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LaSalle Hotel Properties (LHO)

Q3 2007 Earnings Conference Call

October 19, 2007 10.00 AM ET

Executives

Jon Bortz - Chief Executive Officer

Hans Weger - Chief Financial Officer

Analysts

William Truelove - UBS

Charles Scholes - JPMorgan

Bill Crow - Raymond James

Dennis Forst - Keybanc Capital Markets

David Loeb - Robert W. Baird & Company

Presentation

Operator

Good day and welcome to LaSalle Hotel Properties third quarter 2007 conference call.

At this time, I would like to turn the call over to Mr. Jon Bortz, President and Chief Executive Officer. Please go ahead sir.

Jon Bortz

Good morning, everyone and welcome to the Third Quarter 2007 Earnings Call and webcast for LaSalle Hotel Properties. Here with me today is Hans Weger, our Chief Financial Officer.

As is our custom, in addition to providing the financial results of our third quarter, Hans and I will discuss the company's activities in the quarter, the performance of our assets and the trends affecting them, the status of our ongoing reinvestment program, and our outlook for the remainder of 2007 on both a macro basis for the lodging industry and for LaSalle Hotel Properties.

Hans Weger

Good morning. Before we begin, I would like to first make the following remarks. Any statements that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as a result of factors, risks and uncertainties of which the company may have no control. Factors that may cause actual results to differ materially are discussed in the company's 10-K for 2006, quarterly report and its other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements.

Yesterday, we reported net income of $20.2 million or $0.50 per diluted share for the third quarter of 2007. Compared to net income of $17.3 million or $0.43 per diluted share for the prior year period. For the quarter ended September 30, 2007, our funds from operations or FFO rose to $43.7 million or $1.09 per diluted share.

From $37.8 million or $0.94 per diluted share for the prior year third quarter, an increase of 15.5%. Corporate EBITDA in the third quarter increased to $65.5 million from $57.9 million in the prior year period, an increase of 13.1%.

RevPAR for the total portfolio grew 6% in the third quarter. The RevPAR gain was attributable o an ADR increase of 3% to $206.07 with occupancy increasing 3% to 81.6%.

Our hotel portfolio generated $67 million of EBITDA for the quarter ended September 30, 2007, which was up 7.9% over prior year EBITDA of $62.1 million. Portfolio-wide hotel EBITDA margins improved 121 basis points from the prior year period. For the nine months ended September 30, 2007, net income decreased to $55.3 million from $69 million for the prior year period.

EBITDA increased to $189.3 million from $179.4 million for the prior year period. Net income and EBITDA for the nine months ended September 30, 2007 include the $30.3 million gain on the sale of the LaGuardia Marriott and a $3.9 million write-off of the non-cash cost associated with the initial issuance of the company's series A preferred shares.

Net income and EBITDA for the nine months ended September 30, 2006 include the $38.4 million gain on the sale of the Chicago Marriott and the $800,000.00 contingent litigation expense associated with Meridian litigation.

For the nine months ended September 30, 2007, FFO increased to $93.6 million from $88 million or $2.33 per diluted share from $2.22 per diluted share for the prior year period. FFO for 2007 includes the negative impact from the $3.9 million non-cash write-off of the initial issuance cost of the Series A preferred shares due to their redemption in March of 2007 and FFO for 2006 includes the $800,000.00 contingent litigation expense associated with the Meridian litigation.

For the first nine months of 2007, RevPAR increased 4.6% to $151.02. ADR increased 4.4% to $199.72 and occupancy increased 0.2% to 75.6%. For the nine months ended September 30, 2007, hotel EBITDA increased 6.7% to $165.3 million from $155 million.

As of the end of the third quarter of 2007, the company had total outstanding debt of $844.7 million. The company's $300 million credit facility had $28 million outstanding as of September 30, 2007. As of September 30, 2007, total debt to trailing12-month corporate EBITDA equaled 4.2 times, one of the lowest debt-to-EBITDA ratios in the industry.

Subsequent to the end of the third quarter, on October 15, the Board of Trustees declared the fourth quarter dividend of $0.17 per month for October, November and December 2007. Our dividend represents a 4.6% annualized yield based on yesterday's closing price.

I would now like to turn the call over to Jon to discuss the recently completed quarter as well as our outlook for the remainder of 2007.

Jon Bortz

In the third quarter of 2007, while the economy struggled under the weight of the housing recession and the credit market turmoil, we saw a healthy recovery in lodging demand that led to increases in industry occupancy levels.

Both business travel and leisure travel industry-wide saw an improvement in the quarter both as compared to last year and as compared to the second quarter. Overall industry demand rose 2.5% for the three months ending in August. We believe demand in September moderated to 1.5% growth rate primarily because both Jewish holidays fell on September this year versus only one in September last year.

As a result of these healthy levels of demand growth and high levels of industry-wide occupancy, pricing power remained generally strong across the industry. Compared to our industry forecast, the third quarter, like the two earlier quarters, played out pretty much as projected. The LaSalle Hotel Properties, we saw similar patterns of strength in the demand growth, particularly transient, and continuing pricing power in the third quarter.

However, our performance came in below the industry due to several property and market-specific factors. In general, group business came in below expectations at a number of our convention and resort properties and these shortfalls in group pace at the beginning of the quarter were not replaced by short-term group pickup, or in some cases they were replaced by transient business but at significantly lower rates.

In addition, food and beverage revenues were negatively impacted by group shortfalls resulting in a decline for the second quarter last year.

RevPAR portfolio-wide, without regard for rooms out of service, rose 6% in the quarter. Rooms out service in the third quarter were relatively minor, with 5,000 room nights unavailable, which reduced total revenues by $800,000.00, room revenue by $700,000.00 and EBITDA by $500,000.00. The only property with more nights out of service than forecasted was the Alexis, with completion of the room renovation extending into September.

While only a few rooms were out of service across the portfolio, many of our repositioned properties are just beginning their ramp up. On a monthly basis, for our portfolio as a whole, RevPAR rose 4.8% in July, 7.2% in August, and 6.2% in September. July's results reflect a particularly weak convention calendar and group business pace at our convention hotels, which saw RevPAR increase only 0.5% in the month.

September was negatively impacted by weaker then expected demand around Labor Day and both Jewish holidays, only one of which was in September last year. Early October RevPAR was stronger as a result.

Our urban hotels delivered the best RevPAR growth in the quarter with strong demand growth and limited group shortfalls. RevPAR rose 9% with ADR up 4.7% and occupancy improving 4.1%.

Our resorts, a couple of which were impacted by poor performance in the group segment, delivered 5.9% RevPAR growth with rate up 2.1% to $245.72 and occupancy up 3.7% to 84.4%. RevPAR increased 3.3% at our convention hotels, which suffered disproportionately from a lack of success with group.

By major market for our portfolio, West L.A. and Washington, D.C. were our strongest markets. Our four West L.A. hotels benefited from strong levels of activity in the movie and TV production businesses as evidenced by their 19.2% RevPAR growth in the quarter. Occupancy rose 8.7% to 86.1% with ADR climbing 9.6% to $205.95. Washington, D.C. continues to benefit from an act of Congressional Calendar, high levels of overall government business and a return of the leisure traveler enhanced by a weak dollar that has increased inbound international travel.

Our seven D.C. urban hotels grew RevPAR by 13% in the quarter with occupancy up 8.7% and ADR up 4%. Supply growth continues to be minimal in D.C. and demand continues to recover, up over 4% in the CBD year-to-date through August.

San Diego also saw healthy demand growth, though a meaningful portion was lower rated, price sensitive leisure. RevPAR from our four San Diego properties rose 7.3% with occupancy up 5.9% to a very strong 89.5% and ADR up 1.3% to $243.99. With a healthy June through August, demand in the San Diego CBD is now up 2.1% through August compared to last year. Boston continues to see very strong demand growth in 2007. Demand rose to 6.1% in the CBD airport market from June through August and it is up 4.4% year-to-date.

Supply growth has pushed occupancies down slightly in the market, although our properties managed grow occupancy by 2.5% to 87.3%. RevPAR for our three hotels increased 6.2% with ADR up 3.6% to $238.15.

Our weakest major market was Chicago. A soft convention calendar and poor group pace at our two Chicago hotels led to much worse than expected performance. RevPAR was +0.1%, essentially flat with occupancy down 2.3% to 83.6% and ADR up 2.4%.

Our best performing properties for the quarter, as measured by RevPAR growth, were Le Parc and Le Montrose in West Hollywood, the George, the Topaz and Rouge in D.C. and the Viking in Newport, all with RevPAR growth in excess of 20%. Hilton Old Town. San Diego Hilton Resort, Holiday Inn Wall Street, Graciela in Burbank, Chaminade Resort in Santa Cruz and the Helix in D.C. were also very strong, all with RevPAR growth between 15% and 20% in the quarter. That is 12 properties with RevPAR growth at 15% or higher and 19 of 30 hotels achieved occupancies of 80% or better.

Despite all of this strength, our disappointment in the quarter came primarily from our larger properties, which had a significant impact on our overall performance. The Lansdowne resort with extremely poor group business in the quarter saw a RevPAR decline of 10.5%. The lack of key sales and marketing leadership and staff from late last year to spring of this year could not be remedied through short-term pickup by the new sales team.

All key positions at Lansdowne are now filled with experienced individuals, so we expect that our disappointing results that this property should remain limited to the third quarter. Currently, group pace is up for balance of the year and for 2008 at Lansdowne. Golf membership sales have paced very well this year, with 79 sold year-to-date bringing current membership to 370 golf members.

In Dallas, at the Westin, the citywide calendar compared extremely unfavorably to last year's third quarter and we were unable to replace the business with either group or transient. As a result, occupancy declined 6.2% with RevPAR up 1.6% due to an 8.3% increase in ADR. Fourth quarter pace is also poor due to a lack of conventions and pickup has been weak. On the positive side, group pace in Dallas for 2008 is up, due to a more favorable convention calendar.

In Chicago, as mentioned earlier, both Westin Michigan Avenue and Hotel Sax under performed. Convention calendar in Chicago and our booking pace at both properties continues to be weak and worse than we would have expected for the fourth quarter. For 2008, Chicago convention calendar is a little better than 2007 with roughly 10% more rooms on the books. At our properties, Westin Michigan Avenue group grew nine paces up 1% and Hotel Sax is up 17% for next year.

At the Holiday Inn on the Hill, despite a strong third quarter in D.C., our transition to a new management company to reposition the property to an upscale independent hotel led to some disruption that negatively impacted our group sales efforts. As a result, third quarter performance suffered badly with an 11.9% drop in occupancy and a 2.5% drop in RevPAR, significantly worse than we forecasted. We expect some bleed over and underperformance in the fourth quarter while the new executive and sales teams at the property get up to speed.

I thought I would also take a few moments to comment on the topline progress at a few of our recently repositionee hotels not yet mentioned. As discussed in prior calls, we have 16 properties that are ramping up to full market penetration, which often takes as long as three to four years for physical completion.

Overall, the customer response has been extremely favorable and it shows in the performance of the hotels. Of those hotels, we have two hotels the Onyx and the Solamar, which were a year old when we acquired them. Both are ramping up nicely, gaining significant RevPAR penetration. The Onyx is up 8.5% in RevPAR year-to-date, significantly better than downtown Boston, which is up 3.3% year-to-date. And in San Diego, the Solamar's RevPAR is up 10.5% year-to-date, also significantly better than downtown San Diego's 2.8% increase.

In West Hollywood, the repositioning at Le Montrose has been extremely successfully. RevPAR year-to-date is up 14.6%, as compared to 8.6% for its market. Chaminade Resort, where we completed rooms renovation in the second quarter last year, is also seeing good success. RevPAR year-to-date has increased 12.1% while the property's competitors have seen RevPAR decline 1.1%. The second phase of the repositioning is scheduled to get underway next month. After completing the renovation at the Hotel Viking, RevPAR in the third quarter increased 20.5%, substantially better than its competitors.

At the Hilton Resort in San Diego, where we have completed the first phase of the repositioning, which included the rooms and the spa, RevPAR increased 18.7% in the quarter, substantially better than its market's 3.2% increase. In Seattle, at the Hotel Deca following its conversion from a Best Western RevPAR is up 10% year-to-date. This compares favorably to its competitor's 6.6% increase year-to-date through August.

At the Alexis, on the other hand, we continue to struggle with the completion of the rooms renovation and the lack of full inventory. As a result, RevPAR fell 23.6% in the quarter with a drop of 19.3% in occupancy, significantly worse than we had forecasted. The good news is that we now have all of our rooms back in service, including the 12 rooms we added, and the lobby and meeting space were completed last week.

Portfolio wide non-room revenues for the quarter were very disappointing. Food and beverage revenues actually declined by 1.2% from last year's third quarter due primarily to a 5.7% decline in group rooms across the portfolio. Total revenues portfolio-wide rose 4.2% in the quarter.

On the expense side, expenses with very well controlled in quarter. Total hotel expenses portfolio-wide were limited to a 2.3% increase from last year. We are particularly pleased with this performance given the 3% increase in occupancy in the quarter.

Departmental expenses were extremely well controlled, increasing only 0.2%. Undistributed expenses rose 5.6% with significant increases in franchise fees, which are tied to our revenues and our branded properties. And sales and marketing costs and general and administrative expenses, which were up due to additional efforts to pursue and attract transient business to replace our group's shortfalls.

Fixed expenses also grew faster than total expenses, increasing 7.2% due primarily to a 16.3% increase in property taxes. While we expect property taxes to continue to be under upward pressure due to increases in property valuations, we expect the rate of increase to moderate significantly as the reassessments due to our acquisitions last year burned off.

These fixed expense increases were partially offset by a significant lowering of our property insurance costs, which declined 16.5% in the quarter due to reductions achieved through re-bidding the policy upon its expiration on March 31st.

In addition, a yearlong effort to consolidate the general liability insurance, traditionally obtained by our operators into a policy that we successfully obtained corporately has resulted in a significant reduction in our overall premiums.

In the quarter, general liability insurance costs declined by 14.6%. Of additional note, energy and utility cost portfolio-wide rose just 1.1%, with material reductions achieved due to significant energy saving capital investments over the last 12 months and the ongoing implementation of best operating practices from our various operators.

Portfolio-wide hotel EBITDA grew 7.9% on a 4.2% increase in total revenues, resulting in an EBITDA margin increase of 121 basis points in the quarter. Year-to-date portfolio-wide revenues are up 3.6%; total expenses are up just 2.2%, leaving EBITDA up 6.7% and our EBITDA margin up 93 basis points.

We are proud of this healthy margin improvement, particularly given our relatively small 3.6% total revenue gain and a large amount of renovation impact during the first half of the year.

Turning to our capital initiatives. As previously indicated, we continue to execute our strategy of redeveloping and repositioning, both our recently acquired and existing hotels in order to drive significant increases in cash flows and long-term values.

The third quarter had a relatively few number of active projects. Donovan House, the independent luxury reincarnation of the Holiday Inn Thomas Circle, continues to be closed and under reconstruction. We are on track for completion by April 1 next year. As mentioned earlier, the Alexis repositioning and redevelopment has just been completed and the grand opening party was last week.

At the Holiday Inn on the Hill, we finalized our plans for our repositioning and renovation, except for the hotel's rooftop. The project overall includes refurbishing the rooms, upgrading the lobby, ball room and meeting space and rebuilding and reconcepting the restaurant to position it comparably to the upscale hotel.

We are also replacing the window HVAC units with a new energy-efficient 4-pipe HVAC system. Total investment is budgeted at $15 million. The redevelopment began last month and should be complete in the second quarter next year, at which time the Holiday Inn flag will come down and the property will be renamed.

In August, we commenced the redevelopment of the Holiday Inn Wall Street district hotel. The first three floors should be complete later this month. We currently have six floors out, which represents 40% of the hotel. The lobby renovation will start in November and the construction of the restaurant, which is now leased, should commence next year. The hotel will be renamed Guildhall on December 1st, and the $10 million repositioning project is expected to be complete by April 1 next year.

At the Hotel Sax, we commenced the $9 million reconstruction of a new ballroom, meeting floor and banquet kitchen in previously vacant surplus retail space on the fourth floor of the hotel. This state-of-the-art, one-of-a-kind meeting and catering venue should be complete by the end of the year.

Projects for the remainder of the year and into next year include the following: In mid-November, we plan to close Chaminade Resort to renovate the main building, including the lobby, entry, meeting room, ballrooms, the two restaurants, and the bar. The resort should re-open by the beginning of February next year. The capital investment is estimated at $5 million.

Beginning in December, we are planning to commence the renovation of the remaining 392 rooms at Westin Michigan Avenue, including installation of a new 4-pipe HVAC system. The initial 359 rooms were completed earlier this year. The remaining investment is estimated at approximately $11 million, and the project should be complete early in the second quarter of next year.

Also beginning in December, We will be fully renovating and reconfiguring the two floors of ballrooms and meeting space at the Westin Copley in Boston. The $9 million project should be completed in March of next year.

At the Indianapolis Marriott, we plan to commence a soft goods refurbishment of all 615 guest rooms, including seven new rooms, as well as refurbishing the two ballrooms and all meeting and pre-function space. The project is currently estimated at $8 million is scheduled to start in mid November, and be complete in the first quarter next year.

At the Hilton San Diego Resort, the second phase of our redevelopment should commence late this year. The second phase includes redevelopment of the entry, lobby, restaurant, resort store, poolside bar and grill, and the conversion of the existing pool to a resort-style pool. The project should be complete by mid second quarter next year.

In total, we continue to forecast capital investment for 2007 in the $120 million to $130 million range, with $90 million related to major renovations, repositionings and re-brandings. As a result of these renovations, and repositionings, we continue to forecast 92,000 room nights out of service for the year.

Combined with public area and meeting space disruptions, we are forecasting lost room revenues of $9.5 million, a reduction in total revenues of $14.5 million and a decrease in EBITDA of $8 million for the year. These numbers are unchanged from last quarter's outlook.

The $9.5 million of lost room revenues for the full year represents a reduction in RevPAR growth for 2007 of 2.2%. These numbers of room nights out of service and reduced EBITDA exclude the former D.C. Thomas Circle Hotel. As we continue these projects, we anticipate having 24,000 room nights out of service in the fourth quarter, which will impact total revenue $3.1 million and EBITDA by $1 million.

In the first quarter of 2008, we project 34,000 rooms out of service, reducing total revenue by $4.4 million and EBITDA by $2.4 million. This compares to 47,000 room nights out in the first quarter of 2007. None of these numbers includes the Donovan House, which has been closed since February 2006.

All of these capital investments, as well as those made in recent years should continue to positively impact the competitive position of our hotels, and allow them to significantly improve performance in future years, especially, 2008 through 2010.

In addition, all of the repositioning projects planned for the existing properties should be materially complete by mid second quarter next year, so disruption in the existing portfolio after that can be expected to be limited to only typical refurbishments in the normal course of business.

Now, let me turn to our outlook for the remainder of the year. To date, 2007 is playing out inline with our industry forecast. We continue to expect the economy and the travel industry to show growth throughout; although, the acceleration in the economy we were expecting in the latter part of the year is not likely to happen.

As a result, given healthy lodging fundamentals, it is reasonable to assume that lodging industry will be strong in the fourth quarter, but probably not quite as strong as we were previously forecasting. Our four leading economic indicators: corporate profits, airline enplanements, consumer confidence and employment growth now paint a mixed picture with negative trend lines in the last three months for all except enplanements.

Growth in corporate profits and employment have slowed since last quarter, and consumer confidence declined in August and September. Nevertheless, wage growth remains strong and overall employment remains high. Airline enplanements, on the other hand, have increased over the course of the year, including in the third quarter confirming the strengthening of hotel demand that we have seen over the course of the year.

Assuming no major geo-political events, we are narrowing the range of our industry wide RevPAR forecast for the year slightly, by increasing the lower end of our rage from 5.5% to 5.7% and lowering the top end of the range to 6.2% from 6.5%. Urban is on-track to outperform the industry by 300 basis points and upper upscale should outperform by up to 50 basis points.

For our portfolio, we are lowering our forecast of RevPAR growth for the year to 5% to 5.5% from 5.5% to 6.5%. The majority of the reduction is due to our lower RevPAR growth in the third quarter and group and transient pace for the fourth quarter that has not increased as much as we had forecasted when we were projecting a fourth-quarter economic pickup.

While our group pace for the portfolio-wide is up 4.8%in Group room nights and 6% in ADR, we are concerned about a negative group pace in December. We have revised our RevPAR growth forecast for the fourth quarter to 6.5 to 7.5%. On a positive note, we have seen no increase in Group cancellations.

For 2007, despite our very successfully efforts to control expenses year-to-date, the overall lower level of revenue growth is forcing us to lower our forecast for portfolio wide EBITDA margin improvement to a still healthy 80 to 100 basis points.

As a result of our slightly lower fourth quarter revenue and margin projections, we are reducing the low end of our fourth quarter FFO per share range by $0.2 or roughly $800,000 to $0.69 and retaining the top end of the range at $0.73.

For the year, our forecast is reduced to $3.11 to $3.15 or roughly, 1% decrease from last quarter's full year 2007 forecast. This outlook excludes the $3.9 million non-cash expense associated with the March redemption of our Series A preferred shares.

We are currently forecasting EBITDA for the year in the range of $206 million to $207.5 million. The EBITDA outlook for the year excludes the $30.3 million gain from the first quarter sale of the Laguardia Marriott and the $3.9 million non-cash expense associated with the March redemption of our Series A preferred shares.

I would also like to touch on 2008, we remain solidly positive about next year. However, we have not yet commenced our property budget review process, so we are not prepared to discuss our outlook at this time.

But if we look at one indicator for our portfolio, group pace, we are particularly encouraged about 2008. At the present time, our Group room nights on the books are up by 6.5% versus the same time last year for 2007 and ADR on the books is up 4.9%. Room night pace is up in every quarter except the first quarter of next year, which undoubtedly will be challenged due to the Easter holidays moving to March next year from April this year.

As a result, we continue to be excited about the fundamentals of both the lodging industry and our company with the substantial completion of all of the repositioning within the current portfolio, significantly fewer room nights out of service, and less disruption next year, we believe that LaSalle is in a great position to continue to benefit in the years ahead from our repositionings and the continued recovery and growth cycle in the lodging business.

That completes our remarks. Hans and I would now be very happy to answer any questions you might have.

Questions-and-Answers Session

Operator

(Operator Instructions)

We will take our first question from William Truelove with UBS.

William Truelove - UBS

I have got three main questions here. The first one is about the sales force issue you had at Lansdowne and the group pace in the quarter. Were there any other large hotels that also had a sales force turnover like maybe the Westin Chicago and what not?

And what kind of things can you do as an asset manager to kind of work with your operator to not let that happen again?

Jon Bortz

Okay. There were a couple of other properties that had turnover. One, Holiday Inn on the Hill, which I mentioned where we turned over the entire Executive Team and the entire sales force. The entire sales force was not a planned event; although, the executive team turnover was because we needed to put a new team in place to manage an independent hotel versus a Holiday Inn and flag property.

We also had turnover at the beginning of the year at the Westin Michigan Avenue as our Director of Sales and Marketing was promoted to Regional Head and our Revenue Manager was transferred by Starwood to a Phoenix property.

They were replaced, but the new team has not been as strong as the prior team, and the only changes that we can make are, if do not think they are performing, we ask Starwood to make changes.

In the case of Copley, we also were without a Director of Sales for Catering for the first nine months of the year and we saw a significant negative impact in our Food and Beverage operations at that property as a result.

As an asset manager, it is really a combination of the squeaky wheel, really pushing our operators to find the right people, transfer the right people and hire recruiters, do whatever is necessary to get those people. But we are really focused on making sure that we get the right people.

So, we do interview all of the Executives team members that are proposed and we are very demanding in terms of making sure that we find the strongest people that are possible to run our hotels.

William Truelove - UBS

Just, more of an asset specific question as it relates to Seaview in Atlantic City, you have got a lot of other projects going up at the MGM announcement, you have a lot of Morgan Stanley condos going up, has review of the value of that asset changed? And is it possible to maybe make it something more than it already is at this point?

Jon Bortz

That is a good question, Will. One of the positives about that property and one of the things we like about it is the fact that Atlantic City is being transformed into sort of mini East Coast Las Vegas. There has been $7 and 10 billion of investment planned in the market, as it relates to both new casinos and transformation of some existing casinos in the market.

And we believe that is a good thing for overall demand in the market, including the demand for Seaview, but it is also a big employer in the market and one of the things that we are in the process of studying is the possibility of converting one of our golf courses to residential land to help satisfy what is a very strong demand for new housing in the marketplace.

William Truelove - UBS

And my last question, this is probably going to be the difficult one because of the 2008 budgeting, but you did say that you are going to have about 32,000 room nights out in the first quarter and you are expecting 92,000 room nights out for 2007.

So the way of trying to think about 2008 total company-wide RevPAR growth, can we just take sort of an industry growth rate plus the room night differential or is there maybe an asset specific way of some of the new hotels coming on like Donovan and Alexis, what not? Ways that we can try to better forecast room revenues for 2008 knowing that you haven't yet done your 2008 budget at the property level, so any help you can give the street on that?

Jon Bortz

Yes, I think what we can tell you broadly is that the differential in fewer room nights should translate into RevPAR improvement within the portfolio beyond what they would otherwise achieve. And then we do have some significant improvements we are anticipating on top of that, that come from the repositionings that have been completed and that are being completed. So I do think we should next year outperform the industry in a meaningful way and we would be disappointed if we didn't.

William Truelove - UBS

Right. Thanks so much. That is all of the questions I have.

Operator

(Operator Instructions)

We will move on to Bill Crow with Raymond James.

Bill Crow - Raymond James

Good morning, guys. A couple of questions here. First of all, following up on Will's question on '08, we have had a couple of companies already talk about 5% to 7% RevPAR growth for next year. Do you think that is a reasonable outlook for the industry overall at this point?

Jon Bortz

Bill, I think at this point based upon what we know that the industry should be in a relatively similar place to what it is this year with probably some downside based upon what happens with the economy and this continuing sort of low growth pause that we thought would have, in all likelihood, picked up by the latter part of this year, looks to us to probably run into early next year at a minimum.

And the good news about early next year is that the comparisons are pretty easy in the first half of next year. So I would not think that it is going to be materially different than this year. Pricing powers should remain. I think in general it is a better convention year across the nation and I think that is evidenced by really everybody who has reported a significant uptick in-group pace.

Bill Crow - Raymond James

Does D.C. suffer next year because the election and politicians out of town, et cetera?

Jon Bortz

Yes, in the four-year cycle, D.C.would typically suffer in the last quarter of the year. We would expect that to happen again next year. The offsetting factor as we see it right now, Bill, is that the convention pace is up significantly next year. It is back to a level that is more like 2006, and so we think that would be an offsetting factor, and we do think it would be a very active congressional calendar even if a whole lot gets accomplished.

Bill Crow - Raymond James

Okay. Let me dig into the group pace a little bit. I mean, you talked about the pace up I think 6.5% for next year and ADR up almost 5% on those rooms are just terrific. But what is the traditional cancellation rate on group business. At this point and time looking out to next year, have you got a historical number for that?

Jon Bortz

We do not have a historical number on that, Bill, but I would tell you That is very low.

Bill Crow - Raymond James

And is that because most of these group meetings have liquidated damages clauses or is it that they occur no matter what the economy does?

Jon Bortz

Well, Bill clearly they are based upon downturns in the economy. Historically, you have seen a greater level of cancellations but it would tend to be more in a negative GDP environment than just a slow growth environment. Part of the rational, obviously is that there typically are termination penalties, in some cases 100%. That is as you get very much closer to the date but it tends to be smaller, more like 75% or 50% as you get anywhere from 60 to 180 days out.

Bill Crow - Raymond James

Right. All right. And if you went back to '01 prior to 9/11, was the cancellation rate picking up at that point, do you remember?

Jon Bortz

I do not remember, Bill.

Bill Crow - Raymond James

Okay.

Jon Bortz

I do remember that we had a lot of cancellations after 9/11.

Bill Crow - Raymond James

Yes, I was just thinking pre-9/11 when the economy was weakening. Two more quick questions, Jon. You have talked about de-levering the balance sheet as we get into further into the cycle and it seems like it was the popular press would have cap rates rising 50 to 100 basis points recently. A, what have you seen in the cap rate environment as you are looking at deals? And B, how do you balance the desire to de-lever later in the cycle versus maybe a better buying opportunity than you have seen in three years?

Jon Bortz

Well, in terms of what we have seen, I would tell you we have seen no adjustment in cap rates in the lodging space at this point. We continue to expect that there will be some, but we have not seen any although there have not been a tremendous number of transactions to use as a measuring stick.

It is our objective over the next several years to lower our leverage level. We do not think That is inconsistent with being able to taking advantage of opportunities. In fact, it is even more consistent with it. Obviously the lower leverage we have, the more opportunity we have to make acquisitions without having to go to the markets.

For capital, in addition to the fact that our buying power effectively increases as our EBITDA continues to grow from not only the industry improvement over the next several years, but through the repositionings that we have done as well as the re-opening of the Donovan House.

Bill Crow - Raymond James

Do you think there is a better opportunity for you to be successful bidders going forward now that maybe the leveraged buyers are on the sidelines or is there too much capital chasing these assets?

Jon Bortz

We think it will ultimately play out that way, Bill. That is likely, but we think it will take time and we have all been around long enough to know that these transition periods tend to create situations where there's a gap between seller expectations, which were based on the past and buyer expectations that are sort of based upon where we are now or forecast into the future.

But that opportunity may not come around right away, but some time over the next 6 to 12 months we would think that with the reduction in the number of high levered buyers that lower levered buyers, the more modest buyers, will become more competitive.

Bill Crow - Raymond James

Jon, finally, you talked about the rooms out of service in the first quarter but it sounds like most projects end by the end of the first quarter. Is it fair from a modeling perspective and then should we assume that you do not have a whole lot on the table yet for '09 for rooms out of service?

Jon Bortz

Yes, there is a little bit of run over with a few projects into April of next year, but it is pretty minimal, Bill. We do not have numbers on it right now, but its probably less than 5,000 room nights. So there should not be much the rest of the year. And as of right now, we do not anticipate much of anything for '09.

Bill Crow - Raymond James

Okay. Terrific. Thank you, Jon.

Operator

We will take our next question from Dennis Forst with Keybanc Capital Markets.

Dennis Forst - Keybanc Capital Markets

Good morning. I wanted to ask two questions. First, kind of look at the number of available rooms in the opposite direction rather than rooms out. How many available rooms were there during the third quarter, and what do you expect the number to be in the fourth quarter?

Jon Bortz

This is the total here. There were a total number of rooms in the third quarter available before reduction of the rooms out of service. So I know you can do that math.Of 761,164 rooms.

Dennis Forst - Keybanc Capital Markets

Okay. And that includes the two leased properties?

Jon Bortz

Yes.

Dennis Forst - Keybanc Capital Markets

So I back those two out, back out the Donovan?

Jon Bortz

No, you would not back those two out. When we report our hotel results, it includes all of the properties including the two that are leased.

Dennis Forst - Keybanc Capital Markets

The $171 million includes all the properties?

Jon Bortz

It includes?

Dennis Forst - Keybanc Capital Markets

I am sorry the two third party hotels?

Jon Bortz

The numbers on the income statement exclude the leased the two leased hotels, but the numbers on the hotel schedule, which is a supplement attached, includes those two properties.

Dennis Forst - Keybanc Capital Markets

So the $168 RevPAR includes those two hotels?

Jon Bortz

Yes. And the Donovan House is not in any of these numbers. So, the number I gave you for the third quarter of available rooms excludes the Donovan House. All you would do is take the number I gave you, take out the 5,000 rooms out of service and you have what was available.

All you would do is take the number I gave you take out the 5000 rooms out of service and you have what was available.

Dennis Forst - Keybanc Capital Markets

Okay.

Jon Bortz

In the fourth quarter?

Dennis Forst - Keybanc Capital Markets

Yes.

Jon Bortz

The number is 764,000 let us call it, rounded. And you would take out the 34,000 number that we have provided.

Dennis Forst - Keybanc Capital Markets

Okay. And then if I was trying to come up with room revenues and I made the assumption that the RevPAR excluding those two third-party hotels was essentially the same as the RevPAR with them, I could just multiply whatever my RevPAR assumption is by, I think that would be around 675,000 rooms to come up with a room revenue number.

Jon Bortz

To get to the number that is on the income statement?

Dennis Forst - Keybanc Capital Markets

Yes.

Jon Bortz

Yes.

Dennis Forst - Keybanc Capital Markets

Okay, good. Appreciate that, and then secondly, Southern California, West L.A., is that a pretty short-term reservation window? Are most of those transient rooms?

Jon Bortz

West L.A. is very short-term. We do very little group in our four hotels there because they are quite small.

Dennis Forst - Keybanc Capital Markets

Right.

Jon Bortz

And I would say probably 60% to 70% of our business is corporate volume account. The production houses, Disney, Warner, Universal, Sony, all of those types of organizations

Dennis Forst - Keybanc Capital Markets

Okay. And are you concerned about a writers' strike closing down the industry here in the fourth quarter?

Jon Bortz

We would get concerned about any strike, but right now what we hear is that it would not have much impact on production in the near term. But it might have an impact on production in '08, particularly the first half if it was more then a fairly short.

Dennis Forst - Keybanc Capital Markets

I guess if there's enough scripts particularly on the TV side to keep going for a while but if it did last for longer than expected or so, then it could have an impact on the second quarter maybe next year.

Jon Bortz

Right, we might have to suffer through more reruns.

Dennis Forst - Keybanc Capital Markets

Thank you.

Jon Bortz

Sure. Operator?

Operator

(Operator Instructions)

We will take our last question from David Loeb with Baird.

David Loeb - Robert W. Baird & Company

Bill answered most of my questions. So I'll finish off with an easy one. As you look forward at the economy, given all of the leading indicators that are perhaps looking at a pause for the next couple of quarters.

What kind of offset is there from foreign travel given the weak dollar into your gateway markets? Are your hotels positioned to pick up much of that business?

Jon Bortz

They are and they have been aggressively pursuing that business. It is particularly beneficial on the East Coast, David, as you would imagine because the greatest weakness in the dollar has been versus the European currencies. And obviously, less so with the Asian currencies, particularly Japan where it is actually, if anything, gone the other direction.

David Loeb - Robert W. Baird & Company

And how about Seattle with the Canadian dollar?

Jon Bortz

It should see benefit. We have seen for a number of reasons the cruise business move from originating from out of Vancouver to Seattle and That is helped the market. We should continue to see more tourism travel out of Canada into Seattle, but I would tell you more of the business in Seattle comes from the south than it does from the north.

David Loeb - Robert W. Baird & Company

Okay. Great, thanks.

Operator

And Mr. Bortz, there are no other questions in the queue at this time.

Jon Bortz

Okay. Thank you very much, operator. Thank you all for participating in the call and we look forward to giving you an update next quarter. Thank you.

Operator

That does conclude today's presentation. Thank you for your participation and have a wonderful day.

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Source: LaSalle Hotel Properties Q3 2007 Earnings Call Transcript
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