Diamondrock Hospitality Co (DRH) 2007 Q4 法說會逐字稿

Welcome to the DiamondRock Hospitality Fourth Quarter 2007 Conference Call. The Company is hosting a live webcast of today's call, which can be accessed from the Company's website at www.drhc.com in the investor relations section.

Many of the comments made today are considered to be forward-looking statements under 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 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 now like to welcome management. With us today is 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 opening remarks.

Thanks, Francis. Good morning, everyone, and welcome to DiamondRock Hospitality's 2007 Earnings Conference Call. Our fourth quarter and full-year 2007 results reflect outstanding year-over-year growth and are among the best in the industry. In addition to turning in strong operating results, we were able to improve the quality of our portfolio with the acquisition of the Westin Boston Waterfront Hotel in January of 2007 and the sale of our lowest RevPAR hotel at an excellent price in December.

For the year, same store RevPAR increased 9.8%, same store hotel level EBITDA was up 15% with margins expanding 162 basis points. Adjusted EBITDA was $202.2 million and adjusted FFO per share was up 12% to $1.55. Our strongest performers were the Manhattan Courtyards, no surprise there, the Conrad Chicago, the Austin Renaissance and the Westin Boston Waterfront, which helped offset soft performance in Atlanta, our weakest market, as well as flow-through issues at Frenchman's Reef.

The fourth quarter was similarly outstanding with same-store RevPAR increasing 9.5% and Hotel Adjusted EBITDA margins up 136 basis points. Generally, the fourth quarter results were quite consistent with the full-year. In view of the economic environment, our 2008 outlook is best summarized with two thoughts -- cautious optimism and high uncertainty.

On the one hand, several specific indicators provide some measure of optimism. Overall supply growth remains a macro positive, although it's important to focus on specific markets. Our group base is positive with revenue up nearly 6% and we have not yet seen any indication of an emerging cancellation trend. Nearly 70% of our budgeted group revenue was already on the books and special corporate rates are up a solid 4%.

Finally, our primary managers, Marriott and Starwood, remain positive in their outlook. On the other hand, the economy has continued to soften and the credit markets are worse than they were at the end of last year. Our 2008 group pace, while still solid, has moderated over the past six months. While year-over-year performance was outstanding in the fourth quarter, our portfolio's month-by-month trend compared with our expectations has consistently moderated since last September. Taking all of this into account, we expect the Company's same-store RevPAR to increase 2% to 5%, with modest profit growth.

We have broadened our range in recognition of significantly lower visibility than at any other time during our brief history. Mark will review our guidance in a minute and as he will explain, our estimated year-over-year performance reflects much more modest RevPAR growth and flow-through, higher disruption and some non-comp issues.

The first quarter is going to be the weakest of the year because of the seasonality of our hotels, a soft Chicago market in the quarter and the impact of renovation disruption at the Chicago Marriott Dowtown. Our capital structure continues to be a great competitive advantage. We have low leverage, excellent liquidity and low-cost debt with generally long maturities. We continually evaluate the best value creation opportunities for our investment capacity, but we think the acquisition environment will continue to be difficult as there is a gap between seller and buyer expectations that will likely persist for the balance of this year.

While unanticipated, we sleep a lot easier knowing that we are well positioned to handle even a severe market downturn without a liquidity problem. I'll now turn the call over to John to discuss our specific property performance, our capital expenditure plans and his perspective on the acquisition market. Mark will then follow with specific first-quarter guidance and full-year guidance. John?

Thanks, Bill. I'll spend just a minute wrapping up our discussion of the 2007 property results and provide some additional perspective on our expected 2008 hotel performance.

As Bill mentioned, our strongest 2007 performers were the Conrad Chicago, the Manhattan Courtyards, the Austin Renaissance and the Westin Boston Waterfront. Generally, our fourth-quarter results were consistent with the full year, although Atlanta Waverly rebounded with strong group performance and Torrance was strong with an easy [comp] because of the fourth quarter 2006 renovation. Frenchman's Reef had good RevPAR growth, but continued to struggle with flow-through issues, particularly in the fourth quarter.

For 2008, we again expect our strongest performers to the Westin Boston and Manhattan Courtyards and the Chicago Conrad. Our Atlanta hotels are expected to remain soft along with the Chicago Marriot Downtown and the Salt Lake City Marriott, both of which will be impacted by disruption.

The Westin Boston Waterfront enjoyed over 14% RevPAR growth in 2007, its first full year of operation, and it will continue to ramp up in 2008, especially with the 37,000 square feet of new meeting space we're adding. Although the Westin is ramping more slowly than we anticipated, it remains one of our strongest growth hotels over the long term.

City-wide conventions in Boston are weighted towards the first half in the year of 2008, so we have work to do booking second-half group room nights. And we've just signed a large piece of business for July. On the transient side, we expect the recently opened Boston Renaissance Hotel to have some impact in the market. However the transient business in the market is growing and with the new meeting space, we will not need as much transient business in 2008.

The Manhattan Courtyards enjoy premier midtown locations in what remains a very strong New York market. Manhattan will experience fairly significant supply increases over the next two or three years, but it will come primarily on the west side and downtown. Our Marriott Courtyards enjoy solid midtown and east side locations, which should effectively insulate them from the new supply.

The Chicago Conrad continues to show great growth as a result of our asset management initiative to reposition the asset as a four-and-half star hotel, so it could enjoy high rates but still keep good flow-through. The Conrad is successfully using the Hilton sales engines to capture Hilton's high-end customers in Chicago. In 2007, we effectively built occupancy at the Conrad and future growth will come in average rate.

In 2007 our Atlanta hotels were up slightly in the generally soft market with renovation disruption at the Westin Atlanta North. Our Atlanta hotels are expected to remain somewhat soft in 2008. Frenchman's Reef bottom line performance was disappointing in 2007. Although RevPAR was up by a strong 9%, the revenue mix was unfavorable, with moderating group demand leading to group and related transient revenue being replaced by lower rated transient. The property was affected by the Coastal resorts in Mexico coming back on line. The 2008 outlook is stronger, with group revenue pace currently up 14%. We are also focused on cost controls at this hotel and improving profit margins.

The Chicago Marriott Downtown will be impacted by both a soft first-quarter market as well as renovation disruption in the first quarter that will displace $2 million of EBITDA. The first quarter in Downtown Chicago market is expected to be soft generally. In January alone, RevPAR was down 7% in the Downtown Chicago market compared to the same time last year. In addition, with the ballrooms out of service, we displaced 7,000 group room nights in January and early February. The lobby renovation has displaced higher rated corporate transient demand, which we've replaced with discounted transient, impacting the transient average rate in the quarter.

Chicago has several new hotels coming into the market in 2008 and 2009, which will have some impact on both our Chicago hotels. Again, the 17,000 square feet of new meeting space at the Chicago Marriott will help mitigate the impact of the new supply.

The Salt Lake City Marriott is being impacted by the adjacent development of a $2 billion mixed use development called City Creek Center, which when complete will be of enormous benefit to our hotel.

Because of concern about a slowing economy, we've already worked with our operators to devise very specific contingency plans for each of our hotels. I've been through several cycles in my career and it's difficult to predict exactly how this year will play out, but we don't want to overreact. Although we have already begun implementing some of the action items on our contingency plans and we have a whole other level of contingency plans identified, we do not yet see enough softness to implement the more draconian measures. We'll continue to monitor each hotel's performance closely and respond quickly and appropriately if we see business levels deteriorate.

Our capital expenditures came in at $64 million in 2007, about $15 million below our previous estimate. This was primarily due to shifting of some expenditures into the first quarter of 2008. The major projects in 2008 include the completion of the renovation programs at a number of our properties, most significantly the $35 million renovation and meeting space addition at the Chicago Marriott and the $19 million addition of meeting and exhibition space at the Westin Boston Waterfront. These two major projects will be completed on-budget and as scheduled, March 7th in Boston and April 8th in Chicago. As you may recall, Marriott is making a non-recoverable contribution of $10 million towards the Chicago project as part of its brand enhancement program.

We've begun construction on a conversion of an outdated nightclub at the Austin Renaissance hotel to a valuable ballroom and catering facility. That project will be on line in the third quarter of this year. We expect total capital expenditures in 2008 to cost between $70 million and $80 million. The Chicago Marriott and the Westin Boston Waterfront projects, which we completed in the first quarter, represent about half of that total. We also plan to complete the rooms renovation to the Conrad in the first quarter, a ballroom renovation at Atlanta, Alpharetta, over the summer and an $8 million guest room renovation at the Salt Lake City Marriott beginning in the fourth quarter.

Our group booking pace trends remain good, up 6% in revenue over the same time last year. We've seen a slowdown in pace, but we have seen no unusual group cancellations or shrinkage; therefore, although we are watching carefully for indications of softness, we've not yet seen it in a measurable degree.

Approximately 70% of the group revenue budgeted for 2008 is already on the books. On the cost front, we expect support costs to go up around 6% in the year, including about 7% in utility expense. Salaries, wages and benefits are budgeted to increase about 6.6%, which is a function, not only of higher wages and benefit rates, but also reflect the significant increase in banquet and catering volume and man hours resulting from our new meeting space in Chicago, Boston, Austin and Griffin Gate. And we estimate that property taxes will be up about 12% for the year.

I did want to touch on the hotel acquisition market. As a general observation, it seems that we're in a bit of a pause and there's a gap between seller expectations and buyer expectations that will likely persist for some time. Cap rates are adjusting, but slowly. We clearly see much more movement in cap rates of hotels located in secondary and tertiary markets.

It's our opinion that cap rates will end up 50 basis points to 100 basis points higher in urban and desirable resort markets and 100 basis points to 200 basis points higher in secondary and tertiary markets. Although there are some interesting deals on the market, pricing still has not stabilized and we're unlikely to find an appropriately priced hotel acquisition for several quarters. We'll continue to look, but this is a time to be very prudent. With that, I'll turn it over to Mark for more details on our 2008 outlook.

Thank you, John. As Bill mentioned, we are in an uncertain economic environment and accordingly, have spent considerably more time than usual studying macro economic indicators and demand factors in determining our RevPAR guidance. We focus very carefully on each of our core segments to forecast demand. Our portfolio segmentation is 36% group, 26% leisure and 38% business transient and other.

As John talked about, the group segment continues to show strength as we already have contracts covering 70% of the 2008 budgeted group revenue. Leisure demand is going to be heavily influenced by the softer general economy and we expect reduced demand in resort markets, like the Caribbean. But we do see strength from the high-end leisure traveler at Vail and the foreign leisure traveler in New York that is benefited by the weak dollar.

The last piece of the puzzle is the business travel, who is often the hardest to forecast. As you know, the slowing economy is putting pressure on corporate profits in a number of industries and inevitably this will moderate the robust business transient demand we've enjoyed for the last several years. We anticipate that the business traveler will get increasingly rate sensitive as the year progresses and companies potentially reduce their travel budgets. Demand in all segments will be impacted by renovation disruption.

In 2008, we expect total renovation disruption in our portfolio to be approximately $2.5 million, or $1.5 million more than last year. Putting all these pieces together, we are forecasting RevPAR growth of 2% to 5% and are expecting same-store Hotel Adjusted EBITDA margins to be flat to last year to down 100 basis points. Margin growth is negatively impacted by several non-recurring items in 2007 that I will discuss in a minute. Adjusted EBITDA is expected to be in the range of $196 million to $209.5 million and adjusted FFO per share to be between $1.60 and $1.69.

Our guidance assumes that house profit margins can be maintained flat to last year at the midpoint of our guidance, with a 50 basis point impact at either end of our RevPAR range. There are various levels of savings from the implementation of our contingency plans built into these margin assumptions. Additionally, our guidance takes into account that several cost categories below house profit will increase at rates well above the midpoint of our guidance, including incentive management fees up 11%, energy up 7% and property taxes up 12%. We do expect some benefit from moderating property insurance rates in 2008.

As I mentioned, Hotel Adjusted EBITDA margins are negatively affected by some non-comp items, namely the non-recurring yield support and incentive management fee holidays that benefited our 2007 results by $1.5 million. These non-recurring items, coupled with incremental renovation disruption, negatively impact our 2008 adjusted EBITDA margin growth by approximately 50 basis points.

Moreover, the Company's year-over-year adjusted EBITDA growth is negatively impacted from both the sale of the SpringHill Suites Buckhead, which contributed $2.4 million of EBITDA to our 2007 results and from lower interest income, which the Company projects to be $1 million less in 2008.

On the positive side, the moderating revenue growth will benefit FFO, as we expect to pay less taxes. In fact, at the midpoint of our guidance, the Company's tax provision swings from a $5 million expense in 2007 to a $3 million benefit in 2008.

Turning to our first quarter, it will be the weakest of the year due to the seasonality of our hotels, as well as the major impact of the Chicago Marriott Downtown, which is both under extensive renovation and experiencing a soft market in the quarter. The Chicago Marriott will actually generate $4 million less in EBITDA for the first quarter 2008 than it did in the first quarter of 2007. For our entire portfolio, including hotels under renovation, we expect RevPAR growth in the first quarter to be flat to negative 1%, adjusted EBITDA to be in the range of $28 million to $30 million and FFO per share to be in the range of $0.21 to $0.24.

I would like to point out that the first quarter represents only 17% of our total revenue for the year, and for our hotels that report on a monthly basis contains only results from January and February. Lastly, I wanted to comment on our dividend increase and capital structure. Our solid cash flow and conservative balance sheet facilitated our Board of Directors' decision to authorize an increase in our quarterly dividend by over 4% to $0.25 per share. The increased dividend is well covered and represents a payout of about 70% to 75% of our cash available for distribution in 2008 and represents a competitive yield of over 7.5% based on our current stock price.

Turning to our capital structure, going into 2008, we have one of the best balance sheets in the industry and we see it as a significant advantage over some of our peers. We have low leverage with debt to EBITDA of four times, our debt is almost entirely fixed at an average interest rate of 5.6% with generally long-term maturities.

We have excellent liquidity, with a $200 million credit facility as well as eight unencumbered hotels that can be financed at any time. As Bill mentioned, we will continue to evaluate the best ways in which to create shareholder value with our balance sheet capacity over both the short and long term. Now let me turn it back to Bill.

Thanks, Mark. To wrap up, we believe that DiamondRock is well positioned going forward at this stage of the lodging cycle with a great balance sheet and a portfolio of twenty high-quality hotels that are concentrated in gateway cities and destination resort locations. With that, Francis, I think we're ready to open the line up for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Jeff Donnelly with Wachovia. Please proceed.

Good morning, guys.

Hi, Jeff.

John, actually if I could just start with you. I know you did touch on this in your comments, but I guess talk a little bit about hotel pricing, rather than transactions that you are seeing, could you talk about what private owners are thinking right now about valuation? I know you're pretty well connected in the industry and I'm sure you've had the benefit of some conversations with folks like that. I'm just curious where their heads are at right now and how they think about value.

Well, Jeff, as I mentioned, I think owners have not yet come around to the view that there's going to be significant moving cap rates. I think they recognize in secondary and tertiary markets that cap rates have moved, but I don't think there's been enough evidence yet of actual transactions to prove that urban and resort locations will move as well.

I think the other key thing in this market, as opposed to maybe the last couple of downturns, if this is a downturn, is that there's a complete lack of distressed real estate on the market. In other words, if sellers out there are really opportunistic sellers, there's nobody who is under a great deal of pressure, some in varying degrees obviously, but no one who is under a great deal of pressure to sell, so there haven't been the distressed sales which generally lead to a major move in valuation.

I'm curious though, does that tell you that if they are not expecting to see any impact on their property values, nevertheless I'm sure there's a lot of folks out there that have maturities on their balance sheets in the next six, 12 months, 18 months. Do you personally think that we are going to see distressed situations emerge in the next 12 months to 18 months? And I guess, as a follow-on, do you think that could provide attractive investment opportunities for you guys, either in hotel assets or perhaps even hotel debt, to the extent you'd consider that?

Well, we're trying to keep our options, Jeff, in the event that there do become some distressed situations. I think that the level of debt on some of the private equity transactions in the past couple of years would indicate that if there is a turnover required or if there is a severe downturn, there may be some pressure there, but they generally tend to have the strength and the equity to be able to withstand those.

Just like the last downturn in the industry, there wasn't the kind of distressed situation that you saw in the early 90s with the S&L crisis, so no, I don't see a tremendous amount of distressed sales, but there could be some level of that and we'd like to keep our options open to take advantage of it.

Just two last questions. One is on group meetings and even transient bookings that you guys are seeing, what observable trend has there been or has there been one, on I guess I'll call it out-of-room spend or F&B revenues beyond just the room rate, has anything emerged there where you are seeing guests become a little more frugal?

Yes, that shows up in the group mostly and only anecdotally have we heard that there may be some -- some of the event planners for example, who are getting together with the meeting planners for the first half groups to categorize their spend have reported that some of the groups are leaning towards the minimum spend under their food and beverage contracts. So that would be an indication that there's some weakening in the out-of-room spend. But there's no consistent pattern that we're seeing, it's sort of anecdotal.

And is that though where you guys are dialing back your margin expectations most significantly is because of that or is it more on the room rate side?

Well, that's definitely a factor, but I would say we're dialing it back kind of equally between RevPAR and food and beverage.

Okay. Last question, actually for Mark, on Chicago. I just want to clarify your comments in your press release on the Downtown Chicago Marriott. So I guess, bear with me if it requires answering me like I'm a six-year old. The Chicago Downtown Marriott you said you will generate $4 million less in EBITDA in Q1 and if I'm hearing you right, that's split between $2 million in disruption for the renovation and I think another $2 million for I guess business that couldn't be replaced or what have you. Just to be clear, does that imply that that means on a full-year basis, that asset will be down $4 million year-over-year?

No, these other quarters are actually up. The group booking pace there for the quarters two through four is actually pretty good, so we're expecting -- it's the way the city-wide lay out that we had a great Q1 in 2007, the way the city-wides and some other groups lay out, is not repeating in 2008 for that quarter, but the second quarter looks extremely strong and we see strength in the second and fourth quarter in particular this year.

So is it possible that that asset could just finish flat to up for the year or --

Yes, we're currently going to say it's going to finish modestly up.

Okay, thank you.

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

Great, thank you and good morning. I was wondering on, just on the guidance, you took the, I believe, the RevPAR guidance down from 6% to 8%, to 2% to 5%, which is probably as big of a drop as we've seen and I'm wondering if anything has changed just besides the environment, were any of these projects not planned that you're working on? What really, I mean I can make some guesses, but can you just tell me what changed things in general over the last three months?

Let me just add a couple things to that. Yes, we did come out with 6% to 8%, I think our brand managers were a bit higher back then in the fall too and that guidance was in September, early October. So it's hard to separate some of the specific budgets on the properties today versus from the overall look in the economy; clearly the economy has continued to soften and deteriorate during that period of time, so that's been the lion's share of that.

Our sense back in the fall, Will, was that given the makeup of our portfolio that we would outperform by about 100 basis points of the broader brand portfolios and generally, we still think that. I think the disruption of Chicago is perhaps higher than we hoped for, and the softness in Chicago in the first quarter is having a fairly significant impact in our total portfolio, clearly for the quarter but even for the year.

Downtown Chicago Marriott will probably have close to a 70 basis point impact on the RevPAR growth. So it was really a combination of all those things. Chicago's the one thing that comes to mind in terms of any specific changes. Frenchman's was a big disappointment in fourth quarter, which we talked about and is of concern from a flow-through standpoint again also in '08.

Okay, great. Thank you. And in terms of the guidance for '08 specifically, there are some markets I think that you are in that are still very strong, you mentioned Boston and clearly New York has had good RevPAR to date. Are you expecting a slowdown in some of the stronger markets in your guidance?

I think we are generally expecting a slowdown in even the stronger markets, but we've got pretty good visibility on, particularly, Boston and Chicago. So I guess New York is one we're cautious about, we haven't seen it yet, we see some replacement for some of the -- well actually, we've only seen one major corporate account basically disintegrate, which we were easily able to replace, but at some point that debt, if you will, gives us concern.

Will, even the stronger markets are going to -- we do believe they are going to be more moderate than last year. 10% RevPAR growth, which is roughly where we came in, is really great and very unusual and even without some of the more recent happenings with the economy, we would have expected some moderation. And, well New York for example, we believe will stay strong with some caution. We're still not -- wouldn't be expecting mid-teen RevPAR growth in 2008 there. Still well, well above historical averages, but not in the mid-teens.

Great, okay. Thank you very much.

Your next question comes from the line of Amanda Bryant with Merrill Lynch. Please proceed.

Great, thanks. Good morning.

Hi.

Just have two questions for you. First, what does the 2009 convention calendars look like in Boston and Chicago versus 2008? And then the second question would be what would be the likelihood that you will sell any additional hotels this year? Thanks.

Okay, Amanda, this is John. In those two markets, Boston is more or less flat, but the trends are a little bit different in '09; the bookings at our hotel are dramatically up in 2009. There are a lot of reasons for that; they've only been selling that hotel for a fairly limited period of time and I think their efforts are really kicking in in '09 in a big way, but also the city is weighted in different quarters. This year, it's heavily weighted in the first two quarters, which is great because that is normally a soft time, but it also impacts the rate because it's traditionally a lower rated period than the third and fourth quarters.

In Chicago, 2009 has been trumpeted to be a fabulous convention year since 2005 really and we have no indication that that is softening in any way. The patterns are good, the city-wide totals are good and our in-house bookings are quite strong in Chicago for 2009, so that creates all kinds of pricing opportunities based on the compression of the city-wides and the strong in-house groups. That creates all kinds of pricing opportunities on transient and where you position your rate for the balance of the segments. So in those two cities it's a good story; in Chicago, it's a great story.

And then with respect to your, maybe willingness to sell any additional properties this year?

We are in the process of, as we do every year, prioritizing our portfolio. We sold Buckhead in December. There are a couple of hotels that we're considering right now and one of the things we're considering is how we re-deploy those funds if we were to sell the hotels. So yes, we're constantly evaluating it. We've not identified any specific dispositions at this point.

The cautionary note is sort of the disconnect in the marketplace right now in terms of valuation. So we'd have to be comfortable and the one we sold in December, the SpringHill Suites, we think we got a great price for it. Hopefully, that won't be unique, but we got a great price and it will really depend on valuation.

Then I guess you are testing the market now, in essence. And if you feel like you get a decent price, you'd be more than willing to let something go --

No. Amanda, this is Mark. We're evaluating and getting opinions of value on a few assets, but we haven't gone to market with any other assets at this point. We're not asking the market currently.

Okay. I understand. Thank you.

Sure.

Your next question comes from the line of David Loeb from Baird. Please proceed.

Yes, just a quick follow-up on Amanda's question. John, given what you said about cap rates, does that make you think that asset sales are somewhat unlikely, given where you see values changing?

It depends, David, I would have to say. I don't want to be equivocal, but it's -- so many factors go into whether or not you sell an asset -- its impact on the portfolio, its impact on our growth, our ability to redeploy the funds, all factor into it. If we could sell an asset, a slow growth asset and we could get an [A cap] for that asset, we may very well choose to do that given the current capital environment and alternative uses of that capital. But we're not going to sell anything that we think has growth in it that would warrant hanging onto it for the benefit of the portfolio.

Dave, this is Mark. The SpringHill Suites Buckhead we sold in December is really the perfect example. It was our lowest RevPAR hotel, it had zero growth in 2008, and we found a buyer that would pay us what we considered an extraordinary price. So that's our ideal disposition.

Well, I know you probably don't know the answer, but what were they thinking?

They saw potential, obviously.

That's very political. John, on Chicago supply, there's a lot of luxury supply coming into the market. Does that affect your thinking about the Conrad, or do you think you've moved that hotel in the right direction, given where that's coming, or do you see that supply being competitive?

Yes, we see great potential in the Conrad. The location of the Conrad is so superior and the way it's positioned right now as sort of the four-and-a-half star Hilton product in Chicago gives it a tremendous depth of both group and transient demand to pull from. So yes, there is the trump coming up and actually there are more limited service hotels coming on, but we are not concerned at this point about the new supply in Chicago with regard to the Conrad. We think there's a tremendous growth opportunity at the Conrad and a tremendously deep pool of Hilton room nights to draw from.

Great. And generally, what kinds of things do you think could go wrong that would make it challenging to hit the low end of your guidance? Or where do you think there are opportunities in the other extreme that you think you could beat in '08?

I think it's really a question of the economy, more than anything. Clearly, the low end of our guidance does not really assume a significant recession. It clearly assumes lower GDP growth than 2%, but not that much lower, but it really doesn't assume us going negative. So it's really the economy and what's going to happen there.

Okay, thanks.

(OPERATOR INSTRUCTIONS)

And your next question is from the line of Chris Woronka with Deutsche Bank. Please proceed.

Hi, good morning, guys. Just, if I could, drill down a little bit more on the, really on the margin issue. But you mentioned that you are expecting a fairly big ramp in salary and benefits costs on staffing. I mean if the transient business is declining a little bit, I guess I'm just trying to understand a little bit better where you will be staffing up or why if the higher margin banquet business is increasing -- understand a little bit better the staffing relationship with that, thanks.

Okay, I'll take a crack at that, Chris. If you think about it, the meeting and banquet space that we're adding, I was just trying to do it quickly in my head, it totals probably around 75,000 square feet or 80,000 square feet across the portfolio and the banquet volume associated with that is going to be great. As you know, banquet profit margins are higher than other food and beverage profit margins, but they are significantly lower than rooms, obviously.

So the level, if you consider a normal banquet operation has about a 40% payroll cost associated with, and these are very round numbers, you can imagine that the increased revenue is going to create significant increased man hours, disproportionately to normal growth year-over-year because of the [sudden type] of [between] the [meeting space].

Chris Woronka. Okay, that's helpful, thanks.

Your next question is a follow-up from the line of David Loeb from Baird. Please proceed.

Just one more, if you don't mind. On Boston, John, can you just give us an idea of what kind of return you expect on the $19 million that you are investing and when do you see, starting to see, incremental revenues and cash flow as a result of having that meeting space on line?

Well, when we underwrote that, David, we underwrote it pretty conservatively. It's about a $19 million project, it gets us about 37,000 square feet of incremental space now; a chunk of that is exhibition space, so that's not high yielding space. But overall, it was well north of the 20% internal rate of return and I think it was in the first full year of operation. We'll feel the first initial benefit, obviously, when it opens in March. But the full-year impact in 2009 will be when the north of 20% ROI would be hit.

So you think you're talking about on the order of $3.5 million to $4 million.

Yes, I don't remember the specific number but it was a combination of about 11,000 room nights, incremental room nights, plus the associated catering and banquet revenue.

Okay. And some of that will start this year, but you think that '09 is the better year for that.

Yes, a big chunk of it will start this year because we're bringing it on line just as prime season comes in, so we expect a nice return on it this year. And again, I'm going from memory, but I remember this one was well north of 20%, which is our hurdle rate.

And there are no other questions in the queue at this time. I'd like to turn the call over to Mr. Bill McCarten for closing remarks.

One clarification we had to one of our answers was on Downtown Chicago. I think Jeff may have asked what the outlook for the total year was and whether our profits were going to up. I think after the disruption, the revenues are up some and the profits are about flat.

Jeff, this is Mark. Just clarify, on the revenue line with the renovation and the market impact, it's up maybe slightly and then on the bottom line, it's up slightly if you take the $2 million adjustment for the renovation impact. So I just wanted to make sure we were talking apples to apples. So with that --

Okay. Well, thanks a lot for your interest and we look forward to talking to you again.

Thank you all for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.