Strategic Hotel & Resorts CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 4.11 | About: Strategic Hotels (BEE)

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

Q2 2011 Earnings Call

August 4, 2011 10:00 am ET

Executives

Jonathan Stanner – Vice President, Capital Markets and Treasurer

Laurence S. Geller – President and Chief Executive Officer

Diane M. Morefield – Executive Vice President and Chief Financial Officer

Analysts

Bill Crow – Raymond James

Ryan Meliker – Morgan Stanley

William Marks – JMP Securities

Jeffrey Donnelly – Wells Fargo Securities

Smedes Rose – Keefe, Bruyette & Woods, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2011 Strategic Hotels & Resorts Earnings Conference Call. My name is Ed, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

At this time, I would like to turn the call over to Mr. Jon Stanner, Vice President, Capital Markets and Treasurer. Please proceed, sir.

Jonathan Stanner

Thank you and good morning, everyone and we apologize for the technical difficulties earlier. Welcome to the Strategic Hotels & Resorts second quarter 2011 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 webcast of today's call, which can be accessed by the same section of the website with a replay of today's call also available for the next month. Before we get under way, I'd like to say that this conference call contain forward-looking statements under Federal Securities Laws.

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

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

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

Laurence S. Geller

Thank you. While the focus of this call is to cover our second quarter earnings, I’d like to spend some time reflecting on how Strategic Hotels has now reached an important point in its evolution and what we see ahead. My comments will focus on three main areas; operations, our balance sheet restructuring and the outlook for the future.

Our again impressive second quarter operation results, our continuation of the highly efficient execution of our asset management system and processes. We constantly monitor our results compared to our direct competitors and we continue to lead the domestic markets in our segment in all relevant metrics.

Our Q2 U.S. same store RevPAR growth of 12.6% along with our total RevPAR growth of 11.5% continues our previous trend of out performance in both the rooms and non-rooms departments. And with our market share index improvement of 1.8% itself for continuation of the important trend that has continued for the past six quarters, we feel good about what has occurred.

Despite a 3.9% increase in average occupancy over the prior year, our productivity numbers continued to improve with hours worked per occupied room falling by over 1%. Our results again demonstrate the sustainable starting improvements we’ve made.

For example, hours worked per occupied room was 7% less in the current quarter than in 2007. Additionally, and perhaps more significantly as a systemic organizational change, the number of management employees is still 21% lower than peak, despite the gains in occupancy in recent quarters.

The result was our North American same store EBITDA margins improved 360 basis points during the quarter, with property level EBITDA growth of 29.7%. And the important ratio, the EBITDA growth to RevPAR growth was 2.6 times in this quarter.

Corporately, we believe that the systemic operating improvements instituted our properties will lead to long-term higher margin performance through the recovery cycle than has previously been experienced. Meanwhile, on the revenue side, our most widely watched parameter remains group pace. This continues its improvements with rooms booked year-to-date up 7% and rate up by 12% over the same time last year for a healthy approximately 20% increase in group room revenue. For 2011, group pace is up 9% and ADR is up 3%.

2007 is also referred to as peak performance. And in Q2 of that year, we booked approximately 65,000 group room nights in the year full year in our same store portfolio. The number of same store group room nights booked for 2011 in Q2 of this year was 82,000, a healthy 26% improvement over the same time in 2007. Thus far, bookings for the summer month that’s June to August, the same store transient room nights are up 6% and importantly, the rate on those bookings is up 8%. The result is inline with our research and orders well to the fundamentals of our business. This is an extremely healthy indicator of high end consumer confidence and their propensity to purchase leisure stay.

High end lodging suffered more than other segments during the worst part of this unprecedented recession in 2008 and in 2009. But throughout that period, our board and management team remain steadfast in their belief that our unique portfolio combined with unusually benign supply characteristics and our leading edge operating cultural systems would outperform during the inevitable recovery.

The key was getting through the worst of the down cycle by focusing on the strategic steps that we could take to sure up our balance sheet. We titled this plan Strategic 2.0 and have aggressively executed on our transparent multidimensional capital market strategy over the past roughly two years, the planning of both the equity issuance and the debt refinancing strategy. Since the beginning of 2010, we’ve raised over $515 million in new equity, particularly important is that we’ve raised over $165 million of that through the acquisition of assets, which was both deleveraging and very accretive.

One of our strategic objectives was to add significant and strategic partners to our shareholder base, which result appropriate given the unique and comparatively longer term nature of our assets. As such, we brought both Woodbridge and the Government of Singapore into the fold combining these long-term and strategic shareholders with others to over 25% combined ownership in our equity.

We developed certain strategic imperatives that outlined our goals for comprehensive and the needed complex refinancing, regarding the debt portion of the balance sheet. We set out to extend the maturities over the long-term with no concentration in a single given year and having a better balance and enhanced mix of lenders with less reliance from CMBS execution.

Diane will cover the details of our new balance sheet structure and the significant accomplishments we achieved in these debt financings. However, I would highlight some very important points related to this topic. Our ability to complete new debt financing on all of our hotels along with a new line of credit is a testament to the strength of our long-term banking relationships and to our delegating systems are working cooperatively with our lenders on each asset to maximize value both for them and for us even during the bleakest of times.

Although our asset level debt was non-recourse our consistent policy has been since our inception and will continue to be to treat our lenders with respect, opening communications and as importantly collaborative partners. Despite opinions from many that we should walk away from certain properties, we never wave it in our search for solutions that created value for our shareholders and were workable and value preservers for our lenders.

No lender suffered losses on our properties throughout this process. Our reputation as a borrower remains impeccable and will as has been amply demonstrated during this unprecedented downturn have continued great value to our company and our shareholders. We posted it and successfully restructured or refinanced our property level debt on all of our 2011 and ‘12 maturities that we outlined as our goal previously.

And despite the recent turmoil in the financial markets, last week we closed our final debt refinancing on to this plan. Since, January the 1st, 2010, we have recapitalized. (Technical Difficulty) I do apologize to all the participants in this call. It seems there is a problem with the conference operator either that or one of our competitors just doesn’t want to hear our good results.

Since January the 1st, 2010, we’ve recapitalized $1.8 billion of debt and at a pace roughly 12 to 18 months ahead of our result timetable.

Including in this activity were the complex and multi-dimensional restructurings of both the Hotel del Coronado and the Fairmont Scottsdale Princess. The outcomes on these two deals were enhanced by our bringing in sophisticated IRR driven equity partners Blackstone and Walton Street respectively on very attractive terms and condition to us.

Their belief in the properties and very importantly in us, further confirms our view as to the likely high returns we will achieve on our incremental investments in these unique results.

Other transactions that were key to the restructuring phase included the sale of our Mexico City property which what appears to be have been excellent timing, and substantially exiting our Continental European properties. This included the impressive sale of our Paris Marriott hotel at 20 times EBITDA, which make the Strategic almost $60 million in proceeds or over 15 to 20 times what others forecasted the value of our lessee position to be.

In addition, we achieved another one of our strategic objectives, which was to have at least two properties unencumbered by debt, providing us with even further cushion for unforeseen circumstances. These aggressive activities have allowed us to achieve a reduction in net debt to enterprise value from 77% at the beginning of 2010 to approximately 39% at the end of the second quarter.

The last step of the balance sheet phase will be to pay accrued preferred dividends. We have previously stated that our board would address the payment of this dividend catch up when the financing has been fully executed and our operating cash flow covers the ongoing quarterly year payment.

We intend to continue to address the timing of this dividend payment with the board on a quarterly basis. We will make a decision as and when to pay the accrued dividends based on market conditions and our ongoing economic and operating outlook at that point in time.

We’ve now accomplished both our operational and balance sheet objectives. I have embarked on the next phase of our corporate evolution we euphemistically call Strategic 3.0. Along with so many around the globe we’ve watched with increasing dismay the recent financial turmoil caused largely by political leadership not only within the European community but sadly within our own government.

Last week’s result and pull back in the credit markets makes our final financing of the InterContinental hotel in Chicago look prescient. No one yet knows the near-term and possibly longer term impact of these recent events and how they might affect business and consumer confidence.

Despite our excellent operating financial results year-to-date and our continued strong leading indicators for future hotel demand prudence dictates we remain cautious. However, our operating food indicators and metrics remain both positive and strong and we have not felt any impact on our business from the well publicized events of recent weeks.

As such, we are increasing our low end of RevPAR guidance to 8% and the upper end of the range to 9.5% for the full year. Let me stress, we have great overall faith in the underlying strengths of the economy and the relatively robust high-end sector of the lodging industry in which we operate certainly appears to us to be the most resilient of the anemic recovery in GDP growth rate.

Certainly our recent several consecutive quarters of out performance sustains that conclusion. We remain very bullish on our long-term prospects given virtually zero supply in our markets and the likely even further delay in future supply if the debts capital markets become even more cautious once again.

Based on our North American same store forecast room demand is 18% below peak, RevPAR is 15% below peak and total revenues are 25% below peak, EBITDA is still 33% below peak, this gives us plenty of room to still grow and we remain very confident that we will both meet and exceed previous peaks in our key performance metrics. For the recovery periods from 1992 to 2000 and 2002 to 2007, the compounded luxury RevPAR growth rate was 8% while supply grew 23% and 17% respectively.

From a purely mathematical sense, an 8% compounded RevPAR growth rate alone would double our North American EBITDA by 2014 while it would take less than 12% to double it by 2013.

We will continue our unrelenting disciplined approach to acquisitions. We have a very clearly defined, well understood product, market, capital allocation and financial return strategies from which we will not stray as we jealously guard and protect the uniqueness and profitability of our portfolio.

Let me stress that the embedded operational internal growth in our portfolio which when combined with the pipeline of high yielding internal projects allows us the unique luxury of not having to buy any properties whatsoever in order to have outsized growth in our results.

We will continue to guard and allocate our capital carefully and prudently while remaining leverage neutral on any future acquisitions. With replacement cost rand of approximately $700,000 per room we expect to remain for a lengthy period of time in supply constrained environment for our unique locations having an outstanding opportunity for not only unusually high occupancies but more importantly for outsize rates growth with the attendant margin growth and higher levels of profitability than we’ve previously experienced. Our most recent research indicates that our luxury consumers are equally cautiously optimistic, increasingly savvy, have involved from conspicuous to conscious consumption are spending money on things that are worthy to them at any cost, won’t compromise on purchasing high quality items and in a crowded market want brands with both legacy and story.

For us, the great news is that travel is very high up on their list of must do’s and our exceptional portfolio of assets and brands fit their bill exactly. Therefore, despite the current uncertainty in the economy with all of these positives coming together and combining with our current continued out performance, as they are at this time, we remain extremely optimistic about our future profit growth, returns, asset values and ever strengthening balance sheet.

Diane, will now cover our second quarter results.

Diane M. Morefield

Thank you, Laurence. Net income in the second quarter was $39.5 million or $0.22 per fully diluted share, compared to a net loss of $47.4 million or negative $0.42 per diluted share in the same quarter of 2010.

For the second quarter, we reported comparable EBITDA of $42.5 million, a 13% increase over the second quarter of last year, and comparable FFO per share of $0.05 compared to $0.04 in the second quarter last year. Improvements in demand, as Laurence highlighted, were broad-based across our portfolio. However, there are few markets I would specifically want to comment on.

Regarding Mexico, the news, reports and security concerns continue to have a negative impact on the hospitality industry throughout Mexico. Our Mexico results have a meaningful impact on our RevPAR growth given the high ADR for our Four Seasons property there.

Performance at the Four Seasons Punta Mita can impact RevPAR results by as much as a 150 basis points up or down with it currently having a negative impact on our 2011 RevPAR growth results. We wanted to address Washington D.C. in contrary to other hotel company reports on the broader D.C. market, our Four Seasons property continues to perform very well. Since much of the softness in the market appears to be driven by a drop in government for them, which has a little of any effect on their hotel there. Additionally, the IMF returns the city in the third quarter and our property will be one of the primary beneficiaries of the pick up in activity from that group.

Turning to London, our Marriott Grosvenor Square Hotel continues to produce strong operating results. RevPAR on a constant dollar basis was up over 17% for the quarter and following the comprehensive room renovation completion earlier this year; this hotel is in excellent condition to take advantage of an incredibly strong London lodging market.

GOP margins at the Marriott London Grosvenor Square were very impressive, 58% in the second quarter compared to 54% at the same time last year. Regarding the balance sheet restructuring, Laurence highlighted the proactive strategy and that we did obtain the final execution of that restructuring just last week. I would add a few other items of color. In addition to the hotel level loans that we refinanced, we negotiated a new $300 million line of credit that closed at the end of June.

In that process, we rationalized the number of banks in the line from 21 in the previous line, down to ten, which makes it much more efficient in working with our key relationship banks going forward. We also made a strategic decision to finance the Four Seasons D.C. hotel directly by substituting bad hotel with the Ritz-Carlton Half Moon Bay as one of the borrowing base asset under the new line.

We were able to finance the Four Seasons D.C. which had zero debt on it with a $130 million mortgage loan and paid up to previous $76 million mortgage loan on the Ritz-Carlton Half Moon Bay. With those transactions along with the various other financing activity we achieved. This year, we netted $64 million in proceeds.

The line of credit currently has zero utilization and we have approximately $75 million in unrestricted cash including hotel level unrestricted cash of $45 million. This however excludes another roughly $15 million in cash of the broader and joint venture structures that is also classified as unrestricted on our balance sheet.

A few of other key statistics that resulted from the final debt executions include, we reduced our exposure to CMBS debt from 57% to 31% of our total debt. So our debt mix now is again 31% CMBS, 38% bank loans, and 31% insurance company mortgage loans.

We have reduced our net debt to EBITDA since January 1, 2010 from 14.3 times to approximately seven times pro forma for year end 2011.

We also met another critical strategic objective by extending maturities and staggering our maturity schedule over a 10 year period with no more than 22% of our total debt maturing in any single calendar year.

With very attractive low fixed interest rates, we thought the best execution on the InterContinental Chicago hotel, which is a very stable asset, was a 10 year fixed-rate deal. This coupled with the deconsolidation of the Fairmont Scottsdale Princess hotel debt resulted in the need to terminate $300 million in interest rate swaps during the quarter.

The cost of the terminations was roughly $27 million, but we should have no further need to terminate swaps in the future.

Accounting rules dictate that other comprehensive income balances related to swaps that have been terminated in prior periods, continue to be amortized over the remaining original life of both contracts. As a result, we have a material level of non-cash interest expense in our quarterly results for several years.

To assist you in modelling, the current full year guidance for interest expenses as follows: Full year interest expense of $85 million to $90 million, $70 million to $75 million of that is cash interest expense and approximately $15 million is non-cash expense.

We continue to invest in our properties in order to maintain the quality of our irreplaceable portfolio. The comprehensive room renovation taking place at our InterContinental Miami property is forecasted to total $17 million and has been underway throughout the summer month to avoid displacement.

Later in, I’m sorry, later in the third quarter, we are also scheduled to complete and open the Michael Jordan Steak House at the InterContinental Chicago totaling $3.6 million in capital investment.

In addition, the construction of a new 23,000 square foot ballroom at the Fairmont Scottsdale Princess is underway. The ballroom was funded in our joint venture with Walton Street in conjunction with the CMBS loan restructuring and extension that we executed in early June.

The new ballroom and meeting space will open in late 2012 and time to take full advantage of the 2012, 2013 winter season in Scottsdale.

I’d now like to cover guidance. We’re raising our full year 2011 RevPAR and total RevPAR guidance for our North American same store portfolio. We expect RevPAR growth for the full year to be between 8% and 9.5% and total RevPAR growth to be between 8% and 9%. We are also updating our guidance for the first two quarters of actual results and transactions completed during the second quarter including the recap of the Fairmont Princess and the buyout of GIP’s interest in the InterCon Chicago, as well as the reforecast for the remainder of the year. This results in an adjustment to comparable EBITDA guidance to be between a $145 million and $155 million up from the previous range of $140 million to $150 million.

Additionally, we are just seeing comparable FFO per share to a revised range of between $0.08 and $0.14. Surprised to say however our guidance assumes no material or significant changes in the overall economic environment for the balance of the year.

Additionally, all of our guidance is exclusive of these CP expense, which is consistent with our previous guidance ranges throughout the year.

With that, operator could you please open the call to Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Bill Crow. Please proceed.

Bill Crow – Raymond James

Hey, good morning. Great quarter, bad telecom technology, but that’s all right, we’ve seen it reverse before, so I’d rather have it this way, couple of questions. Diane, you said that current post quarter and cash balance is $75 million, is that correct or is it really $90 million?

Diane M. Morefield

Well, no. Unrestricted in total is $90 million.

Bill Crow – Raymond James

And that’s current.

Diane M. Morefield

That is current, that’s as of today correct.

Bill Crow – Raymond James

Okay. And nothing wrong on your line, correct?

Diane M. Morefield

That’s correct.

Bill Crow – Raymond James

Okay. I appreciate the guidance on interest expense, could you, and we can look at what the first half of the year was, is there going to be a difference given the recent activity between the third and the fourth quarter?

Diane M. Morefield

Well, we gave full year guidance and obviously there were points of the area that we had outstandings on the line of credit. Right now, we do not, so it’s going to fluctuate quarter-to-quarter, but as you know on all of our guidance we’re just giving full year.

Bill Crow – Raymond James

Okay. So, we can’t really back in to what the new run rate necessarily will be once all of this is done, so fourth quarter kind of run rate for interest expense, it’s kind of way to see?

Diane M. Morefield

Well, in that supplemental as you know, there is all of the data for all of our new loans and the interest rate.

Bill Crow – Raymond James

Right.

Diane M. Morefield

So, it will just depend, and obviously this non-cash of $15 million is for a full year. So you can figure out the quarterly rate for that, and then it’s – there is nothing out on the line. So unless we were to draw on the line for a specific activity, I think you can back into a quarterly rate.

Bill Crow – Raymond James

That’s right. I just want to make sure the non-cash part of it is not materially different?

Laurence S. Geller

Bill, thank you for your comment on the quarter, but one last thing is, we should explain also the line has a $300 million line has an accordion feature depending on results which allow us ultimately, if we meet all of our forecasts to go up to $400 million of availability under the line.

Bill Crow – Raymond James

Okay, great. Couple other questions, you touched on Laurence, you touched on acquisition opportunities and how you might fund them, et cetera. Could you just talk about what you’re seeing out there, the pace of acquisition opportunities and maybe your general thoughts to make acquisitions?

Laurence S. Geller

I will not (inaudible) let’s stop with that. Having said that, we saw a flurry of activity in the first and second quarters where people were trying to sell assets, people had high aspirations where we felt the product might suit us, but their aspirations will be on practical reality. We didn’t spend any time.

We are watching the market, we watched with a great interest, the recent Rosewood transaction, which have been just under $850,000 is a key, there is other assets being reputed to be traded although one doesn’t know what the recent hiccups in the market will do for them that are in the $700,000, $800,000 key in our market.

So we’re watching carefully. We have a look – our product strategy is so defined and so clear that it’s a sort of an easy strategic shift without us having to bounce around like others around the country buying whatever they can at anytime. We just don’t need to.

Bill Crow – Raymond James

Right.

Laurence S. Geller

And we’ve got embedded projects and embedded growth. And frankly, we’d been through two to three years of very difficult time and we are just going to be very selective, very careful, very cautious and preciously guard our capital because we know what shall I say first the acquisitions to usual term can do for a company.

Bill Crow – Raymond James

Right. Okay two other very quick questions. Has your thinking about the preferred dividend, the timing of the return of that change given recent economic data points, that’s the first question? The second one, and then I will get off the line here; is – whether you’re seeing any negative impact from Marriott’s sales force one initiative?

Laurence S. Geller

Okay. Let me just deal with the second one fairly quickly. We obviously communicate with all the other owners and we understand the concerns people have with sales force one. At the moment we only have one property Marriott Lincolnshire which is affected by sales force one, so I think because every company has its own specific issues, I don’t think we’ve got enough of a trend to be able to comment.

As far as the preferreds are concerned, naturally as you would expect, the recent volatility and the increased amount of unknowns makes us prudent, we have a, at our quarterly board meeting we will look at it again.

We’ve been very, very consistent though, once we’re comfortable with both the outlook and our operational ability to cover it and having finished the refinancings, with all three of those things in line we naturally want to pay the preferred at the earliest opportunity.

But the board and management continue to be very cautious about spending money and we will jealously guard our bank balances at this moment until we’re comfortable with the economy.

Bill Crow – Raymond James

Thank you.

Operator

And our next question comes from the line of Ryan Meliker. Please proceed.

Ryan Meliker – Morgan Stanley

Good morning and congratulations on a solid quarter. Just a quick question here with regards to guidance. You guys talked a lot about how trends now seem to be flowing to pretty positive not only about the economy, but certainly about your portfolio of growth. But it looks like your same store North American RevPAR guidance basically implies a material slow down in the back half of the year from where we were in the front half of the year, I guess down to roughly 4% to 6%, if I’m doing my math giving close to exactly, versus up 12% in the front half of the year. I’m wondering is that just you guys being conservative or is there something else to that that I’m missing?

Laurence S. Geller

Yes, we hope we’re being prudently conservative. Yes, your math is generally correct, but let me point out something that I think we’re going to see for our company for the next few quarters. We outperformed last year. We outperformed in Q4 of last year. So we have a higher hurdle to outperform again than others.

So it’s really the absolute number we saw having to refer to in Q4 rather than relative to the last year. Nothing has changed in our trends. We are the further out this year, because of what has happened lately, even more cautious we will be. And as Diane mentioned, we are still taking a blip to our numbers through Punta Mita. If you remember in Punta Mita, the fourth quarter, with Thanksgiving and with Christmas and the New Year period, has such high room rates that we have to be cautious in case we have a turndown in bookings in Punta Mita is still with 70% or 80% (inaudible) for those periods, now that we’re on 100%, so we have to be cautious about that and that’s what is driving some of this caution.

A 150 bips on a 9.5% improvement in EBITDA, in RevPAR would take us to 11%, which is hardly cautious.

Ryan Meliker – Morgan Stanley

Okay, that’s helpful. Thank you very much.

Operator

And our next question comes from the line of Will Marks. Please proceed.

William Marks – JMP Securities

Thank you. Good morning, Laurence. Good morning, Diane.

Diane M. Morefield

Hi, Will.

William Marks – JMP Securities

First on the guidance of the RevPAR guidance, can you tell us how July looked if you can, and then also what we should look at high quarter?

Laurence S. Geller

I won’t give you specifics on July or even our forecast for August. Suffice to say, that July was in line of slightly better than our anticipated results. We were most pleased with the consumer propensity to consume as you might remember I had commented that the period between the middle of June to the week after July the 4th would be the leading indictor of whether we had to discount rate to induce demand, not only the demand increase for our forecast but a rate increased, so we were very satisfied with what we are seeing for the whole summer period in leisure.

Group business was not as strong in certain properties as it was last year. However, that is nearly a timing blip rather indicating any trend differential. We had a group that would come in July and maybe they will come in, go somewhere else next year, will come back, it doesn’t matter. But our leisure business has been so strong that we filled in demand, and particularly at markets where we have been very concerned to see what the trend would be at Westin St. Francis, the Ritz-Carlton Laguna Niguel, both which have outperformed our rates and occupancy expectations for leisure business.

William Marks – JMP Securities

Okay, great. Thank you. And just one other question, do you know what your EBITDA margins were with the current portfolio?

Laurence S. Geller

Yes, indeed. Our number was, I think as our GOP number.

Diane M. Morefield

Yes. The EBITDA margin was 28% and GOP was 38%.

Laurence S. Geller

And it’s the GOP number that we, obviously EBITDA result of it, but is the GOP number of 38%, which we view as the target to meet and exceed and this company is totally focused towards exceeding that 38% GOP.

William Marks – JMP Securities

Okay great. That’s all for me. Thank you.

Diane M. Morefield

Thank you.

Operator

And our next question comes from the line of Jeffrey Donnelly. Donnelly, please proceed.

Jeffrey Donnelly – Wells Fargo Securities

Good morning guys, and Laurence I apologize, I am not sure if I was on early or late because the way things were cutting out, but can you touch on what your plan is for a few things I guess, first, the (inaudible) of your debt and then two specific assets, London as well as the Four Seasons Punta Mita, I was curious if you’re thinking this longer-term.

Laurence S. Geller

Okay. I got it, thanks. (Inaudible) look, we don’t have to refinance that until the latter part of next year. In conjunction with our part with GIC, we’ve talked about this very carefully, and we’ve decided given the, what we are hopeful on some improving operational trends to look at this matter during the next year to refinancing depending on the credit markets. If we were to refinance it today, we will be – it will be a marginal gap in financing. It really isn’t – has no material impact one way or another to either out cash balances in the bank or to our EBITDA. It’s a good asset, it’s a – the market is strengthening as there is no new supply, but there has been a lot of supply and were you take out the compression from the over supply in San Diego itself, it’s a slower absorption rate. That’s why this last year, we have is really important to maximize for us to understand the future.

As far as the Four Seasons Punta Mita, and I’ll deliberately leave London till the end. As far as the Four Seasons Punta Mita is concerned, this is still a very profitable asset for us not as profitable as it was. We have our own views as to what will happen in the political climate in Mexico given the election next year, and we’ll watch that election and the results post the election on the hotel carefully before making any strategic decisions on it.

As far as London is concerned, we are now in the enviable position of having a positive cash balances in an untouched line of credit with no immediate use for incremental cash proceeds. We are seeing operations improved in London at our hotel. We’re seeing resilience in the market. We anticipate seeing further flight to capital coming into London looking for hard assets in there and we’re very – and if and when we get a number that we think reflects its value to us, so be it, but this is a property that can generate $15 million of EBITDA to us. So we’re very cautious about setting it of anything, but peak numbers and by the way, I think our history shows when we find the right buyer, we now have a margin asset with a buyer.

Jeffrey Donnelly – Wells Fargo Securities

That’s good and one last question, maybe to the more theoretical, but it’s about the sensitivity of the luxury segment RevPAR versus other segments. Clearly, as you can talk from your stock prices be it (inaudible) from the markets about, but the growth prospects will be and the toll that will take on corporate profits. And in last downturn, we saw luxury hotels frankly flush a lot of the luxury group business and – of the transient business as you’ve just seen price sensitive companies scale back. You know, as you think for about the next 12 to 24 months, do you think we do see a slowing in RevPAR growth. Do you think that luxury might be less sensitive than it was in prior times, because may be some of that business didn’t cover to the levels that you had it once before. I’m not saying that they’re insensitive, its just I’m curious, but do you think it will be a different experience?

Laurence S. Geller

First of all, Jeff let me just repeat. I think when we come to – if you hang you hat just looking on our RevPAR growth going forward given that our RevPAR growth has been so high compared to others, our year-to-year comparisons are going to be difficult, but our absolutes are most important. Having said that, we are seeing some little resistance to luxury high-end spending providing we’re giving the value proposition from – with their needs, but we just don’t see it. Even that, even in the group market, you’ll see our pace expectations marry that. The vulnerability isn’t to the luxury consumer and the individual luxury consumer. If any vulnerability exists and we don’t see any at this moment it would be in the group market, but we don’t see that at this moment. I actually are mentioning more optimistic than I was due in the previous cycle about the high-end lodging, just because there just is now supply and the cost of replacement in the values that are going on today make supply tough. So, I just – I worry about macroeconomic issues, but there is nothing fundamental we can see that will weaken the high-end consumer’s propensity to buy our lodging product.

Jeffrey Donnelly – Wells Fargo Securities

That’s helpful thank you.

Operator

And our next question comes from the line of Smedes Rose. Please proceed.

Smedes Rose – Keefe, Bruyette & Woods, Inc.

Hi. I think you’ve got most of mine. But I just wanted to ask you, Diane could you just repeat the CapEx spending for the year and what the major projects were and the associated costs?

Diane M. Morefield

Yeah, it’s really only two projects as far as owner funded CapEx. It’s the – roughly $17 million for the complete room renovation at the IntercCon, Miami and then about 3.5 for the Michael Jordan's Steak House. Fairmont Scottsdale Princess is a ballroom project that’s going to cost roughly $20 million, that was in essence pre-funded at the close of the CMBS loan and as you know, the restructure at Fairmont Scottsdale Princess the $40 million from mezz loan was converted to equities. So Walton Street and ourselves co-funded the combination of the ballroom and the mezz loan payoff. So we put in roughly 30 to 35 million at that point.

Smedes Rose – Keefe, Bruyette & Woods, Inc.

Got you. Okay. And I guess just the final thing I wanted to ask you if you do end up selling London and I guess eventually exiting your Hamburg interest, what would be kind of the cost there, are there any cost savings I guess just on the corporate side from being purely in North America?

Laurence S. Geller

Thank you. Let me just comment. We’ve substantially exited Hamburg financially by removing most of the financial guarantee there. We really now just have frankly almost no investment and strong cash flow coming out of it, it cost us virtually nothing to manage Hamburg, it has very little friction cost given those structure we have. So that is a difficult lessee position to sell, but an enviable one to own for the cash flow.

Smedes Rose – Keefe, Bruyette & Woods, Inc.

As far as London?

Laurence S. Geller

As far as London is concerned yes there is some local friction costs, these are less than $0.5 million a year on that. So there isn’t a significant saving there, it really comes to – in a growth market when do we decide is the optimal time and of what price to sell. We continually are pleased with the increasing operating results and continually are increasing our financial aspirations if we are to exit London.

London doesn’t take a lot of our time internally, it really is the accounting cost for the US REIT structure and that cost us money there. So we look at it as a net EBITDA number and we’re very satisfied with what we have, and that EBITDA will be hard to replace. We would need a lot of money to replace it.

Smedes Rose – Keefe, Bruyette & Woods, Inc.

Yeah. Okay, thank you, that’s helpful.

Operator

And we have time for one more question, and that question comes from the line from (inaudible). Please proceed.

Unidentified Analyst

Hi, Laurence. Going back to – I don’t want to beat the lion [horse] to debt, but a little bit more specific question on the asset, the Grosvenor House just sold for $1.5 million a key, I want to get your take on what you thought of pricing for that asset and how does that asset compare to as a proxy for the Marriott you own and Grosvenor Square.

Laurence S. Geller

Well, it’s very interesting. The – I actually thought that the buyer got a very good deal on it. And with a lot of upside in that property although our property outperforms it currently on a profit per room basis.

I think it’s an interesting proxy for it; there are other proxies in London. We’re seeing very high pricing per key and we are jealous regarding it. However, let me give you a caveat before euphoria sets in too far, is that the – our property is still at leasehold position and with our landlord being the Grosvenor stage as that has shall I say a perspective in the centuries rather than leaving in the decades. So we have a lease of slightly less than 50 years which does have some value consideration as it’s not necessarily in the value of the cash flow but it does diminish our target audience at bias.

Unidentified Analyst

Okay. And then in the performance of the asset, there is quite a pick up there. Is all that attribute – bolt to different market, a general market strength and the renovations that we can expect going forward or did you have a little extra pop in the quarter from the Royal Wedding and other – from the city wide compressions?

Laurence S. Geller

Well, sadly we didn’t post the Royal Wedding although we tried but no, it didn’t – this is just what we planned as normal progression in the business. The renovation had, there are two or three features here. The renovation had a very useful impact, one with the re-plan, because we’ve seen the impacts on the previous part of the renovation. Two, London is exceedingly strong driven by financial services to a degree, and we are in the center of the financial district as far as hedge funds are concerned, and our location is very convenient for the city in terms of under and over ground transportation.

Three, the next point is really important. Marriott is an extraordinarily strong giver of business into London. It has a very strong brand presence, and this year in London and pre prior to our selling that we saw it in Paris, there is a very large increase in the Americans traveling to London and to Paris, which is actually a good indicator of U.S. consumer confidence. So, we have been benefiting from Marriott’s brand in there. So all these things come together, this is an asset that has been good to us and which we believe will continue to be increasingly good to us.

Unidentified Analyst

So the RevPAR, to sum that up, so the RevPAR should be able to be sustainable and like the third quarter, fourth quarter, were absolute RevPAR levels?

Laurence S. Geller

Absolute RevPAR will be sustainable we believe. There is nothing unusual driving RevPAR, you will see an unusual blip in RevPAR during the brief period of the Olympics next year; otherwise these are normal RevPAR’s that we would project and expect.

Unidentified Analyst

Okay. Thank you.

Operator

And at this time, I’m going to turn the call back over to Laurence Geller. Please proceed.

Laurence S. Geller

Thank you. I remain still sad that we didn’t get the Royal Wedding in London, but that’s just a personal thing. We are all very bullish, but as you can hear, we’re still cautious about the overall economy. We still have strong embedded growth, and we believe that any capital markets volatility will cause even further delays to any new supply, and I would remind we are in unique locations with very high barriers to entry.

We’re well positioned to consider attractive investments within our financial guidelines in the future, and we may see interesting opportunities when the market gets volatile, but opportunity is the proper word there.

It’s gratifying for both our board and management to see the continuation with the strong results from our labors. We believe we are in the strongest market segment and still at the nascent stage of recovery. With our unique portfolio of great properties, our asset management systems are working extraordinarily well and no supply for a longer time that we previously forecasted, we remain very confident that we have stronger long-term sustainable growth in both revenues and profits. We believe that the economy will grow despite the blip in current confidence levels and remain extremely optimistic and enthusiastic about our future and our growth prospects.

We thank you for your support, your time and your interest and we apologize for the conference centers communication blip.

Diane M. Morefield

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!