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Strategic Hotels & Resorts Inc. (NYSE:BEE)

Q3 2011 Earnings Call

November 3, 2011 10:00 AM ET

Executives

Jonathan Stanner – VP, Capital Markets and Treasurer

Laurence Geller – President and CEO

Diane Morefield – EVP and CFO

Analysts

Ryan Meliker – Morgan Stanley

William Marks – JMP securities

Bill Crow – Raymond James

Smedes Rose – Keefe, Bruyette, & Woods

Clint Talomo – Interlaken

Enrique Torres – Green Tree – Green Street advisors

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2011 Strategic Hotels and Resorts Earnings Conference Call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

And now I would like to turn the conference over to your host for today, Mr. Jon Stanner, Vice President, Capital Markets and Treasurer. Please proceed, sir.

Jonathan Stanner

Thank you and good morning everyone. Welcome to the Strategic Hotels & Resorts third 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’re hosting a live webcast of today’s call, which can be accessed by the same section of the site with a replay of today’s call also available for the next month.

Before we get underway, I’d like to say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors.

For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings. In the press release and supplemental financials the company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.

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

Laurence Geller

Good morning and welcome to our third quarter 2011 earnings conference call. RevPAR in our same-store U.S. portfolio increased by an industry-leading 11.7% in the third quarter driven by a 9.7% increase in ADR and 1.4 percentage increase in occupancy. This marks the seventh consecutive quarter of improving demand at our hotels.

The strong great growth was broad-based across our entire U.S. portfolio and consistent with our expectations that as lodging demand recovers, a higher percentage of our RevPAR gains will come from growth in rate.

RevPAR in our same-store North American portfolio, which includes results from the Four Seasons Punta Mita increased 11.1% during the quarter driven by a 9.4% increase in rate. Diane will address Punta Mita more specifically in her remarks as the hotel continues to suffer from the envelope of drug violence in Mexico, despite as having no security issues whatsoever at our resort.

We continue to be optimistic about the outlook for the remainder of the year. Current forward-looking indicators for 2012 remain positive. Group pace, which is our best future metric, is up 6% for the full year of 2011 compared to the same time in 2010 at rates 5% higher yielding a very strong 11% group RevPAR growth rate. For the fourth quarter, group RevPAR is forecasted to improve 15% driven by an 11% growth in room nights and a 4% increase in rate.

For next year, group pace is up 6% in room nights and 1% in rate. However, this rate metric is negatively influenced by two hotels, the Four Seasons in Washington DC which hosted the International Monetary Fund meeting this year at very high rates, and the Ritz-Carlton Half Moon Bay which also had a large non-repeat group in 2011. Excluding those two hotels, group rate is up a healthy 8% for 2012.

As we’ve mentioned in past calls, we closely monitor weekly group booking production to identify and to react to developing trends. We specifically discuss the importance of the month of September and October for bookings in 2012. We are very encouraged by strong production in September, up for all future periods by 15% in room nights compared to September of last year with rates 10% higher. While we don’t have final numbers for October, it initially appears that this trend continued through the month.

Although we are optimistic regarding the outlook for next year, we are not in a position to give 2012 guidance. The global and domestic economy and the stock market are incredibly volatile and look to remain so into next year. Our demand visibility into next year is limited to the group side of our business and as we have said repeatedly on these calls, the group booking window remains relatively short.

Despite the recent economic and political turmoil, however, we have seen no unusual group cancellations, and there have been no discernible changes in our guest length of stay or consumption patents for any aspect of our business.

As we look ahead to 2012, I’d like to briefly discuss how we see each of the five components that can contribute to our growth in corporate profitability. The first is our built-in organic growth. Simply by operating as we are today in a virtually no new supply environment and even with current levels of projected moderate GDP growth, we will experience significant increases in our EBITDA.

The second component is continued market share outperformance. By outperforming our competitor’s sets, we will continue to add to our compression makes, bus increasing rates faster than our competition and given our high level of profit flow throws, significantly implementing our profitability.

The third is continued margin outperformance. By rigorously maintaining and improving our labor efficiencies, food savings programs and other internal systems, we will even further add to our margins and result in profits. The fourth component is our ROI projects, such as our ENO wine rooms, restaurant concepts, and repositioning projects, all targeted to achieve double-digit current yields.

We have substantial embedded internal growth within our portfolio and with our significant inventory of projects that we intend to continue to methodically roll out as appropriate, we have a healthy pipeline to look forward to. Given the substantial growth capabilities generated by the first four components, which all can significantly increase our profitability, we have the luxury of being purely opportunistic about the fifth component which is acquisitions. While we certainly have the capacity to add more hotels to our portfolio, indeed, without increasing our overhead, we don’t need to chase deals just for the sake of growth. As such, we will only do so if the opportunity is compelling from both product and financial perspectives.

Our acquisitions early this year at the Four Seasons properties in Jackson Hole and in Silicon Valley are examples of our ability to opportunistically both source and create of the structure strategic deals. The successful execution of our plan to reposition and recapitalize our balance sheet has given a significant liquidity. However, the volatility and fertility of the globally interlinked economy rightly and seriously serves us. And we take prudent note of Federal Reserve Chairman’s comments yesterday that there was significant downside risks to the economic outlook.

We are by nature optimists. However, as we look into the New Year with its uncertainties and challenges, we continually temper our optimism, prudence and discipline. As such, any decision to extend what we deem to be our precious capital must pass through our discipline and rigorous analysis and meet one simple requirement, to generate an adequate expect of return in the face of not only normal commercial risks, but also the macroeconomic risks that can so easily and quickly have a negative influence on logging demand.

With that, I’d like to turn the call over to Diane.

Diane Morefield

Thank you, Laurence. Good morning, everyone. For the third quarter we reported comparable EBITDA of 43.6 million, a 16.6% increase over the third quarter of 2010 and comparable and coupled with – $0.06 per share. Both metrics were ahead of consensus estimates. As Laurence mentioned, RevPAR in our North American portfolio increased to a very healthy 11.1% during the quarter. Occupied room nights increased by 1.3 percentage points driven by a 4.4% increase in transient room nights, which is indicative of strong summer transient demand.

The average rate on transient nights was up over 9% with our premium segment leading the way with the nearly 12% increase in rate. This segment, which represented about 15% of our total transient room night sold during the quarter, grew 11% compared to the third quarter of last year.

Improvement in transient demand was most pronounced our urban hotels as room nights attributable to corporate transient travelers grew 9%, which is a reflection of healthy trends and well capitalized corporate America. Corporate transient room nights sold during the quarter actually exceeded the third quarter of 207 by nearly 2%, consistent with the ongoing industry trend showing luxury demand now exceeds 2007 peak level.

Group room night sold during the quarter declined slightly by just under 3%, which is partially a reflection of feeling in with more highly rated transient rooms. We also have some large non-repeat business at our two intercontinental hotels in the third-quarter of last year which is skewing the year-over-year comparisons. Despite slightly lower group demand as compared to last year, however, our average group rate increased by 9% during the quarter.

We also continue to track compression room nights and the number of nights with occupancy of 90% or greater have increased 16% year-to-date in 2011 with ADR on those nights up 12%. Non-rooms revenue increased by 3.2% during the quarter, which is really a healthy result given the shift of business from group to transient.

Food and beverage revenue increased a strong 7%, partially driven by the reconcepting of the Michael Mina restaurant at the Westin St. Francis and the widely publicized opening of the Michael Jordan Steakhouse at the InterContinental Chicago in August.

Despite selling fewer group rooms, banquet revenues were actually up 1 million year-over-year as a result of the 6% increase in banquet revenue per group roommate, which is the strong indication of corporate groups increasing propensity to spend during their stay. We had another strong quarter from a profitability perspective as our sustainable expense control initiatives continue to result in improved margins.

Our third-quarter EBITDA margins expanded 170 basis points in our North American portfolio and 200 basis points, excluding the four seasons Punta Mita. Our ratio of EBITDA growth to RevPAR growth was 1.8 times, again excluding Punta Mita.

Our corporate G&A expense was actually negative 2.2 million for the quarter on a GAAP basis as we recorded 6.9 million credit related to the VCP program due to an adjustment of the 2012 evaluation of the plan, which is calculated by a third-party evaluation firm and with the result of our recent stack price decline and ongoing volatility.

Excluding this credit, G&A would have done 4.7 million and we still forecast full-year G&A expense to be in the 21 to $22 million range net of the VCP expense. We will continue to exclude the inherently volatile VCP expense from our comparable EBITDA and FFO results.

As Laurence mentioned, the four seasons Punta Mita continues to suffer from the reported violence in Mexico that is affecting resorts throughout the country.

During the third quarter, the four seasons lost nearly 700,000 EBITDA with revenues declining 20% from the third quarter of last year.

Year-to-date, RevPAR is down 18%. At the beginning of this year, we budgeted for the hotel to earn approximately 13.5 million and we are now forecasting roughly 7 million in EBITDA contributions.

Clearly, we did not anticipate this type of decline and it is for the most part completely out of our control, although we are leaving the leaf unturned as we continue to strive for high rated demand. More specifically, traveled from the United States resort is falling, including a 17% decline in the third quarter.

As you are probably aware, the U.S. Department of State updated the travel warning from Mexico on April 22nd of this year, which discourages non-essential travel to certain regions of Mexico, including the state of Navy in which our four seasons resort is located.

The travel warning explains that the majority of the violence has occurred in border regions roughly 800 miles from our hotel and rarely involves U.S. citizens. But clearly, the security situation poses some level of threat to U.S. citizens which is slow travel to the area.

In addition, Mexicana Airlines, which previously offered direct flight from five U.S. cities into Port of (inaudible) went bankrupt in August of last year further restricting air travel into the area.

We expect the lower demand environment to persist into next year as the country prepares for its Presidential election on July 1st 2012. However, one bright indicator is the fact that we are outpacing previous years for the coming festive season.

We have also undertaken a number of initiatives to try and stimulate increased demand at the resort. For example, we have placed a direct salesperson in the South American market and expanded the existing salesforce focused on the Mexican market.

We believe we are beginning to see the benefits of these strategies as the fallout from U.S. transient travels at the resort in the third quarter was somewhat offset by more transient business from Mexico, South America, Canada, and Europe. We do not mean to be or to overly dwell on the four seasons Punta Mita, which was clearly the outlier for our portfolio in the third quarter.

Again, the 11.7% increase in RevPAR in our same-store U.S. portfolio was broad-based and we had five hotels greater than more than 15% RevPAR growth including the Westin St. Francis, Lincolnshire, Fairmont Scottsdale Princess and our four seasons in Silicon Valley and in Washington DC.

Our performance at the four seasons DC was particularly impressive as RevPAR increased over 18% in the quarter, which again was aided by the city hosting the IMF Annual Meeting at the end of September.

To give you an example during that meeting, we required five night minimum stays all pre-paid in full and non-refundable, which resulted in five nights of 100% occupancy at the hotel at an ADR of nearly 1500 a night. IMF related catering events also generated 350,000 of incremental revenue.

Let me give you a quick update on some of the capital projects we have been executing throughout the year. On August 23rd, we opened the Michael Jordan Steakhouse at the Intercontinental in Chicago. For those of you who are able to join us for dinner there at our Investor Day last month, you observe firstly, we took underutilized mezzanine space and created a unique food and beverage outlet on prime Michigan Avenue real estate.

Restaurant costs approximately 4.2 million to build out. We expect to earn cash yields in the mid-teen range. In just two months since opening, the new restaurant and bar have generated nearly 1.6 million in revenue and have exceeded our initial expectation. We are underway on our comprehensive room and corridor renovation at the Intercontinental Miami. We began construction in May and will be completing 641 rooms over the course of the summer and next.

We have scheduled to work to minimize displacement during flow season, and have received very positive feedback from group meeting planners on the new room design. In fact, group pace is up nearly 17% for 2012 at the hotel.

And at our Fairmont Scottsdale Princess, we broke ground on a 60,000 square foot ballroom and convention center in early September and we’re expecting to begin vertical construction shortly. Construction is expected to be completed in the fourth quarter for next year in time for high season in early 2013.

As we previously discussed in great detailed, our accomplishments in recapitalizing our balance sheet which culminated with the closing of four mortgage financings in the month of July just as capital markets began to significantly tighten. We currently have nothing borrowed on our 300 million revolving line of credit other than 2 million of letters of credit; we had approximately 90 million of unrestricted cash both at the corporate and hotel operating account level at the end of the quarter. So we have nearly 400 million of liquidity, not even counting our two unencumbered assets in the Four Seasons Jackson Hole and Silicon Valley, which obviously would have the potential to be leveraged should we choose.

Our forecast of interest expense for the year remains in $85 million to $90 million range, of which approximately 70 million to 75 million is cast interests and approximately 15 million is non-cash expense. Pro forma for all of our refinancing activity, we expect interest expense to be in the $21 million to $22 million range on a quarterly basis of which 17 to 18 represents actual cash expense. And again, this assumes to be continued to have nothing drawn on our line of credit.

We also mentioned in our earnings press release that we are raising our full-year guidance metrics. Despite the underperformance of the Four Season Punta Mita, we are raising our EBITDA range which was originally between 145 million to 155 billion as of last quarters in earnings to now 150 million to 156 million, and we are narrowing our comparable FFO range, which was at $0.08 to $0.14 to now $0.10 to $0.13 for the full year.

We are also raising ours RevPAR growth range for our same-store North American portfolio to between 9% and 10% from our previous range of 8% to 9.5%. We are maintaining our total RevPAR growth range at between 8% and 9% for the year. Growth in total RevPAR is slightly lower than growth in room’s revenue primarily as a result of the decline in ancillary spending from the Four Seasons Punta Mita.

Also as I mentioned, Punta Mita is significantly below are originally EBITDA projections for 2011 and is impacting the ranges to which we are raising our guidance on full-year comparable EBITDA and FFO to a lower degree than we have increased our RevPAR range.

With that we’d now like to open the call for questions and Laurence has a brief summary at the end of Q&A.

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions) Ladies and gentlemen, your first question will come from the line of Ryan Meliker with Morgan Stanley. Please proceed.

Ryan Meliker – Morgan Stanley

Good morning, everybody. Just a couple of quick questions here. First, with regards to RevPAR guidance I guess for 2011. I am wondering if you can – Tommy how much of this is what you are seeing in the marketplace versus how much of it is your more conservative approach to how you are thinking about the future? But it looks like your implied 4Q same-store RevPAR guidance is only up 2% to 6% for North America versus the – plus 11.4% we have seen here today and 11.7 you saw in the quarter. That strikes me as being extremely conservative. I’m wondering if there is something you are seeing in the marketplace that is forcing you to take that 500 bps deceleration in your numbers at the high end, or if that is just your conservative approach to issuing guidance?

And then the second question I had was really just, if you can help us think about 2012 a little bit without giving us specific guidance you maybe just talk about. If RevPAR results were to come in in line with what you’ve seen this year in an equal weighting of rate versus occupancy, would you expect to see similar property margin growth, or do you think that there are issues that might impact that on a positive or negative way quick? Thank you.

Jonathan Stanner

Good morning, Ryan. Thanks for the questions. I think what I’d like to do is I’d like to sort of answer the first part of your question and Diane then to come in more specifically. Yes, it’s very conservative. Yes, we are prudent because we are concerned about the volatility. We cannot help but listen to nerve-racking headlines on the news channels every day.

We also came in – remember last year we had a very good fourth quarter outperformed all of our competition as we have done all of this year. So you’re going to see comparables as we go forward being tougher for us than on others. We are very weary of that. I will say, as we have been in the last several quarters, we are very cautious about projections. As you yourself have cautioned me, we tend not to overpromise.

Diane Morefield

Yeah. And regarding again, Ryan, we are not in a position to give any kind of guidance for 2012. What we have said in the past is that every 50 basis points of RevPAR growth is almost 2 million in revenue and probably about 1.2 million in EBITDA, and about a penny a share in FFO. That’s just a rule of thumb. Again, we are not really in a position to give RevPAR guidance for next year at this point.

Ryan Meliker – Morgan Stanley

Great. I think that’s helpful. Thank you.

Operator

And your next question will come from the line of Will Marks with JMP securities. Please proceed.

William Marks – JMP securities

Thank you. Good morning, Laurence, Diane, Jon. I guess the first question, Laurence what kind of trends are you seeing in terms of international travel from domestic to Europe, Europe to here?

Laurence Geller

We have seen no diminution in the trends over the last two years for inbound from Europe business. In fact, at Punta Mita, for example, we’ve seen an acceleration in European business. We have been targeting it. It’s still small numbers, but it is long stay business and it’s very healthy for us. So we haven’t seen a downturn in it in European business, nor have we seen a downturn in Asian business. We have not seen a pickup in Chinese business on the West Coast, which one would have anticipated in a normal situation, and the situation really goes down to the visa program. There were only four offices to issue visas for Chinese citizens coming to the United States. And those have to be visited in person and it’s made it very difficult for us to see a pickup such as Canada has seen in Chinese visitors. So, so far there has been no impact from the situation in Europe, and the only disappointment for us is across the Chinese businesses, which is a national disappointment and frankly a national disgrace.

William Marks – JMP securities

Okay. Thank you and another question just on supply, any markets at all that you are in where you are seeing more than a percent or so supply growth over the next 12 months?

Laurence Geller

No. This is for me, given my number of years I have been in the business, this is the most unusual supply situation I’ve ever seen. The supply in our markets is as benign as it can be. The cost of construction hasn’t immediately did, so when you look at practically at the economics of our room rate and our occupancies even with increased margins that we are getting where others are necessarily getting, I can’t see how logically we will see supply for five or six years. However, I do know that developers don’t look psychologically.

William Marks – JMP securities

Right.

Diane Morefield

And then the near term with the capital market pretty much shut down, there is certainly, we don’t anticipate anything coming out of the ground.

William Marks – JMP securities

Okay. That’s all for me. Thank you.

Operator

And your next question will come from the line of Bill Crow with Raymond James. Please proceed.

Bill Crow – Raymond James

Hey, good morning, guys. Laurence, nice corner. Don’t complain about the tough comps next year though. Couple of questions for you. I appreciate the details on Punta Mita. Should we assume that it’s going to be a drag throughout next year?

Diane Morefield

We don’t know. It’s so influenced by headlines, volatile headline. The pervasive view in Mexico, which is all I can give you, from the business class in Mexico, is that until the elections take place middle of the year, we shouldn’t expect very much change. From our budgeting point of view, we will take a full-year cautious perspective.

Bill Crow – Raymond James

Okay. And then is there a possibility you will to sell that asset joint-venture that would there be any buyers out there for that asset? Is that something that maybe you are considering?

Diane Morefield

First of all, I doubt that there is very many buyers out there. There are some assets being sold in Mexico City today, which will be a good barometer for it. It is not on our – we – let me make sure you understand. We have great faith in this property, really great faith. We look at this, rather than the systemic problem, as a blip caused by, if you will, the equivalent of a terrorist situation. This is a very, very strong hotel in a very strong market. If we get an offer that, makes our eyes water, we are business people, we will take it. It is not on the list. We will weather through this storm, and we will make a lot of money out of this. This is geared for success.

And just if – as I look at it from a macro perspective, the sheer factor of the client base that is coming without any concern for tourism on the transient side, particularly over the festive season and the fact that our big suits filled first, seems to give us an indication on this property.

So all in all, yes, I’m disappointed by it, but it isn’t a systemic turned down, this is an event caused turndown, which we can weather the storm and make a lot of money on it. And I would remind you, our basis in this hotel is probably only 70 million.

Jonathan Stanner

Yeah. That’s what I was going to say. The basis is in the low 70 million range and even with the reduced EBITDA this year of 7 million, it’s still a good return.

Diane Morefield:...Buying an embassy suite at a 4% cut rate, but I would never say that.

Bill Crow – Raymond James

All right. Fair enough. Another specific property question, which is Scottsdale. And that’s the one that when you went through the whole restructuring process, we thought you might returned to the banks, it wasn’t – the market has changed. How is that property shaping up from a group perspective for 2012?

Jonathan Stanner

From a group perspective, we are actually delighted with the performance, delighted in the relative sense. The property is performing best from the group production basis that we expected anyway. We had a better yield than expected as Diane mentioned, it was one of the hotel 15% RevPAR increase in Q3. Having said that, we are doing much better in space. The big issue for us is the level of interest we are getting in the incremented ballroom facilities without 60,000-foot overall unit. I think our business space in there is about 20-odd thousand feet. So, we are looking fairly healthy. On a competitive set, we’ll certainly erode our competitors’ group positioning by the end of next year. We’ll see the big impact of that ballroom in 2013. That’s where we’re really booking into.

Bill Crow – Raymond James

Okay. That’s helpful. And then finally from me, can you help us to understand what the trigger might be in your mind to bring the preferred back current? I understand all the macro headwinds or concerns, and yeah we look at GDP growth this year, which is going to be about 2% or something like that and we’re – you’re tailing high single-digit RevPAR growth. How do you think about making that move?

Jonathan Stanner

Look, Bill, it’s – in GDP, you mentioned GDP when it drops from 2.9% to 2.2% in 15 seconds, every time I read the papers. I don’t – we are certainly not predicts that’s a GDP growth. The markets remain extremely volatile. We continue to monitor the macro environment. As we do our operating outlook for 2012, management would simply continue to evaluate the appropriate circumstances to pay the preferred dividend in a very financially responsible manner.

Bill Crow – Raymond James

Okay. That’s it for me. Thanks, guys.

Operator

(Operator Instruction) Your next question will come from the line of Smedes Rose with Keefe, Bruyette, & Woods. Please proceed.

Smedes Rose – Keefe, Bruyette, & Woods

Hi, thanks. I just wanted to circle back on you’re the group bookings that you mentioned for next year. I guess what percent of your group nights are now on the books. And if the rate is only up 1%, I mean I guess would you expect that to start moving up at this point? Or when would you start to look for, I guess, better rate improvement?

Jonathan Stanner

Smedes, first of all, let me go on to that 1%. That 1% is 8% if you adjusted it apples-to-apples with the two groups. So, let me make sure we are very pleased and satisfied with our group rate improvement, not satisfied that we are not going to try to beat it. I’m going to say we’re probably at this moment 50-ish percent of what we anticipate for next year in group, which is where we should be. It’s consistent with previous years.

So, there is – when you add and Diane mentioned, the group customers’ propensity to consume, we do not see this being a rate issue or an ancillary services issue. It’s a decision-making issue. We had hoped for a lengthening in the time to book and to go hard on it. What has happened is we did see in Q2 a lengthening of it, which shrank back a little in Q3. So we expect to see more of this year’s group pickup for tendencies than something unusual. So, this is pretty well where we expect to be and what we – and the 1% is not a headline. The headline is really 8%.

Smedes Rose – Keefe, Bruyette, & Woods

Okay. Thanks. And I asked – just wanted to ask you, are you happy with sort of the trends and out of rooms spend? You seem to be happy with some of your opening remarks, I guess they were a little light relative to our estimates, which just could’ve been off, but what’s your sort of senses of how that is going and where it might trending..

Jonathan Stanner

We are delighted with the both the Group and the transient customer’s propensity to consume ancillary services. Remember, our Group – our rate was up significantly in this quarter. And it’s difficult to put the ancillary services rates up immediately commensurate to them. I think we can all get amused by margins and percentages when we look at it in absolute money. They are spending a lot of dough and we are making a lot of profit on it. So, actually, we are very, very pleased with the lack of concern about pennies, more concerned about value.

Smedes Rose – Keefe, Bruyette, & Woods

Okay. And then finally, I wanted to ask you – Starwood and Marriott have given their ranges for next year from three to seven and four to eight. You know if you had to pick a number now – would it be towards the low end or the high-end, or what’s your kind of view? I realize it’s obviously anyone’s guess at this point, but what’s your gut tell you?

Jonathan Stanner

I would pick a number – that they are both right about themselves. I cannot comment about us. But I hope they are at the high-end range, it all bodes well for the industry.

Smedes Rose – Keefe, Bruyette, & Woods

All right. Thank you.

Operator

(Operator Instructions) Your next question will come from the line of Clint Talomo with Interlaken. Please proceed.

Clint Talomo – Interlaken

Hey, guys. I am just curious if you can talk about the EBITDA growth, the RevPAR growth ration that you gave – talked about before. I think you mentioned it’s about 18 this quarter and I think, last quarter its 26 before that in the 33 range. And I believe that in 1Q you talked about if ADR and occupancy were split equally, you would expect the rate to continue around three, but you obviously seen a big growth in ADR and I’m curious why you haven’t seen the flow through that you kind of expected in prior quarters?

Jonathan Stanner

Again as you outlined, the ratio really bounces around quarter to quarter. And depending sort of the mix of business in the given quarter, it was 1.8 times this quarter, excluding Punta Mita since that really would have skewed it down significantly. We have said that we expected to be on average in sort of the two times range, and that assumes about a 50% flow-through. So, again, we were very close to what we think the average range is that we anticipate continuing to see, you know, in the coming quarter.

Diane Morefield

Also, remember, the mix of business has an influence. In this particular case in Q3 where we do more transient than we do group, we have a different margin. I will tell you, I – there is no dissatisfaction on our part with that flow through number, given that the business we picked up we’ve had to pull in with so much transient rather than group business, which has a lower margin on it, but it’s still very satisfactory in the profits flow through sense.

Clint Talomo – Interlaken

So in effect you just expect to see some seasonality in that flow-through rate?

Jonathan Stanner

Yeah.

Clint Talomo – Interlaken

Okay. Thank you. Appreciate it.

Operator

And your next question will come from the line of Enrique Torres with Green Tree – Green Street advisors. Please proceed.

Enrique Torres – Green Tree – Green Street advisors

Good morning, Laurence and Diane. Laurence, if I look at the headlines, I see a lot of corporate heading out to balance between some job cuts and how they – and their budgets for reward spending. In addition, you also see, the occupy Wall Street headlines. Combining these two elements, what do you think the perceived risk is of the revisit on corporate luxury spend?

Laurence Geller

We actually, both politically – look, I cannot comment on anything that has gone on with MF Global, but politically, we hear no noise about it, no rumblings. At the corporate level, we hear no noise on it. If anything we hear is simply a very sensible review process before making the decision on Groups, which has been going on since May, April, I think. And that is where another level of approval is often needed for groups. Not universally, but it has got nothing to do with resorts, it’s got nothing to do with anything. It’s got to do with prudence given the headlines. So instead of a divisional President making his decision, it may need a signature from a Group CFO or Group COO, for example. But that has had no negative impact on it at all.

On that subject, we haven’t seen a turndown on in any form of corporate travel. The airlines certainly are reporting the opposite. The airlines are selling group bookings for their planes for Group meetings next year ahead on the same sort of curve that we are on. So I don’t see the AIG effect, which was really a political effect rather than a rational economic effect. And I suspect our politicians have learned better. I can only hope anyway.

Enrique Torres – Green Tree – Green Street advisors

I got it. Hope – very helpful on the negotiation process. Thank you. That’s all I had.

Operator

And Ladies and gentlemen, at this time this does conclude the Q&A session. I would like to turn the call back over to Mr. Laurence Geller for the closing comments.

Laurence Geller

Well. Thank you all for your patience and for listening and what is I know a busy earning season. Simply stated, we’ve had yet another great quarter. We are optimistic about what we see in the future, but we are very cautious. Let’s all hope for good things in the coming months and into next year. I wish you all well for the festive season if I don’t speak to you before, and thank you for supporting us so well.

Operator

Ladies and common, this concludes today’s presentation. You may now disconnect. Thank you and have a wonderful day.

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