cost per room in the 600,000 to 700,000 per room ex-land, there is little chance of any serious amount of competitive supply coming into our markets during the next four years at the very least.

Group booking pace continues to be our best forward-looking indicator of demand, and currently definite group room nights are up 10% at a rate of a little over 1% compared to the same time last year. While tentative group room nights, which represents group contracts which we out for review or are awaiting signature [ph] from the fund are up over 20% with a 10% higher rate or better.

Importantly, given what is still a relatively short bookings window, group pacing trends continue to improve on a monthly basis, for example, in the month of January we booked 34,000 group rooms for the remainder of 2011, which is a 12% improvement over last year, and additionally the rate for these rooms is 2% higher than last year.

As I see it in summary, we have a unique high-end portfolio of properties in great physical condition, and have no incoming supply in our markets, which gives us a great opportunity for compression related price increases. We continue to outperform in terms of market share growth, our leading-edge internal productivity metrics and measures are being sustained resulting in higher margins. Demand is growing on the corporate transient and the all-important corporate group segments. Our mix of business is leading to rate improvement in general, and our individual segment rates are beginning to strengthen.

We have significantly improved our balance sheet, and we will continue our plans to aggressively do so throughout the year and our liquidity position is in excellent shape. We are returning to giving guidance after living through an incredibly challenging period of unprecedented volatility. 2010 was a very successful transformational year for us, and 2011 promises to be a continuation of the same.

I would now to turn the call over to Diane to discuss our financial results.

Diane Morefield

Thank you Laurence. Good morning, everyone. For the fourth quarter, we reported comparable EBITDA of $28.7 million and comparable FFO per share loss of $0.01. Excluding $5.7 million of expense accrued for our VCP Incentive program, however, comparable EBITDA was $34.5 million, a 6.2% increase over the fourth quarter of 2009, and comparable FFO was actually a positive $0.03 per share.

Note that in the fourth quarter of 2009 we only reported $60,000 in VCP expense. We feel that excluding VCP expense from our earnings result is more reflective of the actual operating performance and our recurring corporate expenses. Therefore we will continue to report our results with and without VCP expense throughout 2011.

For the full year, we reported comparable EBITDA of $119.4 million, and comparable FFO per share loss of $0.05. Again, excluding $12.6 million of VCP expense for the full year, comparable EBITDA was $132 million, or a 10% increase over 2009, and comparable FFO was a positive $0.05 per share. The total charge for VCP in 2009 was only 108,000.

In the fourth quarter, we took impairment charges totaling $141.9 million, which included the impairment of long-lived assets at the Fairmont Scottsdale Princess of $101.3 million, and a charge related to the other than temporary decline in the value of our original investment in the Hotel del Coronado for 40.6 million.

These one-time charges are both non-cash, and have been excluded from the comparable EBITDA and FFO per share metrics. The decision to impair investment in the Fairmont Scottsdale Princess was the result of the upcoming maturity date being within one year of the December 31, 2010 balance sheet date. The impairment of our original investment in Hotel del Coronado is the result of the property being revalued at the time of our reinvestment since it was classified as a change in control under accounting guidance.

Upon this revaluation, it was determined that the current value was below the previous carrying value. Our fourth quarter represented the fourth consecutive quarter of demand growth with a 3.3 point increase in occupancy and a 2.8% increase in ADR over the fourth quarter of 2009. Demand growth was driven primarily by improved transient business, which was up 4.1% for the quarter, and more specifically 19% increase in negotiated corporate transient business, which is yet another sign of the strengthening corporate customer.

The shifting mix of business we saw throughout the year continued with the result that our properties were able to reduce transient discount room nights by over 9%. Transient rate was up 5.4% for the quarter, which helped to offset the small decline in group rate that was a result of lower rated group bookings made prior to 2010 in the depth of the lodging cycle.

Group room nights, however, were up nearly 7% in the quarter. Adjusting for cancellation fees, non-room revenues were up over 10% during the quarter, and 5% on a per occupied room basis, driven by a 12% increase in food and beverage revenue, and a 15% increase in outlet [ph] revenue.

Total RevPAR for the quarter was up 8.7% to prior year and 9.3%, excluding cancellation fees in both periods. Our operating team has continued to do an outstanding job of containing expenses as total hours worked increased a mere 1%, despite a 5% increase in occupied room nights, and a 5% increase in food and beverage covers.

Productivity, which is best measured by hours work per occupied room night improved an impressive 4% during the quarter. For the full year 2010, RevPAR increased 4.7% driven by 2.2% increase in occupancy, and 1.2% improvement in rate. Demand improvement, which began late in the first quarter last year, increased in each successive quarter, and was largely driven by an 11% increase in group demand, of which about two thirds was generated at our resort hotels.

A reflection of the positive trend of replacing lower rated transient business with high rated corporate and group meant that overall transient demand contracted slightly. Discounted transient room nights were down 13% in 2010, I am sorry, while corporate transient room nights increased 10%. Transient ADR improved 5% during the year, more than offsetting the 3.7% decline in group rate, which again was primarily a function of lower rated group rooms being booked before 2010.

Adjusting for cancellation fees, non-rooms revenue increased to 8% during the year, and 5% on a per occupied room basis, driven by a 10% increase in food and beverage, and total RevPAR increased 4.3% for the year, and 6% net of cancellation fees.

For the full year, productivity improved 4%, which is a reflection of a 0.8% decline in hours worked, despite again a 3% increase in occupied rooms and a 6% increase in food and beverage coverage [ph].

As Laurence noted, we have focused on deleveraging our balance sheet through the combination of disciplined asset dispositions and timely equity raises. In May of last year, we raised nearly 350 million of common equity, which we used to retire the 180 million of fully recourse convertible notes and paid down borrowings on our revolving credit facility, which significantly improved our corporate credit profile. In May of last year we also closed refinancing of the Westin St. Francis and Fairmont Chicago with MetLife. And in addition again, we announced last week 145 million equity raise through the Woodbridge transaction.

We have returned cash to the company from our Hamburg asset. We are in the process of returning monies from our Paris property, in addition the sale of BuyEfficient further paid down our line. These transactions accelerate the deleveraging process that will all financially occur as the considerable embedded earnings growth of our hotels continues with the lodging recovery and lodging demand.

Earlier this month, we announced the recap of the joint venture owning the Hotel del with Blackstone and KSL. As part of the recap, we invested 57 million of new equity, and will retain a 34.3% ownership interest, and will remain as asset manager of the joint venture, earning an annual asset management fee equal to 1% of total revenue.

Based on the new debt structure and our ownership percentage, our pro rata portion of the debt balance is now 146 million compared to 284 million under the previous structure. Additionally, we earned 1.7 million financing fee as part of the restructuring. We believe there is significant upside in this hotel, particularly given the implied valuation under 780,000 per key [ph] for this unique business hotel and tourist attraction.

The effective purchase price equates to a 6.5 cap rate on forecasted 2011 NOI, and a 13.6 times multiple of forecasted 2011 EBITDA. To gain some perspective, the property in 2010 achieved 36.5 million in EBITDA versus nearly 57 million in EBITDA in its peak year in 2008, a clear demonstration of the upside potential of this amazing asset.

Lastly, we also announced the planned acquisition of the Four Seasons Jackson Hole, and Four Seasons Silicon Valley from the Woodbridge Company for a combined purchase price of 95 million, in exchange for 15.2 million shares of common stock at a agreed upon purchase price of $6.25 per share. The purchase price represents a 293,000 per key valuation, which is a substantial discount to the estimated replacement cost of these two assets, which we estimate to be in the 600,000 to 700,000 per key range.

The per key purchase price is also attractive compared to recent luxury hotel sales comps, which have been in the 400,000 per key range. On a full year basis, the acquisition represents 11 times 2011 forecasted EBITDA multiple and a 6.2% NOI cap rate. The projected EBITDA contribution to our earnings, however in 2011 is 6 million given the transaction is likely to close around the end of the first quarter.

Also upon closing, we will issue an additional 8 million shares of common stock in a private equity placement to Woodbridge raising 50 million in gross proceeds. The $6.25 per share price represents a 36% increase over the price at which we issued equity in May of last year, and a 4% discount to the previous day’s closing price when the transaction was announced.

As Laurence highlighted, we have entered into an agreement to sell our leasehold position in the Marriott Champs Elysees. This transaction upon closing will generate approximately 54.4 million of gross proceeds. The proceeds include the sale price of the leasehold position. In addition, we will collect roughly 18.1 million related to the existing leasehold guarantee, cash and other closing adjustments. Net of lease expense, the hotel contributed 3.3 million to comparable EBITDA in 2010, and not including an additional 400,000 of corporate expenses, which we incurred related to the ownership of the asset.

So at the 54 million sale price, this represents an 18.8 times multiple on the asset’s 2010 net earnings contribution after G&A, and again the 400,000 of G&A related to the property will largely be eliminated going forward. We sold the 50% interest in BuyEfficient for 9 million in January of this year. We had more originally invested 6.4 million in December of 2007 for a 50% ownership partnership with Sunstone in this venture. However, we also received cash distributions of 1.4 million since the initial investment. So, while small this disposition resulted in unlevered IRR of approximately 14% over the life of the investment.

Now let me give you a sense of how our leverage profile has dramatically changed with all of these balance sheet activities that we have outlined. At year-end 2009, our net debt to trailing 12 months EBITDA ratio was 14.3 times. At the end of 2010, we had reduced this metric by a full 5 turns to 9.3 times. And after making pro forma adjustments for the activities we have either announced or closed, subsequent to year-end, our net debt to EBITDA ratio will be below eight times.

We think this is truly a dramatic reduction in leverage in basically a one-year period. This week we also executed an amendment to the terms of our existing revolving credit facility, in addition to an extension of the line from March of this year to March of 2012. The amendment terms include an increase in our advance rate from 45% to 55% of the borrowing base assets appraised value.

There was also a reduction in the debt service coverage ratio constant from 8% to 7% and a reduction in the debt service coverage ratio limit from 1.3 times to 1.2 times. this equates effectively to a reduction in the debt yield from 10.4% to 8.4%, which is computed on the trailing 12 months NOI of the borrowing base of assets.

In addition, in the amendment we reduced the facility’s total capacity from $400 million to $350 million, and reduced our maximum loan to value covenant from 80% to 70%. Pro forma for the amendment, the company would have had availability on the line of approximately $320 million at year-end 2010 compared to the approximately 240 million of capacity at that point. The company currently has $52 million outstanding on the line, which will be reduced to basically zero upon closing the Woodbridge transaction. This results in corporate liquidity of over 300 million, which is an improvement of over 250 million from the same time last year.

As we have discussed in the past, the company has always managed its fixed LIBOR rate through the use of corporate level interest rate swap. We recently terminated two fixed interest rate swaps totaling 125 million in principle value for a total cost of 4.2 million, which was due to an overhedged position. As Laurence mentioned, after two years of not feeling comfortable enough in the stability of the economy or our business to issue guidance, we are now initiating full-year 2011 guidance as follows.

Guidance for comparable EBITDA is in the range of $135 million to $150 million and our comparable FFO per diluted share is in the range of negative $0.02 to positive $0.07. Our guidance range assumptions are based on RevPAR and total RevPAR growth of between 7% and 9%. Our GOP margins are between 31% and 32% and EBITDA margins between 21% and 22%. Note that these margins represent expansions of between 100 basis points and 200 basis points of our prior year margins.

We estimate corporate G&A expense in the $21 million to $23 million range, excluding any forecast for VCP expense, which again is inherently difficult to predict given the variable accounting treatment related to this plan. Note that for GAAP purposes, the actual VCP expense will affect both EBITDA and FFO reported results throughout the year. And we will report our results without the VCP charge, as well as with VCP, particularly since our guidance range exclude VCP expense.

Also for guidance purposes, we are assuming that Fairmont Scottsdale Princess only contributes to company’s earnings for the first three quarters of the year given the uncertainty surrounding the debt maturity in September of this year. We assume the Marriott Paris sale and Woodbridge transactions close at the end of the first quarter. It is important to note that while we have signed agreements for these transactions, we can make no guarantee that the actual closing date, and we will provide updates to our guidance range accordingly as the terms of the timing of these deals are altered.

We are projecting interest expense for the year to be in the $95 million to $100 million range, but that number includes approximately $25 million of non-cash interest, related to the amortization of interest rate swap financing costs. Our estimates of interest expense are uncertain given the upcoming maturities of the InterContinental in Chicago and Miami, as well as (inaudible), as the Fairmont Scottsdale Princess maturity.

For guidance, we have assumed that the two InterContinental hotels are financed at their maturity dates in September of this year at similar proceed levels to the existing loans and at current market rates. However, given the attractiveness of the current capital markets, we have recently initiated a process to not only accelerate the refinancing of the two InterContinental loans, but in addition our loans on the Loews Santa Monica and Ritz-Carlton Half Moon Bay, which mature in March of 2012. We will update our interest expense guidance as we have more clarity on the actual outcome of these refinancings if executed early.

Finally, we expect total capital expenditures to be approximately 69 million, of which 47 million is related to contractual FFO [ph] reserves at the hotel level, and another net 22 million of owner funded capital. A guest room renovation at the InterContinental Miami represents the majority of the owner funded spending budget for 2011.

Please note that our guidance includes only announced transactions year-to-date with no assumptions for further acquisitions, dispositions or capital markets activity. Our guidance will be adjusted and publicly disclosed to the extent there are any transactions beyond the baseline case that we have shared with you today.

So with all of that, we would now like to open the call for any questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Will Marks with JMP Securities. Please go ahead.

Will Marks – JMP Securities

Good morning Laurence, good morning Diane.

Diane Morefield

Hi Will.

Will Marks – JMP Securities

Hello, as I am on the cell, I hope the reception is okay. I want to first ask about Fairmont Scottsdale, can you talk a little bit about this, I don’t know if I really heard about what the guidance implies in terms of your future plans for this asset?

Laurence Geller

Will, good morning. The guidance for the sake of guidance, we imply that we give back the property at the end of Q3 when the maturity comes through, and that is just – and we impair the property accordingly.

Will Marks – JMP Securities

Okay. So, it is just simple as that. I figured that. I just wanted to hear it from you. On the Q4 season, the acquisition seems like a great deal, I wanted to ask about the plans of the Woodbridge, and are they, I assume the $50 million investment means that they want to be a long-term holder, is there any kind of lock up on the other stock?

Laurence Geller

Will, thank you, we should have probably mentioned it. Yes, indeed there is a lock up on the 445 million for one year.

Will Marks – JMP Securities

It is a one year lock up, okay. And then, how about the historical performance of those assets, you have given some idea of guidance, what about the past?

Laurence Geller

Well, remember these assets were relatively new with Palo Alto opening, I think in 2006. I think it was. So Palo Alto really never had a chance, silicon valley really never had a chance to mature, whereas the Four Seasons Jackson Hole opened a couple of years early, peaked and went down with all of the other resorts, and we see ourselves surpassing peak.

Will Marks – JMP Securities

Okay, thanks. And then just lastly, anymore deals like this in the works?

Laurence Geller

No, Will look, we’re currently not in the acquisition mode. We are very focused on what we’ve said we will do on the operating side, and completely focused on restructuring our balance sheet. This transaction was a very interesting opportunity because it is allowing us to primarily deleverage our balance sheet not only through stock for asset trade, but through the vote of confidence of the Thomson family, with the $350 PIPE investment at a very attractive price for us, because it was obviously a private placement.

We are very conscious corporately about our leverage levels, and the debt maturities coming due over the next 18 months occupy us, and basically mandate we focus our attention on that. We have got very good liquidity, so we have got plenty of liquidity to address those maturities. We have also been working as you know to paying down – to looking at the accrued preferred dividend which will stand if not paid at the end of this quarter in excess of $60 million.

So once we have dealt with our debt maturities, we will be able and we view ourselves as able to pay our current preferred dividend out of operating cash flows, then that would be – the next priority would be to pay the accrual, and before we get to acquisitions, we have got a set of internal improvement projects in the hotels, which as we have told you in the past, and as we have proven time and again tend to yield about 15% to 20% on the current basis on invested capital.

So before we look at acquisitions, we have got plenty of things to do. Having said that, we are opportunistic. If we see trade such as the Four Seasons Jackson Hole and the Four Seasons Silicon Valley we view it as our duty to bring those to the attention of our board.

Will Marks – JMP Securities

Okay. Thank you. That is a thorough response. I appreciate it.

Operator

Our next question comes from Joe Graft with JP Morgan. Please proceed.

Joe Graft – JP Morgan

Good morning everyone. Laurence, I was hoping you can give us an update on your most recent thoughts on potentially selling your London asset either from a timing perspective or just strategically how you are thinking about that?

Laurence Geller

Yes. Thanks Joe. The London asset still remains an asset we view as ultimately for sale, and as we have been consistent in the past, it is really a matter of timing to maximize proceeds. You can see that we are patient and very disciplined and have a very good sense of value. At this moment in time this property is ramping up very quickly, and frankly better than we expected.

We are going into – this is pre-Olympic year. The Olympic year is next year. We are seeing recovery still in the London markets, whereas we have a very strong sense of value, we are not in a rush to sell it below that number, and we will hold out for what our sense of value is. In the meantime, we’re finishing some rooms that need to be done. I think, a couple of floors of rooms are being finished.

Once we have done that, this property will be in clearly in impeccable operating and physical condition, and in the right time to consider how and when we maximize it. It is really not a question of if as far as we are concerned, it is merely a question of when.

Joe Graft – JP Morgan

Great. And then your comments about the closing of the Paris leasehold interest there. And you had some cautionary comments about closing that even in the earnings release, are there any unique or unusual conditions for closing that we should be aware of relative to other transactions?

Laurence Geller

No. Any of you who have bought and sold in France, you will know that it is governed by an Napoleonic code, which is inherently difficult to deal with for the French, let alone the Americans. So there is always – we are always cautious when we look at an international transaction, and I think what I’m hoping you’ll hearing is an abundance of caution rather than an abundance of enthusiastic optimism.

Joe Graft – JP Morgan

Great, and then with the respect to Scottsdale, I know strategically why it is guidance only for a sub period, but when you look at full year 2011 RevPAR growth and EBITDA growth at that asset, does that asset underperform the overall portfolio in 2011 based on your current forecast on the pro forma line, if you can give us some sense of that how you are looking at on an annual basis that will be helpful?

Laurence Geller

Let me try and do – let me try and answer somewhat of a different question that perhaps could give better color. The property’s improvement is up generally in line with what we’re doing for the rest of the portfolio. Having said that, there is – the property, the overall supply in the market, and still the somewhat pernicious impact from Las Vegas, makes this market a slower market overall to recover.

So to answer the question more fully, yes it is in line, but there is much more distance to go for that property than for most of our other properties, which makes the decision to restructure or not restructure much more complex because we don’t have the same anticipated recovery as we do throughout the rest of our portfolio.

Joe Graft – JP Morgan

Great. Thank you guys.

Operator

Our next question comes from Smedes Rose with KBW. Please proceed.

Smedes Rose – KBW

Hi, it is me. Diane, does the borrowing base of assets change with the amended credit line, or is it still the same for properties?

Diane Morefield

It is same for assets under the line.

Smedes Rose – KBW

Okay, great. And then Laurence, could you just repeat it, did you say you would expect to go current on your preferred dividend this quarter, could you just repeat what you said about that?

Laurence Geller

No, no, I didn’t and forgive me if I gave that impression Smedes.

Smedes Rose – KBW

I was sort of half tuned out.

Laurence Geller

No, what I said is that we are working – as soon as we are able to play the preferred dividend out of operating cash flow, or can forecast that we are able to do so, we will probably go current and then deal with the paying off of the accrued. But corporately, we have made a decision, and we have been consistent about it for the last year or so is that we have got to deal with these maturities to understand what our liquidity position really is in a conservative sense before we attack the preferreds.

Having said that, let me make a comment on these preferreds, the preferreds were at one time trading below $2. Now they are trading in the $28 range, but if you add the accrued dividend the total would be $29. That is about a 3.5% discount only to it. So the preferred shareholders I hope are really satisfied with the improvement we have made to the company and to their value.

Smedes Rose – KBW

Well, it seems, I guess if you are able to accelerate the refinancing of the debt, not only in 2011, but in 2012 that maybe the timing on the preferred is sooner versus later?

Laurence Geller

I think that is a good supposition. There is no one in the management or the board that likes having the accrued preferreds out there or not paying current dividend. It is our policy and our belief that we should pay the current dividend and we should pay the accrued as soon as it is practical without putting the company in any form of risk.

Diane Morefield

The other nuance on it is we would – it would require bank group approval under the revolving credit line to pay the preferred, so again that is why we are focused on the sequence and dealing with our property debt level maturities first, and then address the preferreds.

Smedes Rose – KBW

Okay. That is helpful, thank you. The other thing I just wanted to ask you, I was just a little surprised to see (inaudible) in the fourth quarter that revenues were up 40% that EBITDA declined year-over-year, just that did something – was there something kind of specific at that property?

Diane Morefield

Yes, there was this little thing called restructuring cost.

Smedes Rose – KBW

Okay, so that is included in that.

Diane Morefield

Restructuring 630 million of debt is rather expensive.

Smedes Rose – KBW

Okay. So that is in that operating number.

Laurence Geller

Smedes, it was only restructuring 630 million of debt with a CMBS mortgage, a line of credit, and 5 tranches of widely held mezzanine. Other than that there was no complexity.

Smedes Rose – KBW

All right. Point taken.

Diane Morefield

(inaudible) involved.

Smedes Rose – KBW

And then your owner funded 22 million of CapEx, did you say what is that for?

Laurence Geller

We go generally, our properties thankfully going into the downturn

we are in very good condition. The one property that we held back on because of the scale of it was Miami. So, Miami probably represents the large majority of that, and that is a full rooms and corridors renovation, which we will do. But let me just comment on that because of the seasonality of Miami, obviously the summer period is our weak period, we are able to do the full refurbishment of the hotel with de minimis displacement costs, which I think is really good news for us.

Smedes Rose – KBW

Okay, great. Thank you.

Operator

Our next question comes from Bill Crow with Raymond James & Associates. Please proceed.

Bill Crow - Raymond James & Associates

Hi, good morning guys.

Diane Morefield

Hi Bill.

Bill Crow - Raymond James & Associates

A couple of questions from me, given the issues in the past week or two, a few weeks in the Middle East, does that change potentially the timing of the sale of the London maybe sooner is better than later given the potential buyers and the money?

Laurence Geller

No, I don’t think so at all Bill. I understand why you would ask that question. At this moment in time, we are seeing no differentials in the purchasing market out there. However, you know if the situation in the Middle East courses a run of flight capital, naturally we wouldn’t preclude the possibility of changing our timing. We haven’t seen that yet.

Bill Crow - Raymond James & Associates

Do you have a package out at this point, or are you preparing a package?

Laurence Geller

No, as we have with our Paris properties and our Prague property, we handle that uniquely one-on-one. We have a very good method of identifying prospective buyers, and I think you can see from the Prague transaction and the Champs Elysees transaction we have just announced that we produce much more exceptional results rather than by one-on-one contact than through widely brokered deals because we basically manage the process closely, intimately, and we know most of the buyers.

Bill Crow - Raymond James & Associates

Okay, and then last from me, I've always appreciated your imagination, is there anything out there you could imagine that would cause you to put equity into Scottsdale?

Laurence Geller

You know Bill, there was a James Bond movie which I really liked saying never say never, yes, anything can happen. One doesn’t know. At this moment in time when we look at capital allocation in the company, and our liquidity it would have to stack up remarkably well against other opportunities for the board of directors to be persuaded to invest significant capital.

However, having said that, it is a terrific property, the issue is really more of a market issue than the property or anything else. So, I would say that by the best read on this is by our attitude towards guidance, and our attitude towards impairments gives you an idea that we are wide open to both ends of the spectrum.

Bill Crow - Raymond James & Associates

Okay. Thank you guys.

Operator

Our next question comes from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka – Deutsche Bank

Hi, good morning.

Laurence Geller

Good morning Chris.

Chris Woronka – Deutsche Bank

It is a quick question on (inaudible), is that just kind of an issue of group, the fourth quarter performance the group’s lagging and coming back, or is that a California market issue or something else?

Laurence Geller

No, in terms of – first of all, the macro issue, it is not a California issue, it is a Southern California issue, which is compounded by supply coming in in the southern California market. Having said that, there is no – the Ritz-Carlton is in excellent physical condition, excellent management condition with a very lean and seasoned management team and operating team at the hotel now.

We are increasing our share in all of the segments, but we are still increasing our share against a smaller pie then we would have hoped for at this time. Leisure business is obviously California driven with discretionary expenditure in the California uncertainty is reflecting leisure business for everybody, but we are outperforming, and group business is coming back slowly. It is coming back methodically, but it is much slower than we would have originally hoped. But we are outperforming our competitors in market share. So as that comes back we will come back faster.

Chris Woronka – Deutsche Bank

Okay, great. And I think you found a very workable solution to the del Coronado refinancing, is there any I guess color you can share with us on what some of the other options you looked at were, and what in your mind make this kind of the optimal solution?

Laurence Geller

Chris, it is very interesting because this time last year, or even six months ago we would have probably been talking of restructuring all of the existing debt with the existing lenders, prepared for a Mephistophelian approach of a bankruptcy if we had to. But the credit markets on the one hand improving, and the operational overview gave us many more options. When we really analyzed what was out there in the credit availability, we then built solutions of that, and by far the Blackstone was the best solution for us financially valuing the property the highest of all other solutions.

Chris Woronka – Deutsche Bank

Okay, that is great. And then just finally maybe a little more color on this VCP, and what the components of that are, and maybe the factors that influence the amount that gets recognized?

Diane Morefield

Well, the VCP as far as the charge every quarter is determined by a third party valuation firm, and they use, what is called the Monte Carlo method, which is like a million, literally million iterations of stock price and volatility in our stock price, et cetera between now and the 2012 maturity of the plan.

And because it is tied to stock price, it is variable accounting, so it is going to fluctuate every quarter, which is why we can’t even give guidance on what the expense might be for the year or quarter-to-quarter. Obviously, it is a very good thing for unit shareholders when the VCP expense is higher because it is just tied to a higher stock price.

But we think it is important again to report without the VCP because it is really not in our control. We have gone back and had this been able to be done as a standard RSU plan, which it wasn’t available to the company at that point because there wasn’t stock in the employee program to really allow it to be in our RSU plan, but if it had been, RSUs to the executive and management team to continue to incentivize them over the course of the last two years, the actual expense would have only been basically 2 million a year.

So we’re just being penalized by the variable accounting with it, basically having the same end effect in 2012, and it is only 2.5% of the market cap for the company, which we think is a very reasonable level to incentivize the executive team.

Laurence Geller

Let me just clarify one thing, this program expires in 2012. So the balancing factor on that is that it doesn’t have a 2.5% overhang perpetually on the stock going forward, because it is a cash payment in 2012. So, it was in stock without the overhang.

Chris Woronka – Deutsche Bank

Okay. That is great. Very good. Thanks guys.

Operator

Our next question comes from Ryan Meliker with Morgan Stanley. Please proceed.

Ryan Meliker – Morgan Stanley

Hi, good morning guys. Just – most of my questions have been answered, but just one housekeeping item here, it looks like, maybe I missed this because I got on a little bit late, it looks like the other hotel expenses line-item went down materially this quarter relative to last quarter and 4Q09, I’m wondering if maybe that has something to do with property taxes coming down or assessments being changed, or something else?

Diane Morefield

Yes, there was a real estate tax refund for two Chicago assets in the fourth quarter of 4.9 million, so that was the offset.

Ryan Meliker – Morgan Stanley

Okay. So, you know, in terms of thinking of a run rate, obviously it sounds like 4Q just has a refund, but maybe the reminder of 2010 is also probably a little high then, or is the refund not relevant to 2010?

Diane Morefield

The refund in the fourth quarter 2010 was a one-time event.

Ryan Meliker – Morgan Stanley

Right, I understand that. I’m just trying to think about how we think about, was the refund related to earlier 2010 property taxes or maybe 2009, or maybe 2007, just in terms of understanding on a run rate basis where that line item might come out?

Laurence Geller

It is a two year issue. Ryan, rather than try and get into it I will ask Jon Stanner to give you a call afterwards so he can go through for modeling purpose to give you the background on the flow of it.

Ryan Meliker – Morgan Stanley

Sounds good. Thanks a lot.

Operator

Our next question comes from Larry Raymond with Big 5 Asset Management. Please go ahead.

Larry Raymond - Big 5 Asset Management

Thanks. My questions have been answered. Good job on executing the plan.

Diane Morefield

Thanks Larry.

Laurence Geller

Thank you Larry.

Operator

Our next question comes from Jon Evans with Edmunds White Partners. Please go ahead.

Jon Evans - Edmunds White Partners

Laurence, can you just talk a little bit about I guess the preferred, and you have about it will be close to 16 million in arrears, I appreciate that you want to get your debt maturities et cetera in line, and it seems like the quicker that you can pay those your stock is going to appreciate pretty significantly, do you believe the proceeds from London will be enough to take care of the arrears, or how do you see you paying for the arrears, I don’t understand how you get current, but…

Laurence Geller

Look, it is, as Diane and I both alluded to, once the – assuming that both Paris and the Jackson Hole and Silicon Valley transactions close, and there were no other demands on our cash, we would have essentially cash in hand plus an untouched line of credit.

Once we have dealt with the maturities on that, we can then look at what the balance is left in the line of credit, or in cash, and determine whether or not we have adequate resources to even pay the preferred out of the redone line of credit. So, I will say that the sale of London now whereas a year ago clearly had a material impact on our thinking vis-à-vis the preferreds.

It doesn’t have the same amount of thinking now. We are conscious of the effect of the overhang, and owing some $60 million plus of accrued, and we wanted – we don’t want that, and we know that the preferreds would like to get the accrual, it is really a question of prudent and conservative timing, we have acted in a very disciplined manner so far, executing where we have got to.

We will deal with these maturities, and at that stage it is very easy relative decision vis-à-vis the line of credit and cash in hand. So a long way of saying that London isn’t the pivotal feature in dealing with it.

Jon Evans - Edmunds White Partners

Got it. And so may I just ask you one follow up to that, so you have done this very methodically about restructuring your balance sheet et cetera, so do you feel like you get current and then you pay a part of the arrears, and then another part, or do you feel like you get like Falcore [ph] just went current, and it was positive for their stock, so how do you see this playing out, and when do you think potentially you would get current if you had to guess?

Laurence Geller

First of all, we are very different to Falcore. Every company has its own set of dynamics. Secondly, we haven’t made a determination of A, when we will go pay current, and B, how we will pay the accrued. Having said that, we are very conscious as a management and board of directors that not paying the accrued preferreds has certain limitations on corporate activities, while we’re also equally conscious that paying the accrued dividends takes the permission of our lending group in the line of credit. So it is somewhat complex, and I will say as business improves, and as we get these maturities done, we will be in a much better decision to as quickly as possible to retire the accrual and pay current.

Jon Evans - Edmunds White Partners

Okay. Thank you for the information.

Operator

That concludes our question-and-answer session for today’s event. I would now like to turn the call back over to Laurence for closing remarks.

Laurence Geller

Well, thank you everybody for being patient and listening. 2010 was certainly a pivotal, transformational and successful year for our company, very successful. We consistently executed our stated operating and balance sheet strategies in a very disciplined and thoughtful way. And we will continue to do so with constant narrow focus on our goals throughout 2011, and we started the year off well with four important strategic transactions this quarter. So thank you, and we look forward to speaking to you at the next quarter.

Operator

Thank you for your participation in today’s conference. This concludes today’s presentation. You may now disconnect and have a wonderful day.

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