DiamondRock Hospitality Company F2Q08 (Qtr End 06/13/08) Earnings Call Transcript

Aug. 7.08 | About: DiamondRock Hospitality (DRH)

DiamondRock Hospitality Company (NYSE:DRH)

F2Q08 Earnings Call

July 23, 2008 10:00 am ET

Executives

Bill W. McCarten – Chairman, Chief Executive Officer and Director

Mark W. Brugger - Executive Vice President, Chief Financial Officer and Treasurer

John L. Williams – President, Chief Operating Officer and Director

Analysts

William Truelove - UBS

Chris Woronka - Deutsche Bank

David Loeb - Robert W. Baird & Co., Inc.

Dennis Forst – KeyBanc Capital Markets

Michael Salinsky - RBC Capital Markets

William Marks – JMP Securities

Operator

Welcome to DiamondRock Hospitality’s second quarter 2008 conference call. (Operator Instructions)

Many of the comments made today are considered to be forward-looking statements under Federal Security law. As described in the company’s SEC filings, these statements are subject to numerous risks and uncertainties, which could cause future results to differ from those expressed or implied by our comments.

The company is not obligated to publicly update or revise these forward-looking statements. In this call, the company will discuss non-GAAP financial information such as adjusted FFO and adjusted EBITDA, which it believes is useful to investors. You can find a reconciliation of this information to GAAP in today’s earnings press release, which is available on the company’s website and in the company’s Form 8-K filed with the SEC.

I would like to now welcome management. With us today are Bill McCarten, Chief Executive Officer; John Williams, Chief Operating Officer; and Mark Brugger, Chief Financial Officer.

At this time, I would like to turn the call over to Bill McCarten for his opening remarks.

Bill W. McCarten

Good morning everyone and welcome to DiamondRock Hospitality’s second quarter 2008 earnings conference call. I will begin the call by providing some context to our second quarter results and outlook. I have been in the hospitality industry since the late ‘70s. It is a new unescapable fact that the industry is cyclical and the demand closely tracks trends in the overall economy. To state the obvious, we have entered the most difficult part of the cycle often called the decline phase which is marked by anemic GDP growth, the decline in corporate profits, and low consumer sentiment . As a result, the lodging industry will likely generate negative revPAR growth for the balance of 2008. On the positive side, the growth phase always returns. Moreover, in my opinion, we are approaching a point in the cycle where good value creation opportunities will arise for those who had already stood, perhaps, a bit lucky and have the capacity to act. Since ’08 spring DiamondRock has been cautionary with respect to its 2008 outlook.

At the end of the first quarter, we reduced our guidance well below our property managers’ forecast in our attempt to reflect a clearly softening economy. Not surprising, we have our current forecast now approximate that guidance. Our second quarter results were generally in line with our guidance. However, the economic outlook has deteriorated more than we anticipated. Demand trends in all segments have weakened significantly more than expected, primarily over the past six weeks. And we have becoming increasingly skeptical about transiting it in the year for the year group groom night forecast for the second half of the year. As I am sure you noted in our press release, current trends lead us to further reduce our guidance for the remainder of 2008 and Mark Brugger will update our outlook in a few minutes.

Despite these headwinds, DiamondRock is well-positioned. We have purposely maintained low leverage which remained among the most conservative in the industry with fixed charge coverage in excess of three times. With the high quality portfolio of hotels and a stellar balance sheet, DiamondRock is poised to weather the downturns and opportunistically deploy its capital to create shareholder value going forward.

As you already know, I am retiring from my role of CEO but will remain Chairman. Well, it is unfortunate that we now find ourselves on the downside of this cyclical business. I take much comfort that we will continue to have strong leadership with a very talented and experienced team with complementary skill sets. I am highly confident that my successor Mark Brugger will do a great job for our shareholders.

Let me just conclude it by thanking you for your support and interest since DiamondRock’s conception in 2004. We have built a solid company and I look forward to the future. This is perhaps our last public event this summer. I will take this opportunity to pass the baton to Mark and turn the call over to him.

Mark W. Brugger

Against the challenging macroeconomic backdrop that Bill discussed Diamond Rock generally results from the second quarter that were within our prior guidance although it will be at the low end of the range. The Company’s portfolio delivered revPAR growth in the quarter of 1.5% driven by a 2.2% increase in average daily rate which more than offset a half of percentage point decrease in occupancy. The implementation of contingency plans resulted the hotel to adjust EBITDA margins declining only 60 basis points over the same period in the prior year. As a result, the Company was able to generate adjusted EBITDA of $53.5 million and the adjusted FFO per share of $0.43 despite lower than anticipated revenue.

The bright spots for demand in the quarter include the Chicago Conrad as well as our hotels located in Los Angeles and New York City. These positives help to compensate for general softness in the number of markets with particular challenges in the Helena and suburban Chicago markets. The response to the difficult operating environment we continued to work aggressively with our operators to implement cost containment measures and maximize revenue management. John will speak of these efforts in more detail in a moment but let me say that the team did a good job with margins from the second quarter given the modest revenue growth.

This second quarter we implemented our share repurchase program. Through last Monday, July 21, we have repurchased $2.8 million shares an average price of less than $10.75. The board has authorized this Company repurchase up to a total of 4.8 million shares but we intend to continue to be measured and opportunistic with our program. With our stock trading in the greater than a 10% MOI cap rate. Our current stock rates appears compelling.

Turning to the outlook. As Bill mentioned, the economy and the travel environment have progressively become more challenging. Since our last earnings call in April, we have seen accelerating trends of decreased demands in all of our customer segments. This sure showed the first signs of significant slowing as the struggling consumer cut back from vacations. We expect leisure weakness to persist. Business transient hung in there during the first part of the year, but we are a seeing more prized sets business traveler going forward as companies cut back on their T&E budgets.

Groups had been included in the strongest segment thus far. In fact, our group revenue is up 5.4% in the second quarter and cancellation rates remain about the same as last year. However, the short term group pick up often referred to as the 2Bs has declined rapidly in the last two periods. Other groups on the books are still showing we have greatly reduced our expectations for additional group walk-ins for the balance of the year. Accordingly, they have done a more conservative fewer demands in the current lodging environment. We are revising down our expectations for the second half of 2008.

For the third quarter, our revPAR results will be impacted by the softening general economy as well as poor event calendars in both Boston and Chicago, our two most significant markets. Demand in Helena is also expected to decline. We do expect to see some strength in market place in New York. Overall, we now anticipate revPAR in the third quarter to decline by 3% to 5%. This is considerably lower than our properties currently forecast. Our managers currently forecast revPAR to only decline 2.6% in the quarter. Our revPAR guidance reflects our risk assessments of 2B groups as well as trend analysis in the business transient and leisure segments. So, the start expectation for revPAR, adjusted EBITDA at the third quarter expected to range from $36 to $39 million and adjusted FFO per share to range from $0.32 to $0.34. We expect continuing challenges in the fourth quarter. But we will have some benefits from our better group base generally and at Griffin Gate hotel will benefit from the latter company held in Kentucky this year.

For the full year, we now expect revPAR growth to decline between 1% and 3%. This is well below our property’s current forecast showing revPAR up nearly 1% for our portfolio. Chicago Mary Downtown, which underwent a massive renovation earlier this year, negatively impacts full year revPAR by about one percentage point. Based on our new revPAR, range, we expect adjusted the EBITDA for the full year of $175 million to $181 million and FFO per share of $1.60 to $1.51. These numbers include the full benefit of aggressive cost containment plans and assume the completion of our $4.8 million share repurchase program in the third quarter.

Now, I will turn the call over to John for details of our individual profit performance. John.

John L. Williams

I will talk about our second quarter property results and provide some additional perspective on our expected full year 2008 hotel performance as well as our capital improvements and initiatives. In the second quarter our strongest revPAR performance were the Chicago Conrad, LAX Marriott , and the Courtyard 5th Avenue in New York up 12.5%, 9.3%, and 7.4% respectively over 2007 second quarter. Chicago had a good city wide convention calendar in the quarter while LAX and the 5th Avenue Courtyard enjoyed good transient business.

Other strong performers included the Torrance South Bay Marriott , the Renaissance Worthington and Fort Worth and the Salt Lake City Marriott, all up approximately 6% for the quarter. Foreign and good transient demand growth while Worthington and Salt Lake City had strong group business in the quarter. New York City remains a relatively strong market; with international and corporate demand deep enough to overcome financial sector retrenchment. They all enjoyed another good slow season, although the early Easter holiday compressed business in the margin resulted in the soft April.

Weaker performers were Atlanta hotels as Atlanta remains soft. Orlando was the soft market and a newly renovated competitor restrained results. In Austin where the legislature meets only in odd years is creating soft first halves in even years. Increase supply in downtown Austin also impacted the Renaissance. New York Hotels Marriott is suffering along with the rest of the Southwest corner of suburban Chicago. LAX revenue growth was solid but flow through was negatively impacted by the implementation of LA’s leading wage law and lower catering revenue.

For the full year, we expect New York City market to moderate somewhat in the face of tough comps. We expect California transient trends to soften and airlines cut-backs to begin impacting the contract segments. As expected, the Western Boston Waterfront performance moderated in the second quarter as the convention calendar soften from the strong first quarter. For the balance of the year, the hotel faces challenges in the second half particularly Q3 when the convention calendar is soft and the market absorbs the recently opened Renaissance hotel.

Although the Westin will benefit this year from the doubling of available median banquet space, which we have recently completed, the real impact will be in 2009. Hotel bookings already reflected dramatic increase in group revenue. With over 108,000 definite room nights on the books. Nearly, the total number of group room nights were forecasting from all of this year.

In the first half, the Westin’s transient rate for corporate and leisure were up about 10% over first half of 2007, a fraction of the strong group base that hotel enjoys. In the second half with a lower group base, the hotel will likely have to open discount channels frequently. In Q3 total citywide convention room nights in Boston were down about 7% for Q3 2007 but the BCEC which is adjacent to our hotel is down 21% as this year conventions are weighted towards the highs.

Imagine last quarter that in Chicago we were beginning to see a slow down in call volume and tentative bookings. The trend has continued and all of 2009 is still banner citywide year, group base at the Marriott is up 8% versus the same time last year, now for the positive variance of 18% at the end of the first quarter. In Q3 City wide conventions with over 6000 peak room nights in Chicago, are forecast to be down 25% from Q3 2007. For the full year, we expect continuation of poor performance in New York Brook Hills, Marriott, and our Atlanta Hotels particularly Waverly and Westin.

Our group booking phase trends have slowed across the portfolio although the phase remains slightly above the same time last year for the second half it is down 5% in Q3 and up 5.8% in Q4. All of those metrics are down 200 to 300 basis points from the Q1 case report. Although cancellations and group slippage are our concern, we do not see systemic evidence of either at this point. And while 2009 phase is more meaningful at the large convention hotels like Chicago and Boston, it is still encouraging that the 2009 group revenue phase across the portfolio is up 21% versus the same time last year. That number was 26% in Q1 phase report.

In the second quarter, food and beverage revenue increased 2.3% across the portfolio over Q2 2007. Food and Beverage margins improved 50 basis points to 34.6%. Catering and AV revenue was up 4.3% in the quarter and margins improved by 70 basis points. We would anticipate food and beverage revenue to moderate or decrease as group sales moderate or decrease for the balance of the year.

On the cost trend we expect total portfolio operating cost to go for around 1% for the year. Reflecting a 4.4% increase per occupied room. As we have mentioned, each of our 20 properties has implemented varying levels of contingency plans to control cost in this uncertain economic environment. We have left open positions unfilled, utilized PTO to reduce payroll, reduce Par levels of operating supplies to reduce man hours including beverage outlines in kitchens.

We anticipate operating cost savings from contingency plans currently in effect of over $5 million for the year and this is built in to our guidance. Additionally, we are seeing benefits of an energy initiative which we are again implementing across the portfolio. In labor systems we have implemented in Boston in our Frenchman’s Reef resort in the past six months. We will complete the labor study in Vail this summer.

As evidence of the success of the initiatives our Q2 wages across the portfolio were up only 1.6% our goal remains to run as efficient in operating models as we can in our hotels and hold house profit margins as much as possible in the face of flat to declining revPAR. We continue to find good value creation opportunities in our own portfolio of hotels. As we have mentioned previously in 2008, we will spend $70 to $80 million to improve our hotels. In the first quarter, we substantially completed on time and on or under budget the projects that are two largest hotels, the Chicago Myriad Downtown and Westin Boston Waterfront.

At the Chicago Marriott, we spent $35 million to renovate all the meeting space, reinvent the lobby, change the food and beverage outlets, creating incremental 15,000 square feet of valuable meeting space, and modernized the elevators. At the Westin Boston Waterfront, we spent $19 million for converting non-revenue producing shell retail space into 37,000 sq. ft. of desirable meeting and exhibitor space. We have also recently signed a restaurant tenant to lease 6700 square feet of space and he is scheduled to open in October. We will complete the conversion of the dating night club in Austin to a 5500 square feet catering facility and we will complete a ballroom renovation at Atlanta Alpharetta both over the summer.

In the fourth quarter, we will be doing an $8 million guest room renovation at the Salt Lake City Marriott planned it almost entirely from the property’s escrow fund. On the acquisition front, we continue to look at offerings that are consistent with our portfolio strategies but have not bid on any hotels from the past year. Although metrics have clearly moved in the various directions the dramatic reevaluation of public rates has widen the public/private value discrepancy.

With that, I will turn it over to Mark.

Mark W. Brugger

At this time we would like to open up the call for your questions.

Question-And-Answer-Session

Operator

(Operator Instructions) Your first question comes from the line of David Loeb from Robert W. Baird.

David Loeb - Robert W. Baird & Co., Inc.

Hi. Bill, you described that this is the most difficult part of the cycle. Does that mean you think it is going to stop getting worst any time soon?

William W. McCarten

I do not know David if I have a crystal ball. I think ’09 still has a lot of uncertainty remaining and we will have a better feel as we get closer. My guts might tell me that sometime in ’09 we are going to see the draw and start seeing some great opportunities but it is early yet.

David Loeb - Robert W. Baird & Co., Inc.

And if ’09 starts out worse than expected and you find yourself nearing 100% dividend payout from half of the or more than 100% payout. What do you think the board’s reaction to that would be?

William W. McCarten

Well, first of all extending our dividend is important to us. Liquidity is important to us. We are certainly well-established with our balance sheet. I think what we would have to do is really assess what ’09 look like, what kind of duration we thought the problem might be, and how significant the problem might be. And secondly, I think we would always and we continually do this. So, look at the value of alternative uses with capital.

David Loeb - Robert W. Baird & Co., Inc.

Does that mean that if you saw, given the priority of sustaining the dividend, if you saw a short term period in a quarter or two where you might have to fund a portion of the dividend. Would you probably continue to do that?

Mark W. Brugger

Yes, the first quarter of this year which is not our strong quarter for the way our portfolio lays out, we borrowed to pay the dividends. So that is by itself not the defining position.

David Loeb - Robert W. Baird & Co., Inc.

Right, and then clearly seasonality always affects that since you pay the same dividend and your earnings are seasonal. I guess the question really is if it looks like it is more of a fundamental problem rather than a seasonal problem. And I certainly hear your answer on that. I have time for one more?

Mark W. Brugger

Sure.

David Loeb - Robert W. Baird & Co., Inc.

This is more of a John question. Can you just talk a little bit about where the opportunities might lie, that Bill referred to, and how those acquisition opportunities might come up important to the Marriot relationship and cap rates?

John L. Williams

Starting at the top, I am not sure where the opportunities are going to come because at this point there is no distress selling out there. We do not have financings coming due in any kind of order of magnitude. So we have not seen distress in the market yet and I think that is what is going to create opportunities. I cannot predict when that is going to happen. As you know, most of the re-financings probably do not come due for a couple of more years.

Secondly, from the cap rates stand point the recent evaluation of the lodging rates had pretty much taken the public companies out of the market because the spread is just now wider from public to here, from private to public. So, it is pretty difficult to see how we could climb the value greater than some to our international and private buyers. Leverage is obviously is going to be an issue but if people alone will put 60% to 65% as opposed to 85% leverage on it. It is less than a $100 million transaction. I think there is money out there still.

Mark W. Brugger

David, if I could just clarify my comment in my prepared remarks, my view is that the times of greatest opportunity in this business are around the peak and around the lows. If I look back at last spring, I think we could all benefit with volume size. Notice there were some tremendous value opportunities then perhaps in a different way. And my experience looking back, let us say 2003 which turned out to be in 12, I am not sure we all recognize it. That was the time when last cycle there are a lot of buying opportunities.

David Loeb - Robert W. Baird & Co., Inc.

Yes. And how will the Marriott relationship figure in?

Mark W. Brugger

Generally, in times of distress the Marriot relationship is going to be more valuable because we need partners more than they do in times of when capital is plentiful. We are talking to them about the couple of different areas of opportunities. Nothing specific currently but we are trying to sort of position the relationship for the opportunity phase.

Operator

Your next question comes from the line of Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank Securities

Could you just remind us what percentage of your group roommates for ’08 were booked in ’07 or earlier?

Mark W. Brugger

I am sort of confident that I have the answer for you, Chris. I will tell about this year because I cannot look back at this point. But at this year we have got about for the balance of ’08, we have got about 94% for what we needed for the back half of the year on the books. Grow nine that number is about 51%. I think that is probably consistent with last year. I remember, about mid-year having about 50% of this year’s roommates on the books for last year.

Chris Woronka - Deutsche Bank Securities

I know you have not really started the corporate negotiations yet but how are you guys going to approach it, just in terms of everyone else in the industry is raising prices for various reasons and you guys have the expense that everyone else has. At the same time the fundamentals are weak, there is a little bit more supply. I mean, how are you – not even looking for a number -- but how are you just going to approach those discussions and what is the goal, if you could define what the goal is in terms of the rate increases that would be helpful?

Mark W. Brugger

We will work with our three branches starting with Hilton and Marriot. And the strategy at this point is to try to maintain inflation price increases. I think if we are able to do that, it is probably, again come at the cost of some other things that are less tangible but expenses such as last room availability and things like that which we were able to get away from in the last couple of years.

So, we are approaching it with some degree of optimism. We will see how the company has received it because there are a lot of cut backs out there. Chris, I want to clarify a couple of numbers I gave you. I said 94% of what we need for the balance of the year. We have 94% of total ’08 group revenue on the books. For the second half of the year, we have 90% of what we need. It includes Q’s 1 and 2. We have 94%.

Operator

And your next question comes from the line of Dennis Forst from KeyBanc.

Dennis Forst - Keybanc Capital Markets

. I wanted to get a clarification on your level of confidence for next year. I think Bill said that as of now there is 180,000/108,000(?) group rooms already booked for next year. Is that right?

Bill W. McCarten

That is in our Boston hotel.

Dennis Forst - Keybanc Capital Markets

That is just the Boston Hotel? Okay. And that was about how many group nights there were going to be for the whole year at that Boston hotel?

Bill W. McCarten

For this year?

Dennis Forst - Keybanc Capital Markets

Yes. For this year. Okay. On the group pays so is up 26% in the first quarter up 21% the second quarter vis-à-vis last year. Are you confident that those rooms are going to get filled. What is your level of certainty or uncertainty of those rooms being filled next year?

Bill W. McCarten

Well, those are contractual rooms for the most part. There are some in Chicago that are not contractual, they are citywide. But our expectation would be that most of those would be achieved and realized. Where you have risks and this comes as you detail the groups not at this point but as they are closer to fruition. When you detail the groups you then plan for attrition, food and beverage spend, things like that. We are seeing attrition rates a little bit higher although, as I have said, not materially. They are running about 15% attrition including food and beverages pending towards the contractual level which is fairly predictable at this stage of the cycle. So, as the hotels detail the groups that is sort of what they are planning going forward and I am sure that will be the case in’09 although it is early to do that.

Dennis Forst - Keybanc Capital Markets

And why is group pays up so much for next year given the state of the economy?

Bill W. McCarten

In Boston, it is a couple of things – I think it is a favorable citywide calendar. A little bit towards the Busy Easy as opposed to the hinds which is this year. Secondly, we have 3700 sq. ft. of new space which meeting planners have been very anxious to book. So, we have got a lot of smaller corporate groups that we are able to put in there that we have not had the space to do before this year. And then in Chicago, there is a favorable trend in the citywide and we also have new space there which is proving to be very helpful both this year and the fourth quarter and next year annually. So, if you look at the 21% increase, probably 2/3 of that is between Boston and Chicago and a couple of the other smaller hotels, LAX for example.

Dennis Forst - Keybanc Capital Markets

What percentage of your overall business is group?

Bill W. McCarten

It ranges by quarter anywhere from 35% to 38%.

Operator

You next question comes from the line of Will Marks from JMP Securities.

William Marks - JMP Securities

I have a question on the corporate negotiations. Just a follow up. Can you talk about what happened this year with bookings or corporate rates from last year? Did you have the numbers stuck? Do you tend to, in a situation like this as slower economy, do you tend to relax your standard or not force your clients to use as many room nights?

Bill W. McCarten

Well, we do not really have volume agreements with these guys. It is really rate agreements. We have stuck to the rate agreements. We have not come off the rates although we have been asked in some cases. What we have done is we have thrown in some goodies like maybe free breakfast or internet – or free internet access. But, that is not unusual. So, the rates have hilled up. In some cases the volume has dissipated a bit like in New York, we lost our Citibank account but we are able to back fill it with other corporate customers. So, it really depends by hotel. But you do not really have volume guarantees as a part of this corporate rate negotiation. You have sort of indicative volume.

William Marks - JMP Securities

And then just my second question unrelated on the group side. They are actually across the board. You mentioned a little bit on food and beverage spending or outside the room spend – can you expand a little bit on just what we are seeing in general across the hotel industry. Is that taking more of a hit than the actual room revenues?

Bill W. McCarten

I would not say it is taking more of a hit but we are anticipating and have realized some sort of trending towards the minimum, if you will, under the contracts. So, while the groups are reducing below the minimum they tend to be reducing to the minimum. As long as you can budget for that and forecast that. It is not difficult to deal with but we are seeing some catering reductions, for example in LAX, we have seen a fairly 11.5% catering reduction in the quarter which was a function of fewer groups that also groups scaling back on the food and beverage spend.

William Marks - JMP Securities

Then just a final question and back to the corporate negotiation. What happened – let us say back in 2002 in terms of – or maybe 2001 but because that was a tricky time. Did you have any leverage to raise rates to go to your customers and say, look we need to push them by to the level of inflation?

Bill W. McCarten

In 2002, no. hotels did not have much leverage but this is not 2002 or even 2003. I don’t think that is what we are facing in 2009. So, as I say we will see if it is sort of heck type of question at this point but the plan is to go in for an inflationary increase with recognition that we are going to have to give on some of the softer issues.

Operator

Your next question comes from the line of Michael Salinsky of RBC Capital.

Michael Salinsky –RBC Capital Markets

Looking at the cost contingencies that you put in place throughout the year here, what revPAR is needed to break even on the margins line right now?

Bill W. McCarten

I think we have consistently said that we need about 3.5% revPAR on the full year basis to keep our house profit margins flat. As we kind of move below that 3 ½, two plans come into effect but the lower you get on the revPAR and certainly what is going negative, it is more and more difficult to make in the margins

Michael Salinsky –RBC Capital Markets

Secondly, with the Los Angeles Airport Marriott and the Orlando we have seen cut backs in the airline industry right now particularly in Orlando, are you seeing any pressure on the negotiated business side there or do you expect those to moderate significantly on the second half of the year?

Bill W. McCarten

In that – well, we are seeing softness in transient in Los Angeles and in group in Orlando. So, I don’t think it is directly related to the airline activities. What is directly related to the airline activity is contract business which is fairly significant in LAX and Torrance and we are anticipating, we are seeing some, but we are anticipating in the fall effective I think in late October or early November, LAX is going to see some fairly dramatic, among big airports is going to see probably a high end of airline cut backs. So, I anticipated some contract impact there.

Michael Salinsky –RBC Capital Markets

And finally, you have talked about the acquisition environment right now. Can you talk a little bit more about the asset pricing environment? How much your cap rates are off right now or how much your asset down from the peak and at what level would you – how much further pressure do you need to see before you actually jump in to start looking at, making bids or trying to acquire some of these properties?

Bill W. McCarten

I think right now based on recent transactions and there are a lot of them but the range is 7 to 8 with urban assets being at the lower end and suburban assets maybe in 8 ½. That is based on actual transactions not the asked. They would have to come down significantly if you think about re-trading at a 10 cap on trailing 12 NOI so it is a pretty wide spread that we are facing right now. So, the combination of the wide spread and/or heightened concern about the liquidity. I think it would have to be a compelling deal for us to buy and I do not want to see compelling deals on the rise and at this point.

Mark W. Brugger

This is Mark. Just add on to that. I think the opportunity that would have to arise would not just be an adjustment of cap rate. There have to be some kind of real value add play for us to do an acquisition in the near future. That has to be kind of a re-branding, repositioning where there is an opportunity to increase the cash flow of 40% to 50% through some initiatives versus the whole markets cap rates of just 25 of 50 basis points. That is not going to be enough for us to jump into the market, an opportunity creating value for our shareholders.

Michael Salinsky –RBC Capital Markets

Then, as a follow up to that. You look at your repurchase program right now for $48 million shares. I mean, that was like the most compelling adjustment at this point. Would you look to expand that I you exhaust the 4.8 million shares at this point?

Mark W. Brugger

We have talked to the board about our share re-purchase program and we intend to, assuming that our stock trades within this range complete our program this year, I think we need to get a little bit better visibility on 2009 before we could expand our program but it is something we regularly talk to our board about.

Operator

Your next question comes from the line of William Truelove from UBS.

William Truelove -UBS

When I am looking at your balance sheet, you have gone from 94.5 million shares to 94.7 so where is the 2.8 million shares being repurchased? I know that as of June 13. So is that as of June 13 to today or is it that you are issuing shares and then just repurchasing them back? What is going on?

Mark W. Brugger

Yes. I think what you have seen is that we started buying shares just in the beginning of June. Our quarter ended June 13 so we only bought 240,000 shares in the second quarter so the bulk of the 2.8 million, what is third quarter of that? So you see the share count change for the third quarter.

William Truelove -UBS

If there is no compelling acquisition activities, given where you are trading relative to the cap rates. What about the reverse of that – there should be a very compelling analogy to expel some assets. Is that right? Given what your stock is and use those proceeds to repurchase stock?

Mark W. Brugger

That is something that we are looking at right now. So, it might be a great opportunity to sell some of your less strategic assets or assets that you think have the slower growth prospects over the next three to five years and three to four of that capital. So that is something that we are evaluating currently.

Operator

And your next question is a follow up question from Dave Loeb from Baird.

David Loeb - Robert W. Baird & Co., Inc.

John, to follow up on the cap rate question. If you looked at your blend of assets, what is the cap rate that you could actually liquidate the portfolio today in total?

John L. Williams

I do not know the answer to that question, David. We have not look at it in those terms. We look at trailing 12 and what the cap rate relates to based on how the trading but is not so much in the individual assets that we do tend to price. Tend to be the ones that are non-strategic and the ones that fall at the lower end of the zone and ones that are candidates for disposition but we have not gone through the portfolio lately and tried to put the cap rate on New York for example

David Loeb - Robert W. Baird & Co., Inc.

Right. Do you expect that New York would likely be below the 78 range that you have cited?

John L. Williams

Materially.

David Loeb - Robert W. Baird & Co., Inc.

And how about big bucks like Chicago or Boston? Boston, of course, presumably has a bit of a benefit from being really new and ramping.

John L. Williams

Right. They would command different cap rates one is brand new and as you say ramping up. Although it has not ramped this year, next year, it looks like another kind of a rejuvenation year, if you will, then kind to getting back on the ramp patterns. In Chicago, it just would depend I guess on the buyer’s view of the kind of a trophy component of the hotel. It is such a great real estate location. Such a great decent real estate. We would look for evaluation based on the recognition of its kind of trophy status.

David Loeb - Robert W. Baird & Co., Inc.

But that would put it sub seven right?

John L. Williams

David, there has been virtually no transactions over a 100 million in the last 6 to 7 months. The only significant transaction was with Century Plaza which is at 5 ½ cap which we were surprised about. So, there is kind of only one marker on the space but I do not know if that defines what the current cap rates are.

David Loeb - Robert W. Baird & Co., Inc.

And that one clearly is muddied by the potential for redevelopment land play?

Bill W. McCarten

Yes.

David Loeb - Robert W. Baird & Co., Inc.

Yes. I think so. So, Okay, that helps. We are trying to figure out what the liquidation value would be today and it sounds like – well , seven to eight maybe what you are seeing out there for assets that are not necessarily assets that are much like yours or much like the number of yours.

Bill W. McCarten

Right. I think if you take the urban assets it would just be an individual transactions that would define the cap rates but our expectations would certainly be much higher than the 7 to 8 cap rate.

Operator

And you have no more questions at this time.

Bill W. McCarten

We would like to thank everyone for their time today and appreciate your continued attention to our company. Thank you.

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