Diamondrock Hospitality Co (DRH) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 DiamondRock Hospitality Company earnings conference call. My name is Latrice and I will be your coordinator for today's conference.

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

At this time, I would like to turn the call over to your host for today's conference, Mr. Mark Brugger, Chief Executive Officer. Please proceed sir.

Thanks, Latrice. Good morning, everyone, and welcome to DiamondRock Hospitality's third-quarter 2009 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'd 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 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 to review the reconciliation to GAAP in our earnings press release.

Overall, US lodging fundamentals continue to be very difficult. Our quarterly results, albeit staggering from a historical perspective, exceeded our expectations, particularly with respect to profit margins. There were also signs in the quarter that demand is beginning to stabilize, a subject we will touch on more during this call.

For the third quarter, our portfolio RevPAR contracted by 16.9%, led by approximately a 13% decline in average rate, and a 3 percentage point loss of occupancy. It is worth noting more than a third of our hotels actually gained occupancy during the quarter versus the comparable period. This is an improvement over the second quarter, where only a single hotel had occupancy growth greater than 1%. We are encouraged by this trend. Occupancy will need to recover first in order for rates to eventually increase.

On another positive note, our portfolio of hotels continued to gain market share. During 2009, our hotels have increased their RevPAR market share by more than 7 percentage points. Margins were also a very good story in the quarter. Even with the significant loss in revenue, house profit margins declined only 342 basis points and adjusted EBITDA margins by only 421 basis points.

The cost-containment efforts of our asset managers and hotel operators are continuing to maximize hotel profits despite the difficult operating environment. John will discuss these efforts in more detail in a moment.

Driven by our portfolio's performance, the company generated third-quarter revenue of $137.8 million, adjusted EBITDA of $27.5 million and adjusted FFO per share of $0.19.

Turning to the balance sheet, DiamondRock continued its efforts to build a durable balance sheet and position the company to take advantage of future acquisition opportunities. With these twin goals in mind, the company pursued several capital initiatives during the year, including, one, raising over $150 million through the sale of common equity; two, paying off $90 million of debt, including all outstanding borrowings under our corporate revolver and the mortgage debt on Griffin Gate and Bethesda Suites; three, completing the refinancing of the Courtyard Midtown East; and four, paying up to 90% of this year's dividend in stock.

After completing these capital initiatives, the company's simple capital structure enjoys the following positives -- a 20-hotel portfolio with no debt on 10 hotels and the other 10 encumbered only by long-term, limited-recourse mortgage debt; no debt maturities for five years; no corporate debt, including no draws under the corporate revolver; and unrestricted corporate cash of over $100 million.

We believe that DiamondRock is well positioned to create value for our shareholders. In particular, our management team is becoming more constructive on the coming acquisition environment. The lethal combination of dramatic declines in hotel cash flows and the use of excessive leverage during the last peak will inevitably lead to good acquisition opportunities.

Just like (inaudible) Hotel CMBS debt alone, nearly $30 billion of hotel CMBS debt is maturing through 2012, and about $8 billion in total is already unable to meet debt service. So the question remains, just when will these opportunities ripen?

As for the outlook, our visibility continues to be very limited. Based on our current trends, we expect 2010 to be another negative year for RevPAR with difficult profit margin comparisons. However, this lodging cycle, although more amplified and perhaps protracted, will likely play out similar to prior cycles where hotel room rates remain under pressure until occupancy recovers to a threshold level that allows operators to regain pricing power. As the general economy improves, we anticipate that demand will follow its traditional path, tracking GDP growth, employment growth and corporate profits.

Another side of the supply/demand equation, supply -- while not favorable short-term -- is projected to be below historical averages beginning in 2011 and remain and remain at constrained levels for several years. The positive supply picture should lay the groundwork for solid RevPAR growth as demand recovers. DiamondRock, with its portfolio of high-quality hotels concentrating in gateway cities and desirable destination resorts, is well situated to benefit from the next growth cycle.

With that, I will turn the call over to John to get into more details on individual hotel results.

Thanks, Mark. We remain mired in this historic downturn, as evidenced by continuing decline in sales across all market segments. But as the pace of decline moderates, we may be seeing the seeds of recovery beginning to sprout. With that said, it will take time to recover past profitability as demand has been so devastated and related occupancy lost has been so dramatic in this downturn.

For the third quarter, overall portfolio occupancy was down 3.2 percentage points to 73.3% and average daily rate was down 13.2% to $146.73.

New York and Los Angeles continued to underperform with a third-quarter RevPAR at the New York Courtyard down approximately 30%, and Q3 RevPAR at the LAX and Torrance Marriotts down 24% and 22%, respectively. \ Salt Lake City Marriott's RevPAR was down almost 26% in the quarter, negatively impacted by the approximately $2 billion City Creek redevelopment project surrounding the hotel.

The Boston Westin, on the other hand, was a relative star with RevPAR essentially flat in the quarter as the hotel continues to gain market share with its RevPAR index up 16% year-to-date.

Our Atlanta hotels had a relatively solid quarter with a RevPAR decline of around 10%.

For the portfolio, all three major segments were negative in the quarter. Business transient revenue was down 31% in the quarter, although the lost BT room nights were completely replaced by leisure and discount room nights, and overall transient room nights in the quarter were up slightly over Q3 2008, perhaps a sprout, but tempered by the impact on transient average rate, which was down about 18% in the quarter.

Group revenue was down 16% in the quarter with the decline coming again in room nights, down about 12%, with rate down less than 5%. Group room nights booked in the quarter were higher than both 2008 and 2007, perhaps seeds of recovery sprouting, or at least it's validation of the theory that booking pace statistics overstate future group revenue decline because group bookings have such short lead times today.

Cancellation fees were down 40% in Q3 while attrition fees doubled to $800,000, reflecting fewer cancellations in the quarter but groups taking fewer rooms than they booked.

Another small seed sprouting was sold-out days in the quarter, which was up a bit over Q3 2008, the first positive year-over-year comparison in a long time. The group revenue pace for 2010 is off about 20% versus the same time last year. The number is less meaningful because, in addition to the shorter booking window, the pace reports don't take into account last year's cancellations or the significant hedging included in future bookings. Booking pace is not giving much visibility into next year right now.

We are pleased that, in spite of a 16.9% RevPAR decline, declining food and beverage revenues and tougher cost comparisons in the second half of this year, we were able to limit house profit margin decline to 342 basis points. Our cost-containment plans are expected to save approximately $10 million in 2009. 65% of the savings come from reduced labor costs as positions are eliminated and hours reduced. The $10 million in savings from 2009 cost-cutting initiatives is in addition to the $5 million in savings from the cost-containment plans we implemented in 2008, as well as the substantial savings incorporated into the original 2009 operator-prepared budgets.

Our asset managers, in conjunction with our hotel operators, continue to work diligently to search for additional savings, knowing we face potentially negative RevPAR comparisons into 2010. Areas of particular focus includes items such as additional housekeeping efficiencies and food and beverage (inaudible) efficiencies.

As another example of good margin control, despite an 11% decline in food and beverage sales in Q3, food and beverage margins were actually up 87 basis points due to a combination of slightly higher catering sales as a percentage of total food and beverage sales, and substantially better food costs and beverage costs, down 201 and 86 basis point, respectively.

Portfolio labor costs in Q3 were down almost 9%. Support costs, including property-level G&A, repairs and maintenance, utilities and marketing, were down about 11% in the quarter.

Many of our hotels have reduced management headcount by 20% or more. These cost reductions are evidence that our ongoing cost containment efforts continue to pay off.

Productivity at our hotels is better, as measured by cost per occupied room and man-hours per occupied room, by 2% and 7%, respectively. Our capital investment budget is $35 million for the year, including $5 million of energy ROI projects. Most of the work will be paid for out of property reserves.

Because of our capital expenditures over the past five years, our portfolio remains in excellent shape, and capital requirements will remain very manageable through 2010 and '11.

On the acquisition front, sellers remain reluctant to bring institutional-quality hotels to market in this environment, and opportunities remain limited. Our observation on distressed assets is that many lenders are postponing the inevitable, and many of these assets will reach a tipping point to become opportunities for us, hopefully beginning in earnest in 2010.

One of the great advantages of being a company with 20 hotels is that it only takes a few deals to really move the needle.

The momentum of distress is building. To give you an idea of the momentum, one service had, in special servicing -- i.e., fault -- in January of 2007, three hotels with debt of $27 million. In January of 2008, a year later, eight hotels with $44 million of debt. One year later, in January of 2009, the number was 37 hotels with debt of $372 million. And today in September of 2009, it was 106 hotels with $1.4 billion of debt.

Clearly, we will see very good buying opportunities resulting from this epic downturn, and we will have the balance sheet to capitalize on it.

With that, I will turn the call back over to Mark.

Thanks, John. We'd now like to open up the call for any questions you might have. Latrice?

(Operator Instructions). Jeffrey Donnelly, Wells Fargo.

Good morning, guys. Mark, I think in prior calls -- and you guys touched on this already I think -- but in prior calls, you indicated you think you'll eventually see that buyers market for assets. I guess I think your peers are sounding a bit more enthusiastic about near-term acquisition opportunities, and we are certainly seeing more headlines around buying poll REIT activity. I guess why do you think there is a disparity on the thinking about timing of acquisitions and the current depth of the acquisition market?

Well, Jeff, as you know, transaction volume is way down, and we are starting to see some more deals these days, but I think it's just too early to call that there is more of a buyers market yet maturing. I think everyone kind of sees the pig in the [pipe out], if you will, that it's coming. Obviously, people are trying to call at the time. I think some of it is just world perspective how optimistic people are about the future deals versus what they may have in hand today. We are not seeing any tremendous volume of deals coming through our doors at the moment.

Jeff, this is John. Just to add to that, if you think about it, in most cycles -- and of this is no different -- the first opportunities to come out are the ones that really don't fit us or most public companies. They are either limited service or in tertiary markets, or possibly with negative cash flow, none of which meet our strategic needs. But I think, if you added up all of these opportunities that are out there, whether they are strategic fits or not, you could make a case that there is a growing number of potential acquisitions. But the way we characterize our pipeline and we tend to focus on strategic assets that are cash flowing and have a greater growth rate than the portfolio in general, we are just not seeing that kind of volume.

Do you think the caliber of assets that you are looking for is more of a late 2010 event I guess? Where do you think those deals will be coming from? Are they going to be coming out of the hands of banks, or I'll call it distressed owners, or private equity firms? How do you I guess identify those?

Jeff, this is Mark. The initial opportunities are really coming in two flavors, as John was saying. The first are hotels with negative operating cash flow where the banks are kind of forced to take them. The Stanford Court Hotel in San Francisco is probably a good example of those kind of deals. You'll see those more in the hardest hit markets like Hawaii and San Francisco. Some of those deals are difficult to do as a public company with the negative cash flow unless they are really compelling valuations, so we will see some more of those deals and we've seen those increase in volume over the last couple of months.

The second type of deals that we are starting to see are the ones in markets that haven't fallen as far, markets like Washington DC where there still might be some equity left with some of the private equity players, but they have a loan that matures in the next year or two, and they are looking to capture their promote. Those are probably more interesting for the public companies like us as early deals.

But as far as the big volume from the special servicers, we are not seeing it yet. But you can look at some of the macro trends, looking at some special servicers like LNR, CW Capital, and Crestline, just between April and August. The value of commercial loans in special servicing has doubled to almost $50 billion. So you're looking at some pretty big macro trends, and you see the momentum gaining there but I think it's too early to say we are at that inflection point for deals.

Just two other questions actually, to switch gears. In the third quarter, the absolute in percentage decline in EBITDA margin softened as you moved from Q2 into Q3. Can you talk a little bit about why that I guess I'll call it sequential decline in margin erosion and what maybe we should be thinking about as we roll forward?

Sure, Jeff. From a RevPAR standpoint, as you well know, leisure and discount business more than made up the room nights that were lost in business transient on a quarter-over-quarter basis. The third quarter is a little bit different than certainly the second and fourth in that business transient levels are down generally. Leisure and discount are up in general. So what we are really looking for is a fourth-quarter indication that business transient has in fact returned to some degree. We are watching that very carefully.

From a margin standpoint, as I think I said, we are really very pleased with the 342 basis point house profit decline, in the face of the substantial RevPAR decline and the been tougher comparisons which we have all anticipated for the second half of this year.

I think, going forward, we see a lot of work to be done in order to harvest additional savings. I think there's a certain amount of battle fatigue out there, if you will, among the operators, that they have cut so much for so long, it's difficult to see additional cost-cutting opportunities. We do see additional cost-cutting opportunities. The challenge is going to the to convince the operators that these are cost measures that make sense in the short term and in the long term won't be too damaging for their brands. So we've got our work cut out for us, given the success we've had in the second half of '08 and all of '09, but we are certainly continuing to redouble our efforts.

Just one last question, because Mark touched on it in his comments, you mentioned that, at least for 2010, that your RevPAR will be negative and profit comparisons will be challenging until occupancy recovers to a threshold level. I guess the question is what do you feel that level is for your markets I guess, and how does that compare to where your occupancy is in the trailing, say, 12 months?

Speaking more generally, in the industry, there is a big difference between what's going on in New York and what might be going on in LA about where you need to get to to hit that inflection point or break point with occupancy to get the pricing power back. But I think generally the industry has kind of lost 7, 8, 9 points of occupancy, depending on how you slice it in the segment. You probably need to recover at least half of that to start getting the pricing power back.

So, for the industry, not necessarily for our portfolio, I think you need to get to kind of between that 60% and 61% occupancy to see the industry turn and really regain some pricing power.

Jeff, this is John. Within our portfolio, we are looking very carefully at days of the week, individual markets, resort versus corporate hotels. The answer is going to be different in each case. But traditionally coming out of these downturns -- and this one obviously has been so much more tragic that the impact will be magnified -- operators are reluctant to push prices until they feel quite certain that their demand has grown to a point that they are comfortable pushing prices.

That's our job as well, is to kind of get them through the shell shock of the downturn and give them some confidence based on facts, based on demand by day of the week, by season of the year, by type of property, etc. So it is a collaborative effort, I think, but it's hard to say in any general terms what exactly we need to get to before pricing power returns. It will vary dramatically by market and by time.

Because the supply up next year, that would imply that, just to hit the midpoint of what you were saying, we would need 400 to 500 basis points growth in demand to get to that threshold level, potentially.

Yes, that's probably right. I mean, supply in our market is going to be up a little over 2%, I think. So you would need pretty good demand recovery next year. (multiple speakers) that inflection point.

Will Marks, JMP Securities.

Thank you, good morning, everyone.

I had a question to start with on, John, you had mentioned New York and Los Angeles underperforming. Were you saying relative to the portfolio, or versus competitors in those markets? And maybe expand on how you expect them to -- those markets to come back versus competitors if that's the case.

Yes, my comments were related to -- in relation to the portfolio. I would have to look up individually, but in general I think Mark pointed out that our RevPAR index is up about 7 points year-to-date. That's in keeping with our strategy that brands hold up better in downturns. I can talk about each market and each property in detail but generally, in New York, we are starting to see trends improve in the fourth quarter, which is very encouraging and the operators are feeling somewhat more bullish about the fourth quarter than they were two months ago.

LAX -- we have done a complete shift in our strategy. When we bought that hotel, we wanted the moveout contract and increase the group component. We've had to reverse that and go back to the contract strategy because the group just simply isn't there and so many submarkets in Los Angeles are competing for the same groups.

Torrance -- we have a lot of international contract business down there. That, too, has gotten much more competitive.

I think our outlook for LA is a little bit clouded right now. It is really hard to see that market coming back. Particularly with new supply coming in downtown, it's hard to know what that's going to do. But I think in New York, in spite of the increased supply because it's so far away from our properties, we are feeling pretty good about the fourth quarter at this point.

Great, okay, that's all for me. Thank you.

Bryan Maher, Collins Stewart.

Just a couple of quick questions -- when and if you actually get some acquisitions that you want to move forward on, what kind of leverage are you seeing your ability to put on those would be in one-off mortgages or whatever?

Yes, this is Mark. The secured mortgage market remains very constrained. It is how we closed on one loan in the third quarter; there was very little leverage in New York City at 8.8% interest rate, and I think it was about 35% of its appraised value. So the market there is still very difficult.

For DiamondRock, our next acquisitions, unless there is assumable debt, are likely to be 100% equity as we continue our deleveraging strategy over the next couple of years. So it's not going to be a constraining factor for us in finding good deals. Quite frankly, the worst in the secured debt market remains probably the better pricing we are going to be able to obtain by paying 100% cash for acquisitions.

Yes, I am just thinking from a modeling standpoint. Obviously it's not ideal to have no debt on them forever.

We think about debt as a company, not individual assets.

Sean, do you have comments on that on the secured market?

It's, generally speaking, the secured markets, although still constrained, have loosened over the last couple of months, although the only the best sponsors as well as the best assets are getting serious consideration from lenders. I will tell you that the borrowing costs have come in a little but even from when we -- from the (inaudible) Midtown East mortgage that we just closed, but it's still very constrained with relatively low LTVs.

Okay, but generally 50% or below is the zip code to look for?

Correct.

Okay. You know, you guys talked a lot about the CMBS issues. That's really helpful and we are all paying attention to that. But can you kind of walk us through how an asset ends up at the CMBS servicer and then gets into somebody's hands like yours? What is that process? How long does it take? Are you plugged into that market? How should we be thinking about that?

Yes, I think the reason you're hearing a lot about the CMBS debt, which is only a minority of all the debt out there on hotels, is because it is easy to get good statistics I talk about credibly. But it only representative less than 40% of the debt on hotels that is out there.

I think the process is still being defined. We are talking to a lot of people that are -- we don't have anything in special servicing, but we are talking to a lot of the people that are either experts in it or law firms, or going through the process in the industry. It's different. It's different with CW than it is with LNR or Centerline. I think that there is no uniformity yet, that we are -- everyone is kind of waiting for those rules to be laid out.

We are staying close to it; we are tracking the number of hotels that are nonperforming right now. But they have kind of an obligation, a fiduciary obligation if you will, to not sell them on a one-off basis to try to maximize value. So we anticipate a lot of those are going to end up as brokered deals eventually.

Just one housekeeping item -- what was the weighted average share count during the quarter?

It was about 111.4 million shares for the third quarter.

Thanks a lot.

Guillermo Garau, RBC Capital Markets.

Good morning, guys. I am here with Michael Salinsky.

First, looking at your customer segments, do you note any notable changes in business transient during the quarter? I guess with regards to demand versus [rate] or maybe they are in the past month?

I'm sorry, did you say discernible changes during the quarter?

Yes, I mean notable changes in the mix of business transient during the quarter in the past month?

Well, it has been a uniform trend across the year and part of last year in that business transient is down dramatically. Last quarter, it was 37%; this quarter, it was 31%. Last quarter, we almost made up the difference in leisure and discount. This quarter, we completely made up the room night difference but at the expense of rate.

It is a little early to tell what the trend in the fourth quarter is going to be, but if that trend holds, and obviously we are hoping that business transient decline will be lower than it has been thus far this year.

But within the actual business transient, do you see any pickups I guess in occupancy versus rate, or you are still not seeing a change in the mix within business transient?

Yes, in terms of corporate rate, special corporate rate, that sort of thing?

Yes.

Yes, I think the trend is still towards special corporate and below, and we suspect that some of those business transient is actually switching over to Internet rates and some other nontraditional channels, but that is pretty hard to measure. But clearly there is still depreciation in the rate categories.

Okay, and then looking at the group booking pace for 2010, can you provide any color on that?

Yes, for 2010, our revenue, as of the third quarter, our pace is down about 21%. It is continuing to decelerates, if you will. In the first quarter, it was down about 11%, in the second quarter down about 16%. So we are continuing to see the deceleration.

Having said that, we are clearly seeing better pickup in the quarter for the quarter. We had 20,000 room nights booked in the quarter, for the quarter in the third quarter, which is dramatically more than last year and even more than 2007. So that says a couple of things. It says, first of all, that booking is more short term, and it probably also says there was more inventory to book, and therefore groups have a wider choice of dates. So it is a positive trend, but overall the pace continued to decline.

I also would make the point over again that it is not giving us great visibility, in our minds, because in addition to the shorter-term nature of the booking pace, last year's numbers don't include cancellations, and this year's numbers also have a fairly conservative approach in terms of what we are actually putting on the books in definite room nights, given our recent history of attrition.

Okay. Then lastly, going into the acquisitions, the take-away is that you guys are actually not bidding on anything right now, then can you provide any color with regards to your recent discussions [without] Marriott and of the right (inaudible) that you guys have there?

This is Mark. I guess it is an overstatement to say we are not looking at anything. We are actually looking at a number of -- a couple of opportunities right now. I wouldn't say they are high probability but we are actively looking.

With the Marriott International relationship, we have resumed our acquisition pipeline meetings, which essentially a group of our executives and a group of their senior executives get together periodically and go through a list of anything that might fit our parameters that might be coming through their systems. So that has restarted; that is very active. They are not seeing a ton of volume of deals coming through the system, but we expect that to be fruitful over the next year or so.

Okay, perfect. Thanks a lot, guys.

Smedes Rose.

Thanks. I just wanted to ask you a little bit more about you mentioned New York trends were picking up in the fourth quarter. Is there anywhere in particular you are seeing that? Is it more group or leisure or business transient?

Then you mentioned your release supply in Chicago and I think Fort Worth and Austin coming online, so New York has such a tremendous amount of supply coming on over the next couple of years. I am just curious as to why you don't see that as more of kind of a risk to your New York hotels.

This is John. The nature of our hotels in New York were transient hotels exclusively, very, very little group business. So the trends that we think we are seeing or hope we are seeing are on a transient basis.

Keep in mind that our hotels in New York are running in the high 80s%, approaching 90% occupancy. So the demand is there. The question is, at what rate? So as we begin to see strengthening, if we see strengthening in the higher-rated segments, we would see that uptick in rate.

As for the new supply, the bulk of the new supply is south and west of our two hotels. We are pretty well located on Third Avenue and 40th and Fifth. There's not much new supply coming in, in those two particular submarkets, a little bit, but more of it is coming on west down in Soho and downtown, as you know. So it is less impactful than the sheer numbers would indicate.

Okay, thank you.

Dennis Forst, KeyBanc.

Good morning. I got on a little late, so I may have missed some of this comment, but mortgage debt expense in the quarter was about how much? I know that the total was $11.1 million, but I am curious how much of that was mortgage debt versus facility fees, versus financing costs, non-cash financing costs?

Why don't we follow up and get it to you exact.

(multiple speakers) It's Sean. For interest expense for the quarter, $32.6 million was related to mortgage debt, $0.6 million was deferred financing costs, and then the unused facility on the credit facility was $0.5 million. That is on a year-to-date basis.

That's the nine months, yes.

It's on a nine-month basis.

Good, Sean. And then a follow-up on the weighted average shares at 111.4 million in the third quarter. What will it be in the fourth quarter?

118.1 million shares.

Okay -- which is similar I think to -- in the press release you said the shares outstanding were 118.3 million or something like that.

That's the current shares outstanding; that's correct.

Okay, and then the last question --

And then the [impact] on your interest expense real quick for the quarter only, $10.8 million relates to mortgage debt, $0.2 million relates to deferred financing costs and the credit facility unused fees of $0.1 million.

Okay, great, thanks. The last question was, looking for bright spots in the quarter, did you notice anything that stood out to you that you can consider a harbinger of better times, or any bright spots, upside surprises in the quarter?

I will take a crack at that. Yes, the ones I pointed out were in the quarter. For the quarter, group booking were up. All of these things have kind of a double-edged sword and you have to be careful not to over-read them. But in the quarter, for the quarter, group bookings being higher than they have been in the last two years is a positive trend. However, there was more inventory available, so groups had more dates to pick from. It also validates the theory that pace reports are a little understated because of the short-term nature of the group bookings.

Then the other piece of good news was that the overall transient room nights in the quarter were actually higher than they were last year in the third quarter. They were obviously more weighted towards leisure and discount, but this is the first quarter in a while we've had higher trends, overall transient room nights booked.

Again, offsetting that, because they were in leisure and transient, it was about an 18% transient rate reduction in the quarter versus the same quarter last year.

Okay. The transient room nights bookings were up, or actual occupied rooms were up?

Room nights.

Room nights occupied?

Yes.

Okay, not just booked for future quarters but actually occupied in the quarter?

That's correct.

Justin Maurer, Lord Abbett.

Good morning, guys. Just some random stuff -- first, Mark, to your point on CMBS and kind of functionally how it works, how much -- it's more qualitative -- how much more difficult, though, is it the kind of break apart a property, if you will, to kind of get at it, whether by them or by you guys and/or a broker, to get the process moving?

[It's separate]. A lot of the CMBS debt -- we spent some time over the last year studying whether it made sense to go try to purchase some CMBS debt, kind of the loan-to-own strategy. What we found in the CMBS debt is so much of it is crossed that you are buying strips of cross multiple properties if you want the institutional type properties that we want to buy. So it wasn't an effective strategy to get one hotel.

Get some --

But what we're seeing now is --

Sure I guess, all right?

What's that?

But it made some good money, I guess so this year by owning some?

Yes, yes. It could've gone the other way, I guess.

But what we are seeing now is hotels that are getting turned back to special servicers that are performing. And then what we need to understand over the next year is to how the special servicers are going to handle those. Right? Are they going to put them ROE and hold them for year or two until pricing rebounds? Are they going to go more to the auction method? We're talking to servicers now trying to figure out how to get access to those one-off deals.

Okay. Just kind of somewhat tangential to that, the shelf filed last night, is that just to have so when you guys are hopefully unable to shake something loose, you've got that available to you, or --?

Yes, the controlled equity program, it's been a very cost-effective liquidity tool. So we think it makes sense just to have it in place. As you know, we talked about trying to facilitate our twin goals, ability to (inaudible) balance sheet and position the company to buy hotels at the right time. So it's a great way to achieve those goals.

Okay. But would you anticipate -- of course everything is a function of price but -- additional creep in that as time goes on through the next six months, or do you really -- do you want to have that loaded, ready to go?

The decision to issue equity is never taken lightly, so it's a balance of valuation, as you mentioned, overall deleveraging goals, and then use of proceeds. Some of that is going to be our business judgment of how robust we think the near-term pipeline is going to be, okay?

Just operationally, John, the earlier question about margin degradation being less this quarter obviously than prior, trying to kind of split that with your comments, though, about it getting tougher as we look forward, of squeezing more cost even though you guys are still focused on that.

Was this past quarter more of a mix issue at all, whether by the different hotels and their different margin contributions, and/or is for some reason the leisure traveler less costly than is business or is there any noise like that that comes into play?

You know, on the room side, Justin, I think there is a little bit of that. I think the service provided for leisure and discount is -- the expectation is lower, you don't have as many premier rewards players for example.

Then on the food and beverage side, there was a mix element to it in that catering -- the more profitable catering sales were a larger percentage of total food and beverage than they were in last year's third quarter. but a lot of it, frankly was labor and pretty effective food and beverage cost control. So it's a mixed bag.

Our challenge going forward is, as the comps get tougher, to continuing to plumb for new cost containment possibilities. And we see some, but it's not going to be easy to harvest them.

Okay. Then just lastly, you dropped a few comments about seeing some more positive things, which I almost fell out of my chair because you've not ever been the most optimistic guy, recognizably so in the last year. But were there things specific about the fourth quarter? Sorry that I missed it. You mentioned LA a little bit and what were kind of the drivers there?

About the fourth quarter or the third quarter?

Yes, fourth quarter, sorry, more specifically?

Yes, we are not seeing clear-enough trends. I only mentioned that New York is voicing some hopeful noises that, as I say, we hope to have a continuation of the trend.

All right. Great job. Thanks, guys.

[Nichel Ballup], FBR.

Good morning, guys. I have a quick question and I'm trying to get some clarity on sort of the booking pace that you talk about in our new release about 2009. You kind of say that the booking pace is behind by 20% as of the end of the third quarter for 2009. So does that mean maybe the fourth-quarter booking pace is a lot better, given that the first three quarters' booking pace was probably much worse in some ways? Am I thinking about this correctly?

Yes, I think you might mixing some numbers here. The 20% relates to the 2010 pace as of the end of the third quarter.

As far as quarterly booking pace for 2009, there's not a clear trend. The most important quarters, the second quarter and the fourth quarter in the Group segment, are down to most, 24% in the second quarter versus about 16% in the third quarter. In the fourth quarter, as I say, the visibility on these things is difficult, so it is down in the 20% to 25% range right now as well.

Okay, yes. I think, in the release, it just says as of the end of the third quarter, the company's 2009 Group booking pace was 20% lower than at the same time last year.

Yes, you are right. That's for all four quarters.

Okay, I got you. Thank you.

(Operator Instructions). Josh Attie, Citi.

Thank you. I thought maybe you could just comment on or give us some color on what October has looked like from a business travel perspective. I know there has been a lot of holiday comparisons and it makes it difficult to read too much into the results, but just any color you are seeing on corporate travel so far in October.

Josh, this is Mark. I think the October numbers are just too early for us. We are just starting to get some of that data in now, so I think we would be premature in giving you color. Obviously, it's going to be helpful; there's some holiday shift. In really the next couple of weeks we're looking towards to firm up what we think the trend is going to be.

Okay, thank you.

Jeffrey Donnelly, Wells Fargo.

Just, just one follow-up, and I apologize if you touched on this. I had to jump on and off. But you mentioned in your comments that you might see the opportunity for further expense reductions. Where specifically do you see those future cuts? Do you think I guess hopefully those cuts could be significant enough that we could keep expense growth going forward, flat to even down as we go into next year?

Well, Jeff, that would be the target of course. Where we are concentrating is obviously rooms and food and beverage. We've analyzed, for example our food and beverage outlet profitability and we've identified what we think are some opportunities. But in order to harvest those opportunities, we are going to have to get agreement among our operators that these are acceptable costs to go after -- probably not traditionally the way the food and beverage business in hotels has operated. So that's not going to be easy, but we are in the midst of that.

On the room side, we are doing what I think a lot of our peers are doing. That is trying to revisit the overall kind of philosophy of cleaning a room, if you will. A dirty room is not a dirty room in all cases if someone is staying over versus someone is checking out. The way you clean rooms, do you put things back in the same place you wanted them or do you leave them where they just put them? You know, they are pretty mundane things but they actually result in some pretty good cost efficiencies when you look at man-hours per room on the housekeeping side.

Jeff, this is Mark. We are obviously working very hard on cost-containment but it is probably overly optimistic to think that costs would be down next year versus this year.

Just actually another question, and maybe just, John, to tap into I guess your knowledge after coming out of the last cycle. A lot of brands always move to defer tip programs and relax brand standards. I guess the question is what happens when the cycle starts to come back? How quickly do they begin reinforcing those standards again, and I guess how suddenly, or how quickly do they expect to be able to catch up to the deferred to work?

Well, from a capital standpoint, Jeff, it depends how deferred it is. If you are postponing a rooms renovation for two or three or four years beyond its kind of lifecycle, then the brands are going to want you to get on that as soon as it is practical to do so.

But I think, on the operating side, what we've seen in the last couple of cycles is these cost efforts have persisted into the up-cycle portion, and so we would fully expect that the savings we have been able to harvest thus far to some degree and hopefully some significant degree will translate into higher margins once we get the revenue back. That's what happened in the last two cycles and we expect that will happen in this cycle.

You know, this is a perfect example. We are going into next year in a potentially negative RevPAR environment after all the work that's been done on the cost side, trying to find new costs. We will find new costs. Some of that is going to be redoing the way business has traditionally been done.

Great, thank you.

Dan Donlan, Janney Montgomery Scott.

Just real quick on the capital expenditures, your forecast is $35 million for the year. You've only spent about $17.7 million. Is there a large project that's going to be happening in the fourth quarter that's driving that?

No, not per se. We do have projects in the fourth quarter obviously that are underway. There also could be some slippage of projects, as there always is every year, into the following year in terms of when bills are paid and things like that, but generally we are on budget and on pace for the $35 million.

Okay. Then just from a labor cost standpoint, if occupancy is just up slightly, let's say year-over-year next year, would you anticipate labor being able to stay roughly the same with just slightly contractual increases maybe from union contracts and things like that, or would you have to add a decent amount of labor to facilitate that increase in occupancy?

It really depends on the volume. If it's a slight increase, then hopefully we could hold costs. If it's a substantial increase, which we would all hope for, then your variable costs would go up. But hopefully the fixed costs can be maintained for the foreseeable future.

Okay. Then just lastly on the dividend, it said that you could pay up to 90% of your dividend in the form of stock. Are you leaning towards paying that 90% or is there any type of split, or could you maybe give some color on that, please?

Yes, this is Mark. The Board decided that we are going to pay the (inaudible) allows us to pay up to 90%. There is a process where you send out a proxy that's associated with whether to declare a dividend as of the end of the year. We stated that it's going to be in the amount of $35 million to $45 million depending on where taxable income hopefully turns out to be. But as a process, my guess is it's going to be closer to that 90% level.

Okay, great. Thank you very much.

Smedes Rose, KBW.

Thanks. I just was curious. The Renaissance Worthington loan, it looks like it started to amortize in the third quarter. Was that scheduled to do so, or is there some reason why that started to amortize in the quarter?

Smedes, this is Sean. Yes, that was a scheduled start of the amortization per the loan agreement. We had, I believe, 5 years -- I'm sorry, 3.5 or 4 years, I forget exactly how much, of interest-only period at loan.

Okay, thank you.

Dennis Forst, KeyBanc.

Yes, a question about the dividends -- if I just use the midpoint, $40 million divided by 118 million shares, that's somewhere around 4 million shares at 90%. Does that sound right?

Sure.

So you'll probably start off -- and those will be paid by December 31, so those new shares will be outstanding for the full year when we are trying to figure FFO per share?

We are going to declare the dividend on December 31, but that might not be paid until shortly after into 2010.

Okay, but essentially those shares will be outstanding the whole year?

Correct.

Yes, okay, thanks a lot.

There are no further questions in queue at this time. I would like to turn the call back over to your host, Mr. Mark Brugger, for closing remarks.

Thank you, Latrice. To everyone on this call, we would like to express our continued appreciation for your interest in DiamondRock and look forward to updating you next quarter.

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