Strategic Hotel & Resorts' CEO Discusses Q1 2012 Results - Earnings Call Transcript

May. 2.12 | About: Strategic Hotels (BEE)

Strategic Hotels & Resorts Inc. (NYSE:BEE)

Q1 2012 Earnings Call

May 02, 2012 10:00 AM ET

Executives

Jon Stanner – VP, Capital Markets and Treasurer

Laurence Geller – President and CEO

Diane Morefield – CFO

Analysts

Jeffrey Donnelly – Wells Fargo

Smedes Rose – KBW

Bill Crow – Raymond James

Joe Greff – JPMorgan

Will Marks – JMP Securities

Enrique Torres – Green Street Advisors

Tim Wengerd – Deutsche Bank

Ethan Steinberg – Friess and Associates

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2012 Strategic Hotels and Resorts Earnings Call. My name is Erin and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Jon Stanner

Thank you and good morning everyone. Welcome to the Strategic Hotels & Resorts first quarter 2012 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the company’s new 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

Thank you good morning. Yesterday we reported yet another great quarter of results. Diane will cover the first quarter specifics in more detail shortly. While we're certainly very proud of this quarter's performance, I'd like to focus my comments on how these results fit within the context of the past nine quarters of lodging demand improvement and the very favorable outlook for continuing strengthening hotel performance. Of critical importance, our hotels have significantly outperformed their respective competitive sets since the beginning of the recovery in the second quarter of 2010 when we first saw our convergence of our key operating results. These and other trends continue and remain very positive. This consistent clear set outperformance is not nearly a case of all boats rising but is a direct result of our methodical, creative and some might say obsessive approach to systematic pioneering asset management.

Occupancy in our total North American portfolio improved for the ninth consecutive quarter and on an absolute basis is a full 17% or 9.2% percentage points above the trough in the first quarter of 2009. Compared to peak occupancy in 2007, our first quarter results were still 3.6% lower and that relative delta obviously continues to decline each quarter as lodging demands steadily improves. As it has traditionally, rate has been slower to recover, however, the first quarter marks the eight consecutive quarter of ADR growth in our total North American portfolio. Although we are still 4% lower in rate than our peak in the first quarter of 2007, ADR was $17 higher this quarter than our trough rate. This represents a healthy 15% increase. Therefore we have significant improvement ahead of us with our run rate.

Our 2012 RevPar guidance of 6 to 8% reflects the continuation of the long-term strong recovery in the high end lodging sector and implies a two year RevPar CAGR of nearly 9%. This important metric takes into account our outperformance last year which is continuing into this year and the obviously resultant tougher comparisons for 2012.

The first quarter was our seventh consecutive quarter of RevPar index growth at our individual hotels level, our measure of market share performance and this terrific accomplishment means we are now at the highest levels that we have recorded during the past five years of RevPar index growth. Non-rural spending has followed similar trends during this recovery, and our hotels have benefited from the return of our guest propensity to consume coming out of the downturn. For example, revenue at our food and beverage outlets is 32% higher than the trough which equates to an additional 5.5 million of revenue across the portfolio. Total RevPar is now a full 20% higher than the trough in the first quarter of 2010. Labor productivity has improved 14% from the trough and FTEs are down 13% at our hotels. Most critical is the fact that management level employees are down 22% from peak levels which we are confident are systemic and thus permanent reductions to the fixed cost basis of our hotels.

Given our business model that aggressively pursues spending outside of the guest rooms and the lower margins that result from this area of business, one of our preferred methods of evaluating profitability is EBITDA per room. We are in approximately $6,500 per room in the first quarter which is 55% higher than the trough in the first quarter of 2010. But is still 25% below peak, yet again demonstrating there remains a substantial run way for significant growth in operating profitability. Importantly we believe we can continue to augment our per room profitability in a cost effective manner given our significant pipeline of profitable, high return CapEx projects that we evaluate and increment continuously and then execute opportunistically.

Our organic growth potential is of course underpinned by perhaps the most single and unique and important facet of this particular cycle, a virtually 0% supply growth environment with no new supply forecasted for the next 5 to 10 years in our business segment and markets. This all goes well for a sustained and robust lodging recovery. Although we can’t forecast longer term consumption propensities, we remain very bullish about our future and will leave no stone unturned in the path to revenue maximization rate growth and margin expansion.

We have also been increasingly focused on analyzing our hotel portfolio into two distinct segments, our result portfolio and our urban portfolio. You will see on our new website and our supplemental financial package that we are now detailing our results based on this segmentation as an additional view into our portfolio.

We believe longer term that the growth prospects for resource in general and our resource more specifically was slower to build are potentially greater that urban hotels. For example our 2012 group pace is up 8% for our result portfolio compared to 2% for our urban portfolio. Replacement cost excluding is obviously much greater in the resort market than the urban market and a more significant valuation gap likely exists between the trading values of our results and their corresponding replacement costs.

The planning consensus and development time of result can be doubled that of an urban property indicating incredibly long time period where there should be no new competitive supply even if economics would begin to justify new development.

The high end urban resort lodging sectors remain in the nascent stages of recovery, with the lack of new supply clearly been the key differentiating factor between this period and previous cyclical upturns.

Productivity enhancements are been sustained and in fact they are improving. Demographic and psychographic trends are particularly for the high end of both our urban resort lodging sectors and mirror many other luxury consumer businesses and our balance sheet is in ever improving shape. When all of this is combined with our consistent outperformance in the team operating metric it is clear to us that this equates to a broad based and healthy recovery.

The extended lack of supply, will continue driving both our continued upside in revenues, higher margins and ongoing industry leading profit for room performance.

Finally, during this quarter we announced the appointment of Sherri Roosevelt (ph) to our Board of Directors. Sherri (ph) brings us a wealth of sophisticated real estate, transactional, board and government experience and is a wonderful addition to our Board. I would like to now hand this over to Diane.

Diane Morefield

Thank you Laurence. Good morning everyone, our first quarter comparable EBITDA totaled 33.3 million a 16% increase from the first quarter of 2011. Comparable FFO was $0.02 per share an improvement from negative $0.02 per share last year. Improvements in both demand and average rate were broad based throughout the portfolio and covered nearly every segment of our business.

RevPar in our same store North American Portfolio increased 9.4% and was driven by a 5.1% increase in average rate and a 2.6 percentage point improvement in occupancy. Beginning this quarter we reported in our press release and financial supplement package results for both our traditional North American same store portfolio which includes 11 hotels and added our total United States portfolio 14 hotels which includes our unconsolidated JVs at the Hotel Del and Fairmont Scottsdale Princess as well as the two Four Seasons Hotels we acquired last March.

We believe that sharing the operating results on this broader portfolio as well as our same store results is a better reflection of the complete operating trends of our business and we intend to report both sets of portfolio results going forward. In the first quarter, RevPar in our total U.S. portfolio increased 8.8% driven by a 5% increase in ADR and a 2.3 percentage point increase in occupancy and total RevPar increased 7.8%.

Group room nights and our U.S. portfolio were up 5.8% in the first quarter of this year at rate 6.5% higher than the first quarter of last year, total group room nights in the first quarter of this year were over 18% higher than the Trout in the first quarter of 2010 and yet we are still 11% below our peak first quarter in 2007. Group room night pays are best forward looking indicator is up roughly 1% for 2012 at rates that are 4.4% higher than the same time last year, yielding a 5% increase in group room revenue which is an improvement in our previous forecast of 4.2% which we shared in February on our fourth quarter earnings call.

This indicate continued short term strength in corporate and the return of high end association business. However, it also reflects a certain degree of corporate hesitancy which could persist throughout this year as the economy deals with ongoing negative headlines particularly those surrounding the European sovereign debt crisis, stubborn employment statistics, potentially higher gas prices and promise to be a ferociously contested political season this summer and the fall.

Our group outlook for 2013 is very strong are room nights are currently up 8% compared to the room nights we had on the books for 2012 at this same time last year and it rates 2% higher resulted in a 10% increase in projected group room revenues for next year. As you know we place a heavy emphasis on non-room spending which represents roughly half of our total revenues. During the first quarter non-room revenue increased 8% in our total U.S. portfolio driven by a 9% increase in food and beverage revenues. That particularly in process considering that more than half of our RevPar growth in the quarter actually came from rate improvement.

Banquet revenues were up 7% and up 4% on per occupied group basis, which is further evidence of an increasing propensity to spend from our groups. Our results on the Trans-India (ph) were also strong as occupied room nights increased 3.6% at rates of 3.7% higher than the first quarter of last year.

We were most encouraged by a 44% increase in room nights in the highest rated premium segment of our Transient business. Yet another reflection of our hotels abilities to ship the mix of business to a higher rated more profitable customer as higher occupancies drive more compression into our markets. EBITDA margins expanded an impressive 230 basis points, as improved top line results were augmented by continued cost controls on productivity improvements.

Hours worked for occupied room are best measured productivity was flat till last year this quarter. However, adjusting for the Michael Jordan Steakhouse which opened in the fall of last year productivity improved 1%. Property level EBITDA increased to healthy 23% and our ratio of EBITDA growth to RevPar growth was 2.7 times in the first quarter.

Compression room nights which we defined as nights with 90% occupancy or more were up 5% in the first quarter and it rates 4% higher than the same time last year. We experience RevPar growth, at all but two of our North American hotels in the first quarter and six of our 14 U.S. hotels had double digit RevPar growth in the quarter. The broader San Francisco bay area continue to through robust recovery. We have three assets in these markets and in the first quarter RevPar at the Westin Saint Francis Four Season Silicon Valley and Ritz-Carlton-Half Moon Bay improved by 16% 15% and 12% respectively and first quarter RevPar on an absolute basis is now higher than the previous peak at all three of these hotels.

Our Marriott Grosvenor Square Hotel in London had an exceptional quarter, now portion of these results are attributable to an easier comparison to last year when we were completing the final stages of rooms renovation and actually had some displacement. Regardless, RevPar increased 25% and 27% in constant dollars as occupancy improved by over 16 percentage points to nearly 82% for the quarter.

And Four Seasons Punta Mita continues to struggle, as RevPar declined 6.5% in the first quarter on a 3 percentage point of loss of occupancy. This lowered our reported same store portfolio RevPar growth figures by 1.3%. The issues in Mexico are well known and the results in first quarter were generally in line with our expectation. Though we remain cautious on the outlook for any material near-term recovery, we are firm believers in the long-return prospect for this hotel.

Turning to the balance sheet and our liquidity, in April we completed the successful issuance of 18.4 million shares of common stock at 650 per share raising nearly 115 million of proceeds, associated operating fees and costs. This was a well-executed overnight transaction with a file to offer discount of just 3% one of the lowest lodging REIT equity issues discounts in recent years. The offering was significantly over subscribed and we had very strong, both institutional and retail demand. The proceeds from the offering effectively matched upon approximately 50% of the combined preferred tender offer we did in December and including the accrued preferred dividends payable on June 29th. As you know, we've worked very hard to reduce our balance sheet leverage from our 14 times to under seven times today and intend to remain diligent in keeping our leverage within a reasonable range.

We also announced in our earnings press release, the declaration of the second quarter preferred dividend and going forward our quarterly preferred dividend payment is approximately 6 million or 24.2 million annually which is a reduction from the 31 million annual obligations prior to the tender offer. We've only one debt maturity this year which is the mortgage on the Hyatt Regency La Jolla. We are currently in negotiations with the existing lender for long term extension and modification of the loan terms and anticipate reaching a resolution prior to maturity in September. As you know this asset has also owned a new joint venture with GIC. We currently have zero outstanding on our $300 million line of credit, other than a 1.7 million letter of credit and have approximately 44 million of unrestricted cash at the corporate level. Following the payment of the preferred dividends at the end of June, we will have roughly 40 million drawn on line of credit which gives us ample liquidity remaining on the line of credit.

Turning to 2010 guidance, in our earnings release we also reaffirmed our 2012 RevPar and EBITDA guidance. We project full year North American same store RevPar growth to be in the range of 6 to 8% and total RevPar growth in the range of 5 to 7%. Our first quarter operating results were above the high end of this full year range and slightly ahead of our initial expectations. However, we are maintaining our guidance range knowing that the first quarter is seasonally the slowest in our portfolio and quarter over quarter comparisons become more difficult as we progress throughout the year, particularly in the second half of the year.

We reaffirmed full year comparable EBITDA to be in the range of 165 million to 180 million. Comparable FFO per share has been adjusted down by one penny to a range of $0.21 to $0.29 per share, which reflects the recent issuance of 18.4 million common shares in our overnight offering.

With that, we'd now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jeffrey Donnelly from Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Diane might have actually just touched on this in the final remarks you made concerning the outlook, but your peers seem to be getting more confident about the elect for 2012, but you guys didn’t shift your outlook even though luxury isn't one of the stronger performers. Is it just the year-end comps that are concerning you? Are you being cautious? Or is there maybe something in your forward bookings or maybe just market makeup that maybe gives you some pause?

Laurence Geller

Let me start by saying that there is nothing in our forward bookings but good news and nothing that gives us polls. There is nothing to the longer term that dissuaded us for an instant from our belief of the broad-based and sustainable recovery. Obviously Diane mentioned negative headlines which can lead quarter over quarter volatility which concerns and I don't think, I think it will be foolish when you are looking into the year ahead and in election year with gas prices having done what they have done, with headlines on the euro crises going where they are going, it will be foolish for us who had such a good history of growth so far to try and over guess the situation. Having said all of that, let me sure you understand, others maybe adjusting their guidance but we've had two years of our performance of everybody compounding growth on growth on growth so that the fact that our numbers are so good and our guidance is so high, if you look back over two years, the compounding effect is tremendous. And I think one can get myopic by looking at the mere quarter's results rather than what we have been trending for so long. So we're taking all that into our mind. I hope the comps for everybody get tougher. It’s a sign of everybody's improvement but the fact that we've been ahead of the field makes us much more cautious in not letting anybody down. We will not miss a penny of revenue but we're not going to predict something that's unpredictable.

Jeffrey Donnelly – Wells Fargo

And I guess maybe in the same vein, maybe for the current quarter, just maybe if you can clarify something for me, demand in North America just improved a little bit less than I always thought for luxury asset given the high fixed cost nature of your business. Were you guys saying that was maybe attributable to the fact that you had a better recovery and out of room spend and that was dragging down, the F&D margins the fact that you were dragging down your overall EBITDA margins in North America?

Laurence Geller

Yes, clearly. In relative terms I can understand your question, in absolute terms one has to put it in the perspective that nearly half of that revenue is coming from non-rooms, that's our model. I would like to increase our non-rooms business but that of course makes margins down, but as I have said before, you cannot take these margins to a grocery store and spend them what you can take is $6,500 per room in EBITDA which is a fantastic performance. So if margins are interesting, but you have to componentized the margins and look at our various rooms, or food and beverage etcetera. There is no question in my mind, if you adjust them for relative income, mix of income, we weigh outperform anybody's margin performance and we'll continue to do so.

Jeffrey Donnelly – Wells Fargo

Have you guys seen any shift in trends that point to me since the travel warning was modified, for instance you really haven't waivered on the rates I think that you are quoting there. It looks any improvement in occupancy should be a pretty big list to EBITDA.

Laurence Geller

Yes, we've seen some improvements in trends, some change in trends. We've marketed towards the group market a little bit more and we're seeing some relative success there, primarily the US group market and some of the Mexican market. But what we have done, is we had to open up new markets in Central, South America and we’re trying to increase the European market. I will say though when I look at some interesting measures there, our repeat customer is strong. It’s the people we have the aspirational traveler trying to get trial that are frightened by the headlines and I think an interesting statistic to me is that we've had the trend in our remaining fractional ownerships is we sort of we flashed I think about 10 positive contracts for the first quarter of the year, compared to virtually nothing in the third quarter when the headlines start to getting pretty negative. So I think we're comfortable that this is a sustaining and very slow recovery. When the headlines stop coming down, the aspirational travel will return and will just push the rate even higher.

Jeffrey Donnelly – Wells Fargo

And just the last question maybe in two pieces. Concerning the board, first, do you think they want to see a common dividend restored this year and then secondarily, do you have a sense of maybe the timing and maybe nature of the new 2013 plus comp plan they might want to roll out for management that perform might take?

Laurence Geller

I am not sure I can see the linkage yet between the comp plan and the common dividend in this case. Let me just make sure.

Jeffrey Donnelly – Wells Fargo

Well just other than it don't concern the board, that's all.

Laurence Geller

The board is focused on one thing and one thing only, increasing the cash flow and the profitability of the company. As we see that come out, the common dividend is merely a result of that. It's more intended to restore the common dividend as soon as we have adequate cash flow to do so and that's all the effort they focus on. I can't speak for every individual, but collectively there is a drive to a common dividend for the sake of the common dividend. It’s a drive to improve the operating results.

Diane Morefield

And a new comp plan was outlined in the proxy that was sent out.

Operator

And your next question comes from the line of Smedes Rose with KBW. Please proceed.

Smedes Rose – KBW

I wanted to ask you about your RevPar guidance that you've pretty much addressed this point, but just curious, for the second quarter, I know that the G8 meetings were moved out of Chicago but there are still the NATO meetings and do you think that's a positive or a negative for your Chicago hotels. And just sort of bigger picture, with your group RevPar up 5% thus far. How is that relative to where you would have liked to have seen? Are you pleased with that? It looks like it's supposed to be rate driven which is a positive. But maybe some color on the group numbers so far.

Laurence Geller

Let me start if I may, with the second part of your question pertaining to the group side of it. We are actually really pleased with the group side of it. This is as good as we could have hoped for, better the week-on-week production numbers are holding very strong. Our pace is doing well, we are burning through some of the lower rated business that remains on the books, from the previous two years, we're booking well out into '13, some into '14. But Diane mentioned one facet which I think is very interesting and I tend to use it as an interesting guideline when I see recoveries over these past. When the high end association business comes back. It normally follows the strengthening of the corporate group and the high end association business is coming back strongly and we're taking advantage of it now. Well that goes very well because that books out longer than corporate. So we are starting to get those longer term bookings from the very high and high end association business will book group rates at a higher rate than corporate business and it's further out. So I have seen nothing isn't as we anticipated or marginally better there and frankly my fingers are crossed that it just keeps going and improves because it’s the week-by-week productivity numbers combined with the overall group pace, really make for very, very interesting upside, the negative and the only negative is still that remains a shorter term window, in corporate group bookings that we would ideally like in a stabilized environment.

Diane Morefield

In our group Smedes, we are over 80% in definite room nights for our group budget for this year which was a similar level to where we were same time last year, but again as I mentioned, in my comments we're well ahead for 2013 versus where were last year for 2012.

Laurence Geller

And Smedes just to cover that one a little bit, we may be one or two percentage points lower than we were at our peak in terms of confirmed room nights on the books of this time, so its immaterial. So we are tracking our traditional things. Let me go on to the much discussed G8 and NATO summit. Chicago was bold enough to try and attract both at the same time, the G8 and the NATO summit. So therefore we had a longer period of where we knew the hotels would be busy. As you may have read the President decided to move the G8 summit to Camp David, but what it did mean is still that we have over 150 countries coming here and still most of the G8 world leaders coming here for the NATO summit anyway. So it’s a couple of days shorter or day and a half or so shorter than we'd anticipated, but what we have feared is not transpiring that we couldn’t fill it around the edges of these conferences with whom we'd be looking like a 10 day period of difficulty earlier this year. That hasn’t transpired. So I think that in a business terms, it will be fine. We will be up or down a little. But I think on an overall basis, the fact that we've got all of the delegations with their supporting publicity machines coming here, it all goes very, very well for the next couple of years in Chicago tourism and I think we'll see a significant boost in bookings over the next two years particularly from international travel which as you know is the longest day and the highest spend group and that's what we need in the city and that will just throw our properties with their locations in to a next level.

Operator

And the next question comes from the line of Bill Crow from Raymond James. Please proceed.

Bill Crow – Raymond James

I guess seven quarters up, performance creates tough comps. Not a bad problem I guess. Lawrence as you look at the acquisition landscape and I think you're probably doing that today. Do you think there are going to be more opportunities for strategic in the resort side or on the urban side?

Laurence Geller

Yes thank you we had a great quarter. Let me comment. I hope everybody gets tough comps soon because as you say, it really is a healthy thing. As far as the acquisition landscape as we see it, we see a lot of perspective competition for urban hotels, especially in the markets where we would seek them. As you can look from a geographic diversity point of view, we are thin on the east coast, particularly in the North East, New York, and Boston. There is a lot of competition in that, from various people, not merely just our competitive public company REITS. So we see that a lot. We will still look opportunistically at that but we won't chase yields that may have accelerated quickly just for the sake of geographic diversity. We are going to have good deals. There are very few people that really do resorts as well as we do because they are just complex mixed use developments. So if an when resorts would come on the market, we'd look at them very, very carefully knowing that in our quiver of arrows, we have the best asset management skills by far to maximize yield there so we could take advantage of what we see in a market. Why resorts? It can take 10 years to build a resort. If you think it's going to take five or six years just to get permits which are frankly the minimum, I would think of several resorts on the west coast that took 12 to 13 years to get permissions. The cost per key is so high, so to build these, so I think for the longer term resorts offer more sustained growth than the urban markets, very expensive. They are harder work. They may have some more volatility so it has to be paid for the in the risk return and the risk reward ratios. I think we are opportunistically urban and strategic on the resorts. I think that's probably the right way of putting it.

Bill Crow – Raymond James

Let me stay with the resort versus urban. The coastal urban markets have benefited from inbound global travel, including Miami as well. When you think about the South American travel boom. Have the resorts in California benefited to any degree from increased Chinese travel for example? Or is it something that you would have yet to be able to tap into and what are prospects for tapping into that?

Laurence Geller

Our resorts in Southern California have clearly (inaudible) have been in international travel but not from Chinese travel yet. Chinese travel would still thankfully the administration has loosened up some of the visa issues and its improving, hopefully spending more money on visa offices, that's an ongoing situation. That means though, I've listened to quite a lot of nonsense on over the deferring season on China. Let me give you the best analogy for it. Most of us can remember what happened with Japanese travel. What happens with Japanese travel, it's very straight forward. It started off at the high end travel and then corporate travel came after it. After that, organizations like Japan Travel Bureau or JTB started booking all over, west coast to east coast in resorts in that organization. When they came, they came at all levels of the market and they came in significant numbers followed by Japanese investment into the resorts. We're beginning to see the trends in Europe and in certain citizens in United States of exactly the same patent and I would say that over the next few years, it would see a widening and loosening of the travel restrictions, both put on by us and by outbound Chinese travel restrictions and I think we have great days going west to east in resorts and coastal in corporate ahead of us from the Chinese travel and once it starts, it will be a (inaudible). There are internal restrictions or domestic economic issues such as Japan had.

Bill Crow – Raymond James

One final question for me. Laurence, I think you were fairly cautious on the impact of the Olympics in London at least for the time before and after the actual event. Any update there on what you are expecting, what sort of boost or a factor of…

Laurence Geller

Two things are happening. We're expecting to thankfully some of that impact is lessening as the headlines get easier. So we're seeing some fill in. Its early days yet. It will really be more in the last minute but what we have seen is some cancellation on some of the Olympic I hope thankfully cancellation with some of the Olympic booked rooms which we can now replace and are replacing with significantly higher room rated business by the individual traveler and that pattern I expect to see going.

So I am feeling a little bit easier the venues I have actually walked the venues, the venues are terrific, the security is great, the transportation systems are going to be challenging but still work very well. So I am feeling better about it and I think we are going to have a very good year in London which is a continuation of what we have had now this year. The first results is terrific it continues there, London is a financial services market, it has very many of the same impulses that drive New York and we are seeing similar results. Our location is just terrific there and the hotel is in terrific shape so we are really benefiting from everything.

Operator

And your next question comes from the line of Joe Greff from JPMorgan. Please proceed.

Joe Greff – JPMorgan

I have a question on your group outlook, you talked earlier about seeing nice improvement in the high end association business, what are you seeing in other segments when other industries on the group side where are you seeing relative constraints?

Laurence Geller

Look, financial services has remained very strong and solid in third place, technology is in second place now and continues to do so and frankly we are looking at that growing and that obviously the medical and the pharmaceutical take the first place as they have done. All three of those trades which are really the three top markets followed by insurance. Our handling in sales very well and are all very positive. The biggest growth has been in technology related but that pretty logical given what we have seen in the IPO markets et cetera. So nothing unusual in any of the three of the financial services which we have been monitoring because we think that maybe the one that gets hurt hasn’t we have seen no diminution in it.

Operator

And your next question comes from the line of Will Marks from JMP Securities. Please proceed.

Will Marks – JMP Securities

Couple of questions, one, are you seeing any kind of union issues at all with any of your hotels?

Laurence Geller

Always but nothing new, we have always see union it uses the job of the union to make its use, its job of our hotels not to be spooked by the issues. We handle it very well, we are seeing nothing unusual activity, nothing unpredicted. We were liked by the recent non-sense in New York hotels weren’t there and I am sure the people who own hotels in New York weren’t very pleased with the way that was handled. That may give us a buying opportunity who knows but it -- there is nothing unusual in it. I will say that we have had very good relationship with them on to most part of the unions have worked well with reasonable hotel owners to minimize disruption during this recovery period as things get based on (inaudible) and as the political climate ebbs and flows, we will see more activity, much of it is following the (inaudible) commentaries coming out of Washington.

Will Marks – JMP Securities

Okay. Thank you and one other question, where do you think the or know the money is headed that’s been raised by all the U.S. Private Equity firms.

Laurence Geller

I hope a lot of it goes into their pockets but that’s just a personally expected. I have no idea, there are certainly hotel buyers, there are certainly we watch I think if you really scratch the surface of the recent trades you will see a lot of private equity buyers in there and they are sitting on the sidelines, credit is still a problem but I look forward them as much more active participants, remember this is not unusual in cycle public companies tend to solve the problem as credit losses apart. The private equity comes in, on the coastal markets I think you will see foreign money coming in as well. So it's going to be in valuation terms I think there is going to be significant value high value transactions over the next 24 months.

Operator

And your next question comes from the line of Enrique Torres from Green Street Advisors. Please proceed.

Enrique Torres – Green Street Advisors

You brought some kind of the La Jolla (ph) asset and the depth there. I will see that assets seems to be kind of weighing down your overall portfolio metrics, is that an asset you would consider selling depending on how and how well the comps reflect kind of pricing for the assets in downward in terms of marketing.

Laurence Geller

The La Jolla (ph) has suffered from two things, supply in its own market but more really from supply in the San Diego market which because of the great of the supply inputs there has priced to go against, has priced down to go against the La Jolla (ph) as an area. So we have more supply in there terms of, this is a good asset, great brand, sitting in a great location.

Its underperformance is of concern to us and it will -- we will see hard earned improvements in it but it will be hard earned, I think that this is an issue that isn’t just in our hands to decide, this is a partnership issue. We have had a partnership with GIC for decade and a half and together we will make these decisions. I will say it's a pleasure to be working with GIC MetLife who is the lender and hired in a very collaborative manner to make sure that nothing is triggered as precipitated or is value losing. We will maximize the value of this property one way or another.

Enrique Torres – Green Street Advisors

Okay that’s helpful and then a second question, obviously your equity offering was very well received, how willing are you guys, are you guys considering put in place an ATM after some of the restrictions from having the Pref paid back kind of go away.

Laurence Geller

You know our Board is a very sophisticated Board and spends a lot of lot time thinking about capital raising, I think that as and when we see the needs for capital raising it's our general policy, long term policy to try to keep tools, leverage neutral stand as over the longer term. I think the Board will do whatever it can at the right time. I don’t think there is anything it would be inappropriate for us to discussion internal Board conversations, but this is sophisticated Board that elevates every single capital raising opportunity.

Operator

And your next question comes from the line of Tim Wengerd from Deutsche Bank. Please proceed.

Tim Wengerd – Deutsche Bank

On group spend outside the room, are you seeing any data points that give you an indication that group spend outside the room is shifted and are getting away from sort of spending the minimum.

Laurence Geller

Yes indeed, it's consistently it's remained relatively consistent year-on-year but what we are seeing is more upselling in terms of its group booking pace, what is happening closer to the time we are seeing more upsetting and more willingness to consume incremental products as the meeting planner gets close to the event time. So the answer is bi-fabricated question. It's holding very steady in the initial booking phase and when they go definite it's when they get close that we are seeing the willingness to spend and frankly part of that is dictated by current headlines.

Tim Wengerd – Deutsche Bank

And do you think that trend you think you will see improvements in that through ’12, even though I realize comps get sort of get harder through the year but still you would expect an increase in the outside the room spent?

Laurence Geller

I would expect in as consistent with previous recoveries to see a consistent gradual increase in spend, remember two or three the laws of change for spousal travel regulations have changed for spousal travel also we have two things, we have shortening of events. If I have had my brothers I would be extending the group stayed by half a day or a day first and then pushing the rest of it because once you get a group in that’s a happy group, they will spend a lot more incrementally whether it's direct spend or whether they hang out in the bar, the golf course or in the spa. Happy group is there and the longer they spend they stay the more we are going to get them to spend and frankly we are looking at making sure that we relieve every guest as pen as they pocket in their pockets if we can.

Tim Wengerd – Deutsche Bank

And then more on the group side, you know at this point do you have a meaningful amount of bookings for ’13 I guess like it's percent of your overall amounts of room nights that you spent for ’13.

Laurence Geller

That’s a good question. So let me make sure we are ahead of where we expected to be for 2013 and we are seeing very, very good booking production, however in the corporate side it is still shorter than we hope it will go. So it is where we expected it to be, it is better than we expected it's not where we wanted to be and it really it is the lengthening of that booking cycle that is the next leading indicator that we are watching.

Tim Wengerd – Deutsche Bank

Okay and then I think you will also mentioned that rates were 2% for what you have booked for ’13, is that 2% does that compare improvements in 2013 rates booked at the end of March compared to 2012 or booked at the end of March 11.

Laurence Geller

Yes it does.

Operator

And your next question comes from the line of Ethan Steinberg with Friess and Associates. Please proceed.

Ethan Steinberg – Friess and Associates

And I jumped on late so sorry if I missed this, but yes given the run rate in the quarter and then the maintained guidance I just want to understand a little better are you seeing something that does temper that run rate because you are obviously running above what you had expected or was any business pulled into the quarter that is coming out of future quarters.

Laurence Geller

The question was more or less asked previously but I will say there is nothing here but there is nothing here that is unusual, there is nothing that causes us to be more cautious than we were. There is nothing that goes against the long term trends and let me restate, our long term trends have been and are looking to remain very healthy. It is simply us been cautious against the impact of an event or something in any one quarter that could have some volatility whether it be a spiking gas prices, a strike in an airline, American been grounded. European is used, could be anything that could have a short term quarterly blip that could affect your annual guidance.

So long term nothing at all, it's just been cautious here is been the volatile time and who knows what happens in the election year.

Ethan Steinberg – Friess and Associates

Sure okay, so just I guess an increased degree of conservatism into the next three quarters relative to three months ago?

Diane Morefield

As we mentioned the comps get much tougher as the quarters go because we had such high growth rate in the last half of last year.

Laurence Geller

And I am delighted with the tough consequence we are still living with them, no there is nothing there this is just been cautious. We have had the high-end properties can’t have a volatility because there are so many different aspects of their income and so many different segments of business, just being cautious here and I think that’s what…

Ethan Steinberg – Friess and Associates

Okay all right that’s what I taught and the other question I had is does it, does it make sense now that your current on the preferreds or will be after this quarter, are those higher or lower cost to capital than you guys could probably access the capital markets and where I am going with that does it make sense to just get rid of them and replace them with a different form of capital.

Diane Morefield

Well I mean it's still a very attractive layer of capital on our balance sheet given its perpetual, there is no maturity and between the three series they are either 8 in a quarter and 8.5. So, we see ourselves keeping some level of preferred, wouldn’t in our opinion at this point make sense to take it out at par, if there was an opportunity or window again to do at a discount like we did in December we would certainly entertain that. But really don’t feel we need to take it out at par given again it's a perpetual form of capital that’s still at a pretty attractive rate and the structure and terms are very positive compared to the types of terms that get structured in current preferred deal.

Operator

I would now like to turn the call over to Laurence Geller for closing remarks.

Laurence Geller

Thank you for your patience. I know this has been a heck of a busy earning season. We have good news, we see good news ahead and we look forward to speaking to you in another quarter.

Diane Morefield

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

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