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Executives

Vicky Legg – Director, Corporate Communications

Edwin S. Hetherington – Vice President, General Counsel, Secretary

J. Robert Lovejoy – Chairman and Interim Chief Executive Officer

Filip J. M. Boyen – Chief Operating Officer, Vice President

Martin O’Grady – Vice President and Chief Financial Officer

Analysts

Sule Sauvigne – Barclays Capital

Carlo Santarelli – Deutsche Bank

Amanda Bryant – Susquehanna Financial Group

Charles Fitzgerald – V3 Capital Management

Joseph Greff – JPMorgan

Joshua Attie – Citigroup

Ross Haberman – Haberman Management Corporation

Orient-Express Hotels Ltd. (OEH) Q3 2011 Earnings Call November 3, 2011 10:00 AM ET

Operator

Good day, and welcome to the Third Quarter 2011 Earnings Conference Call for Orient-Express Hotels. This conference is being recorded.

I would now like to turn the conference over to Vicky Legg, Director Corporate Communications. Please go ahead.

Vicky Legg

Ladies and gentlemen, good morning. This is the third quarter earnings conference call for Orient-Express Hotels. We issued our earnings release last night. The release is available on our website at orient-express.com as well as on the SEC website.

On the call today are Bob Lovejoy, Chairman and Interim Chief Executive Officer; Filip Boyen, Chief Operating Officer; Martin O’Grady, Chief Financial Officer; and Ned Hetherington, Company Secretary, to whom I now hand over for the usual housekeeping announcements.

Edwin S. Hetherington

Good everyone. I’m Ned Hetherington. Before, we get started today, I’d like to readout our usual cautionary statement under the United States Private Securities Litigation Reform Act of 1995. In the course of the remarks here today by Orient-Express Hotel’s management and in answering your questions they may make forward-looking statements concerning Orient-Express Hotels such as its earnings outlook, future investment plans and other matters that are not historic facts. We caution that actual results of Orient-Express Hotels may differ materially from these forward-looking statements.

Information about factors that could cause actual results to differ is set out in today’s news release, the company’s latest annual report to shareholders and the filings of the company with the Securities and Exchange Commission.

That’s all I have, I will now turn the call over to Bob Lovejoy, our Interim Chief Executive at Orient-Express.

J. Robert Lovejoy

Thank you, Ned. Good morning, ladies and gentlemen, thank you very much for joining us this morning. Orient-Express Hotels announced third quarter 2011 results yesterday afternoon. As I’m sure you know that third quarter is our most important quarter of operations, and consistent with the first two quarters of 2011, that third quarter continued to reflect healthy demand picture, and good operating conditions in the great majority of our markets.

Revenues excluding real estate increased by 17% the quarter to $183 million and adjusted EBITDA before real estate increased by 29% to $46.7 million. Same-store RevPAR increased 19% in U.S. dollars and 14% in the local currency. And adjusted net earnings from continuing operations increased to $19.9 million from $6.1 million in the third quarter of last year.

The company's improved operations in the third quarter resulted from the same strong business conditions for our luxury leisure products that we experienced during the first half of the year. This quarter was led by the outstanding performance of our iconic Italian portfolio where most of our properties are now expecting this year to be their best ever. The company's latest revenue and bookings figures show these trends continuing.

In the month of October, total revenue before real estate was about 13% ahead of last year. And as of the end of October, revenue both achieved and on the books for the fourth quarter of 2011 is up 19%, compared to last year’s numbers and revenue on the books for the year 2012 is up 18%, compared to the figures at the same time last year.

During the third quarter, we also completed the refinancing of our Brazilian credit, which was the last significant piece of financing coming due in 2012. We in addition, completed the financing for our El Encanto property in Santa Barbara, which is under construction and expected to be completed late in 2012.

I’m also very pleased to report that on a trailing 12 months basis as of the end of the third quarter, the company’s ratio of net debt-to-EBITDA before real estate has been brought down to our year end goal of five times.

We are also pleased with the reception of the Bar '21', which is located in the front of the ground floor at the legendary '21' Club in New York City. The new bar retains the style and feel of the '21' Club, but it enlivens the arrival experience, it make the restaurant fresher and more useful.

In addition, the new bar is well on its way to producing its projected three-year payback on the total investment. I want to personally invite everyone who is on this call to come-by to '21' Club and we are going to tell the bartenders there to serve up a complimentary drink for anyone who attended. Their names are Priscilla, Ristue, Viviana and two guys named Matt, and just tell them that Bob sent you.

During the third quarter, we also launched an eight-week brand awareness campaign through the digital and social media channels in the U.S. markets. This campaign portrays the image of the Orient-Express brand of luxury, travel and sophisticated adventure. And today, it has reached over 25 million people, if you haven't done so, I encourage you to go to our homepage, click on the videos, and take a look at the campaign.

Also during the third quarter, we expanded our customer relationship management database to include now three quarters of our properties, and we completed the transition and roll-out of a new and much more flexible central reservation system.

Let me add two comments. As you know, I am serving as Interim Chief Executive, while our Board Search Committee continues to develop the best long-term leadership options for Orient-Express Hotels. You will understand that there is not much detail we can give while the search is in process, but I want to assure you that the process is going well, the committee is moving ahead, and we are talking to very interesting people.

I would also like to comment that, notwithstanding the issues of the Eurozone, which seem to command headlines on a daily basis, four out of five of our customers reside outside the Eurozone, and about half of our Eurozone customers are from France and Germany, which are the accompanied countries that are applying the pressure rather than the countries that are feeling the pressure in the Eurozone.

In closing, I’d like you to know that on the whole, we expect that the fourth quarter will continue to be a solid one. We believe that the rest of this year will continue to be a period of encouraging progress for our company.

Looking ahead, we intend to keep improving our portfolio through selective dispositions and recycling of capital and increasingly to concentrate our resources on the geographies and the properties where we believe that our operating model can deliver strong financial returns.

Now, I’d like to turn the call over to Filip Boyen, our Chief Operating Officer to comment in greater detail on third quarter operations. Filip?

Filip J. M. Boyen

Thank you, Bob, and good morning everybody. As described in our earnings press release issued last night, and by Bob, the third quarter has shown continuing revenue and EBITDA growth, with adjusted EBITDA before real estate increasing to $46.7 million.

Our overall retention based on adjusted EBITDA for this quarter was 39%, up four points from the previous quarter and six points up from quarter three last year. If I break this down by region, retention in Europe was 52% mainly thanks to occupancy and ADR increases in our Italian properties.

Retention in Italy for the third quarter was 65%, retention in the North American properties was 63% for the quarter due to cost saving measures implemented. [Blue Whale] increased retention by 47% achieving 100% flow through, showing that business in Peru has fully recovered from the floods and landslides that affected it in 2010.

There was a significant drop in conversion in both South African properties due to increased competition on room supply leading to reduced occupancy and ADR. In fact, if we excluded all South African properties, the company’s total retention for the quarter would rise to 45%.

Same store RevPAR growth for the quarter was up 19% in U.S. dollars and 14% in local currencies. On a same store basis, in U.S. dollars, Europe was up 30%, North America 8% and rest of the world 5%. This RevPAR increase was driven by both occupancy and ADR. ADR has grown by 15% compared to the third quarter of 2010. For seven consecutive quarters we have seen consistent growth in revenue and occupancy levels. Raising demand levels are supporting higher rates and driving conversion.

Taking each region in turn, in Europe revenue increased in all locations, but continue to be led by strong demand from the UK and the U.S. to the Italian hotels where revenue increased by $11.4 million or 25% compared to the same quarter in 2010. EBITDA for Europe for the quarter was $36.7 million, compared to $28.1 million in the third quarter of 2010, which represents an $8.6 million or 31% increase.

This improvement arose largely from the Italian hotels where the impacts of refurbishments at Hotel Cipriani contributed to EBITDA growth of $2.4 million. The two hotels’ we acquired in Sicily last year will close for the winter season later this month completing their first full year of operations. Compared with the third quarter of 2010, these hotels achieved year-on-year EBITDA growth of $3.1 million.

At the Grand Hotel Timeo, we saw a 23% increase in occupancy and a 64% increase in ADR on the quarter.

At Villa Sant'Andrea, occupancy rose by 25% and ADR rose by 70%. Reid's Palace in Madeira showed a 30% increase in occupancy, showing that the market has fully regained confidence after the landslides of early 2010.

In North America, we are seeing a recovery in groups and weddings business from next year and our group booking pace at Charleston Place is up by 27%, and Inn at Perry Cabin is up 35%. These expected volume increases should allow us to drive rates in 2012. Charleston Place is on track to equal or better it’s best ever EBITDA results this year with a revenue growth in the quarter of $0.9 million, or 7%.

In the rest of the world's segment, which include Southern Africa, South America and Asia-Pacific, strong results in Brazil continue. Revenue in South America increased by 22% to $17.7 million in the third quarter of 2011, from $14.5 million in the third quarter of 2010.

Occupancy at the Copacabana Palace in Rio rose by 16% in the quarter with a significant increase in U.S. guest numbers and year-over-year revenue increased by $2.2 million or 22% driven by record occupancy and strong ADR growth.

The future looks exciting with the Soccer World Cup coming to Brazil in 2014, and the Olympic Games to Rio in 2016. We are making sure that we take full advantage of this opportunity to drive rates and occupancy through a program of renovation works in 2012 to refurbish our 145 rooms in the main building of the hotel, as well as the sixth floor penthouses and the hotel lobby.

The Asia Pacific region also had a solid quarter with revenue growth of 26% reflecting strong growth at all properties. We reported last quarter that we have completed beach works at Napasai in Thailand, and this property has shown revenue increases of $0.7 million or 74% year-on-year following the transformation of the lagoon.

Same store RevPAR increased by 21% in both U.S. dollars and local currency. EBITDA was $3 million compared to $2.2 million in the third quarter of 2010. As discussed in our last earning call, our most challenging destination remains South Africa. According to HVS, the EBITDA margin for the five star market in South Africa dropped from 31% in 2008 to 7% in 2010. 10,000 new rooms were added over the last three years.

Third quarter revenue was $7.3 million compared to $10 million in the third quarter of 2010. Same store RevPAR was down 26% in both U.S. dollars and local currencies. The decreases were largely the result of the absence of the football world cup, although EBITDA has also been negatively impacted by all the new competition in both Cape Town and Johannesberg, resulting in significant pressure on both rates and margins.

Our Trains and Cruises businesses delivered a very strong quarter with revenue up 22% compared with the third quarter of 2010. Revenue for the full year is expected to be up 21% compared to 2010. Each of the company’s properties is inspected twice a year, by the independent luxury hospitality auditors leading quality assurance, with each assessment evaluating 1,200 standards across 28 different departments within the properties.

During the quarter, the company was ranked first within its competitive set of 12 global luxury hotel brands, excelling in the areas of emotional intelligence, service and sales opportunity. These results have never been better. We are also making excellent progress on TripAdvisor as we continue to follow the positioning of each hotel closely. Two-thirds of our hotels are ranked number one amongst the five star hotels within their destination, and the majority of the remaining properties are within the top three. Last year, we were in fourth position.

Looking forward, bookings for the fourth quarter are strong across the board. Our current October results are in now and revenues for all properties were up about 13%. Our forward-looking base for the company is up 10% in room nights or 19% in room revenue for quarter four.

Looking at occupancy, our average occupancy in 2010 was 56%, and we expect this figure to reach 58% by the year of 2011, an encouraging trend five points below our peak rate of 63% in 2006.

The STR Global market performance indicator for our top 13 key assets, taken year-to-date at the end of September remains stable and on track with a RevPAR index of $117.4 million. To summarize, revenues for the quarter were up 17%, and the outlook is positive. With the outlook for the fourth quarter, room revenue predicted to be up 19% and for 2010 up 18%. This is a great start, but of course a lot of things can change over the course of the year. We are encouraged by the fact that those businesses for which revenues are growing are also those where conversion rates are very high. The management team continues to focus on driving conversion rates and EBITDA, particularly in the challenging markets of South Africa and Mexico.

I’m now handing over to Martin O'Grady, our Chief Financial Officer.

Martin O'Grady

Thank you, Filip. Good morning, everybody. Moving down from EBITDA, we recorded an impairment charge of $65 million this quarter, this includes a charge of $39 million relating to Porto Cupecoy after revising our expectation of the timings and the amounts of future sales proceeds. Because of the current backdrop of record low house prices and excess inventories of second homes, we’ve taken a more conservative stance and the net book volume of the development now sits at $30 million.

In addition to the impairment charge of Porto Cupecoy, we’ve also recorded impairments of $24 million at Keswick Hall, and $2 million at Casa de Sierra Nevada.

Our depreciation charge in the quarter was up 2% over last year at $12 million, interest expense was up from $8 million last year to $13 million this year, but of the increase of $5 million, the majority was explained by swap and loan termination costs of $3.5 million relating to loan facilities in Brazil and Italy. The projected run rate for interest remains in the range of $9 million to $10 million for quarter.

There was a tax benefit in the quarter of $5 million, a reduction from last year’s charge of $9 million is largely explained by $4 million movement in deferred tax balances that are affected by foreign exchange movements and the $7 million movements in deferred tax balances cause by the impairments of fixed assets in the period. Cash tax in the quarter was $4 million.

We are forecasting a tax charge in the range of $8 million to $10 million in Q4, and cash tax in the next quarter is forecast to be around $4 million. At this stage for 2012, we are anticipating a tax charge in the range of $18 million to $20 million, spread over the four quarter in the following proportions, Q1, 20%; Q2, 40%; Q3, 30%; and Q4, 10%.

We anticipate a cash tax charge of $16 million to $18 million, spread about evenly over the four quarters. Due to the impairment charge, there was a net loss of $50.1 million in the quarter, adjusted net earnings from continuing operations was $19.9 million compared to $6.1 million last year.

On the balance sheet, at the end of the quarter, the company had $119 million of unrestricted cash plus an additional $5 million of funds available on the short-term lines of credit. Total term debt at September 30 was $663 million, and only $200,000 of working capital loans. Our net debt at the end of the quarter was $530 million, down from $576 million at the end of the second quarter helped by the strengthening of the U.S. dollar against the euro during the quarter. This currency shift reduced net debt by about $28 million.

Our ratio of net-debt-to-EBITDA pre-real estate continues to improve, and at the end of the quarter, it reached our stated year-end target of 5.0 times. Our interest cover ratio was around three times. Our term debt maturity schedule including amortization is now as follows, 2011, $14 million; 2012, $67 million; 2013, $153 million; 2014, $130 million, and afterwards to $299 million.

At the end of September, the interest expense on 53% of our debt was fixed and the average cost of debt including margin was 4.3%. The weighted average maturity of our debt was 3.6 years.

Cash flows for the quarter, net cash from operating activities was $28 million; there was $14 million of CapEx in the quarter, which included $3 million at El Encanto, $3 million at La Samanna, and $2 million at Copacabana Palace and reaching capital expenditure at the other properties. Net debt repayments in the quarter including the amortization were $11 million.

Now turning to the balance sheet. In September, we’ve successfully completed the refinancing of our Brazil facility; a new loan of $100 million with a margin of 3.15% replaced the previous loan of $88 million. In addition, we have a new $15 million facility that will be used next year to finance the refurbishment of the main building of the Copacabana Palace.

Also in September, we closed on a new $45 million construction finance facility for El Encanto that loan carries a margin of 3.65% and it’s for a 3 year team with two one year extension. With this financing secured, we have recommenced the construction of the hotel and currently expect a soft opening toward the end of 2012. The total cost to complete the hotel is now around $65 million, so we will need to invest further $20 million of equity in that project.

Finally, we repaid €7 million or $9 million of debt on the Sicilian properties during the quarter. The remaining loans on these hotel total €44 million or about $60 million and we’ll see if we can refinance that loan during the first half of next year. We estimate that the amount we can refinance will be approximately €40 million or about $55 million, so we expect to make a further repayment of approximately €4 million or about $5.5 in the first half of next year.

The other two small loans that mature next year total $25 million and we still expect to refinance about 100% of this amount. On the put call option relating to the assignments of the New York Public Library contract that was due to expire in the middle of August was extended to November 11. And in addition, we have agreed to sell a further residual amount of development rights for further $2.8 million.

If the call is exercised, which we expect we would receive a total $16.3 million, there would be an associated repayment of $4.5 million of debt, so the net amount of cash received will be $12 million. Unfortunately, there will be a tax charge which will be $6 million, and that will be payable by September of next year. About $6 million would be in addition to the $16 million to $8 million of cash tax next year that I mentioned earlier.

And finally, I just want to advise investors that we recently hired [Amy Brent] into a newly created position of Director of Financial Planning and Investor Relations. Amy joins us from one and only, where she was Vice President of Treasury, and will I am sure making extremely valuable contribution helping us reach out further to the investment community, as well as strategically dissect our business.

And now, I’ll hand back to Vicky for the Q&A.

Vicky Legg

Thanks, Martin. I’ll now hand back to the operator so we can take your questions. In the interest of time, could you please limit yourself to three questions each? Thank you, operator.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Sule Sauvigne from Barclays Capital. Please go ahead.

Sule Sauvigne – Barclays Capital

Good morning.

J. Robert Lovejoy

Good morning, Sule, how are you?

Sule Sauvigne – Barclays Capital

I’m well, how are you.

J. Robert Lovejoy

Yeah, good.

Sule Sauvigne – Barclays Capital

I was wondering, we heard from other luxury companies that demand from Asian consumers has been particularly strong in third quarter and for 2012, and I know it’s not a huge growth market arena, but have you seen that tick up at all in your business?

Filip J. M. Boyen

Yes, Sule, we have. In Q3 in 2010, our total Asian client was 8%, and that has increased in 2011 to 10%. So we’re definetly seeing good signs there.

Sule Sauvigne – Barclays Capital

Okay, great. And you mentioned dispositions to reflect on capital, can you talk about which assets you are concerned with sale. I know in the past, you’ve mentioned not selling Westcliff, has that changed or are there others?

J. Robert Lovejoy

I think what we really want to do there, Sule, it’s just to give you the sort of strategic intentions and the overview and then when we have something to announce we’ll do it, obviously this is pretty sensitive because we have people working at all these places, and we really need to be cautious.

Sule Sauvigne – Barclays Capital

Okay. I understood, and lastly just on Napasai, do you think that property benefited at all from the Bangkok floods in the quarter?

J. Robert Lovejoy

Yes, we expected thus, we have obviously seen some cancellations in our other hotels, but Napasai shows an improvement for the rest of the year.

Sule Sauvigne – Barclays Capital

Okay. Thank you.

Operator

We’ll take our next question from Carlo Santarelli from Deutsche Bank. Please go ahead.

Carlo Santarelli – Deutsche Bank

Hey guys. I had one question on flow through, and then a follow-up if you don’t mind. First thing on flow through, obviously, the Italian assets showed really good flow through, the rest of Europe was solid, and some of the other regions, I would say less, less quality. Could you talk about maybe some of the things you're doing both in North America and rest of world to improve those metrics. And then, if you wouldn’t mind giving us little bit of a preview of CapEx as we look out to 2012?

Filip J. M. Boyen

Okay, Carlos. Obviously, our overall conversion was 39%, in America it was pretty strong based on cost cutting measures implemented, we came in with 63%. Europe as you’ve said strong as well, 52%, rest of the world, as I explained, South Africa remains our biggest problem, so there the conversion was actually minus 21%, and that has pulled us down over the quarter. And trains and cruises came in with good results as well with the conversion of 39%.

So conversion as we said, our target is 50%, our internal target is 50%, and it's a work of progress. And it continues to be a work of progress. We have made our managers and our line managers much more aware of conversion. We have also linked it directly to the incentive schemes of all our management and heads of departments. And as I've said, for next year we expect to get stronger and stronger.

J. Robert Lovejoy

On the CapEx question, Carlos, we are targeting next year of FF&E spend of about 4% of revenue, specific project expenditure, obviously we've got the $15 million of Copacabana refurbishment, which is all fully financed. And then we have the El Encanto, we've got about $65 million left to put into that and $45 million of that is financed. We have a couple of other smaller projects going on. We’re doing some major refurbishments of the rooms and public areas of La Samanna, half of which is completely for the current season coming up, and that would be another $4 million to $7 million for next year and a couple of other projects totalling may be up to about $5 million. But it’s also linked to what Bob is saying about capital recycling. And so we have a very disciplined capital investment program, and we will on other stuff that we’d like to invent in, it would be conditioned on first having priorities on some of those other disposals.

Carlo Santarelli – Deutsche Bank

So roughly $90 million plus maintenance is that a...

Filip J. M. Boyen

Including El Encanto, yeah.

Carlo Santarelli – Deutsche Bank

Okay. Thank you, guys.

Operator

We will take our next question from Amanda Bryant from Susquehanna. Please go ahead.

Amanda Bryant – Susquehanna Financial Group

Great. Thank you. Can you just remind us what sort of expectations you have in terms of growing your management contract business over the next year or so? And then just as a separate question, could you also remind us what sort of carrying costs are ongoing on the (inaudible) project? Thanks so much.

J. Robert Lovejoy

This is Bob Lovejoy. I think on the – it’s very hard to give you a specific program on signing up the management, because everyone of these is a transaction to be negotiated, and some of them are projects to be developed. We are working on a very good handful, and of course, White Paul who has been charged with his responsibility, he’s a guy who knows exactly how to do it. But I think that, just to tell you it’s going to X number of contracts within Y quarters would be probably foolish, because as I say, everyone of them is an individual transaction that would be negotiated with a lot of moving parts.

Clearly, we are focused on the kinds of properties that you would know very well we’d be focused on. We want to be in very important gateway cities where properties that are going to fit our image, that is to say extremely well located properties with good brands, properties with very fine physical assets, and the like, but all I can say is, there is a lot to work on and we’re very helpful but I don’t want to tell you many and on what date.

Martin O'Grady

And the current cost for coupe car, Amanda, running at about $4 million a year.

Amanda Bryant – Susquehanna Financial Group

Thank you.

Operator

We’ll take our next question from Richard Stone from (Inaudible). Please go ahead.

Unidentified Analyst

Thank you. I’ve got two questions, first of all in relation to the two hotels in Sicily, how does average RevPAR and occupation rates compared to when they were first acquired at the time of the rights issues, and are booking being made mainly through travel agencies or are they being made individual customers, personally?

Filip J. M. Boyen

Well, it’s quite a lot more, I couldn’t tell you off the top of my head what they were when the two hotels were acquired. This year we’re getting rates, averaged daily rates at Timeo of about $700 over $700 in U.S. dollars and at the Villa Sant'Andrea near to the beach of about $568, but it’s at least two times, but it was when we acquired the hotels.

And we have a long term strategy of course to turn over the customer base whereas before when we acquired the hotels a lot of the business was indeed coming from tour operators, which is lower price of hotel because they do take much bigger commissions. We’ve obviously been changing that to get more direct business, and through travel agents, which is low commission based, but again I don’t have the number at the top of my head.

J. Robert Lovejoy

We set out when we started on this program to get that transition done over a period of about three years and that still looks about right.

Unidentified Analyst

All right. Thank you, and then just my second question was on the El Encanto in Santa Barbara, I mean you said, you completed the new line facility in that you’re going ahead with renovation. But so when we last spoke, when you last mentioned this, you said, you weren’t sure that you are going to go ahead in the full concept that was showing very low returns barely breaking even, I'm just wondering what your return assumptions are now, and what you assume for occupancy and room rates and when you expect to breakeven?

J. Robert Lovejoy

Yeah, we obviously had a difficult decision to make before we went ahead with the investments in El Encanto especially, after shutting it down during the financial crisis and being able to continue was very much conditioned upon getting bank financing, which happily is in place now.

Look it’s not going to be the best financial return on a forward-looking basis, it will be just below our cost of capital, and then we do think it's worth proceeding with just because we’re going to have a fantastic Hotel on the West Coast of the United States, which will be along the premier resorts and we will do enormous amount to lift the brand awareness in the United States, which of course is our key market. We believe haven’t got the occupancy rate numbers, but I can tell you that it's going to be stabilizing out at around about $6 million and that will take three or four years after opening.

Unidentified Analyst

Thanks.

Operator

We will take our next question from Charles Fitzgerald from V3 Capital Management.

Charles Fitzgerald – V3 Capital Management

Hi, I had a question about taxes; it's relatively hard to reconcile the amount of tax you guys pay. Can you just talk about how much tax you pay currently in Italy and what concerns you may have as reforms and other things happen to that number?

Martin O'Grady

I would agree with you the taxes are relatively high, I’d say it’s more than relatively hard to figure out, not just for you, but for everybody following the company because of the diversity of the business. And certainly, we’ve never given out and due to the intensity of our tax payments by different countries, I’m not sure that would be appropriate. But clearly, it’s something we are conscious of in these days when government is short of cash and physical tightening. Where we tended to see increases in tax payments, the governments is not ready to corporate taxes because they need to keep taxes low in corporate to stimulate investments and job growth where we see it is on employee taxes, which is very difficult to fight off, and we’ve seen that in a few places, not really in Italy but we have seen it in other parts of Asia and Russia, we’ve seen it historically. It’s just one of those things that we have to be mindful of, but I’m not sure about anything else. Yeah, the cash taxes, the expected tax is something that I gave out earlier, but it’s cash tax about $16 million to $18 million expected in total over next year.

Charles Fitzgerald – V3 Capital Management

So $16 million, $18 million in cash taxes next year?

Martin O'Grady

$16 million to $18 million.

J. Robert Lovejoy

Yeah. We would urge you to focus on cash taxes because book taxes are often affected in quite substantial ways by currency and deferred tax computations and things of that sort that actually may never show up in operating cash.

Charles Fitzgerald – V3 Capital Management

Okay. Just a little nuance, follow-up question to that, is it fair to say that because based on Bermuda, your management company in Bermuda is paying the taxes to the company, so there is a – whatever the issue would be, it would be – if there is a change in any kind of treaties between Bermuda tax code and other country tax code, is that something investor should keep an eye on or is there anything you can point to just on that?

J. Robert Lovejoy

Well, there are some tax inefficiencies from being in Bermuda, but we have a structure, actually we have been working on our tax structure more recently, and we have the management business actually based out of Luxembourg, which helps because there’s much better tax region between Luxembourg and the regions.

Charles Fitzgerald – V3 Capital Management

Thank you.

Operator

We’ll take our next question from Joseph Greff from JPMorgan. Please go ahead.

Joseph Greff – JPMorgan

Good morning, everybody or good afternoon depending on where you are. Two questions, and you touched these two topics earlier, the flow through topic, as you look forward to next year and maybe even touch on the 4Q, some visibility on it. Can you review with us, your flow through conversion assumptions, obviously you’re knocking on that 50% flow through range that in the past you’ve talked about.

And then with respect to selective dispositions, asset sales are you actively marketing things currently or is that something that is more forward looking. And then my last question, I guess my third question is, you talked about 80% of your customers being outside of the Eurozone, if you can remind us what are the major buckets within that 80% outside the Eurozone that would be helpful as well. Thank you.

Filip J. M. Boyen

Okay, Joseph, on the conversion side as I’ve said before, it is a work in progress. We’re happy with our progress, we’re not ecstatic, but we’re happy about our progress. As we said before, if we take out our Southern African properties, we would be at 45%. Our internal target is 50%, and quarter four looks very good in terms of conversion, I can’t give you any predictions, but it looks strong. And we expect next year to be better, because obviously the situation in South Africa is not going to be repeated, South Africa will remain weak, the same in Mexico, but it is not going to be as weak as this year that is clear. So I’m not going to predict a figure, but I’m going to tell you that we have good expectations for next year. When it comes to the geographical mix, it hasn’t changed much, 39% of our customers coming from Europe, out of that 39%, 19% are British, and 20% are divided over the rest of Europe. North America 39%, South America 8%, and Asia has come up to 10%, and Africa has dropped slightly to 4%, that’s our geographical mix.

J. Robert Lovejoy

And on this question of dispositions, are we actively working on them? The answer to that is, yes.

Joseph Greff – JPMorgan

Great. Thanks gentlemen.

Operator

(Operator Instructions) We will take our next question from Josh Attie from Citi. Please go ahead.

Joshua Attie – Citigroup

Hi, thanks. Can you talk about St. Martin and the [Condé] projects there, you’d previously targeted $55 million to $60 million of cash proceeds over a number of years, after taking the write down, do you still feel comfortable with target, or do you feel like it’s to be reset at a different number?

J. Robert Lovejoy

Yeah, I mean we had a pretty good start of the year. I think it’s totally about nine units, and then sales just dried up completely, which coincided with not surprisingly record low sales prices in the United States, [casually] index record loan to excess inventories etcetera. And we just couldn’t see that we were going to get the momentum that we were previously expecting, I think just deteriorated.

So previously we thought, may be best case over three years, I always say to you guys, well I don’t know whether it’s 50% this year and 20%, 30% of what the ratios were. But we feel realistically to get to the right present value, you’re looking at maybe five, six, seven years even. What we did just was, we wrote it down to $30 million book value now. So we believe that would be a realistic valuation on the balance sheet for that development. So it’s not great, but it is what it is, and we’re trying to be realistic about it.

Joshua Attie – Citigroup

Is there anyway that you could monetize those, some of those units by using to manage hotel rooms?

J. Robert Lovejoy

I will tell you what we’ve done. We’ve got a rental program and the – some of the empty units are in fact have been brought into that rental program. So it’s not something we’d want to operate as a hotel, because then you’ve got all of the staffing and the operating complexities, but we do a simple rental program, which is what really people want to do, rent a room for a couple of weeks in that development. So we started that off, it’s not making a huge amount of profit to help us make a contribution to the overhead, but it’s really not the long-term game you want to be in. What we really need to do as quickly as possible is to exit sales and monetize that cash.

Joshua Attie – Citigroup

Okay. And if I could just ask another question on dispositions, if you execute on dispositions as money come into the company, it sounds like you are comfortable with where the leverage is, what would be the use of proceeds?

Filip J. M. Boyen

No, roughly, I mean our rule of thumb is, roughly half of it would be used to pay down debt further, and half would be to invest in other revenue generating opportunities. So we see plenty of opportunities across the portfolio where we could have a good return on investments, but in excess of the cost of capital that we carry.

Joshua Attie – Citigroup

Okay. Thank you very much.

Operator

(Operator Instructions) We will take our next question from Ross Haberman from Haberman Management Corporation.

Ross Haberman – Haberman Management Corporation

Good morning, gentlemen. How are you?

J. Robert Lovejoy

Good morning.

Ross Haberman – Haberman Management Corporation

Just a quick question Martin, do you have any actual hotels, which you’re loosing money at the operating level today? And if so, which ones and what you plan to do about it?

Martin O’Grady

Well, the one that investors are most aware of that has been loosing money is Hotel das Cataratas in Brazil where we have this lease from the national government, which was – it’s a rail leasing, the rail has continued to appreciate, ever since the lease is formed, since that’s costly hotel to lose money.

What we are doing about is, we’ve gone through a very detailed and expensive process with the government to appeal if you like to rent to, have that reduced to make that pass through breakeven. The only other ones that are loosing money, and it’s only very slightly, but it's really the very small breakeven level, I think it is Casa de Sierra Nevada and we've got Las Casitas del Colca joint venture in Peru, which is just about to breakeven. The other one that was loosing money, which we sold, it was just about breakeven in fact was a hotel that was sold earlier this year.

Ross Haberman – Haberman Management Corporation

Okay. Thank you.

Operator

(Operator Instructions) For your information, we have no questions at this time. I would now like to turn the call back over to you for any additional remarks.

J. Robert Lovejoy

I don't think we have any other than to say, once again thank you all for joining us. And we look forward to seeing you all at the bar at 21. Good morning everybody, bye-bye.

Operator

That will conclude today's conference call. Thank you for your participation ladies and gentlemen.

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