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Executives

Jon Stanner - Vice President, Capital Markets & Treasurer

Rip Gellein - Chairman, President & CEO

Diane Morefield - EVP & CFO

Analysts

Jonathan Mohraz - JPMorgan

Jeff Donnelly - Wells Fargo

Ryan Meliker - MLV & Company

Will Marks - JMP Securities

Ian Weissman - ISI Group

Bill Crow - Raymond James & Associates

Strategic Hotels & Resorts Inc. (BEE) Q3 2012 Earnings Call November 8, 2012 10:00 AM ET

Operator

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

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

Jon Stanner

Thank you and good morning, everyone. Welcome to the Strategic Hotels & Resorts third quarter 2012 earnings conference call. Our press release and supplemental financials were distributed yesterday and are available on the company’s website in the Investor Relations section. We are hosting a live webcast of today’s call, which can be accessed by the same section of the site with a replay of today’s call also available for the next month.

Before we get underway, I would like to say that this conference call will contain forward-looking statements under Federal Securities Laws. These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates, in addition to the management’s beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results maybe affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings. In the press release and supplemental financials the company has reconciled all non-GAAP financial measures to the directly comparable GAAP measures in accordance with Reg G requirements.

I would now like to introduce the members of the management team here with me today. Rip Gellein, Chairman and Chief Executive Officer and Diane Morefield, Chief Financial Officer. Rip?

Rip Gellein

Good morning, everyone. Thank you for joining us on our third quarter conference call. We are very pleased with our third quarter results and we look forward to discussing the highlights. We continue to execute on our clearly defined strategy of conservatively managing and restructuring our balance sheet, while we are smartly growing our world-class portfolio of hotels with deals like the JW Marriott, Essex House and executing on the operation side every day in a best-in-class fashion.

Today, I will give you an update on the short-term effects of Hurricane Sandy, a quick update on our acquisition of the Essex House, the status of our sale of the Four Seasons Jackson Hole and lastly some early thoughts on trends for 2013.

As you know, last Friday we announced Laurence Geller’s departure as CEO and a Member of the company’s Board. The separation agreement between Laurence and Company was filed on Monday of this week. In addition, my employment agreement has been finalized and should be filed next week. On behalf of our team and the entire Board of Directors, I want to again thank Laurence for his many, many (inaudible) and wish him all the best. While Laurence has moved on, nothing else about our team, our strategy or our vision is changing. Our focus on delivering shareholder value remains paramount.

Our strategy is simple; use our industry leading asset management expertise to extract incremental value from our existing properties, conservatively manage our balance sheet and seek selective and accretive opportunities to grow our portfolio. With the industry best high-end hotel portfolio and an experienced leadership team, we believe we have the right framework to continue to deliver on our strategy.

Before we get into the details of the quarter, let me provide you with an update on the impact of Hurricane Sandy on our portfolio. As many of you know, we have three hotels on the East Coast of the country, two of which, the Four Seasons in Washington DC and the Essex House in New York City were directly in the path of the storm. Most importantly, there were no reported injuries at either hotel and both properties remained open and occupied throughout the storm and sustained no significant damage.

The Essex House was fully occupied throughout the week of the storm as many hotels in Southern Manhattan were forced to close, for instance, Le Parker Meridien hotel across the street from us was evacuated due to the damaged crane overhead.

We do expect some minor softness at our other properties throughout the portfolio given the travel difficulties emanating from the East Coast, but the cumulative impact will likely be less than $500,000 in revenue.

Yesterday, we reported another very solid quarter of operating results which Diane will provide you with more details on shortly. Comparable EBITDA for the quarter was $46.6 million in our total U.S. portfolio experienced RevPAR growth of 5.8% largely driven by rate increases. Excluding the Four Seasons in Washington DC which faced an unusually difficult comparison to last year, RevPAR in our US portfolio of hotels increased 7.4% which is once again near the top of our peer set. This came despite what was a weaker September for the industry given the shift in the Jewish holidays and the Fourth of July holiday falling on Wednesday which had a significant impact on business travel for that entire week.

Although September was soft, October was at least partially the beneficiary of the holiday shift that negatively impacted the industry September results. Importantly, supply growth across the industry and particularly in the high-end segments in which we compete, remains well contained, so luxury demand growth should continue to exceed very limited supply growth for quite some time.

Profit margins at our hotels continue to expand as more of our topline growth is driven by high flow through rate increases and our asset management team keeps a tight reign in operating expenses. We continue to deploy capital in a prudent but effective manner. For example, earlier this month, we opened the new 52,000 square foot Palomino Conference Center at the Fairmount Scottsdale Princess Hotel which includes a new 23,000 square foot state-of-the-art ballroom. This $22 million capital project equally funded by our partner Walton Street and ourselves is already producing terrific results.

We have already booked nearly 25,000 more group room nights for 2013 than we had on the books at this time last year for 2012, that’s a 45% year-over-year increase. We anticipate generating double digit yield on this investment. Given the current environment, going forward we will evaluate our capital expenses very carefully and prioritize only those projects with obvious good return.

We were thrilled to close on the acquisition of the Essex House Hotel in New York City, Central Park in a joint venture with our long time partners KSL. As you know, the hotel was immediately rebranded as the only JW Marriott in Manhattan and Marriott provided an NOI guarantee is outlined when we announce the closing of this acquisition. We are currently working with KSL to develop our master real estate plan for the hotel which includes evaluating all aspects of the property for various uses including condo sales, food and beverage and retail to maximize the overall real estate value of that asset.

We have only owned the hotel for just over a month, but the brand transition has clearly been a success and the Marriott systems are taking hold. We are forecasting an average rate of $475 for our ownership period this year and the hotel is already outperforming our underwriting. We also recently announced our plan to sell the Four Seasons in Jackson Hole. We closed on the acquisition of this asset in March of last year and have been the asset manager at the property since 2009.

Proceeds from the asset sale will effectively be used to match the equity we put into the Essex House joint venture by paying down the draw on our line of credit. We made the strategic decision to recycle capital from the sale of an asset where we have dramatically increased the NOI and value of the hotel into a higher growth asset in the critical New York City market at a very compelling price point.

We anticipate the sale to close in the first quarter of 2013. While we are not in a position to give a specific guidance for 2013 today since our budget process is currently underway, we felt that it was important to provide a high level outlook for next year.

As you've heard from our weak peers and the hotel management companies that have already reported for the quarter, hotel executives are generally taking a more cautious tone going into the next year which we believe is at least partially driven by some of the macroeconomic and political noise that has been so widely publicized.

Importantly, our group pace for next year is up at a healthy 6% in room nights, with rates 2% higher than the same time last year yielding an 8% growth in revenues on definite bookings.

In a phenomenon which maybe unique to our specific portfolio our first quarter pace from next year is down roughly 15% in group room nights partially driven by a couple of large non-repeat groups hosted in the first quarter of 2012. For example, the Westin St. Francis in particular is down in the first quarter primarily as a result of a large start [Starwood] meeting not repeating in 2013 and the Chicago market faces a tough January comparisons as two major city wide conventions are not back next year.

However, despite the weakness in the first quarter the latter three quarters of the year are currently up double-digits in group room night growth year-over-year and we anticipate closing some of the gap in the first quarter with short-term bookings.

In summary, I'm very pleased with our third quarter results and optimistic about 2013 given our solid balance sheet, terrific asset management capabilities and as well as our ability to cautiously analyze growth opportunities through both internal capital projects and external growth as appropriate.

I will now turn it over the call to Diane for more details in the third quarter. Diane?

Diane Morefield

Thanks Rip, good morning everyone. We filed our third quarter financial results last night which included a couple of unusual one-time items that impacted our results that I would like to highlight.

First, we recorded approximately $3 million in transaction costs related to the acquisition of the Essex House Hotel and our formation of the joint venture with KSL. Because the hotel is consolidated in their financial statements for accounting purposes, the full $3 million charge has been recorded in the G&A expense line and on our income statement.

KSL’s share of the expense gets deducted in the minority interest to ultimately our bottom line quarterly results are impacted by a net $1.5 million charge for these transaction related costs. However, the G&A line is skewed by the full amount in the quarter.

At the property level, we've recorded a one-time $2.7 million real estate tax charge of the Hotel del Coronado as a result of the reassessment of the hotel related to the restructuring of the property in February 2011. But we are just [thrilled] this tax assessment in the third quarter of this year. We're appealing this assessment and feel confident that there will be partial reversal that cannot estimate our success at this point. The company’s pro rata share of this charge is approximately $925,000 in the quarter. So excluding these items, comparable EBITDA was actually $49 million and comparable FFO was $0.09 a share, out of which are inline with consensus estimate.

Turning to hotel operations, RevPAR in our total US portfolio which excludes only the recently acquired JW Marriott Essex House increased 5.8 during the quarter, driven primarily by 5.2% increase in ADR. Total RevPAR increased 5.7%.

Our RevPAR results as Rip pointed out for the quarter were significantly impacted by the Four Seasons DC hotel, which last year in the third quarter hosted the IMF annual meeting.

That group alone provided the hotel with $1.2 million in revenue, trailing now with [5.9] minimum space and an average rate of $1,200. Given the result, equivalent meeting in DC this year and along with planned displacement for certain capital projects that we executed during this fall election season.

The hotel experienced a 19% decline in RevPAR for the quarter. Excluding the Four Seasons DC, our US portfolio RevPAR growth for the quarter was a strong 7.4%, driven by 6.7% increase in average rate.

ADR growth was highest in the resort hotels which were up 8% year-over-year, compared to 2.9% rate growth in our urban portfolio. Rate growth was also driven by a continued shift in business mix from lower rated discount in transient room nights, into higher rated premium transient room nights which led to a 5.8% increase in overall transient rate.

Occupancy in the total US portfolio increased by 0.4 percentage points with group and transient room nights increased by 0.8 and 0.4 percentage points respectively. The third quarter is always heavily weighted towards the transient side of our business with nearly 65% of occupied rooms coming from the transient segment.

As I mentioned, discounted transient rooms declined nearly 9% year-over-year while premium rated rooms increased by nearly 23%. Group room nights were relatively flat across the portfolio and with the exception of Four Seasons DC, hotels that saw declining group room nights were able to compensate with the improvement in group rate. For example, the Hotel del and Westin St. Francis two of our bigger group houses in the portfolio saw group rate increased 19% and 10% respectively in the third quarter.

Our reported EBITDA margins were flat year-over-year. However, again excluding the one-time $2.7 million real estate tax charge at the Hotel del, EBITDA margins expanded by a 110 basis points which equates to a two-time EBITDA growth to RevPAR growth ratio which is line with our stated goal.

Let me comment on a few hotels that were particularly strong performers in the quarter. RevPAR of InterContinental Miami increased by 27% during the third quarter and increased at the market share index by 15%, primarily resulting from nearly 10% increase in ADR.

As you know, a $30 million renovation project that the hotel is nearing completion and the returns on our capital investments are expected to be in the 15% to 20% range. The renovation projects include an upgrade to all of 641 guest rooms, a lobby enhancement, the addition of a new Richard Sandoval restaurant and the unveiling of our 19-story digital canvas on the building’s exterior. RevPAR for Ritz-Carlton Laguna Niguel was up 21% in the quarter as the hotel continues to benefit from an increasing group room night which would during traditional lower occupancy period as a result of successful marketing strategies recently implemented at the hotel.

Further compression nights at the hotel were up 10% year-over-year. Our European RevPAR increased 5.6% for the quarter on a constant dollar basis driven by a 6.3% increase of the Marriott Grosvenor Square London.

Not surprisingly during the two week Olympic period, the hotel were enclosed to 100% occupancy with average rate over Euro 400, I am sorry 400 pounds, driving a 15% increased in constant dollar ADR. Results for the quarter were somewhat tempered by the anticipated to lower shoulder period immediately before and after the Olympics as travelers generally avoided the London area. For example, occupancy at the hotel was approximately 55%, the week immediately following the gain.

The Four Seasons Punta Mita continues to be drag on our result, as RevPAR was down 26% in the third quarter. The difficulties at this hotel have been well documented and we continue to work very proactively with Four Seasons on programs designed to generate incremental demand.

We have four separate packages set to be launched following the festive season including in our inclusive packages for transient customers and a fixed exchange rate program to attract Mexican travelers.

On a positive note, festive season at the hotel is once again strong. We are fully booked for the two weeks following Christmas with eight, [nine] minimums days at rates over 1,000 per night.

Longer-term, we remain optimistic in the recovering in the hotel which has incredible upside potential. Regarding our balance sheet, last week we announced the closing of the restructuring of the Hyatt Regency La Jolla alone.

The asset is owned in joint ventures between Strategic and GIC with our ownership at 53.5% and we continue to serve as asset manager. As part of the restructuring, we paid down the previous $97.5 million principal amount to $90 million which has now structured as a $72 million (A) notes priced at LIBOR plus 400 and an $18 million amortizing B notes with a fixed coupon of 10%. Both notes have five year terms set to mature in December of 2017.

Additionally the joint venture has committed $12 million to our capital reserve account to fund improvements at the property including a comprehensive guest room and bathroom renovation plant. In total, the company’s new capital investment in the property of approximately $11 million. This was our last maturity to be addressed in our two year balance sheet restructuring program.

In total we refinanced or restructured 13 properties representing approximately $1.7 billion in total debt. Our loan remaining maturity to address the Marriott Grosvenor Square, which does not mature until October of next year. We now have a smooth maturity schedule and a balanced mix of bank’s CMBS of (inaudible) company debt.

We currently have $135 million drawn on our line of credit and approximately 18.5 in letters of credit outstanding, leaving us with $150 million of line availability. At the end of the quarter, we also had around $80 million of unrestricted cash including cash held at the various hotels. Regarding guidance, we've also reaffirmed our full year guidance range. We project North America same store RevPAR growth to be in the range of 6% to 8% and total RevPAR growth to be in the range of 5% to 7%.

Year-to-date RevPAR in our same store North American portfolio has increased 7.6%. Our fourth quarter is naturally impacted by more difficult comparisons to fourth quarter of last year, when we reported RevPAR growth of 10%. Comparable EBITDA is still expected to be in the range of $165 million to $180 million and comparable FFO per share between $0.21 and $0.29.

Based on the results of the first three quarters of the year and our forecast for the fourth quarter, we expect results to finish closer to the mid-point of our guidance ranges. In addition, we have another $1.5 million and over a $1 million in EBITDA displacement due to finalizing several capital projects in the fourth quarter which again results to a mid-range of our estimates.

Regarding G&A as a percentage, we expect to end the year in the $30 million to $31 million range which is significantly above our normal run rate and includes the $2 million for Essex House related transaction costs and an estimated $2 million charge to be taken in the fourth quarter related to the separation agreement entered into with [Laurence]. This severance charge will be excluded from comparable EBITDA and FFO per share, consistent with how you treat non-recurring charges but regardless we will certainly be in our G&A expense line.

With that we would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question will comes from the line of Jonathan Mohraz with JPMorgan.

Jonathan Mohraz - JPMorgan

Two questions, the full year 2012 guidance you gave has $15 million adjusted EBITDA range, which implies the $15 million range for the 4Q which is a bit broad. Are you more comfortable with the low, mid or high end of that range? And then my second question is for Rip, which is, is your intention to relocate to Chicago or stay in Florida. Thank you.

Diane Morefield

Jonathan regarding the first question.

Jonathan Mohraz - JPMorgan

For the fourth quarter the implied EBITDA range will be a $15 million swing faced off with your full year 2012 guidance. So I'm just trying to figure out whether you’d be comfortable with the low, mid or high point of that, because that’s pretty [wrong]?

Diane Morefield

As we said, we are comfortable in the mid-point of all of our ranges, given year-to-date results of what we see in the fourth quarter including displacement and severance charges and the like.

Rip Gellein

And Jonathan, it's Rip. As I did when I was in Starwood some number of years ago and had a global position, my family stayed in Florida and I commuted to the office. I will do that here and be with the team here in Chicago as well as travel around to our properties. So that’s my plan.

Operator

Your next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed.

Jeff Donnelly - Wells Fargo

Just one housekeeping question, Rip since you mentioned it. Do you expect to file your employment agreement prior to maybe next week or is that going to be towards the end of the week?

Rip Gellein

My guess is it will be toward the end of the week. We are moving on that one as quickly as we can and we will file it as quickly as we can get it done.

Jeff Donnelly - Wells Fargo

And I guess just looking at (inaudible) comfortable, obviously with you just because you are new to some investors, can you talk about the economic backdrop against what you expect to be managing strategic? Specifically how do you think you are different than others out there in terms of how you think about the economy? Would people, in your eyes, do you think they will characterize you as an optimist or pessimist.

Rip Gellein

That’s an interesting question. I am clearly a glass half full guy. You know, I am clearly an optimist. I think that we will see how the economy performs just as the politicians do their things. I am hopeful that they will come together now that the election is over and I really don’t think my personal opinion is I don’t think we go over a fiscal cliff.

But as it relates to our company and these assets and this management team, I am hugely optimistic about our potential. I think we have a unique portfolio and just we’ve done some great deals over the last couple of years. We have worked really hard on our balance sheet. So I think we are in great shape and I am very optimistic about the future.

Jeff Donnelly - Wells Fargo

And if I could just kind of revisit the capital allocation decisions more broadly, whether its dispositions or capital projects, beyond just Four Seasons (inaudible) can you talk about how may be you might be thinking about dispositions in the next few years. Should I differ than may be how long you use to think about it, because I feel there are a lot of assets further a handful assets I should say they are going to be on the cost books of strategy if you will and may be they were just waiting for that moment. And then on the capital project side should we expect you will continue to proceed with projects like the Wine Rooms and Four Seasons in DC; the (inaudible) in Santa Monica are those still on sort of on paces you expected?

Rip Gellein

Well as I talked about in the prepared comments from a capital perspective, we will stay very prudent about what it is we spend. We’ll take as we would do each year. We will sit down with the team on the list of capital projects and evaluate them in each hotel, and we will be prudent about how we spend the capital, given the uncertainty we face in the world as well as just being prudent. I think we have done as we said in the comments some very good things in the last 12 months obviously Scottsdale is a huge hit. The improvements in Miami are proving to be very popular and our business at the Intercontinental Miami is up substantially. So we are pleased with what we have done but we’ll be very prudent going forward.

Operator

Your next question comes from the line of Ryan Meliker with MLV & Company. Please proceed

Ryan Meliker - MLV & Company

First Rip I was hoping you might be able to shed some light on this. Over the past this couple years or so Laurence had been very abdomen and I believe passionate about the facts that these stock price was incredibly undervalued. The internal growth of the portfolio was so much stronger then what our REITs and other peers might be seeing not only internally but externally as well. I want to get in to your general feel, do you echo what we’ve heard from lawns over the past couple of years or are you a little bit moderate like probably that’s the understanding. You just said that, you are known as an optimist, thanks?

Rip Gellein

I am an optimist.

Ryan Meliker - MLV & Company

That’s what you just said.

Rip Gellein

That is exactly right. In our view the net asset value of our hotel is substantially in excess of our current share price. So I share Laurence strongly held views on that topic.

Ryan Meliker - MLV & Company

And then with regards to Four Seasons, Jackson Hall and I apologize if I missed it. Can you give us some background as to why you chose to sell that particular asset, and if you’ve already gotten indication of interest or who you are expecting the potential buyer to be, like [monetary] name but type of buyer?

Rip Gellein

As we said again in our remarks, the reason that we picked asset is that we believe that it had, we built on a nice job with that asset and it had improved its performance substantially and we felt that it’s upside from here was not merely the upside of the Essex House both strategically related to the New York City market as well as the amazing location of that asset and our ability to buy it right and partner with KSL and with Marriott. So we think there's big upside there and more upside there than there was in Jackson Hole, so that was the reason to select that asset.

Diane Morefield

In addition, Jackson Hole is not encumbered by any debt, so 100% of the proceeds will be available to pay down the line and there is, you know, debt charges or the seasonal costs or anything like that. Regarding the status, we have hired an outside broker which we announced in the press release. The operating memorandum is still being finalized, so as we've said, its more likely a first quarter event, but the operating momentum hasn't even gone out or called for bid, so you know we really don't know the price profile of the likely buyer.

Ryan Meliker - MLV & Company

And is it safe for us to believe that you didn't get an unsolicited offer and that's why and that didn’t have an impact in you choosing the [several] assets.

Diane Morefield

We always were going to hire a broker to create a competition for the assets.

Rip Gellein

Yeah, we believe in the process, we think we will get better result if we go through the process.

Ryan Meliker - MLV & Company

And then one last question with regards to the Grosvenor Square asset, you know RevPAR growth of only 4% on occupancy down 7 percentage points, so I am just wondering can you give us some color on, you know I guess we expect, I certainly expect that London to be a little bit better than that given the Olympics, I know there were some challenges leading up to the Olympics with people choosing not to go to London, but was there anything in particular that really limited the upside of that asset in the quarter?

Rip Gellein

No I don't think so, actually I think we are reasonably pleased with the performance of the asset and we think it’s a wonderful asset in that marketplace and so overall we've been pretty pleased.

Ryan Meliker - MLV & Company

Alright so then should we, is it reasonable for us to assume that 3Q results which were down materially from the first half of the year are more in line with what we might see obviously factoring out FX impacts?

Rip Gellein

Yeah, there were two non recurring events in July, so I think that that's what created the anomaly there. Otherwise we think its performing quite well.

Operator

Your next question comes from the line of Will Marks with JMP Securities. Please proceed.

Will Marks - JMP Securities

Not the same after hearing that (inaudible) for the last eight years, but we will get over it.

Rip Gellein

You will have to put up with the Midwest assets.

Diane Morefield

And nobody wants to try and fake that accident.

Will Marks - JMP Securities

No, that would be a tough one. Alright a few questions here; I appreciate the detail on group in the next year, what is group as a percentage of your total revenues these days?

Diane Morefield

Well, ideally we are 50% group, 50% transient and we are still leaning more towards probably about 56% transient, and I think next year its still at similar level. But our goal is to get back to more than 50-50.

Will Marks - JMP Securities

And at this point it was what you have on the books, I assume it’s a fairly small amount, is it a quarter of the groups you expect for the year?

Rip Gellein

We were at 60%.

Diane Morefield

Yeah, we are already about 60% of definitely room nights for, we don't have a final budget for next year as we stated we are finalizing our budget, but about 60% of what we anticipate being total growth group room nights next year.

Will Marks - JMP Securities

Okay, so 60% of your groups have already being booked I guess?

Rip Gellein

That’s correct.

Diane Morefield

That’s correct.

Will Marks - JMP Securities

Okay, some other questions, on the Essex House, I think I saw in the press release that you are the managing member of that venture. Does that mean there is some sort of promote, or are you on equal terms?

Diane Morefield

Well, we are at 51-49 and we are the managing member, where they have the manager of the hotel operations. KSL is more involved in the other aspects of the hotel real estate. So we’ve kind of got a foot of duties, but really it's a straight JV. There is no promote, store, anything like that. It's very straight forward joint venture.

Will Marks - JMP Securities

Okay, thank you and then just my last question. Big picture on next year with some of the guidance that we've seen or there hasn’t been much but Marriott’s 4% to 7% that’s I believe system wide. Should we expect when luxuries outperform next year, and two, you definitely have some, you can’t look at your company as representative of the country, maybe thoughts on next year, Northern and Southern California and New York and Chicago I guess would be key markets, I would want to hear about?

Rip Gellein

We are optimistic as we said about next year for our portfolio. In particular, San Francisco looks strong. The city wide pace is up about 6%. We are bullish in Chicago. InterCon is up about 10% in group pace. DC we think comes back because everybody is back in town. We are focused in San Diego that’s down just a tad year-over-year but we are working hard there. Obviously, our Punta Mita property has struggled based on what goes on in Mexico these days, but we are, it also continues to have a pretty reasonable cash flow despite its struggle. So, we think there is big upside there. And Scottsdale obviously given the fact that we have got the new ballroom and group pace is up 45% to-date that should be a driver of our improvements next year as well.

Operator

Your next question comes from the line of Ian Weissman of ISI Group. Please proceed.

Ian Weissman - ISI Group

Rip, as you stepped into this new role what is your plan over the next 90 days? I assume you have seen some of the assets may be not all, met some of the people not all, so may be if you could just articulate what the goals over the next 90 days would be that will be great?

Rip Gellein

I am going to be on a lot of airplanes. I am headed out to New York momentarily; I will be at NAREIT next week, so I will have the opportunity between those two trips to meet a number of our shareholders in the street and the important people in our lives. I plan on travelling to especially the assets I have not seen but to go with Richard and his team and spend some time with the asset managers on an asset-by-asset basis, so that I get more familiar with the intimate details. And make sure that I am spending time with our largest shareholders as well to make sure I understand their thought process and their goals. So I spent a pretty fair amount of time with the team and which I think which has been great. So on that part, I am very comfortable with, it’s more about getting out and introducing myself to the important people in our lives including our JV partners because we got in fact a meeting with one of them momentarily. So that's how I will spend the time. I need to just be out and as we used to say in real estate business kick the dirt and meet the team. So that's what I will be doing.

Ian Weissman - ISI Group

The stock has underperformed for many reasons, I mean is it very possible that over the next 90 days as you do your own due diligence, I know you say that the strategy today is the same as its always been, is it possible though that we see a different strategy for Strategic going forward? Whether it’s new markets, whether is it asset dispositions and what would be the goal to get the stock moving?

Rip Gellein

I don't think you are going to see new strategy because I think anybody that came in and looked at this portfolio of hotel; it’s a unique portfolio, so we will take very good care of this portfolio. I think our team is focused on making sure we’ve got the best in class performance. And then, we will be cautious about what additional assets we add which we have been over the last couple of years. We’ve been cautious and we’ve done very smart deals and I think that's and I’ve been intimately from there with each of the deals that we have done. So I think the team has just done a great job. So I think more of that kind of activity is what we will showcase the value of the portfolio and the value of the company. So I don't think you will see us to be real aggressive or in some sort of different way begin to lever the company up in some way or chase deals at this point in time. I think being prudent and creative both with our internal capital as well as finding new assets is the prudent way to go and so I like our strategy.

Ian Weissman - ISI Group

And finally, you said the stock trades at a significant discount to NAV; do you care to share your thoughts on net asset value at this point?

Rip Gellein

No thank you.

Operator

Your next question comes from the line of Bill Crow with Raymond James & Associates. Please proceed.

Bill Crow - Raymond James & Associates

What have you been doing since we last saw you at Starwood other than Chairman of the company, what have you been using your time for?

Rip Gellein

I have been working with my son in various entrepreneurial adventures which has been great fun for me. I serve on the board of this Marriott spin-off, Marriott Vacations Worldwide as the Lead Independent Director. So that goes back to my roots. I sit on the board of a company or a non-profit called Mind & Life Institute which studies the health of the mind which I guess I need some of.

And I have enjoyed those sort of desperate and varied tasks and obviously I enjoyed being Chairman of the Strategic and I have always had a great passion and interest in the business so here I'm you know.

Bill Crow - Raymond James & Associates

Hopefully, the golf game has gotten better too along the way?

Rip Gellein

Actually we've invested in some golf courses, and the problem is that we are not taking advantage of it. But I will one day.

Bill Crow - Raymond James & Associates

You said you are going to go out and see some of the assets you haven't seen, which assets in particular have you yet to see.

Rip Gellein

I haven't seen Grosvenor Square in a long time, so I will need to go to London. I have not seen Half Moon Bay as many times as I have driven around it or by it, I have not actually seen that asset. I have not seen the Four Seasons and Jackson Hole. I think I have seen most of the rest, but not with the detail that I would like to go through. I mean I spend a fair amount of time at the Essex House before we bought it with our asset management team going through that and going through the comp set in New York. So I want to do that in most of our major assets. So Richard and I are going to become best friends over the next 90 days.

Bill Crow - Raymond James & Associates

You mentioned some of the more recent deals being very good deals (inaudible) and I think the sale of Jackson Hole will prove that out. But they were done, it was the last couple of deals using equity which delevered the balance sheet and obviously got you some pretty good deals. Talk about your approach to capital allocation, would you be willing at this share price or let's say 6.5 to issue equity if you saw one of more deals out there. And conversely now that the balance sheet has been improved and you are talking about the big discount to NAV, would you be willing to buyback stock at this point.

Rip Gellein

I don't think that we would use equity at this price, because we don't believe that would be prudent, its not reflective of the value of the company. So I don't think we would use equity at this level to go out and buy assets. If we can improve the stock price, obviously those were clever deals at the time and we would, from a structured standpoint and a balance sheet standpoint, it makes good sense. We just have to make sure we have to get the right price for the stock before we would enter in to those transactions.

Diane Morefield

Regarding the stock buyback number one, we are prohibited from doing that under our line of credit, and secondly to do that, we would have to lever up the balance sheet, which we don’t think makes sense.

Bill Crow - Raymond James & Associates

Okay, but you are selling in at least one assets, so there’s no thought to use any proceeds to do that though. I mean, if you ?

Diane Morefield

The proceeds will be used to pay down the line, because as you know, we’ve levered up on the margin at the time of buying Essex House and our goal is to stay leverage neutral to where we were before.

Bill Crow - Raymond James & Associates

And one final question, Rip, give us your philosophy on London the place that that asset holds within the REIT?

Rip Gellein

It's a great asset and we think it continues to have good upside absent of, normally we talk about just a minute ago, would we sell it at the right price? We might well sell it. So we're not against that. But for the moment, it is an important asset. It adds to the cache of the portfolio. So if we were to sell it, we would want a premium price.

Bill Crow - Raymond James & Associates

So the only asset, you are contemplating marketing over the relatively near-term few quarters is Jackson Holes. Is that what we take away?

Rip Gellein

That’s fair. That’s correct.

Operator

The next question is a follow up from Jeff Donnelly with Wells Fargo. Please proceed.

Jeff Donnelly - Wells Fargo

Rip you actually kind of touched on this, but I am just curious, has there been a reaction from your joint venture partner or those folks that are blanking on their name at the moment, but the folks who I took a significant equity interest after you guys did a stock for Four Seasons deal last year.

Diane Morefield

Woodbridge.

Jeff Donnelly - Wells Fargo

Woodbridge what’s been the reaction from them, because I would imagine and please correct me if I am wrong, that a lot of those are may be personal relationships with Laurence. So were people surprised or put off by this or has there been any sort of early reaction thus far.

Rip Gellein

We are scheduling trips to go see each of our major shareholders. We have talked to some and not all at this point, and as you would imagine for sophisticated investors their issue was is the company healthy and is the strategy consistent and they seemed very steady. So we’ve been, obviously I need to go meet the people that I have not met which is one of my high priorities. So they’ve been very steady and supportive.

Operator

And at this time we have no further I would like to turn the call back to Rip Gellein for closing remarks.

Rip Gellein

Thank you all for joining us. I will see many of you next week, and those I don’t see next week I look forward to meeting in person one day soon. Have a great day.

Operator

Ladies and gentlemen thank you for your participation in today’s conference, this concludes the presentation. You may now disconnect. Have a wonderful day.

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