Diamondrock Hospitality Co (DRH) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 DiamondRock Hospitality Company earnings conference call. My name is Dan, and I will be your coordinator 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 your host for today's call, Mr. Mark Brugger, CEO. Please proceed, sir.

Thanks, Dan. Good morning, everyone, and welcome to DiamondRock Hospitality's fourth quarter and full year 2008 earnings conference call. Today, I'm joined by John Williams, our President and Chief Operating Officer, as well as Sean Mahoney, our Chief Financial Officer.

Before we begin, I would just 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 10-K filing.

Before getting into the details, let me start today by addressing the macroeconomic factors impacting our business and how we view the world. The demand for hotel rooms has decreased significantly, as it is correlated with GDP growth, corporate profits and unemployment -- all of which are obviously declining. Lodging is a cyclical business, and this downturn is going to be deep, but we know that it will end and a recovery will occur at some point.

Because of the lack of clarity about the overall economy, we are not in a position to provide specific 2009 guidance, but we will provide some relevant information to allow investors to model out their own forecasts.

Turning to valuations, DiamondRock, like all lodging REITs, has seen a significant decline in its stock price over the last year. Today's opening stock price implies that our hotel portfolio is being valued at a 14% cap rate on 2008 numbers.

To provide some perspective, the historic average cap rate for comparable hotels is probably around 9%. Moreover, our stock price implies a value of $120,000 per hotel key, a significant discount to our estimate replacement cost of probably $300,000 per key. In short, we believe that when the economy stabilizes and begins to recover, there is considerable upside in our stock price.

Now, the results for the fourth quarter and full year were in line with guidance, which incorporated our negative expectations for fourth quarter fundamentals. For the fourth quarter, the Company's same-store RevPAR declined by 9.4%, and the hotel adjusted EBITDA margins contracted by 327 basis points, which reflected the implementation of tight cost controls during the quarter. For the full year, RevPAR declined 3.3% and hotel-adjusted EBITDA margins declined 201 basis points. Full year corporate adjusted EBITDA was $178.8 million and adjusted FFO per share was $1.48.

John will provide more details on specific hotel operations and trends in a moment.

For 2009, DiamondRock is focused on two over-arching goals -- preserving profits and increasing liquidity. To preserve profits, our asset managers are working hand-in-hand with our hotel operators to mitigate the impact of deteriorating lodging fundamentals in order to maximize hotel profits.

On liquidity, we entered this downturn with arguably the strongest balance sheet of any lodging REIT. During 2008, we generated debt service coverage of close to three times, and our net debt to EBITDA ratio was only 4.8 times. Our debt maturity schedule is favorable, with only two near-term debt maturities totaling $68 million, and we have a number of options to either repay or refinance those assets, given the low loan to value ratios of these two mortgages, the $140 million of availability on our line of credit, and the ability to borrow on one of our eight other unencumbered assets.

DiamondRock is uniquely positioned with the simplest balance sheet in the lodge industry, and has no preferred debt, joint ventures or OP units outstanding. We will continue our long-standing efforts to improve liquidity and distinguish DiamondRock as the best balance sheet in the space.

On that effort, we recently suspended our quarterly dividend and are evaluating the option to pay a portion in stock. We are exploring the potential asset sales, although we remain disciplined on our hold values. And lastly, as prudent fiduciaries for our shareholders, we will continue to explore all avenues to maintain liquidity in this environment to both defend the balance sheet, and be well-positioned for growth at the appropriate point in the future.

As for an outlook for 2009, the macroeconomic environment lacks sufficient clarity at this time to provide accurate guidance. However, we did want to provide as much relevant information as possible to assist investors and analysts in deriving their 2009 estimates. Here is what we can tell you.

In 2008, we generated $191 million of hotel-adjusted EBITDA before the $30 million of contributions to our hotel FF&E escrow accounts. This is a good baseline for investors to utilize in making their own assumptions about 2009 hotel performance.

For 2009, we project approximately $53 million of debt service, including $4.7 million of principal amortization. Additionally, 2009 capital expenditures from corporate cash have been curtailed at less than $10 million. And lastly, 2009 corporate G&A is budgeted at $16 million, which includes only $10.5 million of cash expense. We hope that these data points are helpful.

With that, I'll turn the call over to John.

Thanks, Mark. We continued to see operating trends worsen across the portfolio in the fourth quarter, resulting in a rare, full-year negative RevPAR performance. We clearly see an even rarer industry-wide double-digit negative RevPAR year in 2009. Therefore, our primary focus for the foreseeable future at DiamondRock will be on improving our already strong balance sheet and intensifying our already aggressive asset management activities to preserve profits.

Today, I'll spend a few minutes on Q4 and full-year results for the portfolio, and provide some insight into trends we see impacting 2009 results, as well as asset management efforts we're undertaking.

Overall, occupancy was down 3.6% and rate was down 4.6% in the quarter. For the year, occupancy was down 2.2% and rate was down 0.4%. In New York, which had held up surprisingly well through October, the market experienced a dramatic fall-off in the last two periods of the year, resulting in our New York Courtyard's RevPAR declining 16% for the quarter and 1% for the year.

The Atlanta and Salt Lake markets were off around 15% in RevPAR for the quarter and 7% for the year. Griffin Gate, benefiting from the Rider Cup competition, experienced an 8% increase in RevPAR during the fourth quarter. For the year, only four of our 20 hotels showed positive RevPAR over 2007 -- Griffin Gate, LAX, Torrance, and Vail.

Revenue deterioration in our portfolio market segment shows a clear and accelerating trend. Group revenue was down about 2% for the year, with the decline coming in room nights, with rate up just under 2%.

Business transient revenue was down almost 8% for the year and 18% for the fourth quarter, with virtually the entire decline attributable to lost room nights. The lost business transient room nights were partially replaced by opening discounted rate categories and increasing contract room nights, particularly at our airport hotels.

With the reduced volume across the portfolio, food and beverage sales were off 3.3% for the quarter and 2.5% for the year. Margins were off only 46 and 80 basis points for the quarter and year, respectively.

On the cost front, we're generally pleased with the cost containment efforts from our operators, which saved over $5 million for the full year in 2008. Our largest cost category is salaries and wages. For the quarter, salaries and wages were down slightly from 2007. However, benefit costs continue to grow, taking overall wage and benefit costs up 1.4%. For the year, wages and benefits were up approximate 1.8%, representing 32.8% of sales.

Support costs, including property level G&A, repairs and maintenance, and marketing, were down 2.4% in the quarter, reflecting stringent cost controls in the hotels. For the year, support costs were down 1.2%. Utilities were up 6.3% for the quarter and 7.6% for the year. Property tax was up 4% for the year, and incentive management fees were down 12.9% for the year.

In 2008, we completed approximately $80 million in capital projects, which together with the almost $200 million of capital we've invested in 2005, '06, and '07, should position our portfolio to outperform over the next several years, with little incremental capital investment required.

As Mark indicated, we'll not provide significant guidance this year due to the unprecedented lack of visibility about the economy. Clearly, the trends indicate a challenging year. Our group revenue booking pace for the portfolio at year-end is down about 7%. We continue to see the pace drop-off. Pace was up 5.6% as of Q3. The drop-off is all in room nights, as rate continues to be up slightly.

The Boston Westin and Chicago Marriott continue to benefit from the meeting space we added at the hotels, with group revenue pace of 15% and 2%, respectively.

We're carefully evaluating each of our markets to make sure that we have the right cost structure for the environment. In establishing our own internal forecast, we started with our operator-approved budgets, and carefully analyzed booking trends at each of our hotels over the past several years among all market segments. Then, considering local market supply and demand conditions, we have made our own estimates of quarterly revenue in each hotel.

Our internal analysis resulted in a significant reduction of the operator budgets to reflect the lack of clarity in lodging fundamentals today. Our objective is to plan ahead for what we consider the inevitable reductions in our operator forecast, as they move through the year and gain a clear picture of the magnitude of the economic downturn.

We're using our internal quarterly revenue forecast to establish the depth of the operator cost-cutting initiatives that are implemented at each hotel. In many cases, these objectives will require operating models new to the management teams and a significant relaxation of brand standards. We have received excellent cooperation for our managers at both the property and corporate levels thus far.

We have and will continue to closely monitor our capital expenses at the hotel as well. As I mentioned, our portfolio is generally renovated and we've minimized future capital expenditure. We will spend only about $12.5 million in new projects in 2009 across the portfolio. In addition, we've identified approximately $5 million in energy projects, with paybacks of under 18 months.

Actual cash CapEx expense, because of delayed payment for some projects completed in 2008, will be $35 million in 2009, including the energy projects. However, less than $10 million of that will be owner-funded, with the balance coming from property level FF&E escrows.

In summary, our Company and asset management is focused on preserving hotel profits in 2009 through revenue management strategies, aggressive cost containment and reduced capital spending.

With that, I'll turn it back to Mark.

Thank you, John. At this time, we'd like to open up the call for questions.

(Operator Instructions). Patrick Scholes, Friedman, Billings, Ramsey.

This is sort of a hypothetical question, but in your press release, you had a line in here where you may issue common stock as appropriate. I'd like to just hear in your view, what would be a scenario today where you would feel it would be appropriate? What type of asset pricing would you pounce on, in order to pull the trigger and issue stock?

This is Mark. I think on the equity issuance, the point is we have a litany of things there to convey that we have a number of options for liquidity in obviously, a very illiquid market. Of all the liquidity options listed there, equity issuance would be the least desirable, especially at this stock price.

But I think the point we're trying to make with the litany is that we have a number of avenues that are available to us. Some of those avenues aren't available to other companies, and we would hope that investors would take heart that we have numerous options to explore the liquidity front, which we think is advantageous for our Company.

We don't have a set number in our head of -- we have individual hold values for assets, based on our estimate of the future cash flows, based on a number of factors. Obviously, we always evaluate our stock price in this environment. We think it's very inexpensive based -- that it's very cheap, the current pricing wouldn't be -- would be expensive to issue. So, we're constantly evaluating liquidity options.

So, I mean, you don't think there would be a scenario where there was just an irresistible bank foreclosure on a hotel out there that you would consider issuing common stock, if you needed extra liquidity for that?

That scenario could play out. I think we would be very reluctant to leverage up the Company at this point in time. But if there is an opportunity to match fund, and at the same time potentially the lever the Company, that would be something that we would be interested in.

Okay, very good. I appreciate the information.

Jeff Donnelly, Wachovia.

Actually, Patrick touched on my first question a little bit. But I guess on that same vein, by our math, DiamondRock doesn't really need to sell assets or issue common equity. But as you know, you recently listed a good chunk of your portfolio for sale and as you mentioned, you opted to -- or may opt to issue common equity.

I guess I'd say it sends something of a mixed message to the market on how you perceive the NAV, your equity value of the Company. Can you talk a little bit about your rationale for the disposition review, I guess, and to the extent you've learned anything from the bids you've received in thus far?

Well, why don't I -- this is Mark -- why don't I let John talk about where we in and our asset sale process. And then maybe I'll follow up with the balance of your question.

Yes, Jeff, we have actually been pleasantly surprised with the level of activity on the nine assets that we recently put out. I think, as Mark indicated, it's important to understand that we have hold values for each of these assets. And we have no intention of taking a number under our hold value. Some of the activity has been at or above; it's way too early to estimate or predict a conclusion. But as I say, we've been pleasantly surprised.

I think it's also important to keep in mind that all of the litany of things, as Mark described, are really, I think -- as we've explained to several of you -- really just pricing our options in the event raising cash or equity is important to the balance sheet of the Company. As you point out, the balance sheet is very strong, but in pricing asset sales and pricing asset financings, we're just trying to understand the cost of each option.

And Jeff, as far as sending mixed messages, I think our position is we have arguably the strongest balance sheet and the best structured balance sheet in the lodging industry. We want to make sure that we've done everything that we're focused on liquidity. And if we can improve our liquidity and our balance sheet, we think that's a big positive for our shareholders. Obviously, we wouldn't do that at a cost that didn't make sense.

I know you won't share the hold values [rather] individually, but I'm curious -- how are you thinking about coming up with those? I mean, I would imagine every hotel your individual cash flow is for, but I guess, what kind of discount rates are you using on -- I guess call it -- unlevered or levered equity on those hotels? Or can you share with us a little bit about how you come up with those?

Well, there's a whole methodology and I don't want to go in too much detail. But essentially, it's a discounted cash flow analysis based on a five to seven-year hold. We actually look at a variety of discount rates because we're in an uncertain environment and we set up a major space doing that. We use an exit cap rate at the end of the five to seven-year hold period, based on kind of historic averages for cap rates, looking back over a 30-year period.

And the bigger impact, because there's such major sensitivities, has to do with some other things -- the prospectus we may have on an individual market; a supply issue in a particular market; or it may be somewhere where we think that the demand generators will be less robust than where we could redeploy that capital elsewhere.

Yes, I guess, related to that, because I'm trying to get my arms around like maybe how long in those sensitivities is the gap between maybe where we are today versus -- I'll call it more normalized price per key. Maybe it was a question for John, but do you know in broad strokes -- maybe back in the, say, the early '90s, where transaction prices for hotels fell to, versus what replacement costs were on assets at that time? Just roughly and how long it took -- to not necessarily close that gap, but at least narrow it meaningfully?

Yes, I'd hate to throw out numbers, Jeff, but as you know, the RTC portfolios were going out at $0.26 on the dollar. So, interpolate from there. But how long it took to get back, I mean they survived till '95; seemed to hold up pretty well. And I think by '95, '96, we saw asset prices back up to kind of historic cap rates.

And just one last question, actually. You did, in 2009 -- I don't know if you'll share this with us -- but what's been happening in your resort destination, like Vail Marriott and the Frenchmen's Reef? I mean, conventional wisdom out there is those segments would be hit disproportionally; however, at least on the top line, as consumers tighten purse strings. But both hotels seem to perform relatively well in the fourth quarter, I guess, on a RevPAR basis. What's happening there?

In Vail, we had -- actually December was -- the Christmas week in particular was down from a rate standpoint. We lost some of the pricing power that we'd had in previous years. And unfortunately, we were stuck in a situation where we couldn't reprice and discount rooms to fill the hotel, because it would have meant repricing the rooms that were already reserved. So, Christmas week was down a bit.

In general, in Vail, we're seeing a fall-off in group business and we're seeing a fall-off in the highest-rated leisure. We've been able to replace it very effectively, particularly in period two, with lower-rated business. So we're maintaining occupancy and the hotel has done a fantastic job of managing flow-through.

Frenchman's Reef is kind of the same story. Group has been a little softer and we've had to go to more discounted leisure business. I think it's too early to tell about flow-through at Frenchman's in the early part of this year. But in general, the pattern is clear -- we lose Group and highest-rated leisure, and replace it with discounted business.

Michael Salinsky, RBC Capital Markets.

In the guidance you did provide for 2009, I was wondering if you could provide one additional detail. In 2008, you guys had a very, very sizable tax benefit. What are your expectations for tax benefit in 2009? Does that resort back to a more normalized level? Or where does that pan out?

This is Sean. The 2009 tax benefit, we would expect that we will record some level of tax benefit in 2009. The question that we wrestle with internally is, as the tax benefit increases, we need to assess whether that asset will get to a level where we can't support it anymore through future tax [one complex].

We would expect a comparable level, probably a little bit inside that, for 2009 in tax benefit. But it's very difficult to predict, because the tax benefit is derived from our taxable REIT subsidiary income, which is determined by the relationship between the revenues of that subsidiary and the EBITDA. So, it's -- across the industry, it's always very difficult for anybody to predict, because the relationship that -- of those two items, there's so much on what the tax benefit needs to be.

In your guidance too, you're forecasting a pretty sizable increase in G&A. I just wondered what the driver was behind that, as well.

The cash G&A, about $10.5 million, is about a 5% or 6% cash increase. Some of that's due to changes in positions that the Company was [succession-playing] last year. And the change in the stock variance as well is succession-based.

This is Sean. Almost all of the cash increase year-on-year is the result of -- we have to budget our executive bonuses at targets, but in 2008, we did not pay at that level. So, the delta year-on-year is what's generating the bulk of the change.

Okay, so there's a chance that could come in significantly lower?

Yes, if the bonuses were at the similar level that we anticipate they'll be for 2008, it would be a decrease in cash G&A.

Okay. John, a question for you. I mean, you announced a lot of actions you've taken to control costs here. Just what kind of delta should we look for between RevPAR and margins? I mean, if RevPAR is down 15%, what do you expect margins -- kind of what's the flow-through, essentially?

You know, we have really kind of tried to stay away from rules of thumb. We're looking at it at each hotel. And our contingency planning is currently being updated to reflect the operator's revised guidance, from when the budgets were prepared in October and November, and to what the companies -- the brand companies came out with, in terms of guidance in their quarterly reports.

So I hesitate to give a rule of thumb. I will say that the flow-throughs that you've heard from other companies reflect a tremendous amount of cost control in the hotels. So that when you hear these double-digit RevPAR decreases and you hear 500 to 600 basis point drops in EBITDA margins, by historical standards, that's extremely good cost control.

So we're striving for individual hotels to push their costing to the levels that reflect the quarterly, not the annual, but the quarterly RevPAR and revenue that we see at the hotel. So, it's a hotel-by-hotel effort, and it just -- it varies fairly dramatically among the hotels.

Okay. Then finally, last January, February and March, you took off -- took rooms out of service at two of your larger hotels there. Just wondering how January and February trends have tracked on a year-over-year basis and what kind of benefit you're seeing -- if you're still seeing a benefit from that at the Boston Westin Waterfront and the Marriott Downtown there in Chicago?

Yes, Boston -- this is John -- Boston, we did not have rooms out of service. As a matter of fact, we had very little disruption because that was all in that Shell retail space that was unused by the hotel, and the disruption was minor.

In Chicago, it is major. And that was -- but it was not rooms out of service; it was meeting space out of service. And of course, meeting space is critical to booking rooms at that hotel. So we estimated (multiple speakers) about $2 million of disruption there. And of course, that's a very favorable comp going into this year.

Can you talk about how trends have played out, though, in January and February? On a year-over-year basis for those?

Yes, in the first period, we saw results that were over budget but dramatically under last year, sort of just slightly better than our internal forecast; but kind of trends continuing as we saw them in the fourth quarter.

You're talking about Boston?

Oh, I'm sorry; I was talking about the portfolio.

Michael, is your question about Boston and Chicago or about the portfolio?

Yes, specifically Boston and Chicago. I'm just trying to gauge how much of a benefit we're going to see in the first quarter from those two being back in services, more so.

Oh, okay. Well, in Boston, I will tell you that the bookings are up about 15% for '09. On a quarterly basis, we're seeing declines from last year but lower than portfolio averages. So that's benefiting from second and third quarter strong, city-wides in Boston; first quarter relatively soft, city-wides in Boston. And then, of course, the additional meeting space.

Okay. And Chicago is fairly similar?

Yes, Chicago is not up as much. It's basically down a little bit versus the same time last year across the year, as of the first period, in terms of booking pace. It was up slightly, as of the fourth quarter, in booking pace.

Great. That's helpful, guys. Thank you very much.

Will Marks, JMP Securities.

I had a question somewhat related. So performance year-to-date, you gave a little indication of bookings. Are you willing to give a RevPAR performance year-to-date?

No, we're not going to give specifics for -- all we have in hand is the first period, which really isn't very indicative. So, our concern is that it would be misleading to give you some of those numbers. And we don't have period two yet and we're kind of seeing how first quarter plays out [accordingly, to talk willingly] about the numbers.

Okay. On your covenants, can you give an update of the figures? I know we can do the calculations, but there are some numbers we may not have on the leverage and the fixed charge covenant, where you stood at the end of the year.

This is Sean. At the end of the year, our fixed charge coverage was a little under 3. And our leverage ratio was about 41% as of year end.

Okay. When you say a little under 3, so it's approximately 2.9? Or was it --?

2.9 --

2.

[2.92]. Thank you, Mark.

Okay, no, that's helpful. Thanks. And for John on asset sales and just the market, is there any way to give a comp -- you talked about -- I think Mark mentioned you're trading at a trailing cap rate of 14%. And if your operating comes dropping by one-third this year, I know you said it's not, but if I were to say it is, then maybe you're trading at a 9 cap rate -- is there any way we can look at what's going on today and what the market is? I doubt there's a general rule of thumb, but have you seen any transactions you can quote?

No, there are no -- I would say -- comparable transactions that you can look to, for the hotels that we're considering selling. And that's really the difficulty. I mean, there's still a fairly significant divide between buyer and seller expectations.

But in terms of our hold values, it's really based on our view of the future and discounting the cash flows back. And it's a fairly complicated valuation. So we feel that our numbers are very defensible. They may not bear up to market scrutiny and what sellers are willing to put forth, and that's fine. It all goes into pricing the options and what it will cost us to do different things that we need to do.

Okay, great. That's all for me. Thank you.

Chris Woronka, Deutsche Bank.

Kind of a question on the -- you gave the Group pace now -- I think you said down 7% on revenues. And I think it had been up 5%. Should we assume that's all cancellations since the third quarter?

No, that's just a slowdown in the bookings. So that as of fourth quarter, versus same time last year fourth quarter, bookings were up a bit -- or I'm sorry, they were down a bit. Now they're down a bit more after the first period, versus again, the same time last year. So it's basically saying that the pickup in the first period was not as strong as the pickup was last year first period.

Okay, got you. And then can you talk a little bit about the behavior of the -- especially on the Group and maybe the corporate transient side in terms of windows and -- are they canceling -- do you get enough time to try to refill or are the cancellations coming last-minute? And are the new reservations coming last-minute? Is there -- how is that working out?

Yes, we haven't seen a huge pickup in either cancellations or attrition generally, in some hotels we have. I think the behavior pattern is the same as it was the last go-around, which is, decisions are made very last-minute because the meeting planners don't know if they're actually going to hold the meetings or what the attendance will be if they do. That triggers certain reactions on the part of our operators.

So, the uncertainty and the last-minute pickup of these groups is fairly consistent with the last downturn. So we know how to deal with it.

In terms of the corporate transient, you're seeing a drop-off in the premium-rated corporate transient and you're seeing a pickup in the government and special corporate areas. But overall, room nights are down on the corporate side. And that's been a consistent trend.

Okay, great. And then just on the expense side, can you -- I agree, I think your operators and most of the operators have done a pretty fantastic job thus far. I guess the question is at what point do you kind of run out of -- A, low hanging fruit; and then B, any other kind of fruit -- assuming you're probably structured for the kind of downturn we're all kind of expecting now, but if things take another leg down, is it -- at what point do you run out of room there?

Well, the low-hanging fruit is picked and eaten. The additional cost-cutting measures are, believe me, under active consideration right now. And as I said in my statement, the actions we're asking our operators to take are fairly unprecedented, even in 2001 and '02 relationships.

So, it has to do with sort of fundamental operating models as well as brand standards. And for the most part, the brands have been very cooperative. But we're into the fairly significant cuts that, in some cases, are still unprecedented. And we're discussing them actively.

Okay, great. That's helpful. Thanks.

William Truelove, UBS.

My question is about your CapEx discussion -- or your sentence in the press release. $30 million for 2009, of which $10 million was going to be funded by corporate -- or $35 million -- is that going to be the differential funded from restricted cash?

Yes.

Yes, this is John. It's -- the $35 million is cash in 2009. $10 million of that will be owner-funded; $25 million will be from the escrow reserves at the property level -- restricted cash.

Okay, and that's the restricted cash. Okay. Just wanted to be clear on that. Thanks so much.

And just to add, $5 million of that is return on investment energy projects, which have a very, very short payback of anywhere from six to 18 months.

Great. That's my only question. Thank you.

(Operator Instructions). David Loeb, Baird.

Sorry it took so long, but here we go. Two things, first a relatively simple one. Since you have no units, I guess the issues surrounding paying your common dividend in stock are really not an issue for you. I understand the SEC has expressed some concerns about REITs that have up REIT units paying stock dividends. You would be able to, though, because you have no units, right?

That's correct, David -- this is Sean.

Okay. Second, John, this ones really for you, kind of goes back to, I think, Jeff Donnelly had asked about your hold values.

We've modeled your hotels on an asset-by-asset basis and applied cap rates that we think are reasonable. And there are really four that look like their asset value, based on '09 cash flow only, is actually less than what your mortgages are. Throwing out Chicago Marriott -- because obviously the cash flow was severely impacted by the disruption in long-term that isn't as much of an issue -- are the mortgages on most of the encumbered assets assumable? And would you consider selling those at or close to the mortgage amount?

Yes, the fixed rate debt, non-recourse debt on the individual assets is assumable. We have not -- what we look at from a mortgage standpoint is the debt service coverage, obviously. And while we have a couple that are close and one that might be a little under in '09, the hold value is separately determined. And frankly, I can't think of a situation where the hold value is lower than the mortgage value.

Okay. So, even though on my simplistic model it might actually create NAV to give these hotels away, you're saying, in a realistic long-term analysis of their value, there is positive equity in pretty much all of your hotels and positive cash flow in all but one, so, no rush to do anything before maturity anyway. Is that fair?

Dave, this is Mark. All of our -- half of our portfolio -- essentially half of our portfolio is unencumbered. On the encumbered, all of them had good debt service coverage last year, and obviously, the cash flow this year yet to be determined. So, based on what we're looking at now, we wouldn't -- we're going to evaluate that as we go. But we don't see it -- we're not proactively trying to give back any hotels.

That makes perfect sense. Thank you.

David Richter, APG Investments.

I'm all set. My questions have been answered. Thanks.

At this time, there are no further questions in queue. I would now like to turn the call back over to Mr. Brugger for closing remarks.

Thank you, Dan. Let me conclude by saying that we appreciate your continued interest in DiamondRock. And we'll continue to focus on creating value for our shareholders in this very challenging environment. Thank you again.

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