Diamondrock Hospitality Co (DRH) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 DiamondRock Hospitality Company earnings conference call. My name is Krista and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed, sir.

Thanks, Krista. Good morning, everyone, and welcome to DiamondRock Hospitality's third-quarter 2008 earnings conference call. Today, I am joined by John Williams, our President and Chief Operating Officer, as well as Sean Mahoney, our Chief Financial Officer.

Before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws, and they may not be updated in the future. These statements are subject to numerous risks and uncertainties described in our securities filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful for you to review the reconciliation to GAAP in either our earnings press release or our most recent 8-K filing.

Let me start today by addressing the obvious. The general economy and the travel industry have weakened and the financial markets remain under stress, although there has been some relief this week as government intervention is raising hopes for better liquidity in the system. DiamondRock, along with many of our peers, has seen a significant decline in our stock price over the past few months. Our shares have been trading at a price that implies the value of our hotel portfolio equivalent to a cap rate between 13% and 14% of trailing NOI, which is compelling by almost any historical measure.

Given the general headwinds in the industry, we are pleased to report third-quarter results that are generally consistent with our prior expectations. Our hotels in Manhattan, LA and the Caribbean showed strength, although more than half of the hotels in our portfolio turned in negative RevPAR growth for the quarter.

In total, RevPAR in the quarter contracted by 3%, driven by a slight decrease in average daily rate, coupled with an almost 2 percentage point decline in occupancy. Working closely with our operators, we focused on revenue enhancement opportunities and cost containment measures. We were able to save approximately $1.8 million as a result of contingency plans during the quarter and thus limit house profit margin contraction to approximately 200 basis points.

As a result, the Company generated adjusted EBITDA of $40.5 million and FFO per share of $0.34.

Turning to the balance sheet. At the end of the third quarter, the Company had total debt of approximately $900 million. We recently drew on our revolver, as we were concerned about some of the bank participants in the facility. Our current cash position is around $110 million, including $35 million of restricted cash. We will likely pay down our revolver later this year as some of the prior concern has waned with the recent bank mergers, and expect to have over $120 million available on the revolver at year-end. I should note that the Company also has eight unencumbered assets, with a total cost basis of $850 million, that can be leveraged to increase our liquidity.

Our overall credit stats remain solid. The Company's net debt is currently less than 5 times our trailing four quarters' adjusted EBITDA, and our fixed charge coverage is approximately 3 times.

As for the outlook, we are maintaining our guidance for the full year, as we continue to expect RevPAR for our portfolio to contract 1% to 3% for the full year, adjusted EBITDA to range from $175 million to $181 million, and FFO per share to range from $1.46 to $1.51. We currently expect to come in at the middle of the range.

The visibility for 2009 is very low, given the level of uncertainty surrounding the general economy. In projecting lodging demand, we look at economic indicators such as trends in GDP growth, unemployment, business investment and gas prices. Except for gas prices, these economic indicators are trending negative and lead us to conclude that lodging demand will decline to some degree for at least the next several quarters.

I am not sure it would be productive to provide specific guidance on 2009 at this point. We are still in the process of receiving preliminary budgets from our operators. In this environment, the Company will keep its priorities on managing the balance sheet and maximizing profits at our owned hotels. We will also explore strategic ways to take advantage of the market dislocation.

Before turn the call over to John, I did want to touch on dividends. During the third quarter, we paid a dividend of $0.25 per share, which annualized, represents a yield in excess of 22% based on yesterday's closing price. In light of the current challenging operating conditions, we are evaluating the merits of reducing our future dividend amount in order to align our dividend payout with our reduced cash flow projections and to increase our ability to potentially acquire distressed assets in late 2009, or repurchase stock at depressed prices. We will continue to discuss the dividend payout with the Board and will make a determination when we have better visibility on next year.

With that, I will turn the call over to John.

Thanks, Mark. We are certainly back in turbulent times. Each of these storms is different, and this one is especially tough to read. Our objective is to react promptly to what we know and prepare prudently for what we don't know.

Now I will spend just a minute on our third-quarter property results and provide some additional perspective on our outlook. There were only a few bright spots in the portfolio for the third quarter. As Mark mentioned, our hotels in Manhattan, the Caribbean and Los Angeles were better performers. Unfortunately, we experienced weak performance from a number of markets, with particular challenges in Orlando, suburban Chicago and the perimeter submarket of Atlanta.

Overall, portfolio occupancy was down 190 basis points in Q3 from last year. Average rate was down 60 basis points. We saw weakening trends in all of our major demand segments. Business transient and group revenue were down about 8.5% and 6%, respectively. The short-term group booking pace for the balance of the year has slowed and attrition has increased in spots, although fourth-quarter group pace is still up 2.8% versus same time last year.

The leisure and other discount segment revenue was up 6% in the quarter, reflecting our operators' attempt to replace lost premium transient and group business. Contract revenue was up 14% in the quarter.

As a result of the lower group mix, food and beverage, particularly banquet, as well as [A/D] sales were down, collectively, about 4.5%. The real weakness in F&B was a significant drop-off in local catering, down almost 14% in the quarter. Interestingly, group contribution was up 5.9% per occupied room night, albeit on a lower number of group room nights.

With the decline in catering sales, F&B margins declined 136 basis points in the quarter.

On the cost front, we expect support costs to go up around 4.1% for the year, including about 9.4% in utility expense. For a variety of reasons, our utility cost in the quarter was unusually high at plus 23%. This hurt margins in the third quarter, but is expected to moderate next quarter.

Salaries, wages and benefits increased less than 1%, which is a function of lower volume. Man hours per occupied room and sales per man hour were flat in the quarter, a reflection of cost controls at the hotels. We estimate that property taxes will be up 7% for the year, and we expect to save about $700,000 as a result of revising our property insurance program and bidding the insurance out for our entire portfolio.

Each of our 20 properties has implemented varying levels of contingency plans to control costs in this uncertain economic environment. Along with our operators, we are aggressively implementing strategies to maximize value during this period of declining fundamentals. We have left open positions unfilled, utilized PTO to reduce payroll, reduce par levels of operating supplies, reduced man hours in food and beverage outlets and kitchens, delayed R&M projects where feasible, and reduced frequency of certain quality control practices, just to give some examples.

We have not instituted more Draconian measures, such as management layoffs, closure of food and beverage outlets and premium customer lounges or elimination of concierge services and rooms amenities, because these sorts of cuts are obvious to the customer and would cost market share, and less competitors have instituted those same Draconian measures. We anticipate operating cost savings from our contingency plans currently in effect of over $5 million for the year, including almost $2 million in each of the third and fourth quarters. This is built into our guidance.

Additionally, we are seeing the benefits of an energy initiative we began implementing across the portfolio and labor systems we have implemented in Boston, Frenchman's Reef, and Vail resorts in the past six months, and we see more opportunity on the energy front.

For 2009, the visibility we have on group, which represents about 36% of our revenue, looks decent. The group booking pace is up 5.6% by revenue, with particularly strong growth at our Westin Boston, which is up 41.5%. In fact, across our portfolio, we already have 60% of the group room revenue on the books for 2009 that we project to do in 2008.

Turning to capital reinvestment, we continue to find good value creation opportunities in our hotels. In 2008, we will spend between $70 million and $80 million to improve our hotels. Earlier this year, we substantially completed on time and on or under budget the projects at our two largest hotels, the Chicago Marriott Downtown and the Westin Boston Waterfront hotels.

At the Chicago Marriott, we have spent $35 million to renovate all of the meeting space, reinvent the lobby, change the food and beverage outlet, create an incremental 17,000 square feet of valuable meeting space, and modernized the elevators.

At the Westin Boston Waterfront, we've spent $19 million to convert non-revenue producing shell retail space into 37,000 square feet of valuable meeting and exhibit hall space. We have also recently signed a restaurant tenant to lease 6700 square feet.

We completed the rooms renovation at the Chicago Conrad in the first quarter and completed a ballroom renovation at the Atlanta Alpharetta Marriott during the third quarter, and will complete a $7 million guestroom renovation at the Salt Lake City Marriott early in the first quarter of 2009.

Of our 2008 CapEx, over 50% was invested in ROI projects. In 2009, we are currently planning to spend approximately $30 million on CapEx. $10 million of that would be out of pocket. We have identified potential reductions in the 2009 CapEx if economic conditions deteriorate further.

On the acquisition front, we continue to review offerings in the market, but have made the decision to preserve our dry powder for opportunities we feel confident will emerge next year as distressed assets come to market and credit markets find some footing.

With that, I will turn it back over to Mark.

Thank you, John. At this time, we would be happy to entertain any questions you might have.

(Operator Instructions) William Truelove with DiamondRock Hospitality.

Hi. It's Will Truelove at UBS.

Welcome aboard.

If I worked for you guys, I would have really good estimates. I know you said that you had done Draconian measures and operating (inaudible) because of the market share. Okay, totally understood. What kind of triggers are you looking for to do that, and have you had preliminary talks with your major operators about what that would entail? What kind of things are you looking for before you start instituting those kind of changes? Thanks.

Okay, well, thanks. This is John. You know, I think, first of all, we are talking to the operators about that, and we are kind of mutually setting milestones that we are both looking for. I think everybody is a little foggy on 2009 right now. Our current preliminary budgets, we think, don't sufficiently reflect what is potentially going to happen in 2009. We have only very, very preliminary revenue numbers. And so we are scrubbing those with our operators.

We have not set specific milestones, if you will, but if you get into the mid-single-digit negative RevPAR range, I think we will certainly be of the opinion that it is time to take some fairly significant action on the cost front, more significant than we already have.

Okay, thanks so much. Appreciate it.

David Loeb.

First, on the dividend, Mark, I heard what you said. I clearly read the press release. It sounds to me like it is a foregone conclusion that you are going to cut. And with several Board members there, I wonder if you could have some comment on that. And also if you're thinking of targeting a particular percentage of cat or FFO as you think about where to reset the dividend.

Good morning, David. This is Mark. Just to answer the question, the Board has not made a decision yet. Obviously, we need a little better visibility on 2009, because the range currently is very wide. So we want to understand that a little better. I think what we've said historically is that we would be willing to -- the dividend is clearly an important component of the return to our shareholders. And in that borrowing a little bit of money next year, we would be willing to do that. But if it looks like we would be borrowing a lot, that doesn't seem like the prudent thing to do.

The other thing we are wrestling with is there is currently a lot of market dislocation and we think there is going to be tremendous opportunities next year, whether it is buying distressed assets or possibly buying back our own shares at a depressed price. Those options and alternative uses of the capital need to be considered by the Company as well in order to maximize the return to our shareholders.

So everything is on the table now. We are doing -- I think we will have better clarity in probably a month or two months on '09, and then we are going to have kind of a fulsome conversation with the Board and come to a final conclusion.

Okay, that makes sense. Your coverage is clearly really excellent at this point. How bad do fundamentals -- how bad does RevPAR have to get, for example, or EBITDA have to fall before you become concerned about covenant restrictions in your line of credit?

Well, I think the most meaningful covenant is probably the 1-6 coverage requirement, and we are currently -- if I look at where we are now, we are currently about 3 times. So the cash flows would have to fall 40% on that metric. So it would have to be an enormous decline from where we are today.

And if you did fall that much, that would restrict your ability to draw on the line. And would it also restrict your ability to pay dividends beyond what was required to retain REIT status?

I think under end-of-the-world scenario, probably what you do is -- we have $850 million of assets that are unencumbered by debt. So we'd probably look to a different avenue to fund the Company, if we thought we were actually getting close to or covenants.

And David, this is Sean. Under our line of credit agreement, we are allowed to pay dividends to the extent that we have to maintain REIT compliance.

So worst-case is they limit you just to paying out --

Minimum --.

-- the minimum required.

The minimum REIT level.

Okay. And Mark, I guess I would assume that under the end-of-the-world scenario, it would be pretty hard to get mortgage debt from anybody. So I guess that -- not that I think we are going to see the end of the world, because I don't think that -- but I am a little surprised to hear you planning to pay back down your revolver rather than just carry more cash until things look a little more stable.

Well, the revolver is available to us, you know, on three days' notice. And so as long as you are confident that the participants in your line are solvent and will be solvent, it is really available to you. And so it is just a matter of interest savings by paying it back down because you could always draw on it.

Okay, great. Thanks.

Chris Woronka with Deutsche Bank.

Hey, good morning, guys. Could you share with us maybe how many cancellation or attrition fees you've collected in the third quarter and kind of what you might expect for fourth quarter and even maybe what you are budgeting for '09?

Yes, Chris. This is John. If you look at a sales volume in the third quarter of north of $160 million, we collected cancellation fees of just over $700,000 and attrition fees of just over $350,000. So it is pretty de minimis. We are seeing small increases in both those categories, but we are working with the operators pretty closely to make sure we collect those fees as promptly as possible, and therefore the impact on the bottom line is minimized. Both those numbers are up in double digits compared to last year, but they are such small numbers that we don't read it as a meaningful metric at this point.

Okay, that's helpful. And then just kind of looking out to next year in terms of mix. I guess this is the time of year when it becomes -- you start looking at where your bookings are. How do you see the mix right now shift? Is it going to be a dramatic shift? Are you going to do more to contract and discount, or are you trying to use rate to group up a little bit more? Just kind of your general thoughts on where mix is headed? Thanks.

Well, we are seeing the trends already out of the premium rated, business transient, and high-rated group. High-rated group, is, of course, the short lead time stuff, the corporate group. We anticipate that trend is going to continue.

We are trying to group up in certain properties, but there is only so much you can do in terms of grouping up at this stage of the game for next year. We've got 60% of our group revenue for 2008 already on the books for 2009. So it becomes almost a quarterly decision on both lower-rated groups, which of course don't have the same food and beverage contribution, and contract business.

Interestingly, in some of our hotels, particularly in LA, the reduced airline activity has made the contract business a bit more problematic than it has been in the past. That has always been a safe fallback. That is not as safe a fallback at this point because of the reduced level of airline activity. We are still able to hit what we want to -- get what we want to get, but it is nothing that can be taken for granted next year. So these are all very kind of fluid things that on a quarter-by-quarter basis we are looking at and trying to determine.

So, we anticipate a continuation in the trends that we have seen in the fourth quarter -- excuse me, in the third quarter, in the fourth quarter and the first quarter of next year. Beyond that, it is pretty hard to see.

Okay, great. And then just one last one. How do you think in general the pricing integrity is holding up across the board? I mean, you've got a pretty small portfolio, but just in general, are you seeing any kind of irrational behavior start to creep in yet or are you still trying to hold occupancy? Or both?

Hold rate, you mean?

Yes.

Yes, we are seeing pretty good rate integrity. There are a couple things at work here. Yes, generally the sophisticated competition understands that once you give up rate, it's very hard to get it back. We have a couple of markets where we have less sophisticated competition. But in general, I would say rate integrity is pretty good.

A lot of it depends on what is going on in the marketplace. In other words, in Chicago, for example, I don't think it is rate integrity we are worried about. I think it is the fact that we all have to open up discount channels when the citywide market is softer. But you can budget that and opening up discount categories, you are not dropping your benchmark rate, which is what is hard to get back.

So I think in general we are seeing people holding rate, understanding that some occupancy might be at risk, but at the same time, opening up discounts. One, I think, important factor -- and this has yet to be proven in this go around -- in 2002 and 2003, there was very little discipline on the particularly opaque channels. Since guaranteed rate policy has been implemented among all the brands, really, but particularly Marriott, we are hoping that there is going to be much less of that undisciplined inventory distribution that the opaque channels were able to take advantage of, where you completely lose control of your inventory and your pricing.

This time around, because of guaranteed minimum pricing, you are not going to get a better price on the Internet than you can get on the brand website. And so we hope that the brands are able to control their inventory much better this time around.

Okay, that's helpful. Thanks.

Will Marks of JMP Securities.

Thank you. Good morning, everyone. On one of your last answers, you mentioned 60% of '09 on the books. What is -- of group business. What is group business as a percentage of the total? And then is that -- what kind of rate increases, if so, are we looking at for '09 on that group part?

Okay. First of all, it's about 36% of our annual business. It tends to be a little bit more in the fourth quarter. I don't have those rate statistics right in front of me, but as I recall, the average rate is relatively flat, up a little bit. And, therefore, room nights are correspondingly different. But 36% with 60% on the books, that doesn't give you a real firm base of occupancy going into next year, which doesn't help visibility a lot. But particularly in Boston, it's very encouraging to see the patterns that we are seeing.

Great, okay. And then tying that into just corporate rate negotiations, what kind of leverage do you have to raise rate? Can you go to your customers and say, we're in an inflationary environment? Or do they come back with, you know, this is a very bad economy, you have got to cut your rates?

Well, we don't have enough evidence yet to know how we are going to come out. We know what the targets are. The targets are to be flat to just up in rate, kind of knowing that you're going to have to give away some last room availability and perhaps some amenities. But we really don't know yet how it is going to turn out.

Obviously, many customers in many markets have significant cost pressures, and therefore, are going to bring those cost pressures to the table. But at the same time, there is a recognition that hotels have increased costs as well, and frankly, the other business on the books and potentially available is not down to the point where we have no leverage at the table.

Okay. And just last question, on '09 CapEx spending, I'm not sure if you touched on that. Can you mention projects in '09?

Right. We currently are identifying about $30 million of '09 CapEx, $10 million of which would be out of pocket, $20 million would be out of the escrow accounts or restricted cash held at the hotels. We are reviewing those numbers, obviously, and preparing contingency plans if economic conditions worsen.

There are really no major projects for next year that would cause a lot of disruption. We have a rooms redo at Waverley that would come towards the end of the year if we don't postpone it into next year.

Yes, this is Mark. Just to add onto that, so currently we have $30 million, about $10 million out of pocket is our preliminary estimate. But obviously, last 30 days, the world looks a little darker, so --. But there are a lot of projects that may be on the table that we are going back to have a look at, that, depending how the next year plays out, we may revisit.

But there are a number that are underway where we've ordered materials, which is the Salt Lake City rooms redo. And actually pricing is getting better, as you can imagine. It is not a great environment for a lot of those contractors and construction folks right now.

So, things that we think make sense that are prudent to do, we are doing. We don't have any big projects like we did in Chicago or Boston this year coming up. So, we are looking at it; we're being prudent. We are trying to take advantage of what may be a good time to get some work done, but obviously trying to recognize the fact that we need to be responsive to the economic conditions out there.

Sure. Okay, thank you very much.

Smedes Rose with KBW.

Hi, good morning. You mentioned your group bookings at 60%. Where were you around this time a year ago in terms of what you ended up doing? What was on the books for '08?

We are up a little bit versus same time last year. Most of that is coming from Boston. I think we were at a similar place, not quite as strong last year. But offsetting that is -- we are seeing a clear trend, not a major trend, but a clear trend of reduced short-term bookings. So, where we are today versus same time last year could very well deteriorate by the end of the year. So I think net-net, we are comfortable that we will be sort of equivalent to where we were last year at the end of the year, but right now we are slightly ahead.

Okay. And then at your hotels that do a little more airport -- or at airports, are you starting to see, I guess, the fallout from the airline cutbacks? Looking at your Orlando results, is that more driven just by maybe a falloff in leisure business, or -- because the Torrance property seems like it held up fairly well, and I think that does a fair amount of airport business. So I was just wondering if you could maybe talk about trends in that area a little bit.

Yes, at LAX, both our LAX Marriott and the Torrance property are definitely feeling the decrease in airline capacity at this point. And that has to do with contract business. Both of those markets and Orlando are impacted as much by things going on, for example, in LA in the defense industry, which obviously was pretty strong in the first part of the year, and in Orlando, by group activity and other just general commercial activity that goes on in the market.

In LA, we had strengthen in the transient market in the first and second quarter, a little weakness in the third quarter. We anticipate weakness in the fourth quarter. So that combined with reduced airline activity or capacity, we think, is going to impact the hotels.

And with respect to international activity, which impacts Torrance a lot on the contract side, we are seeing a reduction in capacity there as well.

In Orlando, it is more of a market-wide problem. The resort corridor, if you will, has been soft, and therefore, groups have that option at a lower rate than they normally do. And therefore we are at a significant disadvantage in booking groups at the Orlando Airport Marriott. So we have seen that having a bigger impact than really airline activity in Orlando.

Okay, great. That's helpful. Thank you.

Cann Hoe with KeyBanc.

Hi, good morning. My question just is a follow-up to the prior CapEx spending question. For the Salt Lake City Marriott, how many rooms do you plan on being out of service while you renovate it?

Well, they are staggered. This is John. They are staggered, and you take out whatever the most efficient number of rooms per segment, if you will. So that if you can demolish and efficiently clear out two floors of rooms, you might do that. If you can only do -- or if you could do more, you would do that. But it really depends on the contractor's sort of view of his capacity and how fast he can do the work. I'm not sure of the exact number on an average day that will be out of service in Salt Lake City at this point, but typically, you are taking a couple or three floors out at one time.

I see.

This is Mark. Just to add onto that, we stagger this at a time when the occupancy is generally a little lower or a lot lower at the hotel. So we are not envisioning -- although we will have probably three floors out at a time, or two and then the one buffer floor -- we're not anticipating a lot of disruption at the hotel as a result of the rooms redo.

Okay. And do you have an estimate for the available number of room nights for the fourth quarter?

This is Sean. The available number of room nights is about 1,130,000.

1,130,000? And that is probably going to be running into next year, the first quarter also, that rate?

No, because the first quarter of next year only has three periods versus our fourth quarter has four accounting periods in it.

We would be happy to follow up with you after the call.

Okay, sure. I will call you afterwards. Okay, thank you. Bye.

Michael Salinsky with RBC Capital Markets.

Good morning. Following the Marriott calendar, will your fourth-quarter results, will they have an extra week in them? Because one of your competitors is actually backing a week out there for comparability. Will you guys follow the same format?

Our fiscal year -- this is Sean -- our fiscal year is always 365 days for REIT purposes. Everything that we present from a statistics perspective includes through December 31. So we do adjust hotel statistics as well as hotel operating results to back out the incremental days in Marriott's fourth quarter because of the 53-week year.

Okay, so they will be backed out then. Secondly, you touched upon the opportunities for distressed assets. Are you seeing any distressed right now and where do you expect the distress to come from, more so on the financing side or more so on the operating side?

This is Mark, and John can touch on this as well. You know, the transaction volume has declined considerably. I think people are just holding off. So transaction volume is low. I think the number of packages we are seeing has declined, so there is not a lot of opportunity. I don't think we are seeing a tremendous amount of distressed assets now.

I think our thought is a couple fold. One is that there will be some distresses, cash flows turn negative next year, you will have some people get into trouble that did high-leverage loans. You may also have some new hotels that are opening up construction loans where people are trying to look for perms, and that becomes unavailable and they open up to sell it to cash flows. That may be another one that is available as well.

So, we are envisioning a number of opportunities that may emerge next year through a number of avenues. We also have our relationship with Marriott International. And in softer times, the opportunities that come through are more fruitful for us, if you will. John, I don't know if you have anything to add to that.

Well, no. It's just that some of the major houses that we have all heard about have significant real estate holdings, and inevitably, they are going to go on the market. We have not seen it yet, but we have certainly heard a lot of evidence that it is coming.

Would you guys consider joint ventures or fund investments or group investments, possibly, go after maybe some of the larger portfolios?

Yes -- this is Mark. We have -- we pride ourselves on having a very simple balance sheet and being very easy to understand. We have no preferred stock, no JVs, currently. But in this environment, obviously, at the level our shares are trading, it would be very difficult to issue any equity.

So, we are exploring ways that we could take advantage of the market dislocation. That would be one way, to form a joint venture or some other structure where we can put in a smaller amount of capital, get a management fee and a promote, and really try to exploit what may be great opportunities in 2009.

John, you touched upon group bookings and you also touched upon how the Boston market had major renovations, actually, and the Chicago market as well this year. I just was wondering if you could provide some additional commentary on group booking pace, specifically in Chicago and Atlanta and your other two major markets.

Okay. The group booking pace in Chicago is up slightly versus same time last year. It has been up more in earlier quarters, so we are seeing a deterioration in the booking pace. We are hoping that we will wind up the year at our crossover goal of group room nights. As I say, we hope we will and we have no reason to believe we won't.

The new meeting space is really geared -- in Chicago, is geared toward smaller groups. We basically took a fourth floor at the hotel which was essentially out of service, and we created some really great small meeting rooms in it. Unfortunately, that segment of the business, corporate meetings, is what has fallen off this year and presumably next, and therefore it is not providing us a great deal of help in a down market. Clearly, we have booked a lot of revenue into that space, but it hasn't provided the kind of upturn that we had hoped for and will anticipate getting in the next up market. So it is not great defensive space; it is great offensive space, and we are in a defensive market right now.

In Boston, on the other hand, that hotel we knew when we bought it was woefully under group meeting spaced. And so this space in Boston was absolutely critical to letting that hotel kind of fend for itself, if you will, when the BCEC is dark. And so that space has been directly incremental in the 40% increase versus same time last year in group revenue that we are seeing in Boston. So that is a very direct cause and effect.

Hey, Mike, this is Mark. Just to give you our overall booking pace, we are up -- room nights for the whole portfolio in Boston is a big driver; it was up over 3%. And ADR is up a little over 2% for next year. So those are -- again, Boston is a big driver, but those are relatively encouraging signs on the group booking pace.

No, I agree. I was just trying to get an understanding of how other markets were playing out there in the portfolio. Then finally, I know you're not providing 2009 guidance, but 2008, you had a pretty large tax benefit. Do you expect that to reverse in 2009 or to be meaningfully lower?

This is Sean. We would expect that number to be meaningfully lower, as some of our leases mature and we renegotiate them on current rates.

Thanks, guys.

(Operator Instructions) Smedes Rose.

Hi. I just wanted to ask you, your Courtyard on Fifth Avenue here in New York, you saw RevPAR increases of 6.5%, but almost a 2 point decline in the margin. I was just wondering if there is anything going on specifically at that property, I guess on the cost side, and maybe if you could talk just a little bit about what you are seeing right now for the New York market.

Sure. This is John. At Fifth Avenue, specifically, we had increases in ground rent, a dramatic increase in utility rates in New York, that impacted both Third Avenue and Fifth Avenue, and property tax. So those three elements depressed the flow-through at Fifth Avenue.

In terms of the New York market in general, we are seeing at this point a shift in demand. We are seeing consultants replacing sort of corporate customers. We see no -- and of course a continuation of the strong tourism, particularly international tourism. We don't yet see any deterioration in that; we anticipated, but we have anticipated it for the last couple of quarters. So the fourth quarter continues to look pretty strong. Next year, again, we have no indication that there is going to be a falloff, but we certainly anticipate that there has to be.

Okay, thank you.

At this time, there are no further questions. I will turn the conference back over to Mr. Mark Brugger.

Thank you, Krista. Thank you, everyone, for your continued interest and support of DiamondRock. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.