Diamondrock Hospitality Co (DRH) 2006 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the DiamondRock Hospitality's third quarter 2006 earnings conference call. The Company is hosting a live web cast of today's call, which you can access on the Company's web site at www.drhc.com in the Investor Relations' section.

Many of the comments made today are considered to be forward-looking statements under the federal security laws. 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 in 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 web site and in the Company's Form 8-K filed with the SEC.

[OPERATOR INSTRUCTIONS]

I would now like to 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. Please precede, sir.

Thanks, Cheryl. Good afternoon everyone and welcome to DiamondRock Hospitality's third quarter earnings conference call.

DiamondRock recorded terrific results in the third quarter as stronger than anticipated lodging fundamentals at our portfolio of hotels allowed us to exceed our prior guidance on all measures.

RevPAR increased 14.6% during the quarter with half of our 17 hotels turning in double-digit RevPAR growth. Flow-through was also outstanding.

Performance was particularly strong in New York, Chicago, and Atlanta.

Leisure continues to be a bright spot for us with outstanding third quarter results at Frenchman's Reef, Vail, and Sonoma.

We remain bullish on hotel fundamentals for the balance of the year. And we are raising guidance for the full-year.

Looking towards next year, we expect the macro-lodging environment to be very solid. Although growth will most likely moderate from the double-digit RevPAR increases we've seen over the past few years as comparisons become more difficult.

The supply story is still a very good one. Supply is expected to remain well below historical averages, particularly in urban areas such as New York, Chicago, and LA where we have the majority of our portfolio and demand remains strong.

Although there is potential for further increases in occupancy rates, we see the great majority of growth coming from rates.

On the corporate side, the pace reports are showing solid group bookings for 2007. The business transient traveler continues to demonstrate little resistance to rates, particularly in markets like New York.

Additionally in 2006, we have invested significant renovation capital in our hotels and we expect to benefit from those investments beginning in 2007.

For all of those reasons, we are optimistic that our portfolio of hotels will continue to perform well in 2007 and should outperform the general market.

During the third quarter we continued our trend of being active acquirers of high-quality hotel assets, putting the Conrad Chicago under binding purchase agreement for $117.5 million.

With the Conrad Chicago acquisition, we will have acquired approximately $500 million in hotel assets year-to-date because we continue to find good acquisition opportunities in a very competitive acquisition market. We completed an equity raise for approximately $97 million shortly after the end of the quarter.

With these proceeds and after the Conrad acquisition, we estimate that our current investment capacity to be about $300 million. And we're working hard to make sure that we continue our disciplined acquisition strategy in finding high quality hotels at attractive prices.

Now I'd like to turn the call over to Mark Brugger, who will review our third quarter operating results in detail and update our guidance. Mark?

Thank you, Bill.

As Bill touched on, DiamondRock had an outstanding third quarter. Now, let's jump into the numbers.

For the quarter ending September 8, 2006 the Company reported total revenue of $114.9 million, adjusted EBITDA of $29.8 million, adjusted FFO of $20.6 million, and adjusted FFO first share of $0.29.

For our entire portfolio of 17 hotels, same-store RevPAR for the third quarter was $118.06, a 14.6% increase over the same period of 2005, driven by a 12.3% increase in the average selling rate and a 1.6 percentage point increase in occupancy.

Our portfolio occupancy was 76.1% at the end of the quarter.

Same-store hotel adjusted EBITDA margins for our hotels increased to 27.2%, a 427 basis point increase over the same period in the prior year. And proven in both RevPAR and margins benefited by comparison to periods of 2005 and had renovation disruption as well as yield support in 2006; more on this in a minute.

The financial results in the third quarter were above the Company's prior guidance. This out performance is primarily attributable to 4 factors.

One, RevPAR was 2.6 percentage points better than the high end of prior guidance because of stronger than forecasted transient demand and general lodging strengths in markets such as New York, Chicago, and Atlanta.

The RevPAR out performance was almost entirely at room rate and that's had very high profit flow-through, which led to better margins and greater EBITDA than previously forecasted.

We expect this trend to continue to a lesser degree in the fourth quarter, as we had already forecasted a very strong fourth quarter.

Two, the disruption was less than anticipated from several of our major capital projects at the LAX Marriott, Frenchman's Reef, and the Orlando Airport Marriott. Some of the disruptions anticipated in the third quarter have been moved into the fourth quarter as timing has shifted on select projects.

Three, food and beverage profit was higher than previously forecasted as a result of booking more groups that had greater FFE contributions.

And four, the performance at the Oak Brook Hills Marriott resort improved as a result of asset management initiatives and improved transient demand. The hotel outperformed its third quarter EBITDA forecast by $400,000.

While the hotel continues to present operational challenges and will be significantly below its original budget, we are encouraged by these developments.

Our third quarter results also benefit from contractual yield support that DiamondRock received from its hotel operators under certain management agreements. Most significantly at Oak Brook Hills and the Orlando Airport Marriott.

During the third quarter, the Company received $754,000 of yield support, which contributed 67 basis points to our hotel adjusted EBITDA margins in the quarter.

Now turning to the balance sheet.

Our balance sheet is in great shape and is among the best in the industry. As of the end of the third quarter, the Company had a total debt of approximately $665 million. We have taken advantage of historically low interest rates to lock in inexpensive debt for an extended period of time.

The Company's debt is comprised entirely of fixed-rate, property specific mortgages with a weighted average interest rate of 5.7% and a weighted average maturity of approximately 9 years. Moreover, the Company's capacity and a number of alternatives for future debt needs.

Seven of the Company's 17 hotels are unencumbered by mortgage debt and can be leveraged.

The Company also maintains a $75 million secured line of credit, which is entirely available. With lender consents the line of credit may be increased to $250 million.

Looking at the other side of the balance sheet, as of the end of the third quarter, the Company had total assets of approximately $1.5 billion including $120 million of cash and restricted cash.

We currently earn over 5.2% on our cash.

The Company's overall capital structure continues to be very straightforward and transparent. We have 100% ownership in all of our hotels, in other words, no JV interest.

We have not issued any operating partnership units. And we have not issued any preferred stock. We believe that our capital structure is a competitive advantage, as it makes it easy for investors to understand our operating results and provides us maximum flexibility going forward.

Now as Bill mentioned, our balance sheet today provides us the flexibility to acquire another $300 million of hotels. In arriving at investment capacity, we do not base it on a single factor but instead take into account a number of factors.

Note that our net debt to enterprise value was about 33% at the end of the quarter.

Turning to dividends, during the third quarter the Company declared dividends of $0.18 per share. The annualized dividend of $0.72 per share is well covered at 1.4 times CAD and represents yield of 4.3% based on Friday's closing stock price.

We generally intend to provide a well covered and regularly increasing dividend.

Guidance, the Company is now providing specific fourth quarter guidance. We are also raising guidance for the full-year 2006.

The fourth quarter is expected to benefit generally from better than anticipated lodging demand in the quarter. But the results will be tempered by disruption that has shifted from the third to the fourth quarter.

So for the fourth quarter, including our period of ownership for the Conrad Chicago, we expect RevPAR to increase 10 to 11%, hotel adjusted EBITDA margins to increase 280 to 320 basis points, adjusted EBITDA of $41 to $42 million, adjusted FFO of $27.5 to $28.5 million, and adjusted FFO per share of $0.36 to $0.37.

Now what does that mean for full-year guidance? Well, for the period that we own our hotels in 2006, we expect RevPAR to increase 10.5 to 11.5%, hotel adjusted EBITDA margins to increase 280 to 300 basis points, adjusted EBITDA of $130 to $131 million. The mid point of this new guidance is a $5.5 million increase from the mid point of our prior guidance.

And we expect adjusted FFO of $90.5 to $91.5 million, adjusted FFO per share then of $1.33 to $1.35.

Lastly, total capital expenditures are expected to be approximately $78 million for the full-year 2006. Year-to-date more than $40 million has been spent on capital improvements at our hotels.

To sum up, we had a great third quarter and the outlook for the balance of 2006 is very positive.

Although it is too early in the budgeting process to give 2007 guidance, we remain optimistic about next year and the ability of our portfolio of hotels to outperform the general market.

With that, I'd like to turn it over to John Williams, our Chief Operating Officer.

Thanks, Mark.

As you've heard, our third quarter performance was excellent. Our concentration of assets in high growth markets was the catalyst to our overall high performance in the quarter, led by better than expected strength of New York, Chicago, and Atlanta.

The Courtyard Fifth Avenue in New York enjoyed a very easy comparison because it was undergoing a full rooms renovation in Q3 of 2005. Its RevPAR increased over 100%, which contributed significantly to our RevPAR and margin growth.

Our Chicago downtown Marriott RevPAR increased 20% in the quarter, as did RevPAR at the Vail Marriott. We saw slower growth for our hotels in the Washington, DC and Orlando markets.

We continue to see positive trends in the market mix of our portfolio. Our portfolio mix is very evenly distributed among business transient, group, and leisure.

In Q3 for our portfolio BT revenue grew almost 19%. Group revenue grew almost 23% and leisure revenue grew just over 4%.

Significantly, the average daily rate in both the BT and leisure segments grew about 15% in the quarter, reflecting the continuing shift out of the lower rated discount channels to higher rated business.

We've been very pleased with our operators' ability to maximize profitability by leveraging the strong lodging environment to effectively manage the inventory and yield at our hotels.

The booking pace for our portfolio demonstrates continuing strength in this lodging cycle. Definite group bookings are up 19% for Q4 versus the same time last year. For the portfolio, 2007 definite room nights on the books are up 27,000 room nights or 7.5% at a rate that's 4.1% higher than the same time last year.

Food and beverage sales were very strong in the quarter and contributed meaningfully to our out performance. Food and beverage revenues were up 13.5% for the portfolio in the quarter.

Because of stronger group demand and the new meeting space we've added in our hotels, our operators have been able to book more groups and more banquet and AV intensive groups, which has boosted the overall profitability of our hotels.

For the quarter, banquet and AV revenues for the portfolio were up 22% and now comprise 60% of total food and beverage sales, which stimulated a 32% increase in total food and beverage profits.

Wage and benefit costs increased only 3.9% across our comparable hotels. As a result, wage and benefit costs as a percent of total sales dropped from 34% to 31.6% for the quarter, a 240 basis point improvement.

On the other hand, among top hotels in the third quarter, property taxes increased 5.7%. But we expect a 21% increase for the year.

Property insurance was up 39% and we forecast a 34% increase for the year.

Incentive management fees were up $624,000 in the quarter, a 45% increase over Q3 2005.

And energy costs, which remained volatile but seemed to be moderating, were up about 10%.

As we told you on our last earnings call, the Oak Brook Hills Marriott has gotten off to a very disappointing start. Group bookings, which are critical to the hotel's success, remain off pace for 2006 and 2007. The hotel remains significantly behind our underwriting projections.

However, Q3 profits were up $400,000 over the forecast prepared by Marriott in June. In 2006 we expect to utilize $2.1 million of the $2.5 million of yield support that we negotiated with Marriott.

This hotel continues to receive a disproportionate share of our asset management attention as well as the attention of Marriott executives in both the regional and national levels.

I also want to talk about our ongoing capital program. As we have said, we're investing $78 million of capital improvements in our hotels this year, which is about $10 million lower than our original projections because some projects have been moved into the first quarter of 2007, other projects have been indefinitely delayed or value engineered out, and we found about $2.5 million of cost savings.

Year-to-date more than $40.6 million has been spent on capital projects across the portfolio. Obviously renovations and repositioning activities displace business. During the third quarter we had disruptions from projects in LAX, Orlando, Torrance, and Frenchman's Reef.

The overall Q3 disruption was less than we anticipated, partially because some work shifted into the fourth quarter. So Q4 disruption will be somewhat higher than projected but well within our full-year projections.

For the year we now estimate that the total portfolio EBITDA will be impacted approximately $2.2 million, about $800,000 less than our prior forecast with about 40% of that displacement coming in the fourth quarter.

Thus far our asset managers and our operators have managed the pace, cost, and overall displacement of our substantial capital program very effectively. And we're very excited to be going into 2007 with a substantially renovated portfolio.

I also wanted to touch on our pipeline of acquisition opportunities. As Bill mentioned, year-to-date we've acquired or put under contract approximately $500 million of hotel assets.

Our most recent acquisition was the Conrad Chicago, which we will finalize in early November. Conrad is Hilton's luxury brand.

This was an attractive opportunity to acquire a luxury hotel in a great location less than a block from our Chicago Downtown Marriott. The hotel opened as another brand in 2001 and converted to the Conrad brand in June.

In connection with the re-branding of the hotel, Hilton is investing $5 million to upgrade the property including installing state of the art technology such as 42-inch plasma televisions, wireless Internet, and hi-fi Bose entertainment centers.

Because of the Conrad's location and quality, we will position the hotel to accommodate Hilton's high-end honors guests. The hotel competes for Chicago's high-end group customer as well because of its excellent meeting space.

We think the Conrad Chicago has tremendous upside as it ramps up over the next 2 years and captures its fair share of the high-end travelers in Chicago.

Our current pipeline is strong. As an example, we're working together with Marriott to acquire an existing Marriott hotel in a Southeastern city. Marriott's participating financially, giving us a significant advantage in the bidding.

We're also close to an LOI for a very high RevPAR, extended stay hotel in an urban sub-market of a major city in the mid-Atlantic region. We continue to see many opportunities through our network of contacts, our first look relationship with Marriott, and the hotel broker community.

Competition for hotel acquisitions remains very strong but we've remained disciplined in our underwriting parameters. And we will continue to do so.

In summary, our portfolio performed very well in the third quarter. We continue to benefit from our distribution in strong markets like New York, Chicago, Atlanta, and LA. And we will continue to work hard to maximize asset values through aggressive asset management.

And we'll continue to source hotel acquisitions that deliver the same strong results as our portfolio has delivered to date.

With that I'll turn things back over to our Chairman.

Thanks, John.

As I mentioned, we delivered terrific results in the third quarter. And we feel very good about the balance of the year as well as 2007. Lodging fundamentals and the outlook remain quite solid. And our portfolio is performing very well.

With the strong industry environment, our portfolio quality, and our acquisition track record we're quite confident that we will continue to deliver not only strong returns but also productively deploy our investment capacity.

And with that we'd like to open up the line for questions.

[OPERATOR INSTRUCTIONS]

Our first question will come from the line of David Loeb of Baird.

Hi. John, I want to ask my favorite pipeline question a little bit differently this time.

Given what you see in the pipeline, how long do you think it will take you to deploy the $300 million of capacity that you have?

Well, David, there are a lot of product -- there's a lot of product on the market as we've said. And our pipeline is relatively full. But you can never predict how these things are going to wind up.

And as I said, we're not going to change our underwriting parameters.

So I would just fall back to the default answer, which is we expect to maintain sort of our average as we performed over the first, what, 2.5 years of our existence.

Okay. Can you give me an idea about the size of the 2 properties that you mentioned in terms of acquisition dollar size?

They're each under $100 million but well above $50.

Okay.

And on the CapEx number, the 10-Q said $84 million. I guess that was the old target.

$78 million is what you're planning for the year, meaning you've got like another $33 million in the fourth quarter?

I think the 83 might have included some carry, about $5 million of carry over that we're currently estimating into '07, David.

The balance is in the fourth quarter, that's right.

Okay.

Mark, a numbers detail, was the green shoe from the offering exercised?

It was not.

And it is expired?

Yes.

Okay.

Last question, John if I understood you correctly about Oak Brook, do you expect that yield support to burn off then in the first quarter of next year?

Probably within the first 2 quarters, anyway. The first quarter for us is slow anyway. But, yes, within the first 2 quarters.

Okay, and at that point do you think it'll be a meaningful, do you kind of expect that that's around when the trough is? Or do you think there'll be a meaningful decline in your bottom line profitability?

Well, what we're working very hard to achieve is group bookings to overcome that.

So at this point, with what's on the books, yes, we would have a shortfall to our Pro Forma. But of course we'll budget that into the '07 numbers.

Okay. Thank you, very helpful.

Sure.

Our next question is from the line of Jeff Donnelly of Wachovia Securities. Please proceed.

Good afternoon, guys.

Actually a follow-up on that is Downtown Chicago has been a very good market and it's expected to be strong I think through year-end. I guess why have group bookings at Oak Brook been so weak of late? Is it a staffing issue at the property level or just getting attention at the region and national level at Marriott?

No, I don't think it's regional or national attention. I think it's at the property level.

I think maybe the sales force was deployed improperly initially and we think we've got that straightened out. We also had some personnel issues. One salesperson went out on maternity leave.

And we are now fully staffed and fully deployed. And we fully expect this thing is going to turn around the way we underwrote it because really this is what Marriott does best. And I think it's just off to a slow start. That's really the extent of it.

And Jeff, we clearly have Marriott's senior executives attention on this.

And I'm just curious in your experience, how long does it take to sort of build back with what your normal, if you will, run rate was in group business? Is it sort of a 6 to 12 month effort?

So you said before there's a chance that by mid '07 when your yield support burns off you guys should be probably okay.

That's the target.

But is it a reasonable one?

Based on what is on the books today we're going to have to budget a shortfall in '07. But we fully expect them to catch up.

Okay. And then just concerning the Courtyards that you guys have in New York, certainly the acquisition market in New York has been pretty frothy. I think you guys all saw that the W in Union Square went over a $1 million a key.

How do you guys think about holding or selling one of those Courtyard properties?

Well, I mean clearly the values appreciated, Jeff, significantly. We always consider looking at our portfolio and components of it to determine whether we should sell something.

But at the moment we're still in the process of sort of building the business. And one of the things I would look at is the implications to the portfolio without several of those assets.

And given that we see our mandate is delivering fairly consistent and growing returns, I don't think we're at the point where we would sell those 2 assets.

Yes, Jeff, this is Mark.

Just on top of that, we think there's a lot of room to grow in New York. So although we could get a big per key number for those hotels, we still see a lot of upside in those properties both in margins and in rate. And we don't want to give that up in our portfolio.

I think if you think about recycling assets, it is a pretty frothy market generally in the country. We're probably more inclined to recycle our slower growing assets and take that capital and put into more assets that are similar to the Courtyard in Midtown.

I guess I'll maybe put on the spot then I guess. Have you considered targeting any of your slower growing assets for sale then? Is there a short list that you guys might have or no plans immediately to try and sell any properties?

This is Mark again.

I think, Jeff, some of that's going to depend on what we acquire, what we think there's a concentration in the market that and in that region we think of because it's diversifying and lower our waiting. That'll play into it.

So we're kind of waiting and seeing how the pipeline comes to fruition here before we make any judgment calls.

So it's possible that maybe some of these acquisitions you guys mentioned that you could actually be funded with asset sales rather than with additional equity?

Putting timing aside, yes.

All right. And on Bethesda, how has that hotel been performing?

I'm sorry, Bethesda?

Yes.

Yes, the whole Washington market is evolved or has been soft this year. Bethesda has actually gained premium in its RevPAR position in the star market. But it's not enough to -- it's basically flat with last year's I think.

But we expect a decent fourth quarter. They do have some groups on the books that should allow them to yield pretty well in the fourth quarter.

And just one last question, Mark. I was curious, have you looked at what your RevPAR or margin growth might have been if you had a more traditional calendar quarter end rather than September 8?

We tried to play with that; it's just been in question. I think it would be a bit lower. But we don't have the exact number to run the Marriott period to calendar quarters. It's really impossible, especially given the size of our portfolio. I would hate to guesstimate.

Okay, thanks guys.

Our next question will be from the line of Will Marks of JMP Securities. Please proceed.

Hey, Bill, John, and Mark.

A question on DC, you took it through the fourth quarter on Jeff's question. What about the outlook for next year? And do you see it still kind of weak throughout all DC markets?

Well, the citywide bookings are not strong. But we really have not gotten into the budgeting process in depth yet. So we haven't looked specifically at '07 at Bethesda yet.

Okay. And then what about, I know you don't have anything in Baltimore. Is that market kind of weak as well?

As you said, we don't have anything in Baltimore.

Okay, how about then some markets where you do have properties, Atlanta and Dallas. Atlanta has done quite well. I never really looked at that as a high barrier to entry market. Can you comment on that development there and what your outlook, do you expect it to remain strong next year?

Yes, Atlanta of course had the hurricane impact, so it was somewhat soft in the third quarter.

But in general Atlanta has been a relatively strong market. And we anticipate it's going to be, continue to be a relatively strong market. And you're right; it's notoriously over built.

But we have looked at every market that we're in and, except for Buckhead. There are some projects talked about in Buckhead. We can't find any projects being mentioned right now other than a very small luxury hotel up in Alpharetta.

So we feel good about the supply and demand picture.

And in the perimeter market our property is currently by far the best product in the market. And with nothing new coming on that positions us very well for the future.

Okay. And then just lastly on Dallas or Fort Worth, what, is there a tough comp from Katrina? Or did it really come that far?

It didn't impact Fort Worth. But the story in Fort Worth is that special corporate has been very soft this year.

Our hotel tried to hold the line on rates and wasn't able to do so. So they lost an account. They've been able to make it up in group this year.

But now as a result, and this RFP process for special corporate next year, they're not being quite as aggressive because of the softness in the corporate market there.

Okay. That's helpful. Thank you.

And our next question is from the line of Justin Maurer of Lord Abbett. Please proceed.

Hi, guys.

Hi, Justin.

You know we got to knit-pick you on these, the more difficult ones since everything else is hard to do so.

Just on Oak Brook, I mean if I'm looking at the RevPAR numbers right that was one of your better properties. Is it because of the mix? Are you guys just doing more discount channel type business there?

Well I think it was, what it was doing before the conversion and this is what it is comparing to it for the most part.

But I mean if it's rough - if you're talking close to a 20% type of RevPAR were you guys budgeting the mix to be different? Or were you budgeting RevPAR to actually be better than that?

Actually, the transient's been a little stronger than we anticipated, which is a higher rated business. But you can't count on that in this location.

Bill's right. It's the comparison and actually their rooms, total room sales is not the biggest problem. The biggest problem is food and beverage.

Okay. All right.

And the EBITDA there 2 6 for the quarter, Mark, what's it year-to-date? Just trying to get a feel for how much of that is the support versus just the run rate?

The support in the quarter was about a half a million if I recall right. You got the year-to-date?

If you don't have it, that's fine.

We can get that for you, Justin.

No problem. And then on Torrance also looks like at least on RevPAR side it's holding up pretty well. And John your comments about some of the CapEx that you're maybe pushing it out to a later date. Have you guys re-evaluated that property at all relative to the whole Nissan situation? Or are you guys pretty comfortable that it's still a move in the right direction, putting those dollars in?

We think Torrance is going to be fine. And we're in the process of tearing up the lobby. We just added a meeting room where there was an old bar.

But most importantly for that particular hotel the mall has, part of the mall closest to us has been renovated and opened. And all the meeting planners who are visiting the hotel are excited now about this product and this product's location. Whereas, it's been a long time since we've been able to get meeting planners excited about this hotel.

So we're pretty, and more importantly the property level management is quite optimistic about Torrance.

Yes, okay.

Hey, Justin just one more on Torrance. Nissan is moving out but basically all those employees got picked up by Toyota there. Toyota has such a big need for people that most of those people went over there.

So we're not seeing a big negative impact from that. And actually we hope that new tenant in those offices will actually be enough positive to keep the openings there next year.

All right. And I mean would you guys say that about Southern California generally, just with the LAX too? I mean you've seen on the margin any softness there relative to other markets or no?

Actually LAX at the end of the third quarter started to soften in business transient.

And it's a very hard market to figure out. The property management has a hard time explaining the phenomenon. But obviously it's related to the airport. And the airport statistics are always trailing.

Yes, okay. And then lastly on Orlando how much of that would you say is in terms of thinking about yield support and what have you is the repositioning and or CapEx that's going in there versus other things that you guys thought would be there or not when you bought it?

As you know, it was negotiated to cover the disruption during the construction. We have got great group bookings on that - at that hotel for next year, up substantially from same time last year.

Maybe the, I would say the business transient during the week has been a little bit softer than they've anticipated. So they've had to leave some contract business in there.

But overall, once that property's finished it's going to perform very well.

Thanks. Great job, guys.

Our next question is from the line of Gustavo Sarago of Friedman, Billings, and Ramsey.

Hey, good afternoon guys. How are you doing?

Great.

Just to follow up on Justin's question maybe for you, John. Could you talk about some of those projects that you had decided to push off and specifically which properties? You highlighted quite a number of projects during the June property tour in New York City. And I was just wondering which projects you might be referring to?

Okay, well the big one was a $2 million project out at LAX. We thought we were going to have to upgrade the fire and light safety system to get our building permits for the renovation. And in fact we didn't.

There's nothing wrong with the fire and light safety. It's at some point it'll need to be replaced. But that's sometime in the future.

So that was the big one.

There was another one a façade job at Fort Worth, which we pushed into next year. But frankly that may wind up being a problem because we had estimates that were higher than our forecast. So we're working through that one.

And the rest of the ones you can put the $5 million that get pushed off, a lot of it is done in January. It's just by virtue of the fact we couldn't finish it in December.

So to summary if you think about the $10 million reduction, I mean $2.5 were sort of productivity savings that we identified. Roughly, too, were sort of indefinite deferrals and then about $5 million is just moving over into first quarter of '07.

But it sounds like the LAX was really never a revenue-enhancing type of project anyway to begin with.

That's correct.

That's what I was trying to understand, if you guys were pushing things off because maybe the returns weren't there as you expected originally. But it doesn't sound like that for some of these things like the façade job.

Nope, that's good news. Thanks, guys.

[OPERATOR INSTRUCTIONS]

Our next question is from the line of Asad Kazim of RREEF.

Hey, guys. Could you please comment a little bit on expenses? I guess year-to-date and then just a rough sense of how you see them next year, specifically insurance, utilities, wages and benefits, and then just the incentive management fees?

Well in my script I explained the property taxes, property insurance. We also have credit card and travel agent commission; year-to-date cost increases of about $1 million each. So it's in those categories.

The biggest categories, though, rooms' margin, labor rates, et cetera. We -- those are well under control and we don't see any change in that next year.

Asad, this is Mark.

On wages and benefits, a little under 4% kind of running that way, you delete the union contracts and the wage pressures, probably in that ballpark.

Insurance, most of our properties are in the Marriott insurance program, which is April 1 renewal date. We've had pretty substantial increases this quarter. But that's going to carry through to at least next April.

And we're not anticipating - we're anticipating things don't go up a lot but we're not anticipating that our insurance rates go backward.

And the real estate taxes were another one that were up this year. Some of our hotels are on a kind of calendar year estate property tax basis and some are on a kind of mid-year to mid-year. So that should moderate. It should be - we'll still see the significant increases in the first half of the year. But I imagine on the full-year basis we'll see that moderate.

Okay, just on incentive management fees. Once that threshold is hit where you are paying incentive management fees, is any increase in the top line over that number just at then just a certain percentage of that automatically flows to incentive management fees? Or does the hurdle get reset after you pay it?

This is Mark. So the way most of our agreements work is there's an owner's priority first and then we pay 20 or 25% above that. That's a bottom line number for the incentive management fee, not a top line number.

Understood. I guess I was just wondering any incremental increase in RevPAR once you've gotten to the point where you've gotten the owners' priorities. So let's say you got it this year, you got a 10% yield on your acquisition.

And then if RevPAR is increasing going forward, does that fall over and above the 10% yield you've already gotten? So do you keep paying incentive management fees there or does it keep getting reset?

We don't have a reset feature for our owner's priority in any of our properties.

Okay.

Well the only reset is for additional capital going into the hotel, obviously.

Sure, understood.

And then just lastly guys. In Chicago we've heard and read about utility costs going up meaningfully for most businesses. Is that something you can comment on what you see happening in this market?

Well in Chicago for the quarter we were up about 12% over last year for the quarter. And we anticipate for the full-year that it's going to be in that neighborhood, maybe 15 or 16%.

But we do have a contract at our Downtown hotel that should hold it to that level. And the Conrad may be able to piggyback on that contract at the Downtown Marriott.

John, when does it go through? Because I believe in January 1, 2007 the increases are supposed to be pretty high.

So does this contract go through '07?

Yes, it goes through January of '07. I'll have to get you the specific date, Asad.

Okay. Thank you.

Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to return the floor to Bill McCarten for closing remarks.

Great, Cheryl.

Well thank you very much for joining us. And we look forward to talking with you again soon.

Ladies and gentlemen, thank you for your participation in today's call. This concludes our presentation. You may now disconnect. Good day.