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Executives

Jon Bortz - President and CEO

Hans Weger - CFO

Analysts

Charles Scholes - JPMorgan

William Truelove - UBS

Bill Crow - Raymond James

David Loeb - Baird

Jeff Donnelly - Wachovia

Michael Salinsky - RBC Capital Markets

Joshua Attie - Citigroup

Dennis Forst - Keybanc

Chris Woronka - Deutsche Bank

Jeff Donnelly - Wachovia Capital Markets

Stephanie Krewson - Janney Montgomery Scott

LaSalle Hotel Properties (LHO) Q4 2007 Earnings Call February 22, 2007 10:00 AM ET

Operator

Good day everyone and welcome to the LaSalle Hotel Properties fourth quarter 2007 conference call. Just as a reminder today's call has been recorded. At this time I would like to turn the conference over Mr. Jon Bortz, President and Chief Executive Officer. Please go ahead, Sir.

Jon Bortz

Thank you, Christina. Good morning everyone and welcome to the fourth quarter and yearend 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 fourth quarter and full year, Hans and I will discuss the company's activities in the quarter and the year, the performance of our assets and the trends are affecting them, the status of our ongoing reinvestment program, and our outlook for 2008 on both the macro basis for the lodging industry and for LaSalle Hotel Properties. Hans?

Hans Weger

Thanks, Jon. Good morning. Before we begin, first I would like to 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 over 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 2007, quarterly reports and its other reports filed with the SEC. The company disclaims any obligation or undertaking to update or revise any forward-looking statements.

Our SEC reports as well as our press releases are available at our website www.lasallehotels.com. Most recent 8-K and yesterday's press release include reconciliation of non-GAAP measures such as funds from operations to the most comparable GAAP measures.

2007 funds from operations or FFO grows to $123.4 million from $114.2 million in the prior year. FFO per diluted share increased $3.07 in 2007 from $2.87 per diluted share in 2006. 2007 FFO includes the $3.9 million non cash expenses associated with the Series A Preferred redemption. FFO for 2007 would have been $127.3 million or $3.17 per diluted share excluding this expense.

EBITDA improved to $237.8 million from $225.2 million in the prior year period. EBITDA for 2007 includes in net gain of $30.4 million with the sale of the LaGuardia Marriott and for the 2006 include the gain of $38.4 million from the sale of the Chicago Marriott Downtown. Excluding these gains, EBITDA increased to $207.4 million in 2007 versus $186.8 million in 2006. RevPAR for the total portfolio increased 5.4% in 2007 to $148.58. The RevPAR gain was primarily result of the increase in ADR a 4.7% to $200.78 with occupancy improving 7% to 74%.

Our hotel portfolio generated $217.6 million of EBITDA in 2007, which is up 8.3% over prior year EBITDA of $200.9 million. Portfolio-wide EBITDA margin was 31.7% an increase of 118 basis points.

FFO rose to $29.8 million for the fourth quarter 2007 from $26.2 million for the fourth quarter 2006. FFO per diluted share was $0.74 versus $0.65 for the prior year's quarter, an increase of 13.8%. EBITDA increased to $48.5 million in the fourth quarter 2007 from $45.7 million in the same quarter of 2006. RevPAR for the fourth quarter 2007 rose 8.1%. ADR increased 5.6% to $204.20. Occupancy increased 2.4% to 69.2%.

Fourth quarter portfolio-wide hotel EBITDA was $52.3 million versus $45.9 million in the prior year period, an increase of 13.8%. EBITDA margins increased 198 basis points from the prior year quarter to 30.8%.

As of the end of the fourth quarter 2007, the company had total outstanding debt of $875.2 million. The company's credit facility had an outstanding balance of $56 million. Interest expense for the year was $44.9 million excluding amortized financing expenses resulting in the trailing 12 month corporate EBITDA as defined in the company's senior unsecured credit facility to interest coverage ratio of 4.3 times.

For the year, the company's weighted average interest rate was 5.2%. As of December 31, 2007, total debt to trailing 12-month corporate EBITDA equaled 4.2 times, one of the lowest debt EBITDA ratios in the industry. At the end of the year, the company also had $26.1 million of unrestricted cash and cash equivalent on its balance sheet and $11.9 million of restricted cash.

In January of 2008, the company announced its monthly dividend of $0.17 per share of its common shares of beneficial interest for each of the three months of January, February and March 2008. This represent a 7% annualized yield based on yesterday's closing price.

Also in January, we announced an increase in our senior unsecured credit facility to $450 million. The additional $150 million of commitments came from six banks that had previous commitments and one new bank. Terms and conditions of the Amended and Restated Senior Unsecured Credit Agreement were not modified. The ability to increase our borrowing capacity without a change in the terms in the midst of this difficult credit environment is a testament to our conservative balance sheet strategy and the strong commitment from our bank group.

The company continues to operate with the conservative flexible balance sheet. We've $14.7 million of debt, which are in 2008 and $126.6 of debt in 2009, excluding $20 million of debt that matures in 2008, which we have three one year extension options. With only $75 million currently outstanding on our $450 million senior unsecured credit facility, we believe we are well position to protect shareholder value, if the economy enters the recession or it take advantage of acquisition opportunity as they arise.

I would now like to turn the call over to Jon to discuss the recently completed quarter as well as our outlook for 2008. Jon?

Jon Bortz

Thanks, Hans. In the fourth quarter the economy continue to struggle under the weight of the housing recession and worsening credit market turmoil. Nonetheless, for the second quarter in a row the lodging industry experienced modest, but healthy demand growth that led to only a very minor decline of 0.2% in industry-wide occupancy on a year-over-year basis.

Both business travel and leisure travel industry-wide saw modest growth in the quarter, as compared to the prior year. Overall industry demand rose 1.3% in the fourth quarter compared to 2006. We believe demand in October benefited from the Jewish holidays shift that negatively impacted September. Notably, industry-wide demand did weaken through the quarter from 3.2% in October to 0.9% in November to a negative 0.8% in December.

As a result of this demand growth and high industry wide occupancy, pricing power remained generally strong across the industry. For LaSalle Hotel Properties, we saw slightly better levels of both demand growth and pricing power in the fourth quarter. As a result, our performance came in better than our expectations and substantially better than the industry. In general, both group and transient were slightly stronger than expected as with average rate. Washington D.C., Boston and West L.A. were stronger than forecasted and Chicago, Seattle and San Diego were slightly weaker than forecast.

Outperformance of the industry came primarily from our hotels that were not impacted by redevelopments, though some completed redevelopments also contributed to the outperformance in the quarter. Overall ongoing redevelopments continue to have a negative impact on the portfolio in the quarter. In addition, food and beverage revenues also came in slightly better than projected in the fourth quarter. For the year, industry-wide demand improved in the second half of the year and increased a modest 1.2% for the full year. That was just below the industry-wide supply growth of 1.4% for 2007.

Pricing power remained strong throughout the year. For LaSalle, we saw healthy demand throughout the year, but were negatively impacted by our extensive program of major redevelopments, repositionings and rebrandings, as discussed in detail in our prior quarterly results. RevPAR portfolio-wide without regard for rooms out of service was 8.1% in the quarter and 5.4% for the year.

In the fourth quarter, there were approximately 23,000 room nights unavailable due to redevelopment projects, which were estimated to have reduced total revenues by $3.1 million, room revenue by $1.4 million and EBITDA by $1.3 million. For the year, there were approximately 91,000 room nights out of service, negatively impacting room revenues by an estimated $9.2 million or over 200 basis points of RevPAR, total revenues by $14.5 million and EBITDA by $8 million.

On a monthly basis, for our portfolio as a whole, RevPAR rose 8.6% in October, 8.9% in November and 5.9% in December. The fourth quarter was the only quarter of the year, when our room nights from group business were greater than the prior year.

Our urban hotels again delivered the best RevPAR growth in the quarter with healthy demand growth leading to a 2.7% occupancy increase and strong pricing power delivering an 8.2% ADR increase, resulting in RevPAR at our urban hotels climbing 11.1%. RevPAR our resorts grew 6.4%, with ADR up slightly more than occupancy.

Our convention properties grew RevPAR 5.8% in the quarter with 70% of it coming from rate growth. For the year, urban led the way up 6.2% with 5.8% from ADR and 0.3% from occupancy. Our convention hotels delivered a 5.3% RevPAR increase and in our resorts our RevPAR increased 4.5%.

In the fourth quarter West L.A. and Washington D.C. were our strongest markets. Despite the writer' strike, our West L.A. Hotels led our markets by posting a 20.6% RevPAR increase with ADR up 11.7% and occupancy up 8%.

RevPAR our Washington D.C. properties climbed a very strong 19.1% with ADR up 10.6% and occupancy up 7.7%. Boston with RevPAR up 16.2% was also extremely strong. Our weakest markets in the quarter were Chicago with RevPAR declining 4.9% due to a 9.5% decline in occupancy and San Diego with RevPAR up 3.7%, which was all occupancy driven due to significant rate discounting in the market.

For the year West L.A. was by far our strongest market with RevPAR climbing 13.9%for the year, benefiting from the overall strength and demand and aided by the temporary closing of two competitive hotels for redevelopment. Our hotels in Washington D.C. rebounded from a very soft 2006 and out performed the CBD market with an 11.1% increase in RevPAR with occupancy up 6.2% due to an active congregational calendar and a nice recovery in leisure travel.

Boston also benefited in 2007 from very strong demand growth, demand rose 4.9% in the CBD airport market for the year, absorbing the 5.1% increase in supply extremely well. For the year, excluding Seattle which was down due to the renovation impact of the Alexis. Our weakest major market was Chicago, major renovations related to the redevelopment of the Hotel Sax and a soft convention calendar in 2007, combined with weak group pace at our two Chicago hotels led to RevPAR decline of 2.3% for the year.

Occupancy was down 7.5% and rate was up 5.7%. Both properties are in much better shape going in to 2008 with the Hotel Sax renovation complete including the addition of a ballroom and meeting floor, and a significantly more favorable group pace at both hotels. Despite the favorable prospects, this year's first quarter in Chicago will be negatively impacted by a weaker convention calendar than the first quarter of 2007, though Chicago has a favorable convention calendar for the year.

Our best performing properties for the quarter, as measured by RevPAR growth were the Viking in Newport, benefiting from it's repositioning the Onyx in Boston, Le Montrose and Le Parc in West L.A., the Topaz, Helix, Rouge and Hilton Old Town in D.C. and the hotel Deca in Seattle. All of these hotels have RevPAR growth in excess of 20%.

In total, 17 properties in the quarter achieved double-digit RevPAR growth. For the year RevPAR growth was led by the Viking and Le Montrose both benefiting from major repositionings and the George, Hilton Old Town and Le Parc, which all benefited from recent refurbishments.

Our weakest performers were materially impacted by major redevelopments. The Alexis with RevPAR down 24% due to an occupancy decline of 25%, and the Hotel Sax with occupancy down 17% leading to a RevPAR decline of 9%.Both of these properties should see substantial rebounds in 2008 due to the completed redevelopments.

I would like to take a minute to comment on the top line progress some of our recently repositioned hotels that I haven't 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 from physical completion. Overall, the customer response has been extremely favorable, and it shows in the performance of the hotels.

Of those hotels, Chaminade resort benefited from the first phase rooms renovation completed in 2006, as evidenced by its 11.7% RevPAR increase in 2007 and 9.7% improvement in competitive RevPAR penetration. Sheraton Bloomington continues to ramp from its redevelopment and flag change, delivering a 9.9% increase for the year and another 200 basis point increase in RevPAR penetration.

The Onyx grew almost 15% for the year likely nearing its full market penetration as its RevPAR penetration increased 7%. And Hotel Deca continues to ramp up from its redevelopment and conversion from the Best Western flag with RevPAR climbing 12% in 2007 and penetration growing another 5.5%.

Portfolio-wide non-room revenues for the quarter rose 4.1% with food and beverage revenues increasing by 5.8%, total revenues portfolio-wide rose 6.5% in the quarter. For the year, total revenues rose 4.3% with food and beverage revenues up 2.3% reflecting the significant disruption from the large number of redevelopment projects as well as a 2.7% decline in group rooms.

On the cost side, expenses were very well controlled in the quarter. Total hotel expenses portfolio-wide were limited to a 3.5% increase from last year. We are particularly pleased with this performance given the 2.4% increase in occupancy in the quarter.

Departmental expenses, despite as occupancy increase, were extremely well controlled increasing only 2%. Undistributed expenses rose 7.1% with the largest increase coming from a 22% increase in incentive management fees. Our investment in energy efficiency capital projects and implementation of best energy operating practices paid off substantially in the quarter with energy cost declining 2.9% from last year. Fixed expenses declined 2.7% benefiting from our initiatives and insurance, when property and casualty expense declining 22% and general liability declining 34.2%.

For the year total portfolio-wide expenses were limited to a 2.5% increase, even with an increase in occupancy of 0.7%. Departmental expenses were limited to 1.3% increase due to numerous portfolio-wide expenses saving initiatives, aggressive individual property asset management, best practice initiatives, and a terrific cooperative partnership with our many operators. Undistributed expenses were limited to a 3.5% rise, including only a 0.2% increase in energy cost.

Fixed expenses increased by 5.7% due primarily to a 13.6% increase in real estate taxes. Properties outside of California continued to be reassessed at higher valuations driving significantly higher property tax payments. We have appealed a number of these reassessments, though we expect double-digit increases to continue into 2008.

In the fourth quarter, portfolio-wide hotel EBITDA grew 13.8% on a 6.5% increase in total revenues, resulting in an EBITDA margin increase of 198 basis points in a flow through to EBITDA of 2.1 times the revenue growth.

For the year, portfolio-wide EBITDA grew 8.3% on a total revenue increase of 4.3% leading to an EBITDA margin gain of a 118 basis points and an impressive flow through of 1.9 times the revenue growth. We are very proud of this healthy margin improvement in flow through, given our relatively small 4.3% total revenue gain and the large amount of renovation impact during the year.

Turning to our capital initiatives, we continue to execute our strategy of redeveloping and repositioning our 2005 and 2006 acquisitions, as well as a few of our other hotels in order to drive significant increases in cash flows and long-term values. As planned, we commence the number of projects in the fourth quarter, representing the bulk of what remains of our redevelopment and repositioning initiatives, including the following: the renovation, expansion and reconfiguration of our two large ballrooms and meeting space on two floors at the Westin Copley in Boston. This $8 million project is on track to be completed by the end of this month.

At the Holiday Inn on the Hill, we commenced our $15 million repositioning, renovation and flag change, which includes rooms refurbishment, lobby ballroom and meeting space renovation and reconfiguration, rebuilding and reconcepting the restaurant to position it comparably to the upscaled hotel, and replacing the window HVAC units with a new energy efficient four-pipe HVAC system. The redevelopment should be substantially complete in April, with the Holiday Inn flag coming down April 1, and the property renamed the Liaison Capitol Hill, at that time.

Later this year, we also expect to redevelop the hotel's rooftop, which currently includes a pool by adding poolside meeting and function space and a bar.

In mid November, we closed Chaminade Resort to renovate the main building, including the lobby, entry, meeting rooms, ballroom, the two restaurants and the bar. The resort reopened on January 31st, with the redevelopment substantially complete.

In December, we commenced the renovation of the remaining 392 rooms at Westin Michigan Avenue including installation of a new four-pipe HVAC system. The initial 359 rooms were completed earlier in 2007. The current phase investment is estimated to $12 million. The project is on track to be complete in early April.

At the Indianapolis Marriott, we commenced the soft goods refurbishment of all 615 guest rooms, including creating seven new rooms, as well as refurbishing the two ballrooms and all meeting and pre-function space. This $8 million project is on schedule to be completed by the end of this month.

At the Hilton San Diego Resort, the second phase of our redevelopment commenced late last year. This 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 the end of April, with the restaurant being complete in mid May.

In August, we commenced the redevelopment of the Holiday Inn Wall Street District Hotel. The hotel was renamed Guildhall on December 1, and the $10 million repositioning project is expected to be complete by the end of March. The new Todd English restaurant will not open until later this year.

In addition, we are on track to complete the redevelopment and conversion of the former Holiday Inn Thomas Circle hotel in D.C. into the Donovan House with opening scheduled in late March. Total project costs are forecasted at $37 million. At the Hotel Sax, we commenced the $9 million construction of a new ballroom, meeting floor and banquet kitchen in previously vacant surplus retail space on the fourth floor of the hotel in the third quarter. This state-of-the-art, one of a kind meeting in catering venue was completed in mid December.

In total, capital investments in 2007 came in at a $128.4 million, at the upper end of our year long $120 million to $130 million range. $90 million relates to major renovations, repositionings and rebrandings for which we expect to earn significant returns as they ramp the stabilization over the next three to four years. As these projects have continued into 2008, we anticipate having 46,000 room nights out of service in the first quarter approximately 12,000 more room night out of service than previously forecasted, combined with the impact of the ballrooms out of service at the Westin Copley, Holiday Inn on the Hill, Indianapolis Marriott, and the major public areas at Hilton San Diego Resort. Total revenue is forecasted to be reduced by $5.6 million and EBITDA reduced by $3.1 million.

This compares to 47,000 room nights out in the first quarter of 2007 with only one ballroom out. None of these numbers include the Donovan House, which has been closed since February 2006. There are no major projects currently planned beyond April, and therefore, no expectation for any material disruption throughout the portfolio for later in the year.

For 2008, we are forecasting total capital investments of $80 million to $90 million with just under $50 million related to the previously described return-on-investment, redevelopment and repositioning project.

Now, let me turn to our outlook for 2008. Forecasting the performance of the lodging industry and our own performance this year is particularly challenging at this point, probably the most difficult since early 2002. This is due entirely to the difficulties of forecasting the path of the economy. Will the economy continue its slowing trend and tip into a milled or even severe recession? Will the consumer-led slowdowns spread more broadly throughout the business community? Will the credit crunch continue to worsen and spread? Stifling lending, and the ability of businesses to obtain capital to grow and invest? Obviously, these are difficult questions to answer. And there are many differing opinions.

What we do know is that the current economic trends are negative. We also know that the fed began lowering rates in September, and got much more aggressive in January. But rate cutes take time to work, and so far, they've not relieved the crunch in the credit markets. In fact just the reverse has happened. Lending has become even more constrained. What we also know is that travel and lodging trends generally lag the trends in the overall economy. So we start with a significant amount of caution and concern about 2008.

When we look at the four leading economic indictors that we utilize to forecast lodging demand, three of the four employment growth, corporate profits, and consumer confidence are all on negative trends and have been for at least a couple of quarters. The only positive indictor has been airline enplanements, which is more of a lagging indictor like lodging. It is nonetheless confirmed that people were still traveling in the fourth quarter. However, it appears that enplanement growth slowed significantly in January.

So, the overall industry statistics have not yet been published. Despite the slowing economy, and the lack of significant clarity, a lodging industry begins the year with pretty good fundamentals. Supply growth is continued to below the historical average, and the credit crunch has already begun to significantly slow new construction starts particularly projects in urban markets, where the developments and financing requirements tend to be larger.

The industry's overall occupancy levels are about the same level as they were when they peaked just before the last recession. But supply growth in the two years prior to last recession was substantially higher than the supply added in 2006 and 2007.

In our seven major urban markets, occupancy levels are the same or higher in all but one, Boston. And all are running in the mid 70s or better with New York in the mid 80s. When we look at the Smith Travel data for the industry in the fourth quarter and year-to-date, what seems clear to us is that demand growth slowed throughout the fourth quarter, went negative in December, was slightly up in January, and slightly down so far in February.

In addition, we believe it also shows that leisure transient has been impacted the most so far by the economy, not surprising, given the economic pressures on the consumer. And in the last several weeks, we've also seen some softness in weekday transient and short-term group.

When we look at our own results, we did see some leisure softness towards the end of last year, and into this year more noticeably in San Diego though the weather has been unusually bad there.

In general, we are seeing more sensitivity to prices, more hotel discounting and a greater pursuit of discounted rates by customers. But when we examine our group pace data on the other hand, we are encouraged by what we see for 2008. As of February 1st, group pace is up 5.3% in room nights, and 4.3% in ADR for a 9.6% improvement over same time last year. We currently have 70% of our targeted group room nights on the books.

Room night pace is up in every quarter but the first quarter which is being negatively impacted by one closed hotel, three properties with ballrooms out of service during the quarter, the Hilton Resort with the major public area renovation, and a calendar shift of Easter to March this year from April last year. Also convention calendars for Q1 are not particularly favorable for D.C. and Chicago, although both look favorable for conventions for the full year.

So, where does that leave us? Negative economic trends, with a very cloudy economic future, and good industry fundamentals but weakening trends. As a result, we have very little comfort with any forecast, so we are providing our outlook with major qualifications and a wider range than recent practice. We believe that given what we now know it's reasonable to believe that industry demand will continue to weaken, and be somewhere between no growth and plus 1% for the year.

We also believe it's reasonable to predict, that ADR will grow somewhere between 2% and 4%. For the industry, we are currently forecasting supply to increase between 2.2% and 2.5% with supply in 2008 unaffected by the recent economic trends and credit crunch, since construction for the supply has already commenced. That leaves us with a 2008 outlook for RevPAR for the industry a flat to 3% growth. We also expect the urban sector excluding New York, which accounts for 23% of urban room revenues according to Smith Travel to perform inline with the industry.

For our portfolio, given the industry range, we believe we'll outperform by a couple of 100 basis points meaning a range for RevPAR growth of 2% to 5%. If the economy and industry do better than our lodging outlook, then we would expect to do better than these numbers, and if the economy and lodging industry do worse then we would expect to do worse than these numbers.

The 200 basis points of expected out-performance is forecasted to come primarily from our properties that have been redeveloped and repositioned in the last couple of years, including the properties being completed in the first four months of 2008. For the first quarter, we are currently forecasting that RevPAR will be between minus 1% and plus 1% compared to Q1 2007. This takes into account an estimated 4.5 point negative impact from our redevelopments in Q1 and further negative impact from the March holiday shift and the previously described unfavorable Q1 convention calendars.

With the ratcheting down of our revenue growth expectations for 2008, as a result of the dramatic slowdown in the economy, we have already begun to plan and implement cost containment programs at many of our properties. Should trends continue to worsen? We are fully prepared to initiate more stringent cost saving measures, throughout our portfolio. Our experience from 2001 and post 9/11 and our extensive best practice program gives us the knowledge and confidence to know what can be done and how to get it done.

Currently, based upon the RevPAR outlook provided, we believe total expenses throughout the portfolio can be limited to a 3% to 4% range, and may be slightly lower at the bottom of the forecasted RevPAR range. This is in spite of an expected double-digit increase in total real estate taxes. Given these RevPAR and expense assumptions, the change in our EBITDA margins in 2008 is likely to range between minus 50 basis points and plus 50 basis points. Based on these assumptions, we are currently forecasting EBITDA for the year in a range of $204.5 million to $217.4 million and FFO per diluted share in a range of $3.13 to $3.43. A quarterly breakdown of both EBITDA and FFO per diluted share is included in our press release from yesterday afternoon.

To conclude, 2008 will certainly be an interesting year with an economic outlook particularly unclear at this time. Nevertheless, we are just two months away from completing the last of our major redevelopments and repositionings with significant upside to come over the next three to four years. Our properties are in excellent competitive condition, the company is in terrific financial shape, with a low overall leverage level. And we expect to operate our properties with a sharp focus on financial prudence, cost containment, and aggressive marketing and sales. Our team is well prepared for whatever the economic environment throws our way.

That completes our remarks. Hans and I would be very happy to answer any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question will come from Charles Scholes with JPMorgan.

Charles Scholes - JPMorgan

Hi, good morning. A number of your competitors have recently announced a potential share repurchases with the funds coming from either accessing the balance sheet or selling non-core assets. What are your thoughts on that strategy for LaSalle?

Hans Weger

Well, we regularly review that issue with our Board. I would tell you that philosophically, our view is that for REIT, that's utilizing its excess cash flow currently to fund its growth, it's redevelopment and repositioning projects and company that expects to grow in the long-term with the need to go back to the capital markets, on a regular basis, that we philosophically our view is that stock repurchase plan would need to be extremely compelling and we would need to have a relatively clear view of the future from an economic standpoint because were a highly cyclical business that as we saw back in 2001 even pre 9/11, where balance sheets can be extremely stressed by a significant or sever economic downturn.

So as you know, we've not announced any stock buyback program at this time.

Charles Scholes - JPMorgan

Okay. Thank you. One more question, could I just get a little more color on your 2008 quarterly tax benefit or expense amount expectations.

Hans Weger

Well, as we talked about before it's a very difficult calculation because it all depends on which properties perform how and how the various breakdown of revenues coming from the food and beverage and the room side. And so I'd expect that 2008 would not look too dissimilar in terms of the spreads and 2007, where you have a tax benefit in the first quarter, tax expense in the second and third quarter and then a beneficial again in the fourth quarter.

Charles Scholes - JPMorgan

Thank you.

Operator

And our next question will come from William Truelove with UBS.

William Truelove - UBS

Hi guys, good quarter, actually. I have two questions. Can you provide what you think a normalized quarterly breakdown in EBITDA would look like post the kind of renovation disruption? And the second question is, of the ones completed, you talked about a lot of double-digit RevPAR. How are those how those renovated hotels that have been already completed going to your budget. It sounds like they maybe ahead of budget, but that kind of RevPAR growth? Thanks.

Jon Bortz

Hey Will, I'm not sure I understood your first question.

William Truelove - UBS

Because of the impact of renovations your quarterly breakdown for 2007 maybe different than if you didn't have the renovation. So I'm thinking about quarterly breakdowns of EBITDA per se 2009, 2010 once we done with all the renovation activity?

Jon Bortz

So, are you talking about EBITDA on breakdown by quarter on a percentage basis?

William Truelove - UBS

Yeah, by a percentage basis, thanks.

Jon Bortz

I think that's a tough question to forecast '09 and 2010 particularly considering what were, how unclear things are for 2008, but I think what we try to do in '07 and we did again here in the first quarter of '08 was to be specific as to what our forecast were for last revenues and RevPAR and EBITDA in each quarter. And I guess I'd guide you to go back and utilize those numbers to rebuild the more normalize levels and then take into account our forecast for '08 for overall RevPAR and EBITDA growth with our first quarter forecast, which also has its impact from displacement.

William Truelove - UBS

Okay.

Jon Bortz

And Will, what was your second question, I'm sorry?

William Truelove - UBS

How are the renovations that have been completed performing relative to your budget you talked a lot about double-digit RevPAR growth, how is that going and are they ahead of schedule or the way you envisioned it what?

Jon Bortz

Well, it's a mixed bag. They performed well. We had -- most of the properties have performed inline with budget and then our outperformance in the fourth quarter, as an example, really came mostly from assets in Boston, D.C. -- in the Boston and D.C. markets and West Hollywood, I'm sorry. And so I'd say, properties like Le Montrose and Viking well outperforming what our budgets were. Property like Lansdowne, as discussed in our prior call, we had some disappointments in prior quarters. RevPAR was up 9.6% in the fourth quarter for Lansdowne and we have a terrific group pace benefit going into 2008.

The Sheridan is probably a disappointment for us. We've shaken up a team again there. We did continue to increase our penetration there, as I mentioned earlier, but not at the pace that we would have hoped. Some other projects like the Onyx, which was not a redevelopment, but was a new hotel when we bought it, had a terrific year, well more than forecast, as did all the properties that we have in Boston.

The hotel Sax is been a little bit of a disappointment in the fourth quarter, and what we've learned is, we really needed that meeting space open, critical to building occupancy in the off season and with its completion in December. We should see a much better year. So, it's a mixed bag, I'd say by and large, in total, as we forecasted it were a little bit better, but with laggards that we are working very hard to improve performance on.

William Truelove - UBS

Alright, thank you so much.

Operator

And our next question will come from Raymond James, Bill Crow.

Bill Crow - Raymond James

Hey, good morning, guys. A couple of questions, Jon the 2% to 5% forecast for RevPAR growth for this year, what would that be, if you had no disruption activity in the first and second quarter?

Jon Bortz

It's probably about 70 to 80 basis points. It would be 70 to 80 basis points higher with no disruption at all.

Bill Crow - Raymond James

Okay. So, 3 to 6 how does that compared to what you were thinking last quarter, you come down what 200, 300 basis points or more than that?

Jon Bortz

Probably a couple of hundred basis points, Bill.

Bill Crow - Raymond James

Okay. You talked about supply growth for the industry between 2.2 to 2.5, which sounds a little bit higher than maybe some of the industry forecasters. Two questions I guess, how do you look at it from your markets in particular, and which markets do you kind of fear from a supply perspective and second of all how do you see that translating in the 2009 are you starting not here in the development game, but are you starting hear more evidence that projects are get canceled.

Jon Bortz

Let me address that the latter part of the question first. Canceled, no, properties unable to find financing? Yes, almost all of them. Almost all major construction projects in the cities that were aware of that did not have financing two months ago have yet to find financing today. And we don't see that getting easier, we don't see a resolution to that in the next six months, we think given the continuing tightening in the credit markets, the continuing problems of the banks with their bloated balance sheets and the non-functioning nature of the CMVS markets, even for good properties, that financing is not likely to be available very much for any of these projects.

In addition, a number of these projects were tied to residential components and of course those markets are significantly worse than there were even three months ago. So, we do believe that the credit markets, the softening operating fundamentals will significantly limit starts in 2008, which would lead to significant reductions in supply, in the urban markets in particular in 2009 and 2010. So, while we hear that limited service and smaller suburban projects are continuing to find financing, although we believe just intuitively if that has to slow, the urban markets are going to really feel the pinch of what's going on.

As it relates to the markets that we are focused on, 2008 is going to see substantial supply growth in most of them. Boston, we are forecasting about 5.5% supply growth, again these are all projects that were completed at the end of last year or are being completed this year. In Chicago, about 4% supply growth in the CBD. New York, almost 5% supply growth, primarily limited service projects half of which McSam in the marketplace.

San Diego between 4.5% and 5%, Seattle 5%. The markets with the least new supply would be D.C. at a little over 1%, which is just hotels actually coming back in service that were closed for redevelopment and in Hollywood, Beverly Hills Market, West L.A., a little over 2% supply growth.

Bill Crow - Raymond James

All right and one housekeeping question. Hans, where do you put capitalized interest in the first quarter?

Hans Weger

In terms of…?

Bill Crow - Raymond James

Your estimate for capitalized interest in the first quarter given that, you still have the Donovan House closed?

Hans Weger

Hold on one second, Bill. It should be [12,000] million bucks.

Bill Crow - Raymond James

Okay. Thank you very much.

Operator

And our next question comes from David Loeb with Baird

David Loeb - Baird

Hi, I wanted to drill into the guidance particularly about the fourth quarter of 2008, you are calling for a down quarter and both at the high and the low end of your guidance and yet you are going to have the Donovan House open all of the projects that were underway in the fourth quarter of '07 done, what makes you so downbeat about the fourth quarter prospects?

Jon Bortz

When do you say a down quarter, I'm not sure what you're --

David Loeb - Baird

You're guiding to FFO 67 to 73 and you reported 74 for '07

Jon Bortz

Right, I guess, our view -- first of all, we will have more debt outstanding at the end of the year than we will at the beginning of the year, David. So, we do have a greater interest costs on a quarter-over-quarter basis. But our view right now is that the economic will weaken through at least mid year '08 and perhaps into the leak into the third quarter before it begins to recover and we're lagging industry, so our view is this that our industry will continue to weaken through the better part of the year and not pick-up until 2009.

Hans Weger

And as we've talked about earlier David, the Donovan House when it comes online all the capitalized interest associated with that also comes back. They basically offset each other in 2008.

David Loeb - Baird

Okay. That was asking the next question, the capitalized interest. I guess you've a little bit more in the second quarter and then it will be done it all the expenses?

Jon Bortz

It's pretty much all gone in the first quarter, David. The bulk of it is tied to the Donovan House, which will open at the end of March.

David Loeb - Baird

Okay, great. Thank you.

Operator

And our next question will come from Jeff Donnelly with Wachovia.

Jeff Donnelly - Wachovia

Good afternoon or good morning, guys. Jon I don't expect to rehash, your rational for your 2008 outlook or maybe answer for your peers,

Jon Bortz

That's great, Jeff.

Jeff Donnelly - Wachovia

But I guess your outlook for US RevPAR is so much lower than the other brands that are out there whether its Marriott or Starwood or choice. Limited service brand provider and the other owners too, I guess I'm just curious on your personal opinion. Why do you think there is such disparity? Is there something that you're seeing that they're not or vice-a-versa. Do you think there is one particular point that causes that different?

Jon Bortz

I don't have any idea how other companies arrived at their outlooks. So, it's really difficult to make a comparison, what I can comment further on is, how do we come to this conclusion. First of all, I mean I'd qualified obviously it just our opinion, it just our guess is to where the industry is going to go. We do it based upon and also a lot of research, economic indictors that we've used historically to correlate to demand, our experience through the last cycle and previous to that into the early 90s.

If you go back and you look at prior recessions and again we are not saying that either we are going to have a recession or in fact that our forecast include the recession because I don't think it really does anticipate anything that would be more than a significant slow down or very mild recession, which we could already be in. But if you go back and look at prior cycles the things that forecasted the downturn had to do with employment growth, had to do with corporate profits, and those same indicators are pointing to very similar trends.

So, what makes a difficult is either we are somewhere in that trend, we don't know where it's going to bottom and that's obviously the key and how quickly we come out. So, it's very, very difficult at this point to forecast that overall. All we can do is use what we know and I guess the philosophical piece and we always talked about this, is we think its important to share with our investors our view, regardless of whether its different from others. And again it just our view everybody out there is sophisticated, they have their own view at the economy, but we believe under weakening economy these are reasonable and very pragmatic view of what's can happen to the industry.

Jeff Donnelly - Wachovia

It's helpful. I guess I been interested in hearing what you're seeing in the out of room spend, thus far, even into February to the extent you have the information and will share it. Whether that measured total revenue growth versus your RevPAR growth, I'm curious how that factors in your guidance for this year?

Jon Bortz

Well. The other thing I'd say about our; that what we forecasted is our view has been that we don't need to necessarily see things changing that's what we've all of these things tied to what the future looks like these indicators. So, as opposed to making a forecast that says, well this is all we're seeing therefore we are going to forecast anything different in the future.

We don't think that's really helpful to our, to the investment community. So, as it relates to the other kinds of revenues you're talking about, our forecast does call for a softening in food and beverages revenues. That would be typical on an economic down turn. We would see less spend on the part of groups that already have committed to come to your property. We've not seen that yet.

We've not seen cancellations other than a few, very small number. We haven't seen any significant attrition other than in a couple of cases of what we call pay-go meetings, where it's a meeting, where the attendee pays their own way. We've not seen it on the corporate side in terms of any lower amount of people coming to the meeting, showing up no greater attrition. We've however seen short-term group being added on to the books at a much slower pace then what it has been previously and that again is an indicator of a slowing economic time were companies are being cautious about how they spend their money?

Jeff Donnelly - Wachovia

That's good to know you put some of that conservatism into your guidance. One last question, then I have another one for Hans. I know this may seem premature at this point, do you have any indication how 2009 convention bookings are looking for your venues versus maybe the same point last year, when you are looking at 2008?

Jon Bortz

I mean, at our properties, we have a pace. I can't put a whole lot of value in it, but I can share with you, what it is right now. I mean right now we are up 2% in room nights, for '09 versus, where we were at the same time in '08 and were up 7.5% in rate. So it's positive, but I'd tell you that we are looking about -- right now we are looking at it just over quarter of our targeted group room nights for the year on the book.

So, unlike '08, where we have 70% we only have 26% and to put that into more perspective even for '08, while it sounds like a lot 70% there is 30% that's not on the books and most folks tend to honor their contractual commitments, but they don't necessarily make new commitments. That's how they become cautious with their spending.

And when you put that in perspective of total group rooms or total rooms expected to be on the books based upon our forecast, when you added to the trenchant that's on the books including what's already happened in January and half of February, where really only looking at about having 36% or 37% of our total occupancy on the books for they year.

Jeff Donnelly - Wachovia

It is a last question for Hans. What should we assuming around your debt maturities for 2008 and 2009, specifically I guess timing and pricing, and you have any growth that you are getting from banks out there?

Hans Weger

Well, as I mentioned in my remarks. We only have a little over $14 million coming up in '08, and so on a smaller properties so I'd anticipate that we would probably just utilize the lot.

Jeff Donnelly - Wachovia

Okay.

Hans Weger

That pace and then when you deal with 2009, you've got roughly $125 -- $126 million, again we would evaluate it up one time, where the rates are and things, but now we've not started looking at that, because that's at least 12 to 18 months away before you have that.

Jeff Donnelly - Wachovia

Okay. Thanks guys.

Operator

And our next question will come from Michael Salinsky with RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Good Morning, guys.

Jon Bortz

Good Morning Mike.

Michael Salinsky - RBC Capital Markets

Jon, I'd be interested to get your thoughts on the asset pricing, the overall pricing environment right now in lodging, where do you seeing asset pricing moving and where do you expect it to move over the next 6 to 12 months and what are your current economic forecasts.

Jon Bortz

Sure. I think the sort of simplistic version and I would relate to what we look for upscale luxury full service and realize the top ten major cities in the US and related resort, domestic resort markets. What we have seen is that the increases in pricing or decreases in cap rates that took place in '07 have all, but been eliminated. So, we have retraced the ground that we covered, which most of it was covered in the first half of '07. Where we saw EBITDA multiples go well beyond 12 up into the territory of 14, 15, 16 times numbers in our markets and we've seen that retrace down primarily into the 12 region or potentially less.

That would lead you to a cap rate in the 7% range on a forward basis, although that would depend upon your view of the future the next 12 months. That's about a 50 to 100 basis point change from where we would have bought properties previously in the 6.5 range and certainly well more at a upper end of that 100 range for -- or more where maybe some other folks were buying assets.

Michael Salinsky - RBC Capital Markets

Second question your 2% to 5% outlook for RevPAR growth for fiscal '08. Can you provide that kind of sense like which market you are expecting to be the top end of that, which ones you are expecting to fall below that?

Jon Bortz

I can although I'm not sure, we have been very good that in the past. Markets this past year like Boston were much better than what we thought. The year before D.C. what turned out to be much worse than what we thought. But I will give your best kind of shot at it and this would leave out the influence of our redeveloped properties that obviously will have a major impact on the performance of our assets in the region.

We think Boston is showing surprising demand strength that probably comes out of the things the sort of infrastructure improvements that have taken place that have made Boston more attractive, expansion of the convention centre, the success of the dual convention centers in Boston, both the BCEC and the Heinz, the airport expansion and renovation and of course the elimination of the elevated highways, the big dig. That have really made Boston a very attractive place as well as the strength of technology and biotech and education and science and even the recovery in the financial markets in '07, that I think have driven demand in that market.

But our guess right now would be that Boston would be an average year given its 5.5% supply growth. Chicago has a little better convention calendar than last year it will be weak in the first quarter, we expect Chicago to be about average for the year. We think West Hollywood in general will be stronger, the end of the writers strike, the reinstatement of production and even make up for some loss production that should take place should drive demand in that marketplace, offset a little bit by the two hotels that will reopen. We think Manhattan will continue to be pretty strong, although, I would caution that there is a lot of supply being delivered and its relatively in expensive room supply which has been desperately lacking in that market.

In terms of San Diego, we think that will be a slightly worse than average year. The convention business is pretty good, although slightly down versus this past year, conventions don't lay out quite as evenly as they did last year, and it's particularly weak in the first quarter and almost all that down room nights could actually be attributed to February.

But there is also supply growth in the marketplace and that needs to get absorbed. The other market I would say, I think do you see will be an interesting year. The congressional calendar looks active, although, certainly a question as to whether there will actually be anything done this year, which would be typical in an election year, which would tend to lead to less traffic than normal, and most importantly would lead to a very weak amount of demand in the fourth quarter when they leave town in October, in order to go out and campaign for reelection.

The good news is, it is actually offset to a great degree or to some degree by a much better convention calendar up about 20% particularly in the fourth quarter, which should help offset some of that weakened demand from the congressional calendar. So D.C., I would say probably an average year from an industry perspective.

Michael Salinsky - RBC Capital Markets

Okay. Thanks that's very helpful. And, finally, Hans a question for you. In terms of your guidance for fiscal year '08 what kind of growth you have expected for food and beverage?

Hans Weger

I would tell you roughly those; I can tell you that those numbers would run at the low end slightly below our RevPAR number. So, down in a 1.5% range.

Michael Salinsky - RBC Capital Markets

Great, thanks, guys.

Operator

Thank you. And our next question will come from Joshua Attie with Citi.

Joshua Attie - Citi

Hi. I just had a question on the guidance kind of comparing 2007 to 2008. If I take your 2007 and tell me if I am not doing this right way, if I take your 2007 EBITDA number of 207 and add on the $8 million of renovation disruption, I get to around 215. If I take the midpoint of your '08 guidance of 2011 and I add-on the $6 million of disruption pre-opening, I get to about 216-217. Is that fair way to look at the growth '08 over '07 or am I not factoring something in?

Jon Bortz

I think the biggest that's maybe not being factored in is there is about a $3.5 increase between property taxes and an offsetting property insurance. But you might be taking that into account in your overall expense. I don't know what you are using for your expenses, overall and how they might align with the way the expenses would fall out based upon the margins we've provided in the revenue growth.

Joshua Attie - Citi

I'm just taking the midpoint of your EBITDA guidance for '08 and comparing to what you reported in '07.

Jon Bortz

Yeah. Your math is correct. I think the one other thing at least from an FFO perspective to keep in mind is the reduction in capitalized interest of about $3 million in '08. It will offset pretty much one for one, the increase in EBITDA that comes from Donovan House in a year.

Joshua Attie - Citi

Okay.

Operator

Anything further you wish to add?

Joshua Attie - Citi

No. Thank you.

Operator

Thank you. And our next question will come from Dennis Forst with Keybanc.

Dennis Forst - Keybanc

Good morning. I wanted to ask Hans about or maybe Jon about the rooms out of service for the first quarter. You did say it's going to go up out of third from 34,000 to 46,000. Where does that come from exactly? And then, what does that mean to second quarter rooms out of service?

Jon Bortz

Dennis, the 34,000 came from a couple of places the 12,000 increase from 34 to 46 came from a couple of places. We have rooms out of service at Seaview which was not planned to do a minor soft goods renovation. We have rooms out of service too a much greater extent at the Liaison, which had to do with a little more extensive time the rooms had to be out of service to accomplish the HVAC improvements of the property. And then, we have a few couple of thousand rooms more out of service at Westin Michigan Avenue again having to do with primarily the additional time that the HVAC improvements are taking.

Dennis Forst - Keybanc

Okay. So, that did not take any rooms that were going to be out of service in the second quarter, where we still have a few thousand rooms out of service in the second quarter that the tail end…?

Jon Bortz

Yeah, right now, we are forecasting just a couple of thousand rooms out of service in the second quarter, and at that level it's not meaningful to even talk about it.

Dennis Forst - Keybanc

Yeah. And just trying to come up with the number of available room nights, you've really only have I think one property that's managed by Marriott that's on different calendar than the normal calendar?

Hans Weger

That's correct.

Dennis Forst - Keybanc

That's a 84 days in the first quarter, some like that about 12 weeks.

Hans Weger

But keep in mind, the way that we handle the Marriott is that we actually what we use one week of the period and the first quarter and then two. So, we actually don't just use the numbers for the periods that they close on.

Dennis Forst - Keybanc

So, we just assume that all the properties are 91 days?

Hans Weger

Correct.

Dennis Forst - Keybanc

Probably [leap day]?

Hans Weger

Yes

Dennis Forst - Keybanc

Okay. So, if I just multiply 91 times your total number of rooms, then backed out the 595 rooms that are leased to others, and then subtract 46,000 rooms from that, I should get kind of the theoretical available room nights?

Jon Bortz

As it relates to the revenues on our income statement that come through our wholly-owned subsidiary properties, but when you look at obviously the total, the RevPAR numbers we have provided

Dennis Forst - Keybanc

Include those two.

Jon Bortz

Include those two properties, exactly.

Dennis Forst - Keybanc

Yeah. But then even if you exclude those two, I don't think it changes the RevPAR, much…

Jon Bortz

There are no rooms out of service at those properties.

Dennis Forst - Keybanc

So, can you give me the total number of room nights that were used in the fourth quarter? To see if my model is reconciling close to, is it correct?

Hans Weger

Keep in mind that the numbers that we use will include all the rooms.

Dennis Forst - Keybanc

Right

Hans Weger

Including ones at Le Montrose and Paradise.

Dennis Forst - Keybanc

Right

Jon Bortz

Right. So, in the fourth quarter the number of available rooms was 762,744 before any reduction for the room nights out of service.

Dennis Forst - Keybanc

Okay, good. That is just about what I had. Thank you.

Operator

And our next question will come from Deutsche Bank, Chris Woronka.

Chris Woronka - Deutsche Bank

Hi. Good morning, guys. Just a couple of quick ones. One is on the real estate taxes, should we assume that the kind of worst the increase has hit the first quarter? And then the second one is any update on longer-term plans for Seaview?

Jon Bortz

I think from a real estate tax perspective those will be spread out over the course of the year, and we do these on a parole basis. So, we are going to accrue either based upon assessments or actual bills we already have for '08. And then, there might be adjustments throughout the year depending upon where the actuals come in for some of the cities that lag in getting us both the assessments and the tax bills. As relates to Seaview, Chris there are no current plans to do anything with the property from a sale perspective. We have said it's in our long-term plans to sell the asset and the market is well aware of those desires. So, it's not on the market.

Chris Woronka - Deutsche Bank

Okay. Thanks.

Operator

And we have a follow-up question from Jeff Donnelly.

Jeff Donnelly - Wachovia Capital Markets

Yeah, Jon, I was curious, how was the meeting space at the Hotel Saxs being received now that you had it open for a little bit?

Jon Bortz

Incredibly. It's incredible space. It's the most unique meeting space I believe in the United States in a hotel. And the response has been exceedingly good, we've had quite a few meeting planner trips, taking people through the property and we are highly focused on a several segments of the market that would utilize space that is what I would describe as non-traditional meeting space.

Jeff Donnelly - Wachovia Capital Markets

Any measurable bookings that have come out of it, yet or you are sort of early on in the process of just more showing the space off to event planners?

Jon Bortz

The bookings are coming. They really didn't began until January because the space wasn't completed in December and not surprisingly people had a hard time imagining the space from the renderings as opposed to what it actually looks like right now, because it is so different. So, I think we suffer a little bit from the fact that it's not traditional space, and therefore a little more difficult to sell, the reality once it's complete I think it's much more easier to sell because of how different it is.

Jeff Donnelly - Wachovia Capital Markets

Okay. Thank you.

Operator

And at this time, there appears to be no further questions in the queue. (Operator Instructions).

Jon Bortz

Okay, operator?

Operator

Yes.

Jon Bortz

There are no more questions?

Operator

We've just got a question from Stephanie Krewson with Janney Montgomery Scott.

Jon Bortz

Okay.

Stephanie Krewson - Janney Montgomery Scott

Guys two quick questions. What's your LIBOR assumption for your '08 guidance?

Jon Bortz

We've assumed LIBOR running in the lower 3% in the first couple of quarters, and then falling down to 3% for the second half of the year.

Stephanie Krewson - Janney Montgomery Scott

Thanks, second question. What's driving increasing your G&A for '08 it's a larger increase than we typically see from you all year-over-year?

Hans Weger

There is two pieces there that are really driving it, one, is the fact because of the performance in 2007 compensation actually is lower than normal. So, then when you put back in the November budget that would increase it, and then secondly, as you recall, last year, the Board change the compensation plan for the executives on a three year plan to include performance based compensation and that rose in over three year period. So, that increases it, also.

Stephanie Krewson - Janney Montgomery Scott

Great. Thanks very much.

Operator

And at this time there appears to be no further questions in the queue.

Jon Bortz

Thank you, Christina. And thank you all for participating in our call today. We certainly appreciate your interest in LaSalle. And we look forward to giving you an update with hopefully more visibility in the next quarterly call. Till then, best wishes.

Operator

That does conclude our teleconference for today. We would like to thank everyone for your participation and have a wonderful day.

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Source: LaSalle Hotel Properties Q4 2007 Earnings Call Transcript
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