Laurence Geller – President and Chief Executive Officer
Diane Morefield – Executive Vice President and Chief Financial Officer
Stephen M. Briggs – Senior Vice President and Chief Accounting Officer
Bill Crow – Raymond James
Jeff Donnelly – Wells Fargo Securities
Lou Taylor – Paulson & Co.
Ryan Meliker – Morgan Stanley
Andrew Didora – Bank of America
Enrique Torres – Green Street Advisors
Tim Wengerd – Deutsche Bank
Strategic Hotels & Resorts, Inc. (BEE) Analyst Day Conference Call October 4, 2011 9:30 AM ET
Unidentified Company Representative
All right. Good morning, everyone. On behalf of all the Strategic staff here we would like to welcome you, and thank you for coming to the 2011 Strategic Hotels Investor Day at the InterCon. As a reminder, we will be webcasting today's program so for anyone that’s listening on the webcast we welcome you as well. Because we are doing that if we can hold all of the questions until the end of the show, we will have a question-and-answer session at the end of the show.
Eric Hassberger, where is Eric? The newly married Eric Hassberger will be – has a microphone, and will pass out the microphone if we have questions at the end. If you – well, try to remember if you have a question, to announce yourself and your firm so that we have it for, there will be a transcript of the event produced and it will be helpful to have your name and your firm for that.
Let me just walk through very quickly the agenda for today. We obviously are starting the presentation now. We have an hour and a half to two hours in here to go through all the slides and the Q&A, and then we will be taking a tour of this property. At 11.15, there will be transportation for anybody that would like to go over to the Fairmont. At 11.30 we will provide a tour of the Fairmont for those of you who can go, and then at 12.15, again, for anyone that can stay and would like to stay we will have a lunch at Aria, the restaurant at the Fairmont. At 1.15, there will be transportation back here to the InterCon.
I would like to introduce the members of the Strategic staff that are here today. And they are kind of spread out, so if you guys can help me out I will go around the room. Cory Warning, our Vice President of Investments. I will come back. Paula Maggio, our General Counsel; Eric Hassberger, Vice President of Capital Markets; Tom Healy is an Asset Manager, the Asset Manager of these hotels, in fact. Steve Briggs is our Chief Accounting Officer.
Who else do we have? Michael Dalton, who is the Vice President of Design and is responsible for the design of the Michael Jordan's Steakhouse that you all ate in last night; Bob Britt, Vice President in our Asset Management Group; Richard Moreau, who is our Chief Operating Officer; Ken Barrett, another Vice President in Asset Management in our group. Is Dave here? Dave Hogin, right there, I can never forget, Vice President and another Asset Manager of ours.
There is a lot of work that goes into these events obviously. There is one person who deserves a very special thank you for all her efforts. I think you’ve probably talked to – all of you have talked to her for organizing this. She has worked night and day. And I think it is a wonderful event. So, I would like to say a very special thank you to Kim Lavin, who is back there, for making the event possible.
I think without further ado, I will introduce the speakers this morning. Laurence Geller, our Chief Executive Officer, and Diane Morefield, our Chief Financial Officer. And, Laurence, whenever you are ready.
Good morning, everybody. If I sound a little gravelly or hoarse it’s because I was up there drinking with the reprobates until midnight last night. So I think it was a great evening. I hope everybody who was here enjoyed it. The staff were terrific last night. And we arranged especially a beautiful day for you here because at Strategic we are in the full service business, so we can arrange these things. You are sitting at the InterContinental Hotel, which is a one acre parcel of land on Michigan Avenue. So, if you think about that as an irreplaceable asset, you think about our portfolio.
I got up this morning at the ungodly hour of five o'clock and read the Wall Street Journal, and I wondered about how people would think about it today, and how could we be so lucky to have the DOW drop down, what it is and the S&P do, what it is, and yet I have to do an investor presentation. And here is how I thought about it. I’ve been around a long time. The first cycle I managed through was in 1974 after the Arab put the oil embargo on. And the world was coming to an end, but it didn't and business got stronger, and it keeps doing the same. And I’m an optimist and I’ve been around a long time, and like a kidney stone this too shall pass.
I just want to say one thing about the Strategic team. Many of you know that I was in the Army many, many years ago. And it’s easy to be in the Army until you have to go into a battle. And when you go through a battle with people, you have a special bond. And we’ve been through a battle the last couple of years as a company and as an economy, and we have a special bond.
My partners here are terrific, especially my partners Diane and Richard. They have proven that the impossible is easy to do. Miracles are not a daily occurrence, but if I am ever going to be in a foxhole with anybody I am going to be in a foxhole with those two guys. Great partners. And I cannot thank them enough for what they’ve done for this company and for our industry.
You are not going to find us or me being a shrinking violet. What about the mistakes we’ve made, the lessons we’ve learned or the accomplishments we’ve made now? I am as proud as the fattest peacock of what we’ve done for the last two years. And I will not be a pessimist because I’m not, and I have absolute faith in tomorrow. And I will not be humble about the achievements because we have done great stuff. So with that apology, if it is one, let me go on.
Today you are going to see a six-point presentation. And we believe in our hotels; each of our hotels having what we call a unique selling proposition. Procter & Gamble invented that term in the late 60s, and we now have adapted it to having a unique value proposition. So, I am going to start with that and we will go through the rest of it. Diane will take the second half of the presentation, and I will do the first half.
We are the only 100% pure play. We have executed against a very clear vision, and mention our name and you can visualize what we are, what we do and what we achieve. Let me tell you what we are not. We are not all things to all people. We set out to be the best portfolio in the high-end space, the best asset management team and to deliver the best operating metrics. And we have now, because of that our unique selling proposition.
We are – it is crystal clear what we are, how we differentiate and why we are in business. Diane doesn’t want me to knock my peers so I won’t, but I wonder how many can fit that definition. Our high-end portfolio of assets is better poised to outperform in a recovery than any of our peers. So, our culture is as simple as this. We are hotel people running a hotel company, and have always maintained that asset management was not merely a core competency. It is our reason for being and we have the operating results to back it up.
High-end outperforms the industry in a recovery, you know that. We have clearly industry leading asset management expertise, and it is not a one quarter wonder. If you have been seeing our results through the thick and thin, you can see that the operating results show what we are. Our assets are in pristine condition. We just never stopped investing during the worst of times, and there is simply no deferred CapEx.
We have a theory that if we have a constant pipeline of off the shelf capital projects that we have propelled to pull down, and in the right market conditions we can create value without having to buy it. We own the space, we own the square footage. You were in a Michael Jordan's restaurant, it’s merely typical of what we do. Our portfolio is embedded with organic growth.
We have clearly a long way to go to recover to the peak, and our job is not merely to recover, but to execute against our belief. And what’s our belief? Our belief is robust through the peak largely because of supply. Our replacement cost, $700,000 a key ex-land if you can build. And we're trading at the miserable number of half of that. We are an incredible proposition in terms of replacement cost. We have a historically low supply environment. As I said, being around a long time, I have never, ever, ever seen anything like this. Given the time it takes there ain't going to be no new supply before 2015 or onwards in a logical manner.
Our balance sheet. Diane will discuss it, but we executed a very comprehensive balance sheet restructuring plan. It was hard. It took over 20 different transactions to get to it, but we now are well-positioned for future growth. And our maturities has been sluiced over a 10-year period. And we have approximately $400 million of liquidity plus the two unencumbered Four Seasons assets we acquired earlier this year. All of this translates into the best investment proposition in the lodging space, which translates to money.
As I said I am no shrinking violet. Okay. This is a volatile environment. I don’t have to tell you, you are experts at it. The only issue for us is we can't change the environment. I can't make the European debt crisis go away. I’d like to make a bunch of the European politicians go away, but what we can do is to do what we do every day, is we set ourselves out to beat our competition. We can't make a market, we can be the best in the market and that’s what we do.
So we have had to build this company to be nimble, flexible and geared to volatility. And so, all we can do is outperform, which is why for us market share growth and margins are how we are measured. We see – and this is really important for us, we see that the economy is diverging and it goes along demographic lines and educational lines. I don't need to tell you any of this, but with 4.4% of those people with Bachelor degrees or better being unemployed only and 14.3% with no high school education being unemployed, you can see how it works.
So, in our markets which are really skewed towards graduates, undergraduate degrees and graduate degrees, we have only 2.4% points of unemployment different from the norm. We are in an interesting position. And our customers today are confident that they are going to keep their jobs. This is so different from when we went out in the market in 2008 and 2009. So, our customers are employed and they can keep their jobs. It makes a big difference.
I’m optimistic. And it is really simple, corporate profits are at an all-time high. Personal income is increased for 21 consecutive months; it’s up 5.3% from a year ago. Corporations are sitting with over $2 trillion of cash, which represents nearly 48% increase since Q1. Now, when I think about it relative to 2008 and 2009, you will forgive me I had too much grape last night. When I think about it in that context it seems to me very simple. People are not worried about survival in their corporation, they are worried about opportunity. And if we have to define why our results and the industry's results are as good as they are in this marketplace, I think it is just simply the health of people's balance sheets.
GDP is a measure, is a lagging indicator for us. It used to be about a 94% correlation, today it’s an approximately 80% correlation to lodging demand, but it is a lagging indicator. So, we have been struggling to look for future indicators. And you will hear how we look carefully week by week at group production as a forward indicator, but we look at corporate profits and business investments. And business investment is expected to grow next year even in this mess in the double digits. Group cancellations remain in line with – and we have seen no fall off in business. GDP is still positive, but all of that is interesting, but the unknown factor and how we measure it is that we’ve seen no supply. And it’s the first time I have seen a no supply environment, and I’ve been around over 40 years in leadership in the lodging industry.
So, it’s really – the 6% differential between demand growth and supply is just an amazing thing, and you will see how demand growth is growing. And this supply issue is changing how we think about it. So, it’ hard to get depressed in this supply environment. We have a very, very favorable supply outlook. It’s the biggest story for us, less than 0.2% new supply in the pipeline, 0.2%. Nothing. And if it takes four or five years, nothing. How are we going to price when demand goes up? Eventually there is a propensity to consume level that we will meet, but we really are optimistic about pushing the rates. That is why we talk on our calls about compression nights.
It’s all about how quickly can you get demand up that you can squeeze the juice out of the room rates. This is a business. Our business is delivering service, but it is a business and the more we charge the more we make, simple as that. And we believe in that. By the way, the silver lining in this mess; credit markets have shut down. Any construction optimism if there was out there has gone. The banks and you (Inaudible) hearted bankers out there will confirm it. Just ain't giving any money for construction, and if they are they are nuts.
Historically, luxury hotels outperform by a significant margin in a recovery. We’ve shown you these charts before, but they are really self-explanatory. We outperform by 2% to 4% in CAGR. It’s astonishing numbers. But, here is the one. The slide on the right is the one that makes me the happiest. We have sold 24 – as a luxury industry, we have sold 24% more room nights than we did at the previous peak, 24%.We are now absorbing all the supplies that has come in, and yet through all of this mess we’ve sold 24% room nights and it goes back to prove the argument about the demographics.
We had limited unemployment and people comfortable, so they are spending, they are travelling, they are negotiating good rates, they are negotiating for bargains, so would you. All of us do. But that night – that number here 24% growth, added to the favorable supply, fantastic numbers. I cannot and will not get myself into the depressed malaise. We will look to the silver lining. Our hotels are simply unique and irreplaceable. We have significant built-in operating leverage, and we have a constant stream by absolute strategic impulse of ROI opportunities. Our model has been, is and will be based on outstanding leading edge and proven asset management capabilities.
Going into the downturn, our team focused on improving margins from 2007 onwards. We are generating industry leading incremental value today, and we were throughout the recovery even in the depths of recession. We are able to create value no matter what the brand. And we continually review management contracts for compliance, renegotiations and amendment, and let me talk about that. There is significant value in a management contract. Rightly so, I come from both sides of this measure, rightly so. However, these management contracts are done long term and they are done for in history. The world has changed. Things changed. Capital investment changes, technology changes, centralized services changes, hotel companies screw up.
And our job is not to be supine, but to use our expertise to renegotiate management contracts for the benefit of our shareholders, and we do every day. It is a core competency that is the hidden secret in the business.
Our many decades of leadership on the brand, operating, development and ownership sides of the business are frankly, unmatched, mainly because we are old. But we have, in fact, created unmatched, long-term relationships throughout the global lodging industry. We are proud of them. I am proud to call most of the CEOs in the companies around the world, my friends. They may not like us renegotiating the contracts. They respect us because we bring loads more profit than others do, and then to the bottom line. Simply stated, nobody does it better.
I am sorry, but I like that. Well, I guess that shows my age. I think that is a modern pop song. I had to tell the guys that that actual song existed. We have a clear vision. We have great hotels in great locations. They are in great physical condition. They have great internal physical and operational growth opportunities and no supply. I challenge anybody to come up with a portfolio like ours anywhere in the world. We are in high barrier to entry markets; they are desirable. We have world class assets. And I honestly believe that they are operated by most of the industry's best hotel brands. And this isn’t just about service levels or this and that. It is about delivery of people into the hotel. It is about frequent traveler programs, distribution systems, boldness, internet strategies, digital strategies, cyberspace strategies. These brands have to be good because this asset is worth $300 million or $400 million. I ain't going to give it to a putz.
And that is the challenge for all the wannabe brands they cannot exist tomorrow because the technology costs of delivering people into the hotels are just getting too expensive. We like them to stick to what they do. We know what we are and what we do best. So, let me make it clear, we will stick to what we do and what we have done. We will be disciplined, we do not need to grow, and we will not try and be all things to all people. Our strategy is focused on the high end. We are the only pure play lodging REIT. We totally believe there is no better investment than the high end airspace and no better investment than ours.
We’ve got a device called a brand test. We did this – invented it many years to talk about brands. Let me explain it. We close our eyes and we name a brand. If you cannot visualize the brand in your mind physically and operationally, we do not believe the brand is a brand. It is a hodgepodge. I would challenge you to put the same test to lodging REITs.
You can see us when you close your eyes, but can you see the others what they are? That’s smart business. That’s strategic planning. That’s the way corporations exist. They have to have a reason for being, and we have a reason for being. I mentioned we have a great team. We are a hotel REIT lead by hotel people not by a real estate maven who is financial engineer. We are experienced in buying, selling, financing, repositioning, driving yield per square foot, and above all delivering exceptional margins. All of that translates into the only thing that matters as far as I’m concerned, which is shareholder value.
I have a great team to work with. I enjoy coming to work with my partners every day, and I hope they do. And our environment is a fun environment. You can see how we react even in these times. We have an experienced and very beautiful team. And we have a great asset management team. They have been introduced. But, let me make one other comment that is not up here. We have a great Board of Directors. As we went in to the downturn, we reached out to a number of our investors and we got advice about things we were doing right or wrong in the Company. And it wasn’t pablum. We took that advice and amongst the advice we took was, we have to restructure our Board to have it more relevant to cope through the downturn, and we did. And we have a good Board.
Many of you know the names on some of our players form Ray Gellein, our Chairman; Richard Kincaid; Gene Reilly from AMB; David Michels, ex-Hilton. We have got really a sophisticated Board, and I can say it’s a very involved Board. And it’s a Board that really work and help us. And I’ve been on board since I was 26 years old, I don’t think I have seen as involved and a helpful Board as this one.
Let me just talk about our asset managers for one minute. They are at the sharp end. This is a team that have pioneered industry leading innovation that the brands copy. I get somewhat chagrin that the brands don’t innovate as well as they should. But now I think about it, their job is to manage to the lowest common denominator. They are moving a super tanker around, but we more like a speedboat.
These guys have pioneered techniques that I won't talk about today because I talked about them endlessly, that have become industry leading. And they are never satisfied and they are never stopping. And we will continue to spend money innovating, trying, failing, getting it right and executing across the brand. We will not stop. And we have a team of people that do not know that they cannot walk through walls, and I’m not about to tell them.
I’m proud of the Company and I’m not embarrassed by singing our praises. And I now would like to introduce the best part of my team, which is Diane. Richard won't come up and talk, so it is Diane. I would like to say there is brains and beauty in this organization, unfortunately she has both.
Good morning. Hopefully, I am a little clearer than Laurence since I did not smoke cigars or drink until after midnight thankfully or my voice would be cracking right now. I am going to cover a couple different sections, the first being, again, our organic growth, our operating and asset management capabilities and our ROI opportunities. We really do feel we have industry leading asset management capabilities. And I want to give you, on these various bullets, actual live examples versus just the – sort of the big overview words.
In the area of market research based programs to develop market share growth and revenue enhancement, at the Ritz-Carlton Half Moon Bay, before we bought that hotel and when we bought it, the average transient room night there was one night. And we wanted to increase that. So through market research and our own creativity, we came up with the Fire and Wine concept for that hotel. And as you know, that’s generally in the wine country area. So we developed an ENO bar. We put fire pits at fairly minimal cost on all the patios of the ground floor rooms. Since doing that program and rolling it out, our average transient stay is now between two to three nights, and we charge almost $100 premium a night for those fire pit rooms.
We also have developed proprietary operating systems throughout Strategic, but again we roll out to all our brands. One is our food procurement program, which has enhanced our incremental margins by roughly 50 basis points. We also have a labor management scheduling process that we’ve talked about quite a bit over the years, and one example is here at the InterCon Chicago. We purchased this hotel in 2004, and since that time we have actually reduced total hours worked by 82,000 hours, and saved roughly $2 million in wages, and again at a time where actually wages were increasing.
We also have partnered with TIG Global, which is an Internet marketing firm, in order to receive prime internet placement for all of our hotels across the portfolio. And in 2010, we are tracking the marginal revenue from these programs, and that marginal revenue was roughly $35 million last year. We also went in to the recession of '08, '09 and did some very early cost cutting when we started to realize how bad things were getting. We worked with the brands, we actually pushed them very hard, but we didn’t want to sacrifice, obviously, service. We have permanently reduced 20% of fixed wages throughout the hotel portfolio.
And that leads to our next point that we are proactively maintaining those fixed cost reductions and not letting them creep back in during the recovery phase. In the second quarter of 2011, the hours worked per room was 7% less than the second quarter of 2007, again, a sign we are keeping those costs out.
Finally, and as Laurence noted, we have a very rigorous oversight of our brand managers to ensure alignment of interests. I like to say they really don’t want to fight with Laurence and Richard, so pretty much we are able to get what we need to get. But, I think this is really a great example. Richard and Dave Hogin and some of our asset managers attended the Four Seasons owner conference earlier this year. And Four Seasons highlighted six initiatives that were significant contributors to the hotel profitability across their brand. Of those six initiatives, three of them were actually created by Strategic Hotels. Pretty impressive.
And, finally, and we will get into this in more depth, we are always evaluating and implementing value added ROI projects. We have a constant pipeline that we are looking at. We have roughly ten projects in the pipeline right now that we are analyzing, which would be a capital spend of about $21 million and yield probably low 20% to mid-20% returns. That would then equate to a $0.25 to $0.50 per share in value.
So, quite frankly we really do feel that we set the bar for best-in-class asset management. Again, we are always comparing ourselves to our peers and our competitive set. Every company in America does that. And here are some statistics that show we do stand out. We have the highest ADR, the highest RevPAR and the highest non-room revenue of any of our peers, or quite frankly, any of the lodging REITs more broadly. What is more important and what we track more closely is the ratio of our EBITDA growth to RevPAR growth, which for 2010 was 2.6 times well above, again, all of our direct competitors. And that ratio has been running in the two to three times consistently over the last six-plus quarters.
The other thing that distinguishes Strategic from some of our peers is we really track total RevPAR, as well as just RevPAR. The reason being, as you can see in these pie charts, our revenue mix is roughly 50% room and 50% non-room versus a much higher skewing towards room revenue for our peers. What this means is we really are always pushing ancillary revenue, revenue from food and beverage, from catering, et cetera, in order to maximize our yield per square foot in our hotels. We actually like to view our hotels as a mixed use property, where the rooms are in essence the anchor tenants and the guests staying in our rooms were trying to always maximize their spend at the hotels while they are there.
So, we continually drive ancillary revenue throughout the properties, and maximize total revenue and total bottom line earnings. So, for us it’s not just about the margins, which is on the surface sometimes hard to really see through, but it’s about our total cash yield at every asset. The other I think unique characteristic is our revenue is roughly from 50% group, 50% transient. Again, the transient base is – roughly half of that is actually business travelers as well. So, roughly 75% of our revenue comes from corporate clients. Why that’s important is generally corporate business and corporate travelers are more stable and less price sensitive. And the other key advantage of a high group mix in our properties is that it does create internal compression nights, which allows us to really push the transient ADR rates when the group business fills the bulk of our hotels, very similar to obviously, the airline model. Our mix in 2010 was roughly 44% group. It will be up a bit this year to about 45% group, but we continue to push towards that 50/50 mix, which we think will really maximize our returns.
Again, going back to margins, by definition margins for food and beverage are lower than room margins. So, it’s somewhat perverse, since on the face of it, that type of analysis that would say we really shouldn’t be pushing for food and beverage and ancillary revenue, which is one of our primary focuses.
But, again, when you go back to our mix and you layer on that mix to our competitive set and adjust accordingly, which the calculations on this chart show you, this is how we really track ourselves quarterly; what our margins and our mix are compared to our competitors. And you can see for full year 2010, when we do this apples-to-apples comparison, we actually outperform in margin by 400 basis points, which is really a significant outperformance.
So, again, it is about making money, hence the little musical clip. And we believe our mix and revenue strategy outperforms in delivering bottom line cash flow. As you know, group pace is the best forward indicator of our business. What has changed since the 2008 recession is the group booking window has clearly shortened pretty significantly. And to give you an example of that, in August of this year our ITYFTY,
in-the-year-for-the-year bookings for the third quarter were 42%.
By comparison, in 2007 in August of that year 24% of the big bookings were for that quarter. So, again, people are booking-in in a much shorter window. The good news is, though, we did experience a 26% increase in the second quarter for ITYFTY room nights compared to 2007.We have achieved almost 100% of our budgeted group nights for this year. And looking into 2012, based on the current pace and assuming a similar production level next year as we’ve achieved this year, we would still be below however 2007 group room nights by around 13%. Again, which just shows we still have runway for internal growth. And, we continue to push again towards that 50/50 mix.
Here’s another slide that gives you some stats on group booking outlook. Again, we are monitoring group production very closely given the volatility in the current market. We define production as the number of group rooms that go under contract in that month for a future period.
Importantly, current production levels are trending higher for comparable months in 2007. And these graphs show you the trailing 12-month group booking production compared to last year, which were 8% above prior year. And for 2012 versus 2011, again, same time last year were 6% above. And the stats on ADR increases for these trend lines in 2011 were 4% above and for rooms being booked for 2012 ADR is up 6%. So, the bottom line is we are really not seeing any cracks of slowdown in our group booking pace.
Occupancy growth, obviously, always leads the recovery, which has clearly been the trend during this recovery cycle beginning in the first quarter of 2010. However, we are now seeing growth in ADR becoming a more significant factor in driving RevPAR. And what we track most closely is our market penetration by hotel and their specific market, which is our penetration compared to our directly comparable competitive set in that market and it’s reported by SmithTravel, obviously a third party validation.
Our total portfolio market penetration is higher and has improved throughout all points of this cycle over the past six quarters. For example, in San Francisco where it’s generally – RevPAR is up 20% for the whole industry in that market, however, our Westin St. Francis is even higher with a RevPAR index competitive set gain of 4% year-to-date. We’ve actually a 3% RevPAR market penetration for Ritz-Carlton Laguna Niguel in Southern California.
Our corporate goal, and actually one of the metrics that all of our asset management team is judged by, is to consistently increase market share of each of our hotels and their competitive market set. Laurence mentioned compression nights. And, again, this is another indicator that we track very, very closely on two metrics over 80% occupied nights, and over 90% occupied nights.
Clearly, we can drive higher rates when we hit these two layers of compression nights. I want to point out that the decline in August is merely seasonality, where August is a slower month. Obviously, less group business and people are headed back to school, and it’s just a slower month. But what’s important to look at is the trend of both of these lines comparing 2011 to 2010. And, again, the trend lines are above consistently throughout the year as compared to last year.
In addition, the ADR year-to-date is up 7% for the 80% compression nights and is up 13% on the 90% occupancy nights throughout this year. Another positive trend is that compression nights are up – I am sorry, number of room nights are up even more significant, 80% nights are up 16% compared to last year and 90% occupied nights are up 20%. We have significant internal growth and we have been covering this throughout the recovery. And we know this because we are still below the 2007 peak year. And we feel we have ability to grow our occupancy and ADR back to peak levels and, quite frankly, beyond.
Our portfolio occupancy is still five percentage points below peak, and ADR is 10% below peak. And, again, given lack of supply throughout the legs of the recovery we really feel we can blow through peak. The only question really is when we exceed peek, which will clearly be linked to the broader recovery in the U.S. economy.
Our current level of RevPAR and EBITDA compared to peak is even more dramatic. We have a 15% delta for – before getting back to peak RevPAR, and our same store EBITDA portfolio is still 27% below peak. Again, given supply-demand – I’m sorry, supply dynamics, we do not feel that peak is necessarily the assumed ceiling for any of these metrics. And the table at the bottom of this side shows the sensitivity of what level of compound annual growth we would need to get back to peak in those respective years. Recall that RevPAR CAGR in the last two recoveries was roughly 8.5%. And, again, we believe the actual CAGR this time could be above that number. So, it illustrates the significant organic growth we have in our existing portfolio and, in other words, we really don’t need to buy our growth.
This picture actually didn’t need words. You will notice Michael Jordan in the middle. How cool was it a couple of weeks ago to see Michael Jordan walking into the hotel of Michigan Avenue on a red carpet? It was kind of like Academy Awards with people trying to get a glimpse of him and take a picture. But these are the kind of creative innovative things we do to really make our hotels stand out, and to utilize every bit of space in a revenue generating way.
This slide highlights some of our recent more notable ROI projects over the last four years. First of all, I want to make the point we fund that the 4% FF&E reserve in all of our hotels year-in-year-out even during the down years. But that is, by definition, more of the defensive capital we put into our properties. These projects represent what we call ROI owner-funded projects, and they have to have at least mid-teens returns for us to consider them.
Again, we have spent even during the down cycle of '08 and '09, and now those projects are really paying off during the recovery cycle. Our philosophy is simple. We already own the real estate, and we are devoted to maximizing the return on all of the space. We are never satisfied, as Richard and his team know intimately and all of us know, as Laurence is always pushing us to look at projects, to think out of box, and to research demographic trends to capitalize on higher returns and to update our assets.
Now, I want to cover three specific capital projects, again, to drill down a little more. At the Four Seasons DC, in '08 and '09 we added 11 new rooms including two massive suites called the Presidential and the Royal, and they are well-named. We also, again, substituted sort of a regular hotel restaurant with Michael Mina's Bourbon Steakhouse, which has been wildly successful.
The return on that is approximately mid-teens for 2010 and growing as it continues to stabilize. The suites go for $9,500 a night. Some regulars that stay there are Oprah Winfrey, or kings or sheiks of the Middle East when they come to DC. So it is – those have been truly an amazing success story. And the Bourbon Steakhouse annual revenue is roughly $9.5 million a year.
In addition, the ENO Wine Bars was a demographic repositioning concept that Strategic developed, again, to use underutilized space in some of the lobbies of our hotels. And you experience that for a while firsthand last night in our ENO here at the InterContinental. These wine bars are really small capital investments in the area of $1 million to $1.5 million, but for huge returns.
In addition, in the InterCon here in Chicago, we really maximized storefront Michigan Avenue space by putting in a Starbucks right on street level with access from Michigan Avenue and from the lobby of the hotel. It is a franchise, and it is one of the top five busiest Starbucks in the United States and has just been tremendously profitable for the hotel. In 2007, when we acquired the Del Coronado, we had a vision for building condo units that would be owned by individuals, but in our resort rental pool. This development was terrifically successful. It returned $45 million to the ownership venture on gross unit sales of a $113 million or 40% net profit. In addition, the condo units, again, are part of the hotel and contributed $6.6 million in EBITDA in 2010 alone, and will continue to increase in its EBITDA contribution as we continue to push rate on these units.
Turning to our 2011 capital projects, our largest owner-funded capital project is the $18 million guestroom renovation at the InterCon Miami. There has been a significant increase in supply of rooms in Miami. We actually delayed the room's renovation until the JW Marriott opened, so we could see their product and get a feel for what we thought we needed to do with our rooms.
We did in-depth market research. We got feedback from meeting planners, and we rolled out some different design concepts and style before we really spent a lot of capital. Once we designed what we felt was the right room, we rolled out this project. You can see from the before-and-after picture the completely different feel to room. We now have a contemporary feel, it’s very up to date and it’s been very well received. And I don’t know who picked the original bedspreads, but they are pretty something else, but I’m sure they were in at one point.
We have completed over two-thirds of the rooms now, and we did it during the slow summer months of 2011 so to avoid displacement. And we will finish the last third of the rooms, again, in the slower months of 2012 and that project will be completely done. We are also looking at revitalizing the lobby making that a lot more interesting and interactive, so that we can completely finish the repositioning of this landmark hotel.
So we are confident and we already are gaining back market share, and there will be a very attractive payback on this capital, again, likely mid-teens. And not to belabor the Michael Jordan's Steakhouse, but just to give a few stats now that you’ve experienced it firsthand eating there. We took what was really pretty mundane mezzanine level tucked away space on the second floor, it has low ceilings and it was really just a hotel type restaurant that pretty much only did a breakfast business.
Turning it into the Michael Jordan, and actually moving the Zest Restaurant into alternate space that was really underutilized meeting space also in the mezz floor, mezz level. We now still serve a very healthy breakfast business in the Zest Restaurant, but then also have a lunch business in both and, of course, the successful dinner business in the Michael Jordan Restaurant. It’s had excellent reviews, and we are projecting about $9 million in annual revenue in its first full year.
Here is an outline of the actual live potential capital projects that we are constantly evaluating. We have a very disciplined, rigorous internal process for analyzing, reviewing and approving ROI capital projects. We have a minimum return threshold for these projects of at least mid-teens. And these are also presented to our Board for approval once we've fully vetted them. We get, again, guest and consumer and meeting planning feedback on our projects, we test concepts. And now, we can roll out some of the more successful projects that we have already tested such as the ENOWine Rooms, the Michael Mina steakhouses and the Richard Sandoval Concept Restaurants, which has just been tremendously successful throughout our portfolio.
The other nuance that we really like to point out is, if one of these projects provides say a $1 million incremental NOI value, at a five cap rate that actually equates to about a $20 million net asset value enhancement to the hotel that we put in one of those projects. So, we lever relatively small capital investments into very significant net asset valuation growth.
Okay, so Laurence gets Nobody Does It Better and Money, and I get Rocky. I am not exactly sure what that means, other than I’m Italian by birth. One of my colleagues, when we talking about different songs that we might play throughout the presentation, mentioned maybe You're So Vain could be one of the songs. I will let you guess whose section that would have been in.
Oh, by the way, one just side note. I actually got married in this room a little over 20 years ago, so I think it is kind of ironic that I am now standing here doing an investor presentation. But my marriage has gone well, lasted over 20 years, so I am hoping that’s a good luck sign for my job here at Strategic.
We do want to cover our debt refinancing strategy, and before we talk about the results we want to outline the objectives we set out at the beginning of this year. And I do have to say, again, based on the Rocky song, I feel like we’ve been climbing and running up a lot of stairs continuously and been in training the past 18 months.
But we decided in January of this year, we made a very deliberate focused decision to early accelerate all of the refinancings of our 2011 and 2012 maturities. And now, in hindsight it looks like, oh, that was an obvious decision, or it looks so easy. The reality is, when we were making that decision you have to remember all of our maturities were actually back ended to the end of '11 and throughout '12. So, to be tackling these maturities pretty far in advance was sort of a unique decision.
The other thing is the underlying interest rates, this was done back in '06, '07, they were very low rates. So we knew we were going to be paying higher rates for some short period between these early refinancings, but again, we felt it was absolutely the right thing to do to take the risk off the table.
So we have outlined these very specific objectives. Even though our line of credit didn’t mature until March of 2012, we knew we had to go a simultaneous to the market and do a new line. The primary reason being we made a decision that we want to substitute the Ritz-Carlton Half Moon Bay under the borrowing base assets, and release the Four Seasons DC and do a separate loan on DC. DC, where we ultimately put a $130 million of debt on. Ritz-Carlton Half Moon Bay only had $76 million of debt. So, that was pretty obvious why we chose that strategy.
We also wanted to create a competitive loan marketing process for all of the loans and for the lines, so we decided to go to market simultaneous for all of them at once. We knew we had to stagger loan maturities, quite frankly, better than we had done in the past. We want to look out over ten years. And we made a very conscious decision that we never wanted more than 25% of our debt maturing in a single year. The reality is you never know what the bad capital market year is, and you never want to be overexposed. We also knew we have to manage our fixed versus floating because we had an existing swap portfolio that had several years to run on it. So, we know if we did floating rate deals we still had coverage with the swap portfolio.
We also, for very obvious reasons, wanted to reduce reliance on CMBS loans given some of the difficult restructurings we were living through at that point. And we clearly knew we had to position the Company for the payment of our preferred dividends. So, I will go in detail, but thankfully our mission was 100% accomplished. I really like this graphic. It really, again a picture is worth more than 1,000 words. But it shows you that we have these two towers of debt maturing in 2011 and 2012. So, again, we decided to early refinance and just take that risk out of the equation.
So now, we have no real near-term refinancing exposure, other than the Hyatt Regency La Jolla, which again is our 2012 maturity in September of 2012, and that we own in JV with GIC. So we need to work with them and knew that we would address that maturity at some point in 2012 likely or early in the year than later. And I think we’ve shown that we have a track record for refinancing or restructuring our debt, so we are very comfortable that we will be able to do that as well on La Jolla.
The 2013 debt is the Marriott Grosvenor Square, obviously, U.S. dollar equivalent of $190 million. We know we could go to market today and based on a 10% trailing 12-month yield. We could refinance this asset in the area of a $130 million. And obviously, London remains a very healthy, very attractive market. So, our balance sheet now is completely stable. We can certainly write-out any near-term market volatility, yet we’ve ultimately positioned ourselves to look at growth opportunities at the appropriate time.
This chart shows how we’ve also significantly improved our various leverage metrics. The results are pretty dramatic. We’ve taken down our net debt to EBITDA from over 14 times to around – approximately seven times pro forma for this year. Our target range is four to six times net debt to EBITDA, and we will get there naturally just through the growth in our EBITDA over the next couple of years.
We’ve also taken our net debt to total enterprise value down to under 50% from a peak of over 77%. Any future acquisitions we make will clearly be done on a leveraged neutral basis. And as Laurence pointed out, our corporate liquidity between unrestricted cash on our balance sheet and our $300 million line of credit, which is completely unutilized is roughly $400 million, and it’s more like $500 million if we put debt on the Four Seasons, the two unencumbered Four Seasons.
Importantly, again, our mix of debt is much less skewed towards CMBS. The CMBS was over 56% of our debt in the past, it’s now done to 30%. Roughly 30% of our debt is with life company lenders, and 38% is bank balance sheet debt. So now, we have a much higher percentage of our debt with actual relationship lenders. And we also are still effectively 100% fixed, through our fixed-rate debt coupled with our swaps portfolio.
I don’t want to dwell on the Hotel Del since clearly that we closed in early February and all of you know the story, but it was a very complex CMBS restructuring that we started almost a year in advance of the actual maturity date, knowing with a first mortgage a revolver in five layers of mezz with all different lenders in each stack that it was going to be difficult.
We successfully had a new joint venture with Blackstone, KSL remained in and, obviously, ourselves. We continue to have roughly 35% interest in the property, and we are the asset manager and get related asset management fees, and we have a return based promote on our position. We also did another very challenging CMBS restructuring with the Fairmont Scottsdale Princess, which was also a highly leveraged situation with a $180 million of debt between a $140 million CMBS, $40 million mezz with a life company. The end result on this one was actually fantastic for all parties. And, quite frankly, I think a lot of people didn’t think we would pull this one off, and some people questioned if we'd pull off the Dow.
But, again, bringing in Wall Street as a JV partner, we are 50/50 partners with Wall Street, converting the $40 million second mortgage into equity committing, and we are building a $20 million ballroom, which is a second ballroom in the attendant meeting space, plus some transaction cost. We invested roughly $35 million for our 50% joint venture. And, again, we retain asset management fees and have a back end promote.
Finally, I think all of you in the room are well aware of the kind of IRR hurdle rates and the kind of rigorous underwriting that both a Blackstone and a Walton Street do. So, we feel we are going to get incredibly attractive returns on these two reinvestments, and particularly given our returns are enhanced by our promotes.
Finally, the nuance on the Hotel Del. The sale of the Marriott Paris, which I will get into, which raised about $60 million in proceeds, basically funded our reinvestment in the Del. We actually thought this transaction went a little bit unnoticed for some pretty significant results. We had sold this hotel effectively in 2003 to a German pension fund in a sale leaseback, and really owned a small sliver of the net economics of the asset. But, again, we continued to asset manage, upgrade the asset. The only hotel that faces on the Champs-Élysées. So, we wound up earlier this year selling this asset at 18 times the 2010 net EBITDA contribution to us. And, again, the sale of that kind of multiple for just a sliver of the economics was amazing.
So, the $60 million in proceeds achieved multiples of the roughly $5 million in NAV that actually a lot of the analysts in this room had the NAV for this asset at. We also eliminated over a $0.5 million in G&A related to the asset. And really, the bottom line is we effectively exited Continental Europe at an, again, a very opportune time given the current struggles in the Eurozone.
Another transaction everyone is well aware of. But we were asset managing, for the last couple of years, the two Four Seasons in Palo Alto and Jackson Hole for the Thomson family, which goes under the investment name of Woodbridge. Laurence and Richard and the asset managers had really developed a great relationship with the Woodbridge executives. And we started discussions a while ago on the thought of us acquiring the assets for stock. In the end, the acquisition metrics alone for this hotel were very compelling at roughly $293,000 a key, which is at roughly half of the original construction cost and 11 times multiple.
The use of our stock as currency at 6.25 a share, including the $50 million equity pipe was tremendously delevering to the balance sheet, while we obviously increased EBITDA by acquiring these assets. But another benefit of this transaction was the addition of a highly regarded long-term shareholder to our investor base. The InterCon Chicago is another acquisition for stock.
We bought out GIC's interest in this asset for $82 million or roughly $364,000 a key. The replacement cost, again, ex-land of an acre on the Michigan Avenue, so not even giving value to land that is easily in excess of $700,000 a key and we bought it for roughly half that. And this property probably can even be rebuilt today with its finishers given its historic nature.
We also now get 100% of the economics including the new Michael Jordan. And we had the flexibility then to put the financing on this hotel that we wanted to that fit into our overall corporate objectives. Finally, with this stock transaction we now have roughly 25% of our stock in the hands of long-term shareholders, which clearly better matches our long term nature of our assets. Our original line of credit was due to mature in March 2012. Again, we had to address that this year and in conjunction with our other asset based loans. We removed Four Seasons DC successfully and replaced Ritz-Carlton Half Moon Bay in the borrowing base.
In addition, we actually wanted a lower committed line because we are paying unused fees on $350 million was the old line and not really using the line. But we do have a $100 million accordion feature to increase the line in a bridge fashion to $400 million if need be. Another goal was to rationalize the number of banks.
We had 21 banks in our old line. We wanted to get it down to eight to 10 banks, and have it all be relationship banks for obvious reasons. It’s much easier to deal with your bank group when they are true relationship banks and there is a rationalized number. So, we are down to 10 banks in the line, and again have direct relationship with all of them. We actually executed this line at lower pricing than in our previous line and better covenant.
We were also tracking the other lodging REITs and REITs more broadly that were doing lines in the marketplace, and we got better market terms than those lines as well. For example, we have no LIBOR floor in ours and some of the other lines do. We finally achieved also, the goal of not to require bank approval to pay the accrued preferred dividend.
We had proven to the bank that we had effectively raised proceeds through asset sales and other liquidity to pay the accrued preferred dividend and didn’t want to have to go to the bank group for any kind of approval or waiver. So, the bank line closed at the end of June, allowing us to execute the remaining hotel level financings. So these are the four non-recourse, not cross-collateralized hotel level loans that we marketed simultaneously to get the best market terms and the best mix of lenders.
I want to point out that we received advice from a lot of market intermediaries and actually from the one that assisted us in marketing the loans that we should go to the market on these loans in a staged methodical process. We overturned that device and we are going to market all at once for all of them and the line. No holds barred. We knew the iron was hot, and we just couldn’t predict what the future capital markets might look like.
Another reason to go to the market at once is we were balancing who was coming in the line and making a commitment to us on the line to reward the larger line participants with individual hotel loan business. So now – and we also had to balance the staggering maturities, again a reason to do it all at once so we could plot the various maturities of each loans plus the line.
We are very pleased with the individual executions on each of these loans, how they laid out in the maturity table, the overall terms, which you see here, and again with the lenders that we are able to do each of these forward loans with. We closed the very last hotel mortgage loan actually on this property the last week of July just as the capital markets completely shutdown given the debt ceiling crisis the first week of August. So, our timing truly couldn’t have been better.
So, to summarize the results of the debt financing strategy. The end result is, if you really think about, we actually executed 10 hotel loans in the first half of this year, including the two CMBS restructurings, there is four hotel loans under the line which all require mortgages, plus the four individuals. And we did all of this well ahead of the original loans maturity dates.
Again, we successfully did the two CMBS restructurings, which we are really pleased with. We staggered the debt maturity schedule. We are really pleased with the mix of lenders and loan types. And, finally, I think a very important point to point out is that we raised roughly $70 million in net proceeds by doing this holistic strategic approach to our debt refinancing.
I want to contrast that to early in 2010 as we were analyzing the potential debt refinancing gap for our '11 and '12 maturities, back then we were projecting a refinancing gap of roughly $150 million. So, we – and granted, obviously, the capital markets worked with us, we were in a recovery. But, again, our strategy being as deliberate and as defined as it was, we swung from maybe having to write a check of a $150 million to raising $70 million in proceeds.
So in the end, we achieved all of our goals, however, that was not without much angst and daily badgering from Laurence, and heavy-lifting throughout the process and, obviously, our timing literally could not have been better. This leads us to the final point on what we finally referred to as our restructuring stage, or Strategic 2.0.
At yearend, our accrued preferred dividend, which has been accruing for now a full three years at the end of this year, will be $93 million. Contrast that to we do have roughly $400 million in corporate level liquidity. So, it is not a liquidity issue to pay the accrued preferred dividend. And we are also, again, not restricted to paying it under the line. But, given the recent economic volatility and the somewhat uncertain outlook in 2012, we’ve stated publicly on our earnings calls and in these meeting that we want to monitor our internal operating metrics. Again, group pace, cancellations if there were some, which again we’re not seeing, and then external market trends as far GDP estimates et cetera, and determine what is the appropriate time to pay the dividend.
It’s also important to note that we intend to couple the payment of the accrued dividend with beginning to pay the dividend occurring on a quarterly basis. So that’s the other factor in this decision. We want to just make sure and be comfortable that our operating cash flow will cover the roughly $7.3 million a quarter of preferred dividends. So, we know it’s imperative of us to take this last step and pay the preferred dividends to get caught up, and ultimately that will position us to be able to pay a common dividend in the future. It’s clearly our corporate objective to return to paying a common dividend as soon as practical and when appropriate.
You’ve all seen our financial results year-to-date. Let me just, again, point out, we’ve had a very strong first half. Our RevPAR in this first six months was up 14.7%, our total RevPAR up 13.4%.This far exceeds any of the brand company results or the other lodging peers. Our EBITDA margin, again, is exceeding the competition at an increase of 410 basis points.
These metrics, again, speak to our cost containment that we are keeping in place, our revenue enhancement programs and our asset management capabilities. And our comparable EBITDA for the first six months was up 18.4%. And our RevPAR growth to EBITDA growth is regularly trending in the two to three times ratio.
On our second quarter call, we increased our guidance. Originally, we came out with RevPAR guidance at the beginning of the year of 7.5% to 9% range. We increased it to 8% to 9.5% and we are very comfortable at the higher end of guidance on all these metrics. Margins are due to expand in the 200 to 300 basis points, and EBITDA to increase up to 17% this year over 2010.
Laurence opened this meeting highlighting the eight key attributes, which defined the unique value proposition for being a BEE shareholder. I just want to reiterate those points one last time in closing. We truly are the only pure play high-end lodging REIT, and we simply have the best portfolio on the public markets. High-end has outperformed the industry in every other recovery, and we feel this will be true in spades in this recovery as well given that our demographic, which is the corporate traveler, as well as the high-end business traveler – that demographic is in very good financial shape compared to some of the other parts of the economy.
We keep saying this, but we really feel our metrics prove it, and we were really not trying to be arrogant about it, but we have industry leading asset management expertise, which we really feel sets the bar for the whole the industry. Our assets are in pristine condition, and we are continuing to evaluate significant ROI opportunities. And we will continue to spend relatively modest levels of capital to enhance the return at each of our hotels. We have significant embedded organic growth, again, to get back to peak and beyond. And so, it very much limits any need to acquire or buy external growth. We use this metric a lot and it is so true. Our replacement cost not even including land and we have land on beaches in California, on Michigan Avenue, in Georgetown.
So not even given any credit for that land, we know it would cost over $700,000 a key to replace just the hard assets of our hotels versus at where we are trading in our stock price well below half of that less than $350,000 a key. We have historically low supply growth environment. Laurence pointed that out. I’m not as old as Laurence. I have not been through quite as many cycles, but I believe him, and it has never been this low in the past, although I have been through some cycles too. And it really is unique to this recovery that we just have no new hotels, particularly in our space, coming out of the ground.
Our balance sheet is clearly been cleaned up, prepared for and kind volatility, but more importantly is positioned for growth at the appropriate time. So, again.
Okay, I guess that is our theme song now. With that, Laurence, Richard Moreau, John and I will come up front and we are going to take whatever questions you have for us based on the material. Obviously, third quarter earnings are off limit, but happy to answer any questions you have about our generally trends or anything that we highlighted throughout the presentation this morning.
Eric Hassberger has a microphone so that the people on the webcast can hear your questions. Thanks. Anybody?
Let me first of all just say about Eric Hassberger. He’s got married on Saturday and his dedication to duty, we made him put his honeymoon off so he could be here today. So his whole job is handing around the mic. You had some questions?
Bill Crow – Raymond James
Thanks for the presentation. Bill Crow, Raymond James. Laurence, I'd like your gut feel for how you see 2012 playing out. We know we are going hear from Marriott tomorrow afternoon. I love to hear from you before that. It doesn’t have to be company specific, maybe it could directed toward the industry or the luxury space.
I divide the industry into two basic propositions, high-end upper upscale, if you will, luxury, and mid-market. I have – I think the mid-market is the riskier proposition. There is no visibility. It reacts within a 30-day booking cycle. There's a lot of supply still there the change of trying to knockout franchises as fast as they can. Then, I get to our side of it. When I look at our production, our group production is the best indicator. I know we are ahead of – without going into specifics – of where we were this time this year for – this time last year for this year. So, I am feeling very optimistic about it. So, let’s assume that Marriott gives you 3% to 5%, 4% to 6%. I do not know. It does not really matter because our proposition is, we think we will perform between 100 bps and 200 bps better than the market. So, you are hearing actually a lot of optimism here. Everything is just in better shape in our booking pattern and business investment and corporate balance sheet. If there is a catastrophe, everybody goes down, we will outperform anybody else. So, I guess what I’m saying is give us 100 bps to 200 bps over the market. I will probably get killed for that, but I am sorry.
Jeff Donnelly – Wells Fargo Securities
Laurence, two questions actually. Jeff Donnelly, Wells Fargo. On the first question, it is no surprise or say it is not surprising to people that we are operating at record levels of demands for lodging in general and particularly in luxury, but we are not back there yet on rate. What do you attribute that to? Is it supply from prior years that is still weighing on us? Why haven't we gotten there?
Yes, I mean it is really simple. We are absorbing – we have absorbed a lot of supply. If you took the supply out, and I do not have a statistic in front of me, but if you took the supply out you would be running at about triple the amount of compression nights. At triple the amount of compression nights, your rate goes through the ceiling. So for me, you are absorbing this supply, you have absorbed it, we have absorbed it now. If the demand keeps growing, and I see absolutely no practical reason why it won't, those compression nights 80% and 90% will drive the rate up. I mean, this is simply airline module pricing. It just comes down to 80% and 90% pricing. And, frankly, that is why I am a bit – that’s why the mid-market is a problem because the (inaudible) having won the holiday in franchise system all those years basically, you get to 72%. Somebody is just going to pop another franchise next to you. So, they can't do it. At the upper upscale when you can't – nobody is going to pop another InterContinental next to me or another major hotel in this market. So, you are going to get those 80% pricing will start giving us muscle, 90% pricing will gives us infinite – theoretical infinite growth on rates. When you look at it, it does not take very much now because the supply has gone. So, it is a very interesting issue. I am – I would have been much more predictive in July than I was in – than I am now. But I am – the supply is going to drive rates to levels we haven’t seen. When I look at markets like New York and London, and I look at their compression pricing – and New York has always been a predictor for the rest of this country. It is always ahead. When I look at their compression night pricing, they are up probably 30% in rate on compression night pricing and in the high-end. So, we are very close.
Jeff Donnelly – Wells Fargo Securities
And just a second question on London. You sort of flared in the past with selling that asset, holding that asset. The talk was maybe you would sell her around the Olympics or following that period of time. Where is your head today on that property and its disposition?
Let’s start by the background because it is the right – it is a great question, Jeff. The background is the hotel we have positioned it for a sale. It is fully renovated. We’ve used pretty well every square foot, probably every square inch. I probably reached a new all time low when I converted toilets to a private dining room. And we have really done everything we can. The two Gordon Ramsay Restaurants are rated amongst the best in the country. So, we’ve done everything right. By doing everything right, we are making about $15 million of EBITDA. We don’t need the cash. When we first announced we were selling it we probably had $4 million in liquidity. Now we got $400 million. However, strategically we are not – we intent to stay as being the North American company in the strategic sense. Opportunistically, we are making a load of dough. I think the Olympics aren’t going to be as good as everybody thinks, and let me explain why. And it’s stupid. The two weeks, two to three weeks either side of it, are not doing as well as we think – we thought they would do, for London. Why? Because the scare tactics. Oh, London is going to be full, people are renting out their houses for the Olympics. So we have to work on that, and we are starting a marketing campaign now for that. So we are going to have a video big year next year, but it is not going to be big. On the other hand, this hotel is for sale. I just – we just want a bucket of dough and we are not shrinking violets about it in that side of it. We don’t need to sell it, but we’ve got to replace our $15 million of EBITDA and this is a great asset. We’ve got work to do on renegotiating the leases, we got all sort of things to do, we will – but eventually somebody will come in there and dangle a bucket of dough, and we will take it and run. It is just not a strategic asset, it is an opportunistic asset.
Lou Taylor – Paulson & Co.
Laurence, along those same lines --
Lou Taylor – Paulson & Co.
Who do you have in your asset management pipeline? How many assets are you managing for third parties that could come in as acquisition as you have done earlier this year?
We are managing at this moment two Four Seasons, Whistler for Bill Gates and Vail to Barclays. We have, truthfully, not gone out and sort them of late because we have been overwhelmed with what we got to get done here. The opportunities are there for taking. We turned it down an awful lot because they don't – you are only to asset manage those hotels in general that we want to eventually be in the position to buy. The fact is once you are in a hotel asset managing you have perfect information. Anybody comes in to bid and you have got to do due diligence. We have got plenty of time to look at it on that. So it is really – will we take more? I think we would probably will. It is a way of being paid to do due diligence. Will we buy the ones that we’ve got now? I don’t know. Maybe, maybe not. It is pricing – pricing I mean, it is clear, you can see our strategy on that. It’s worked out absolutely exactly as planned for us. The fact is that if you don’t have an intent to buy, to asset manage for $0.5 million a year a hotel is a diversion of attention, so we have to look at it as an option. And on that subject of that, let me talk about two asset management deals, which I think people don’t even recognize the importance of them. In our joint ventures with both Blackstone and Walton Street, we asset manage. It promotes. Let’s start with that. Blackstone don’t give anybody asset management. They have a very big asset manage function, and it is no accident that they want us to asset manage. Walton Street have a big asset management function, and it’s no accident they want us to asset manage. One of the unknown pieces of those two deals they don't talk about, which I value and so does our Board and our team very highly, is both of those we have rights of first offer. We have roll first. These guys are not long like we are. If we like the dynamics and we like our position and we own it, we are in absolute pole position should we choose not to take whatever offer comes in to buy the assets in when these guys want to exit. That is worth is weight in gold. Because, again, I don’t have to look – we can look at this as a buying opportunity option. So, I think this asset management is a tremendous complement to the team, but it is a very effective weapon as a strategic opportunity.
Ryan Meliker – Morgan Stanley
Thanks, Ryan Meliker with Morgan Stanley. Just taking a step back, when you started the presentation you talked about how you are not seeing any slowdown in fundamentals. Group booking pace is in line with your expectations and really what you’ve seen throughout the year. Since September, transient volumes were up 8%, transient rates up 10%. And your first half RevPAR was around 14.5% and your – the high end of your guidance is 9.5% implying that the back half is closer to five. That’s a pretty huge reduction in RevPAR growth even at the high-end of guidance. Can you reconcile the positive fundamentals that you talked about what you are seeing to-date and given it is already October versus --?
No, I can’t. To tell you the truth, I really can't. However, we went public in 2004 and we made a series of overbold announcements. Many of you know Jeff Caira from AEW. He came in and beat the snot out of me when we listed the projections. I can't help, but read the papers. Our Board reads the papers, our teams reads the papers. In an intellectual sense, I cannot reconcile it other than call it an abundance of caution. Diane said we are at the high-end of guidance. Clearly, we are. But I do not know. I don’t know. You tell me what’s going to happen with those people with funny accents in Europe. We Americans know that they are crazy. And, I mean, I just don't know. This is an abundance of caution. Logically, with a group pace that we’ve got, Diane talked about 80/20. Looking at our production numbers we should increase the guidance, but we are just being cautious.
Ryan Meliker – Morgan Stanley
Great. So it sounds like that basically what you are seeing today would lead you to a higher RevPAR level than the high-end of your guidance, but you are being cautious. Is that --?
What I am seeing today is I will open the Wall Street Journal every morning and I vomit. If you can take CNBC off the drop down television I would feel happier. Okay? I think it’s madness.
Ryan Meliker – Morgan Stanley
Fair enough. One other question. You’ve had success buying out recent joint venture partners, particularly this property with GIC and you’ve got the Hyatt La Jolla and the debt maturing next year. Are you in talks with your joint venture partner with the Hyatt La Jolla potentially taking over the remaining stake in that net property, or is that not of interest to you?
La Jolla is a great asset. How well it supply. I think both of us – both GIC and ourselves, who now are 6% plus shareholders so they are not just a partner. They are like you guys, owners. I think what we have to do on that one is watch what happens with the dynamic of San Diego market because what has happened is La Jolla has ended up to a degree as a compression market for San Diego. So, I think we have to see what happens. We have got plenty of time. We have got the lender – just to put it in perspective. We’ve got 53% I believe of the venture with GIC. The lender is MetLife. We’ve had a very successful and long relationship with MetLife including the refinancing of the Westin St. Francis and the Fairmont here in Chicago. I think this is one were we take our time. There are a lot of friendly parties involved and we see what happens. Buying out a partner for stock is a healthy device providing the stock is at the right price, and we just have to see, which way we go. We have been successful in selling our stock at premium each time. We’ve done these deals. So, I think we have to go with it. But, again, if you think about it we have also got two other joint ventures namely Scottsdale and the Del Coronado, so we have opportunities to leverage in a variety of creative ways as time goes on.
Ryan Meliker – Morgan Stanley
Andrew Didora – Bank of America
Hi, good morning. Andrew Didora from BofA. You mentioned a couple of times in the presentation about being able to significantly get past prior peak. In a very low or minimal GDP growth environment – low economic growth for the next few year – if there is a very low GDP growth over the next few years, how long do you think it takes you to get back to peak?
Yes. Look, for me there has been, for me (inaudible). There has been a systemic change in the metrics, and I don’t think I have seen this happen. I can't remember seeing it happen this way actually. What has happened? Because of the labor systems and I would take full credit for Richard and his team having implemented leading edge labor systems, we’ve changed the dynamic of the hotel. 21% of the management staff have gone away.
You have changed it so you are operating numbers – forgive me, I will get round to this. The operating numbers have changed, your EBITDA is higher now, maybe 100, 200, 300 basis points when you get to peak. So, I think that if you keep going that GDP isn’t the correlator for getting to peak as much as it is. 1% or 2% growth, I think we will get there in maybe two or three years, but you will get there. But, there has been systemic change and the issue is not RevPAR, it’s EBITDA. I think you will get to peak EBITDA quicker because of the changes that Richard and the guys have put in. And that is not just for us. I think the industry has got – I think we will be ahead of it because it is a cultural thing. But you have to believe firmly in industrial engineered labor management to get the results. Everybody says they do and they will get some results. I think we will outperform them. But I think you get back to peak RevPAR, but I think you get back to peak earnings earlier. So it really – 1% GDP growth does not faze me particularly. I want 3%, I want 4%, but where it used to be 2.5% to 3% before you could do it, you can do it at less than 2% because of the systemic changes. It is really a very interesting dynamic. It has been a sea change. You can tell I am an optimist. There is a silver lining of everything. Silver lining of the last time is the changed tact management positions. They never did before. It was always the hourly employees that they were playing with. Now they’ve attacked the executive committees, et cetera. That is – and, again, Richard and his team they can take credit for a lot of that. The silver lining right now is that the credit markets have shutdown again for new construction. So, we get a better supply absorption. My real problem is I can’t figure out the algorithm for room rate and supply because it’s a market propensity to consumers, an emotional barrier there. And I can't – at the moment you have just – it is the people are too short-term. The business confidence and individual confidence is too-short term.
Enrique Torres – Green Street Advisors
Enrique Torres, Green Street.
And by the way, Enrique, I understand that you took my – the steak knife away from me last night.
Enrique Torres – Green Street Advisors
I am having it shipped. I am making sure that it does not end up in my back. You were talking about the potential sale of the London asset. How do you prioritize the use of those proceeds, and is it any different than your retained cash flow from the rest of your operations?
It is a good question. We don’t need the cash at the moment. We can pay the pref, as Diane said, the accrued pref from what we have now from our liquidity lines. We haven’t got enough internal growth operate – or ROI projects that we need to draw down a $100 million-odd or $75 million, or whatever that number is coming out of London. I don’t think I differentiate it. The moment we have an asset that is in perfect condition we have opportunities with lease renegotiations to create capital value. You have flight money from all over the world looking at London, particularly because of the Middle East Spring it’s left even more flight money. You have an asset that is right on Grosvenor Square. The American Embassy is moving. There is more demand coming in there. This is not a rush to sell. And it is not a rush to – but of all of our assets, London first then Washington DC are probably the most liquid assets. That if one choose to sell and had a fairly tight range, and was prepared to take the lower end of the pricing range, three to four months and you are done. So, if we see the opportunity we’ve got it there. Have we bored you to death?
Enrique Torres – Green Street Advisors
Just to clarify in Europe. I just wanted to ask how much incremental G&A is associated with Europe. And, should you decide to exit, how should we be looking at that?
Oh, with the London asset?
Can you take the mic, Diane?
Yes, we are – it is probably 700,000 range or less, but again it – Steve?
Stephen M. Briggs
500,000. But it – again, it throws off $15 million of EBITDA, so clearly a huge return from that single asset.
And you have noticed that we still report on Hamburg. We took out all of that cash out of Hamburg. We did a sale leaseback again to the same pension fund in 2003, I think it was. We took them, and we had a (inaudible) there. We are earning – Steve, Richard about what, $0.5 million a year out of Hamburg?
Stephen M. Briggs
Little less. And it costs us about $50,000 a year to oversee it. We don’t put any capital investment in there. So, Hamburg is, as far as I am concerned, we have exited and just got an asset management fee there. London is probably about $0.5 million – $0.5 million on $15 million is – I look at it as a good return. Maybe we can give you a number on that. London is making, Richard and the guys have made London make for us over a 50% GOP, 50% GOP in London. That is outperforming everybody. When we took on London – it gives you a clue of how we think. We looked at the competitive set – kind of cute – and we looked at it, we said it is wrong. You know the old story about if there is two of you out fishing and you get attacked by a bear, all you got to do is outrun the other guy. It is the same in London. So, we just simply turned our attention to beating the Marriotts. And we have grown from number four to number one, and that was pretty cool.
Enrique Torres – Green Street Advisors
To follow up with that, how do you look at hedging your net currency exposure in Europe – or should you decide to keep the assets?
We don’t hedge. The debt is in pounds as is in the revenue. And you can't really time when you are necessarily going to get money repatriated back in U.S. dollars. So, we really do not have a formal hedge on it because it’s naturally hedged.
Enrique Torres – Green Street Advisors
And just a quick question regarding the ROI pipeline that you mentioned on page 30 of the presentation. What would the size of that be should you – if you decided to do those transactions today?
Well, again we said all ten in total would probably in $20 million to $25 million range. That is not to say we are rolling them all out next year at once, but that’s sort of the total capital spend.
Enrique Torres – Green Street Advisors
And just to clarify your preference, what would your preference be when you look at incremental acquisitions versus doing ROI projects and end up going forward?
They are – given the scale – let me explain. The reason why the pipeline, we look at it in a relatively modest around $30 million-odd is we do these acquisitions – we do the internal stuff ourselves. Michael, where is Michael Dalton? Michael Dalton did the design, for example, of Michael Jordan's himself, as we do a lot with his team. Execute ourselves. So, we don’t want to take them too many. That is normal course of business, and as many as we can handle we should roll out, so it is not really the rule. As far as acquisitions are concerned, we look at it in two ways. One is strategic, and the other is opportunistic. In a strategic sense, we would like to be more heavily weighted towards -- we would like the incremental weighting on the East Coast. Clearly, Boston and New York and DC are opportunities. However, we will wait for the right creative deal. We leverage our relationships with various people, owners, brands, while we are doing that. And that would be really good because you just take the geographical risk – some of the geographical risk. If you see – traditionally New York starts and in – New York starts and it flows east to west and up and down. So, we would like to try and even that out a little bit, but not to the point of overpaying or saying we got to be there. And the other one is opportunistically. You will see we get – we are seeing an awful lot of opportunities that we didn’t see a year ago I guess that now people believe we are real again. You know when you go through the valley of the shadow of death we know who the evil ones are.
Enrique Torres – Green Street Advisors
And just on the acquisitions, you’ve done most of your recent acquisitions through joint ventures. Is that a pattern that we should see as something that will be consistent going forward? Or, would you – do you view those promotes and relationships as beneficial or would you rather do things wholly-owned?
I think to take an asset like the Del, $0.75 billion. In our current state of a balance sheet we do that time and again as a JV. Take some of the risk off the table in Scottsdale, we had the choice of doing it ourselves or not. The team and the Board decided that we take some risk off the table there given the history there. I think it is not necessarily our preferred, I think we would rather keep ourselves as a pure play to keep the optionality of it, the option of selling, the buying, trading if you take this hotel.
Diane alluded to it. When we looked at our financing strategy we’ve said that this is a hotel, because of the stability of earnings, is that this would be ideally suited to be a book end on the maturity schedule, and we always peg this one as ten years. This would be a really good ten-year book end. GIC, who had been wonderful partners to us over the last 15 years, wanted to have a shorter term because they didn’t want the lock-ins, they did not want all of these things. And so we took – we bought them out happily. They were very pleased to convert to stock. And we own it 100% because it gave us the flexibility. So, I think our preferred course is clearly to own an asset ourselves, but when it is big and chunky and can take – can give us a real heartburn, and if the Del went down we earn 34%, we can deal with it. If we – at (750 million) if it went down and we own 100% of it we have heartburn.
Enrique Torres – Green Street Advisors
Tim Wengerd – Deutsche Bank
Hi. This is Tim Wengerd from Deutsche Bank. As you approach another peak in EBITDA, how do you want to manage leverage differently or how do you think about managing leverage?
Well, again, we’ve stated that we want our net debt to EBITDA to be in more of a four to six times range. If you are getting to the more mature stage of the cycle we would want it to be in the lower part of that range. So, we see through our EBITDA growth in the near term getting under six and, again, then anything, any acquisitions, whatever we are always going to manage within that range going forward.
Tim Wengerd – Deutsche Bank
Thanks, and a follow up as well. On the $700,000 per key replacement value, just how did you arrive at that number? And what sort of data points did you do to get that?
There are several data points. First, we take our assets and we look at them as if we were going to replace them today not on square footage like this. If you take this hotel I probably – the inefficiencies of this hotel gives you about Richard, 15%, 20% more square footage that we need to drive the same volume. Then we take that net square footage and we apply local construction indices to it, we know what it cost to do the FF&E, we know what the soft cost are, so we only have to do the local indices based on union, non-union and the geography. That is one. So, that’s kind of easy and that’s easy to update every quarter, every six months.
The other is we look at comparables that are being done in the market. If you have take in this market the JW Marriott opened in the Loop area and the cost ex-land was $680,000 a key because we share that. The Radisson Blu in the opposite that is opening now – opening next year rather, I think it is – opposite of our Fairmont Hotel, it was the Aqua project we moved away from, is at $630,000 ex-land. So you’ve got very good data points there, and pretty well in most of the markets we can do that. Where there is no construction in a market – there was construction at Laguna Niguel, for example, there was a couple of hotels including the Pelican Hill, so it was dead easy to take construction yield numbers.
Where we do not have construction, all you have to do is extrapolate union, non-union, geography and take residential indices and add them to it. So it’s kind of really, really very – it is not as abstract as it sounds. However, here is a reality. If it cost $700,000 to build, how much is a piece of land worth? They don’t give you the land for free. You’ve got to pay for the permits. You’ve got to pay for the architect to go through everything, to go through two years of permitting in most organizations. So, I don’t know how much that is. Argument, I would say $200,000 to $300,000 a key is probably land cost, but I don't know. That’s why we give it net. And it’s ironic, if I can criticize some of the – my buddies in the room here, it is ironic that – say well replacement cost you $700,000 or $650,000 and you are trading at 356, we are trading at 350,000 with land. Our replacement cost is without land, so it is the wrong metric.
Tim Wengerd – Deutsche Bank
Forgive me, Bill, Jeff. I am not aiming it at you, believe me. I would not, Bill, and Jeff. Was that okay, Bill, and Jeff?
Nothing else? What is our schedule?
Unidentified Company Representative
So, we will head out on the tours now. There are bags here for everyone to take. And I think those of you who had dinner last night you got a steak knife, do leave those here with Kim, you probably won’t get through security with them, so we will ship them to you. We have wine glasses to ship as well. We will meet in here. We will have people come in and will lead the tours.
I do want to say one quick thing. I made a glaring omission when I did the introductions earlier today, but Clay Thelen who is back in the AV booth back there worked tirelessly all night to get this set up. So, Clay, I am sorry. I missed the introduction earlier, but he did a heck of a job getting everything set up today.
Well, if you want to leave your stuff here we can come back into this room before we go to the Fairmont, but the tours will start right out here. So thank you, everyone, for coming today.
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