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LaSalle Hotel Properties (NYSE:LHO)

Q1 2008 Earnings Call Transcript

April 24, 2008 2:00 pm ET

Executives

Jon Bortz – Chairman, President and CEO

Hans Weger – CFO, EVP and Treasurer

Analysts

Bill Crow – Raymond James

William Truelove – UBS

Michael Salinsky – RBC Capital Markets

Dennis Hoerst – KeyBanc

Jeff Randall – Black Creek Capital

Andrew Whitman – Baird

Operator

Good day. Welcome to LaSalle Hotel Properties first quarter 2008 conference call. This call is being recorded. At this time, I'd like to turn the call over to Mr. Jon Bortz, President and Chief Executive Officer. Please go ahead, sir.

Jon Bortz

Thank you, operator. Good afternoon everyone and welcome to the first quarter earnings call and webcast for LaSalle Hotel Properties. Here with me today is Hans Weger, our Chief Financial Officer. As we do each quarter, in addition to providing the financial results of our first quarter, Hans and I will discuss the company's activities in the quarter and in the year; the performance of our assets and the trends that are affecting them; the status of our ongoing reinvestment program; and our outlook for 2008 on both a macro basis for the lodging industry and for LaSalle Hotel Properties. Hans?

Hans Weger

Thank you, Jon. Good afternoon. Before we begin, I'd like to first make the following remarks. Any statement that we make today about future results and performance or plans and objectives are forward-looking statements. Actual results may differ as result of factors, risk 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 web site www.lasallehotels.com.

Our most recent 8-K and yesterday's press releases include reconciliations of non-GAAP measures such as funds from operations to the most comparable GAAP measures. First quarter funds from operations or FFO was $9.8 million as compared to $7.6 million in the prior year. FFO per diluted share was $0.25 compared to $0.19 in the first quarter of 2007. 2007's FFO includes a non-cash expense of $3.9 million associated with the Series A preferred redemption. EBITDA declined to $24.5 million from $58.8 million in the prior period. EBITDA for the first quarter of 2007 includes a $30.3 million net gain on the sale of LaGuardia Marriott.

RevPAR for the total portfolio decreased 1% in the first quarter. The RevPAR decline was a result of a decrease in occupancy of 2.4% to 64.6%, while ADR increased to 1.5% to $183.08. Our hotel portfolio generated $27.9 million of EBITDA in the first quarter of 2008 versus prior year EBITDA of $31.6 million. As expected, RevPAR and hotel EBITDAs were negatively impacted by our company's numerous redevelopments, repositionings, and renovation projects and the Easter holiday shift to the first quarter from the second quarter last year.

As of the end of the first quarter 2008, the company had a total outstanding debt of $967.1 million and an average interest rate of 5.4%. The company's $450 million credit facility had an outstanding balance of $152 million. As of March 31, 2008, trailing 12-month corporate EBITDA, as defined in our senior unsecured credit facility, to interest was 4.2 times and total debt to trailing 12-month corporate EBITDA equaled 4.7 times.

In 2008, the company has $34.8 million of debt maturing. In May, the $14.8 million loan secured by Le Parc is due and will be repaid in full with proceeds from our line of credit. In November, the $20 million loan secured by Guild Hall is due. However, we anticipate extending the term of the loan another year as allowed for in the agreement. In addition to this one-year extension, we have the right to extend the loan through 2011.

On March 18, 2008, a joint venture between the company and Oxford OG Hospitality Chicago, LLC acquired a portion of the iconic 52-story IBM building located at 330 North Wabash Avenue in downtown Chicago, Illinois for $46 million. The building was recently designated a Historic Landmark and as a result, we will benefit from significant real estate tax savings for the next 12 years following the opening of the hotel. The joint venture plans to convert the existing vacant floors to a super luxury hotel. Design is essentially complete and construction drawings are in progress. Construction is currently forecasted to begin late this year or in the first quarter of next year with completion estimated by the end of the first quarter of 2010. LaSalle Hotel Properties holds a 95% controlling interest in this joint venture, with the remaining 5% interest owned by Oxford.

On April 15, 2008, the Board of Trustees declared our second quarter dividends of $0.17 per month for April, May and June 2008. This represents a 6.9% annualized yield based on yesterday's closing share price. On April 17, 2008, LaSalle Hotel Properties and LaSalle Investment Management announced a joint venture to seek domestic hotel investments in high barrier-to-entry urban and resort markets. LaSalle Investment Management is the global investment advisory subsidiary of Jones Lang LaSalle and is not in any way related to us. The two companies plan to invest up to a total of $250 million of equity in the joint venture. With anticipated leverage, this results in investments of up to $700 million.

LaSalle Hotel Properties will own 15% of the joint venture and have the opportunity to own and promote, based on the venture achieving specific return thresholds. The company will receive additional income while providing acquisition, asset management, project redevelopment, oversight, and financing services, in addition to our pro rata share of income and cash flow.

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 first quarter the economy continued to weaken under the weight of the housing recession and worsening credit market turmoil. Nonetheless the lodging industry experienced modest though decelerating RevPAR growth, as a result of increases in average daily rates, offset by declines in industry-wide occupancy on a year-over-year basis. Industry-wide demand saw positive growth in the first two months as compared to last year, though the quarter was slightly negative due to a drop in overall industry demand in March from the shift of Easter to March of this year. We believe demand in April will benefit from the shift. Notably, industry-wide demand growth was stronger in February than both December and January, demonstrating some surprising resilience.

Leisure travel weakened during the quarter reflecting the economic difficulties facing the consumer. Business travel remained positive though we've seen some increase in group attrition and weaker group ancillary spend for things like food and beverage, audio visual, and other services. In the month for the month, group sales also weakened. Both leisure and business travelers continue to be more price sensitive, utilizing discount channels to a greater extent. On the other hand, U.S. hotels, particularly those in gateway cities continue to benefit from strong growth in international travel, especially from Europe, due to the continuing weakness of the U.S. dollar.

For LaSalle Hotel Properties, we saw similar trends though as expected our overall results were negatively impacted by our redevelopment, repositioning and renovation projects. In general both occupancy and rate came in at the low-end of our outlook, with a combination delivering RevPAR at minus 1%, the low-end of our range. San Diego and Chicago were weaker than forecasted and Seattle, Boston and West L.A. were better than we expected. Our Resort Properties performed below our expectations as leisure travel, particularly in San Diego, was negatively impacted by the economy, unusually bad weather, and the holiday shift.

Overall, our in-process redevelopments continued to have a negative impact on the portfolio in the quarter. RevPAR portfolio-wide, without regard for rooms out of service, declined 1% in the quarter. There were approximately 46,000 room nights unavailable in the quarter due to redevelopment projects, which we estimate reduced total revenues by roughly $5.6 million, room revenue by $3.4 million and EBITDA by $3.1 million.

On a monthly basis for our portfolio as a whole, RevPAR rose 0.6% in January, fell 2.4% in February, and declined 0.9% in March. Our group business, as expected was particularly weak with group room nights down 8.9% from last year. This poor group performance was due primarily to our meeting space out of service in the quarter at the Westin Copley, Indianapolis Marriott and Liaison Capitol Hill, the major public area renovation at the Hilton San Diego Resort, including the lobby, pool and the restaurant closure and the weak convention calendars in D.C., San Diego and Chicago as compared to last year's first quarter. Due to this weak group business, food and beverage revenues also came in at the lower end of our projections.

RevPAR at our Resort Properties rose 0.7% in the first quarter, which was all rate growth. RevPAR at our convention hotels declined 0.4% which was all occupancy and RevPAR fell 2.1% at our urban hotels which was also all occupancy.

In the first quarter, our properties in Seattle and West L.A. had the highest RevPAR growth with Seattle up 10.6% which was all occupancy, our West L.A. hotels up 9.4%, which was almost all rate. Our properties in Boston saw RevPAR increase 3.6%, despite the substantial impact from renovation of our ballrooms at the Westin Copley. Demand in the downtown Boston market continued to demonstrate significant strength, increasing 4.5% in the first quarter. Of our major cities, Chicago CBD was the weakest with demand down 6.1%, reflecting the comparatively poor convention calendar versus last year as well as the negative Easter holiday shift.

RevPAR at our hotels in Washington, D.C., declined 6.9% in the quarter, but that obscures a solid performance for our D.C. properties except for one. The redevelopment of the Liaison Capitol Hill and its conversion from the Holiday Inn on the Hill was in full steam during the quarter with a large number of rooms out of service, no restaurant, a temporary lobby and the meeting space out for a large part of the quarter. As a result, RevPAR was down 36% with occupancy falling 39%. Excluding the Liaison, RevPAR at our D.C. urban hotels rose 4.6% in Q1, substantially better than the CBD RevPAR growth of 0.6%.

Our best performing properties for the quarter, as measured by RevPAR growth, were the Viking in Newport which was up 56% from a year ago, benefiting from its repositioning; Hotel Deka in Seattle which was up 16.7% and Hotel Sax in Chicago which was up 11%, both of which also benefited from their repositionings. Le Parc in west L.A., the Hilton Hotel in D.C. and the Onyx in Boston, all grew RevPAR in double-digits. Our weakest properties included the Liaison Capitol Hill, the Gild Hall in New York, and Seaview outside Atlantic City, all of which were impacted by repositioning and renovations.

Portfolio-wide, room revenues were flat as compared to the 1% decline in RevPAR due to the extra day in the quarter. Non-room revenues for the quarter were down by 5.3%, with food and beverage revenues declining by 7%. Both food and beverage revenues and other non-room revenues were hurt by the 8.9% decline in group rooms which was due to the renovations, meeting space, out of service, and the weak convention calendars in several markets. Total revenues portfolio-wide fell 1.9% in the quarter. On the cost side expenses were well controlled in the quarter. Total hotel expenses portfolio-wide were limited to a 1% increase from last year. Departmental expenses declined by 0.7%.

Undistributed expenses rose 2.5% with the largest increase coming from a 9.8% increase in general and administrative costs due primarily to full executive team staffing and related costs and a 6.3% increase in sales and marketing costs due primarily to strategic increases in sales staffing levels that we deem to be necessary for a more competitive environment and costs associated with marketing our recently repositioned and reflagged hotels. Our investment in energy efficiency capital projects and our implementation of best energy operating practices continue to pay off in the quarter with energy costs declining 6.4% from last year. Fixed expenses increased 5%, primarily due to a 12.1% increase in property taxes related to higher assessments, partially offset by our initiatives in insurance, which led to a property and casualty expense decline of 22.2% and a general liability insurance decline of 44.9%.

In the first quarter, portfolio-wide hotel EBITDA declined 11.7% due to a 1.9% decline in total hotel revenues and a 1% increase in portfolio-wide hotel expenses, resulting in a 230 basis point decline from a year ago as we expected.

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. We made terrific progress in the quarter with our projects being completed on time, on budget, and with disruption in line with what we had expected. We reopened Chaminade at the end of January as planned, opened the Donovan House at the end of March as planned, and reflagged the Holiday on the Hill as the Liaison Capital Hill also as planned on April 1. At this point, our extensive program of redevelopments, repositionings, flag changes, and renovations is essentially complete with only minor nonimpact for work left to be completed and except for new restaurants at Liaison, Gild Hall, and Donovan House which are all scheduled to open later this year. In total we made $28 million of capital investments in the first quarter and continue to project total capital investments of $80 million to $90 million for the year. These numbers exclude our joint venture investment at the former IBM building in Chicago.

Now let me turn to our outlook for 2008. Forecasting the performance of the lodging industry and our own performance this year continues to be very challenging. This of course, is due to the difficulties of projecting the path of the economy, how long the down trend will last, and how deep it will get. What we do know right now is that the current economic trends are not favorable. What we also know is that travel and lodging trends generally lag the trends in the overall economy so we view the rest of 2008 with a significant amount of caution and concern. The four economic indicators that we utilize to forecast lodging demand, employment growth, corporate profits, consumer confidence and airline employments are now in worsening trends. As a result we expect lodging demand trends to continue to weaken and put further pressure on occupancies as the year progresses.

On the positive side the economic down turn is not pervasive. While there are many industries and companies suffering such as those in financial services, housing related, autos and retail, there are many that are doing well such as those in commodities, agriculture, defense, energy, technology, export, infrastructure, and basic manufacturing. As a result, while we don't have a lot of economic visibility, we haven't seen anything yet that would serve to change our industry forecast for the year which anticipated these worsening trends. So we are leaving our industry forecast for RevPAR in a range of flat to plus 3%. For our portfolio given the industry range, we continue to forecast that we will outperform by a couple hundred basis points meaning a range for RevPAR growth of 2% to 5%.

If the economy and the 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 outperformance is projected to come primarily from our properties that have been redeveloped and repositioned in the last couple of years, including those completed this year. And our outlook is supported by our group pace data which continues to be encouraging for the remainder of 2008.

As of April 1, group pace for quarters two through four is up 8.3% in room nights and 4.9% in ADR, for a 13.2% improvement over same time last year. We currently have approximately 80% of our targeted group rooms on the books and group represents roughly 39% of our targeted occupancy portfolio-wide for the year. Room night pace is up in all three quarters for the rest of the year although the overall pace advantage has slipped by about 300 basis points since our last report to you in February. For the second quarter we are currently forecasting that RevPAR will increase between 5% and 8% compared to the second quarter of last year.

Facing a challenging and uncertain economic environment, we've worked very closely with our operators to implement cost containment programs at all of our properties. Should trends continue to worsen, we are fully prepared to initiate more stringent cost-saving measures throughout our portfolio. We continue to believe that total expenses throughout the portfolio can be limited to a 3% to 4% increase for the year and likely slightly lower at the bottom of our forecasted RevPAR range. This is in spite of an expected double-digit increase in total real estate taxes for the year. Given no change in our RevPAR and expense assumptions since our last call with you, we continue to believe that it's likely that our EBITDA margins for the year will range between minus 50 basis points and plus 50 basis points.

With no change in our Q2 through Q4 outlook at this time, we are currently forecasting EBITDA for the year in a range of $205.9 million to $217.1 million and FFO per diluted share in a range of $3.16 to $3.41. A breakdown of both EBITDA and FFO per diluted share for the remaining quarters can be found in our press release in February.

To conclude, 2008 will certainly be a challenging year with an economy that is weakening and lacks clarity as to the depth and breadth of its decline. But nevertheless we've just completed the last of our major redevelopments and repositionings with significant upside to come over the next three to four years. We are in great financial position. We have a well covered dividend and our team is well prepared to deal with whatever the economic environment throws our way.

Before we move on to questions, I would like to make one final comment. Today we celebrate our 10th Anniversary as a public company. We are very proud that we have been able to deliver industry-leading returns to our shareholders since our IPO on April 24, 1998. Our total return including dividends and appreciation equals 221% equivalent to a 12.4% compounded annual return which exceeds both the RMS' 11.8% compounded annual return and the S&P 500's 4% over the same 10-year period. We greatly appreciate your support and we want to thank you all for your confidence in us over the last 10 years. That completes our remarks, and Hans and I would be very happy to answer any questions that you might have. Operator?

Questions-and-Answer Session

Operator

Thank you. (Operator instructions) The first question comes from Bill Crow with Raymond James.

Bill Crow – Raymond James

Good afternoon guys. Jon, a couple of questions. First of all, if I just go back to your first major renovation program, I think it was the four hotels in D.C. and they opened up just as the economy was unraveling the 9/11 hit and now we've got this other big program that's just wrapping up at a time when certainly fundamentals are pressured. It's got to extend your period to recover these investments and drive down your IRRs. Just wondering if there is any hesitation to move forward with big initiatives in the future, whether you might switch to more stabilized acquisitions or what are you thinking in terms of the next round?

Jon Bortz

It's a good question Bill. And using those four properties as a guide, I think what we found there was that it did stretch out the ramp up, particularly the initial ramp up of those four properties by about a year from what we had originally intended. We've also done other redevelopments and repositionings since then, including the first time we redeveloped the Holiday Inn on the Hill, which we did during the last down turn, and Paradise Point Resort, which was completed just before the 2001 tech wreck and recession and 9/11, and what we found was the returns are so strong from these redevelopments that even with slow downs, they greatly improve the performance of the properties and provide very attractive returns. So while they may be less than what we underwrite on an initial IRR basis, particularly on cash flow, what we find is they do ultimately get to where we are looking to get for those properties and still deliver pretty attractive returns. So we would not hesitate to do these projects and down turns, provided that we've got the balance sheet to do that.

Bill Crow – Raymond James

All right. Then the joint venture that was announced a week or two ago, do you have any pipeline of assets for that at this point? How does the acquisition environment look?

Jon Bortz

Well the answer to the first part of the question is I guess no different than what our answer's been for ten years for us, which is we don't talk about pipeline for any of our new investments. But as it relates to the acquisition environment in general, what I can tell you it's certainly a much more sluggish than last year. There are fewer properties on the market. We are seeing certainly far less competition and a seller and when there is a broker involved, a broker who are really looking very hard at a buyer's ability to close and in particular has financing lined up. So a joint venture with the strength that we have with LaSalle Investment Management and ourselves as a purchaser, with our balance sheet and our ability to buy off our line, I think put us in a very good competitive position for assets that become available. And I think the other trend that we have started to see, have seen in similar times in the past, is deals that are really not brokered through a process, a competitive process, but quietly to specific potential buyers who are qualified to buy because of their ability to buy without financing. So we think we will be in great stead from a competitive position as we see more opportunities. And I guess the other thing I would say is the projects really most difficult to get financed today are those that have value added upside that require a lot of capital. Because lenders are really lending off of in-place cash flow. So what we are particularly looking for, we believe is exactly what is most difficult for a seller to sell these days. And we think that will help us over the next 12 to 24 months as we see more opportunities.

Bill Crow – Raymond James

Then finally Hans, on the balance sheet, how much debt is on there related to the IBM building joint venture.

Hans Weger

Right now because we have run it all through, it's around $50 million, $52 million.

Bill Crow – Raymond James

$52 million on the debt. Okay, that's it. Thank you guys.

Operator

Next question will come from William Truelove, UBS.

William Truelove – UBS

Hi guys, I have three questions. First of all, sort of a strategy question as we go into this slow down. You mentioned that you wanted to target about 39% of the occupancy to group. Are you anticipating increasing that as we go through the slowdown?

Jon Bortz

That is an increase. We actually about mid way through last year worked with our property teams to focus on increasing our overall group mix at our properties. And so one of the reasons that you saw this quarter and saw in the last couple of quarters of last year increased sales and marketing costs is that we added staff to almost all of our hotels to find more group business. And so we've – I think that's why our pace is up so much because we've changed the mix in terms of what we have been targeting. And I would tell you we certainly continue to focus aggressively on putting group on the books and not necessarily waiting around for tranches to show up.

William Truelove – UBS

My second question of three is what's your sort of strategic view on the mix of between the floating rate debt and the fixed rate debt? I know the credit market is sort of screwy right now. But,given where we are going with interest rates, are you guys reconsidering changing that going forward?

Hans Weger

Historically we have said we move up and down with that with the fixed and variable mix. And when the interest rates were low on the fixed side we were able to do a significant amount of fixed rate debt that got average pricing around 5.5% to 5.7% on the fixed rate. Now as we moved into this more declining market, we are really utilizing a lot of credit. And so now we are up to 23% variable rate debt when we put the $14 million from Le Parc that will be moving from fixed to variable and as we move forward with the renovations at the IBM building and actually pay for the renovations that have been completed. All those funds will be coming off the line of credit which will be increasing our available rate debt during this time.

William Truelove – UBS

Okay. And then lastly, I believe you guys had in your 10-Q, you mentioned you were going to get a payment from Marriott on the Seaview makeup payment for '07. Does that flow into your second quarter results? And if it does, which line item does it hit?

Hans Weger

That payment is just because it is a guaranteed payments that Marriott has the right to earn back after the performance of the hotel crosses certain thresholds. It is just shown as a payable on our balance sheet. It has no impact on income other than the fact that we are holding approximately $10 million at this time which obviously reduces our debt balances. So there is just the benefit of the interest.

William Truelove – UBS

Thanks so much, guys.

Jon Bortz

Thanks.

Operator

Next question comes from Michael Salinsky with RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

Good afternoon, guys. Jon, one of the questions there you had touched upon what you are seeing in the acquisition markets. Could you talk about what you're seeing with regard to asset pricing right now, whether you are starting to see some people giving in essentially on the cost side or are people holding pretty steadfast right now?

Jon Bortz

Well, I think we have probably seen a fairly consistent across the board increase in cap rates in all types of properties. Although I think as you get out of the major cities and you move into the suburban markets and any of the secondary or tertiary markets, you have seen a much bigger increase in those cap rates. We have probably seen 50, 100 basis point retrenchment in cap rates in the major cities and probably 100 to 200 in the suburban markets and the secondary markets. Again it really depends on the property and its condition and cash flows. And I think we've seen some transactions and I think a lot of those were retraded as the credit markets worsened. And what we have probably seen more so than anything is deals that just fall out dead because the buyer, they are willing to pay the price but they are unable to get the financing to make their numbers work.

Michael Salinsky – RBC Capital Markets

That's helpful. The second question I had, in terms of – you talked about your group booking pace for 2008. How is 2009 looking at this point?

Jon Bortz

Right now 2009 is encouraging, although I wouldn't get too excited about it because it is such a small percentage. But right now we are up 4% in group room nights and we are up 5% in rate for the year, but we only have about just under 30% of our group room target for the year on the books at this point.

Michael Salinsky – RBC Capital Markets

And finally, with your joint venture there with LaSalle Investment Management, does that joint venture have the right of first look at all available acquisitions or can you present things to them and keep stuff for yourself, or how does that work?

Jon Bortz

Yes. The way it works is that any asset below $75 million, we have first look at it. Any asset over $175 million is presented to the joint venture first, and anything in between those numbers alternates back and forth between the company being able to acquire it first or the joint venture.

Michael Salinsky – RBC Capital Markets

Thanks, guys.

Operator

Moving on to Dennis Hoerst with KeyBanc.

Dennis Hoerst – KeyBanc

Good afternoon.

Jon Bortz

Good afternoon.

Dennis Hoerst – KeyBanc

As usual, I kind of wanted to try and focus on room nights. Jon you said about 46,000 room nights out of service and I wanted to just make sure I understood, that that did not include the Donavan House that didn't open until the end of the quarter?

Jon Bortz

That's correct.

Dennis Hoerst – KeyBanc

But did it include one month of Chaminade or not?

Jon Bortz

It included, Chaminade being out of service. That's in the 46,000.

Dennis Hoerst – KeyBanc

Okay. That clarifies the one point. And then on a different subject, the IBM building. I think you said you spent about $46 million to buy the 11.5 floors?

Jon Bortz

Yes.

Dennis Hoerst – KeyBanc

Okay. And then, Hans said that there was already $52 million of debt on the books. You consolidated because you own 95% of it or 85%?

Jon Bortz

Correct, 95%.

Dennis Hoerst – KeyBanc

Why $52 million versus the $46 million cost?

Jon Bortz

Because the significant development costs have already been incurred both prior to our acquisition that have been paid for so that would include design, legal and other transaction costs, brokerage fee that was paid, et cetera.

Dennis Hoerst – KeyBanc

I got you. How much is it going to cost to build out?

Jon Bortz

We are looking at about $180 million total investment for the venture.

Dennis Hoerst – KeyBanc

That includes the $52 million that's already gone out the door?

Jon Bortz

Correct.

Dennis Hoerst – KeyBanc

Okay great. And financing, I think it's all going to be on your line?

Jon Bortz

Well, it's not determined. It's certainly not finalized yet. That is one way we may do it, which is on the line and another may be a venture construction line.

Dennis Hoerst – KeyBanc

Then long-term, you own 11 floors in fee simple? Will the banks lend on that?

Jon Bortz

Yes. And we have a number of other projects, as an example, like our Dallas property which is part of a condominium development that has retail and office. We have a number of projects that are condominium developments. In fact, the property next door, Hotel Sax is part of the Marina City condominium development and we own the whole hotel building and we own a portion of two iconic corncob buildings which have – the portion we own is the parking which is up the first 17 floors and below-grade space which has retail in it.

Dennis Hoerst – KeyBanc

Okay, great. Thanks a lot.

Jon Bortz

Sure.

Operator

Next question comes from Jeff Randall from Black Creek Capital.

Jeff Randall – Black Creek Capital

Hi, guys. Jon, can you just comment on your supply outlook for Chicago out to 2010?

Jon Bortz

I thought you were going to say like 2020. Sure. What we are looking at right now for Chicago based upon what we know is under construction. And what we have estimated or forecasted will commence is about 4.5% in the city this year which includes a couple of smaller projects, includes the Renaissance Blackstone that just opened, includes the Trump International Hotel which opened early in the year and the Residence Inn and the Spring Hill Suites that White Lodging developed. And we are looking at about 3% in '09 and a little over 3%, about 3.4% in 2010.

Jeff Randall – Black Creek Capital

Okay, great.

Jon Bortz

And Jeff, the one thing I would say is a number of those have not started construction and don't have financing so they may or may not happen.

Jeff Randall – Black Creek Capital

Okay, got it. On the guidance, I just wondered on the top part of the RevPAR range, 5% for the year and a 50 basis point increase in EBITDA margins, what's the headwind on that upside if you assume a best case on the RevPAR outlook?

Jon Bortz

It's our preopening costs, which relate to the sales and marketing and brochures and web sites and lots of up front costs for these reflaggings and repositionings. It's our property tax increase and it's wages and benefits.

Jeff Randall – Black Creek Capital

So kind of hard to pull out some of that stuff to get to a normalized flow through?

Jon Bortz

Correct.

Jeff Randall – Black Creek Capital

And then, last question. Just on the LaSalle joint venture you mentioned earlier on the call, the break points on assets. Was there any method to that madness or is that just sort of an arbitrary up to 75 and over 175?

Jon Bortz

There was certainly a method to the madness, if you would call it madness, but part of it had to do with our desire to get diversification in a joint venture, same desire that LIM has. So we wanted to have at least a minimum of five properties in the mix. It also wanted to provide for our ability to buy the small projects on our own and continue the smaller urban lifestyle investments that we've made historically, as well as still have opportunities to buy the medium-sized properties. And the larger properties which the venture would at first look at would probably ultimately be an issue that they couldn't do all of the largest ones anyway because we still need to get a diversified base in count for hotels out of that $700 million.

Jeff Randall – Black Creek Capital

Okay. Thanks, Jon.

Operator

Next question comes from Andrew Whitman with Baird.

Andrew Whitman – Baird

Hi, guys.

Jon Bortz

Hi, Andrew.

Andrew Whitman – Baird

Just a little bit more on the LaSalle JV. You talked about the technical terms and some madness behind it. Just strategically do you find now that you are going to be trying to put more assets in that and be in the sweet spot where you are over $75 million so that you can get the fees or do you progress more selfishly and continue to go down for the lifestyle smaller hotels.

Jon Bortz

Really neither of those. I mean the objective is to pursue opportunities within the marketplace and we will pursue all-sized opportunities as we have in the past and really those splits are purely an allocation between ourselves, for our own account and the joint venture.

Hans Weger

I guess to clarify one thing is that it's just who gets the first look on those assets. We may choose not to buy the ones that are below $75 million and now put them to the JB. And likewise, if the JB passes on one that's $180 million, we could if we wanted to buy it ourselves after they pass on the deal, so it is strictly an allocation of first look, not an allocation of the asset.

Jon Bortz

But the other thing I would add is that the point of this joint venture is to be able to take advantage of opportunities in the market and near to immediate-term without stressing our balance sheet and certainly without issuing equity valuations that we deem to be unattractive to the shareholders.

Andrew Whitman – Baird

Okay. And then finally, just on the capital outlay maybe for this year and next year for the build-out of the IBM property. Do you have an idea of how that might shake out between this and next year?

Jon Bortz

Yes, we have an idea. And you know take these numbers with a grain of salt as we are just in construction drawing phase right now. But we are looking at about $15 million for the remainder of this year. And then the bulk of the dollars, probably all but about the last $20 million would all be invested next year over the course of the year and then the remaining part would be in the first two quarters of 2010. And as you know, the dollars out the door tend to lag the actual work performed.

Andrew Whitman – Baird

Okay. Thanks.

Operator

(Operator instructions) We have a follow-up question from Dennis Hoerst with KeyBanc.

Dennis Hoerst – KeyBanc

I wanted to see if you could detail for us your February performance given that I think you said demand was better industry wide in December – I'm sorry, better in February than December and January and I know from the Smith Travel numbers RevPAR was up in February. But you had your worst performance of the quarter in February and certainly it has to do with renovations up but can you give us some detail on that?

Jon Bortz

Yes, it did have to do with the renovations that were very, very active in that month. In addition, that was the worst month of the year in San Diego as compared to last year for conventions. And to give you an idea, the entire convention calendar for the year, this year is down 50,000 room nights from last year, but February alone was down 70,000 room nights. So February was a tough month in San Diego which also was hurt by a lot of rain which makes a leisure location relatively unattractive for a drive-away weekend in particular. Then Chicago was very weak. Again that was a convention calendar issue where the convention calendar was much better last February than it was this year. And so Chicago, as an example, our properties were down a little over 11% in February. And San Diego, I mentioned, was down a little over 13% in February. So those two markets really were the reason that February itself was down as compared to the other months.

Dennis Hoerst – KeyBanc

When those percentages were RevPARs?

Jon Bortz

Yes.

Dennis Hoerst – KeyBanc

Thanks a lot, Jon.

Operator

At this time there are no further questions.

Jon Bortz

Thank you all again for joining us for this call. Again I want to thank you for your support over the last ten years. We look forward to another great ten years. And in the meantime we will talk to you again in 90 days. Thank you.

Operator

That does conclude today's conference. Thank you for your participation today.

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