Diamondrock Hospitality Co (DRH) 2009 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2009 DiamondRock Hospitality company earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer.

Good morning everyone and welcome to DiamondRock Hospitality's fourth quarter and full year 2009 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'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 for you to review the reconciliation to GAAP in our earnings press release.

The past year was the single most difficult year in the US lodging industry since the Great Depression. As you know, beginning in late 2008, the prospect of a severe economic downturn and a concomitant negative outlook for fundamentals resulted in a precipitous decline in lodging company's share prices, including DiamondRock. The decisive actions of our management team and the forward-looking nature of the market contributed to the dramatic increase in our share price during 2009, resulting in a total return of more than 70%, albeit significantly below our peak share price in 2007. Having weathered what we hope is the worst of the economic storm, DiamondRock is well positioned for future growth. We expect to achieve our growth objectives through the cyclical recovery of our existing portfolio and growth fueled by acquisitions as we deploy our investment capacity from our conservative balance sheet.

As history has taught us, the lodging industry experience is well documented in cycles. Planning for the expected volatility during lodging downturns is an integral part of our fundamental business model. However, the breadth and depth of the recent recession was unprecedented in modern times as was its impact on 2009 lodging fundamentals. Demands for hotel rooms declined by a staggering 5.8 percentage points as supply peaked in the cycle at 3.2%, well above its historical average. This supply/demand imbalance resulted in industry RevPAR declining approximately 17%, almost double the decline experience in 2001.

Our portfolio performed better than its competition within the respective hotel markets, gaining approximately 5 percentage points of market share during 2009. Our gain in market share helped validate our corporate strategy of owning hotels with global brands. Despite these gains, our hotels we certainly not immune to the downturn, as our portfolio RevPAR declined 17.6%. In light of the decline, we were pleased that our asset managers, who worked in concert with our hotel operators, put in place rigorous cost-containment plans to minimize our profit margin declines to 520 basis points in 2009. Our management team was early to recognize the severity of the economic downturn and formulated an aggressive action plan to mitigate the impact.

We entered 2009 with a clear and focused plan to enhance liquidity and create a durable balance sheet, which was critical to achieve our long-term strategic objectives of not only surviving the economic downturn, but position the Company to thrive during the recovery periods. With the multipronged action plan, the Company sought to eliminate all corporate debt,, address all near-term debt maturities and create drive power for acquisitions. We executed our 2009 action plan by one, demonstrating leadership among the lodging peers by being the first lodging REIT to issue equity with a highly over-subscribed offering in April. This offering was followed by two successive controlled equity offerings. In total, the company raised approximately $205 million in net proceeds from the sale of equities.

Second, we were able to secure new debt on the Courtyard Midtown from Mass Mutual during an incredibly difficult financing environment. It was the only hotel financing done by the select company during 2009. Lastly, the Company took advantage of the IRS RevProc 2009-15, which allowed us to pay 90% of our $0.33 per share dividend in stock. Although we believe that paying a cash dividend is a very important component of our total shareholder return, the unique circumstances in 2009 warranted paying 90% of the dividend in stock. Our election allowed the Company to retain approximately $37 million of cash.

As a result of these proactive steps, the Company raised a quarter of a billion dollars in new capital, achieved a 30% reduction in net debt, increased its unrestricted cash position to $177 million and addressed all its debt maturities until late 2014. With no corporate debt and half of our portfolio unencumbered by any form of debt, DiamondRock ended 2009 with one of the most durable balance sheets in the industry. Before I turn the call over to John to get into more detail on the individual hotel results and the current acquisition environment, I did want to provide a level of detail on the fourth quarter results. The company's RevPAR decreased 14.8%. Hotel adjusted EBITDA margins decreased 557 basis points, and adjusted FFO per share was $0.18.

On Frenchman's Reef during the quarter we identified a non-monetary default on this non-recourse loan. The short story is that our loan agreement required the completion of certain capital projects by certain milestone dates. Although a substantial portion of the work was completed by the date specified, not all of it was. As soon as we identified the issue, we proactively raised it with the loan servicer in January and requested a waiver of the default, including a waiver of potential penalty interest and the extension of the deadline to complete the work. Those conversations are progressing.

We have accrued but have not paid $3.1 million for 2009 penalty interest. The adjusted FFO per share impact of the penalty interest accrual was $0.03 for both the fourth quarter and full year results. If the servicer accepts our proposal, the $3.1 million will be reversed. We will keep you updated as our negotiations with the servicer develop. Additionally during the fourth quarter, the Company reported $2.6 billion expense related to two management changes, the termination of our general counsel and the retirement of our Executive Chairman, Bill McCarten, who will remain non-executive chairman. These one time transition costs are added back in calculating the Company's adjusted EBITDA and FFO. I'll now turn the call over to John.

Thanks, Mark. For DiamondRock's 20 hotel portfolio, the fourth quarter marked the sixth consecutive quarter of negative RevPAR. With RevPAR for the industry projected to remain in negative territory for at least the first two quarters of 2010, operating fundamentals promise to be challenging. Even when RevPAR returns to growth, cost pressures from salaries, wages and benefits and incremental costs from higher volumes will continue to pressure margins. As Mark said, the fourth quarter overall portfolio RevPAR was down 14.8% as a result of occupancy declining 2.4 percentage points and average rate down 11.7 %.

For the year RevPAR declined 17.6% as occupancy across the portfolio was down 4.1 percentage points and ADR declined 12.6%. House profit margins for the portfolio were down 493 basis points for Q4 and 441 basis points for the year. RevPAR declines moderated significantly in a number of our hotels in the fourth quarter. Our New York City hotels went from down 30% in Q3 to mid teens in Q4. Frenchman's Reef in Saint Thomas had a RevPAR decline of just 5% in Q4 and 9% for the year. Our Chicago Marriott RevPAR declined 10.6% in Q4 and 14.8% for the year. In addition, the Boston Waterfront Westin RevPAR declined moderately in relation to the portfolio and the overall Boston market, down 8.6% in the quarter and 6% for the year, reflecting the ongoing benefit of the 32,000 square feet of meeting space we added and its location adjacent and attached to the BCEC.

For the portfolio, all three major segments continue to be negative in the quarter. Business transient revenue was down 24% in the quarter, notably an improvement to the 31% decline in Q3. Group revenue declined 22% in the quarter. Leisure transient fared better, as has been the trend, and was down 10.5%. Lower rated contract and other declined only about 3%. Q4 did continue the recent positive trend of accelerated short-term group bookings. In the quarter, group bookings increased 47% compared to Q4 2008, and rolled in marginally below realized group rooms in Q4 2007. Cancellation and attrition fees returned to more normal levels in the quarter, with cancellation down 30% and attrition fees down over 50%. Sold out dates for the quarter were up almost 30%.

Portfolio group booking pace for 2010, after adjusting for prior year's definite revenues for cancellations and attrition, is off about 8% versus same time last year as of Q4. Pace has continued to improve and stands down 5.8% versus same time last year -- again these are adjusted numbers -- as of period 1. In light of the short booking window and increased recent booking activity, we are hopeful the deficit can be reduced within the year for the year's sales activity. In 2009, the net definite revenue on the books as of Q4 2008 represented 76% of group revenue achieved in the year. Food and beverage revenue in Q4 was off 22%, with margins off 226 basis points, reflecting a decline in group volume in the quarter and the resulting loss of high margin group banquet business. Local catering was also down approximately 20% in Q4 .further pressuring margins.

Cost containment remains a central focus or our asset management team. Our savings from contingency plan implementation in Q4 was $4.3 million. For the year, our cost containment efforts yielded almost $11 million in savings, nearly 40% ahead of budgeted savings. Cost containment efforts in 2010 will be more challenging, as comparisons become more difficult, wage and benefits are set to increase and hotels are likely to gain first in more costly occupancy before rate. We're working hard to identify additional, sustainable savings for 2010. As a testament to our cost containment efforts in 2009, portfolio labor and benefit costs in Q4 were down 13.5% from Q4 2008. Man-hours per occupied room improved almost 10%. Support cost per available room including property level G&A, repairs and maintenance, utilities, and sales and marketing were down over 5% in the quarter and 9% for the year.

Turning to Capex We are fortunate that we entered the downturn with a mostly renovated portfolio and were able to appropriately curtail capital spending during this downturn to only necessary or truly value-enhancing projects. We invested approximately $24.5 million in the portfolio in 2009. including $3.6 million of energy ROI projects. The owner funded portion of 2009 Capex was $4.4 million, with the balance coming from property-level reserves. We anticipate Capex in 2010 will be approximately $30 million, including $12 million of carryover from 2009. In 2010, the owner-funded component of the Capex will be about $6.2 million.

Before I turn the call back to Mark, I wanted to touch on acquisitions. DiamondRock remained disciplined through the last cycle, and has not purchased a hotel in over three years. We've made the macro call that now is a good time to buy. We expect significant distress to set in as hotel owners throughout North America are experiencing the difficult combination of excessive leverage and significant declines in operating cash flow. The distress we are seeing at this point is in the form of debt being marketed at significant discounts to par. We are not interested in participating in debt at this point. Equity transaction volume has remained low over the past year, but we expect things to be begin heating up modestly in 2010.

We have restarted our acquisition pipeline meetings with Marriott, and with our healthy balance sheet, we have become increasingly aggressive hunting for deals. However, while we believe this will be a buyer's market, we do not anticipate anywhere near the distressed pricing of the early '90s, and we don't believe hotels will trade at fire sale prices. Owners will have various motives for selling hotels, and we will continue to work diligently to uncover and seize attractive opportunities as they become available, whether or not they are viewed as distressed. With that, I'll turn the call back to Mark.

Thanks, John. Although we are not comfortable providing specific items due to the continued lack of clarity in fundamentals, we did want to provide a general outlook. We expect negative RevPAR for 2010 and, perhaps because of our conservative nature, believe that current 2010 consensus numbers for the Company are too high. However, we remain very optimistic about the long-term prospects for the lodging industry, and specifically the prospects for DiamondRock. If history is a guide, the lodging segment should enter its growth phase over the next two years.

Although demand recovery may take a little longer than a typical recovery, we expect new supply to remain constrained as the result of the lack of development financing and the fact that hotels appear to be trading at discount to replacement cost. Our portfolio is likely to be a prime beneficiary of the cyclical recovery and the long-term growth of the lodging industry, as our hotels are high quality, well located and enhanced by global brands such as Marriott, Renaissance, Westin and Conrad Hilton. Moreover as John mentioned, we believe that we are entering an excellent hotel acquisition environment and we will be able to acquire high quality hotels that are additive to our portfolio quality and growth prospects going forward. With that, we would now like to open up the call for any questions that you might have.

Your first question comes from the line of Chris Woronka with Deutsche Bank.

Hey, good morning guys. Couple questions. First one, can you give us a little bit of guidance on cancellation, attrition fees, how much of an impact they were last year and how we should think about that this year and maybe the margin impact specifically?

Yes, Chris. This is John. They were both down significantly. Attrition down over 50% and cancellation fees I think were down about 30% I said. We anticipate that trend will continue to now basically at normalized levels. We don't think -- probably the early part of the year there'll be a negative impact from fewer cancellation and attrition fees, but I would expect as we get into the third and fourth quarter, they'll be more normal.

Okay, great. Then on the visibility front, I know the booking windows are still short, probably across all segments. Can you talk a little bit about how maybe that might have changed in the fourth quarter, even in the first quarter so far, is anything lengthening and which segment is it?

We are not seeing it lengthening, but it's encouraging that the in the quarter, for the quarter, for both the fourth quarter and so far in the first quarter are well above last year's levels -- or prior year's levels. That is at lower rates, but overall room nights and pickup is up dramatically year-over-year.

Okay, great. And just on the acquisition front, you guys mentioned it -- a few other have -- it doesn't look like there's going to be any real steals available unfortunately. How do you underwrite this in this environment? There is a lot of uncertainty with the recovery. When you are looking at assets, how are you underwriting them and how expectations may be different versus what you might have thought or hoped for several months back?

Chris, this is Mark. For acquisition underwriting, we are taking a more macro view of the recovery. It depends on the specific market the hotel may be located in. But we're anticipating that we get back close to these numbers, somewhere between 2014 and 2016 depending on the market generally. Underwriting a lot of these assets, we are looking back over the last three years and seeing how they performed in the last peak going back to 2000 and looking at how they performed then and trying to benchmark that versus our macro view of the future of that particular market and that particular asset. We are also looking at things -- price per pound and key versus variables in the market,, discounts to replacement costs, and then we are also benchmarking all potential acquisition targets against our current portfolio to see if it's additive to the quality and growth prospects of our existing portfolio.

Okay. Very good. Thanks, guys.

Thanks, Chris.

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

Hi, guys. I wanted to just ask a little bit more about Frenchman's Reef. Clearly, that's a hotel where you're getting a lot of cash flow well in excess of the interest expense. How do you think this ends up playing out? It seems like the servicer is acting like servicers often do and just doing the knee-jerk, okay, you're out of compliance -- we charge more interest.

Let me just provide a little more fact on that, David. Frenchman's Reef with the loan, we made a mistake, I think, interpreting the loan. We realized that issue in January. We brought it to the servicer's attention and said, look, we have an issue and reviewing this billing document, that it looks like we may be out of compliance -- non-monetary compliance with one of the covenants. We'd like to get an extension for another year or so to complete the work. We are willing to post escrow because we are going to do the work. That's our intention. And, we'd like you to waive any potential penalty interest that might be there. Given the way the accounting rules work, and dealing with that, we have to accrue for that because they haven't approved that amendment that and we just really began the discussions in the last month with the servicer and, as you know servicers, it's a process that you need to go through, and you don't resolve everything in one week. So, we're in that process now. We're having discussions. They have to go through a number of levels of approval and committee reviews to assess our request, but that's where we are. The debt service coverage is 1-5 there. There's a lot of repositioning capital needs at that hotel that we're analyzing now. So, it's a relatively complex hotel, but we're in discussions with the servicer and we hope to resolve it as soon as possible.

Okay, well I guess we'll wait for resolution on that. In previous releases you've given interest G&A, tax guidance. Is there a reason why you didn't provide those this time?

No. If you want, we can provide those numbers. The only reason we were hesitant to provide in this release was that with the penalty interest at Frenchman's, it looked a little -- we didn't want to present everything two different ways. We thought it might add to the confusion.

Can you give it to us without that, and we can make our own assumptions with it?

Sure. David, I'll tell you what, we'll loop back at the end of this call with the exact numbers.

That would be great. Thank you very much.

Thanks, David.

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

Thank you and good morning. I had just a question on -- in the guidance discussion you mentioned some markets where there's weakness. Can you elaborate a little bit on Chicago, Austin and then give us your view on New York.

Sure. This is John. Well start with Chicago. Chicago convention calendar in 2010 is down about 30% in terms of shows with greater than 6,000 peak room nights, which are the important ones for us. So, with that in mind, we anticipate a soft year in Chicago to the extent we can mitigate that with pick up in transient, it's going to be at somewhat lower rates. We also are anticipating impact from the opening of the JW Marriott in the loop, which is a 640 room property with significant meeting space, and we are factoring that into our projections. So, Chicago could be a tough year in 2010. Again, we hope to be able to pick up short-term bookings both in group and transient to offset that.

In Los Angeles, the convention calendar is much less meaningful to us at LAX, but in general they're flat from a show standpoint and down maybe 3% in a room night -- in the room night picture. And then Atlanta, it's gotten to the point where basically the city-wides are irrelevant because so much supply has gone into Midtown and Buckhead. So, it's really in the hotel group bookings that we're concerned with. They're showing kind of the same kind of trends as the balance of the portfolio. There is hope that we can make up the deficit in the year for the year sales activity. Austin had a tough group year. They've had a lot of supply downtown, so there again, it's harder to get compression from city-wides. And then, there's a Westin opening up in a pretty good location out in our submarket. And that, I think, is in the first or second quarter of this year. So, we're anticipating that impact as well.

And New York? Did you mention New York?

I'm sorry. New York, we're relatively unimpacted by the city-wides. I think the full service hotels -- you heard some numbers. I think they had a pretty tragic period last year. I think some of their pick up reflects some of the increased group activity in the city. We're seeing generally positive trends, but it's too short-term to really put much stock in it. We are anticipating that New York's going to have a pick up. From our standpoint, it's more important from the special corporate and regular transient rate categories.

Great, thank you very much.

Your next question comes from the line of David Katz with Oppenheimer.

Hi, good morning. And, my sense is -- there's been some commentary on this so far -- but I just wanted to go back to the acquisition landscape because I think operating-wise we sort of have your perspective on it. What can you tell us about over the last quarter or so -- you continue to raise some equity -- about the prospect that you think you could actually close on an acquisition this year -- probability wise or scale of 1 to 10 or some form like that?

David, this is Mark. I think we're feeling a lot better in the last 90 days than we were previously. There is increased chatter. Both the brokers seem to have an increasing, although a relatively low volume, but they're having an increased number of offerings. In talking to some potential sellers and some potential off-market transactions, there seems to be more of a willingness to entertain sales, and that may be because pricing isn't -- you know, I think there was expectation on the seller's part too that pricing was only going to be at these incredibly depressed numbers, and maybe it's somewhere in between that and a reasonable number. So I think that we're feeling better. The chatter is certainly improved. I would still say it is a relatively low volume of things that are on the marketplace, but it certainly feels better than it did 90 days ago.

And David, I would just add to that, the opportunities we are seeing now -- this is sort of typical in any cycle -- are the more distressed properties, and it's coming in the form of debt offerings, whether it's the [mez debt] or a [traunch] of the former First Mortgage. That's complicated and time consuming area to play in. As you know, you have to pick the right [traunch] of debt to bet on -- you're basically doing an over and under on the valuation. And, it's a tremendous amount of work from potential litigation and from negotiating standpoint. And, that's just an area that we have chosen not to play in. Now what we have done is we have reached out for potential partners to play in that segment, as I think many are doing. On the equity transaction side, as Mark said, we're hearing more but frankly we're not seeing more. We are seeing kind of a reduction in the spread between the ask and the bid, and have gotten fairly close on a couple but have not yet gotten to the finish line.

Perfect. Thank you very much.

Thank you, David.

Your next question from the line of Bryan Maher with Collins Stewart.

Good morning, Mark and John. Can we go a little bit deeper on some of these properties? In particular, I'm interested in the pretty severe weakness at the Vail Marriott and then also the kind of odd numbers coming out of Chicago and New York where your New York Courtyards, one is down 9% and the other is down 18. And then in Chicago, your Marriott's down 10 and your Conrad, which is a Hilton property, is down 20. Can you give a little more color on that?

Sure. Starting with Vail, Vail had kind of an anomaly which hopefully won't continue. Their business in December is often -- is almost always heavily influenced by state groups because the rates are attractive. The timeframes are open. Transient business hasn't picked up. Historically the hotel is marketed aggressively to state groups. The state budget this year was just devastated, and so the state groups didn't meet. That was the fundamental problem in Vail. Add to that, the late snow that they got out there, and December was a very, very tough month, and it's very impactful on the quarter.

In Chicago the Marriott was able to put some groups on the books in the quarter for the quarter. Conrad does not have the meeting space to enable it to do that, so it's much more reliant on transient and city-wide activity. That's why they were down substantially more than the Marriott. The Marriott margins were impacted by some fairly -- some unexpected and fairly significant expenses that had to do with them being down event managers -- two event managers. And, they incorrectly forecast some major group business particularly in December but also in November. Their margins were negatively impacted by basically some poor planning on their part. In New York, the hotels are in slightly different locations with 5th Avenue being closer to Times Square, and I think 5th Avenue probably benefited from the relevant strength of Times Square. Whereas 3rd Avenue is much more contingent on business transient on the upper east side, which is showing strength in the first quarter but did not show much strength in the fourth quarter.

As an aside over the last six to 12 months as you have seen trends unfold and how your certain portfolio assets have reacted and performed -- I'm not asking you to say what you might do specifically -- has it given you any pause or change of heart with respect to assets in the portfolio and possibly making some portfolio changes over the next year or two years?

This is Mark. I think the macro perspective is now it is a better time to be a buyer than a seller. Over the next five years are we going to reallocate the portfolio in some of these markets and change it? Probably, but I think that the likelihood of selling some assets in the next year or so is relatively lower. More likely be acquisitive in this part of the cycle, and I think our planning is to be a much more proactive recycler of capital as we move through the cycle, which will allow us to fine tune our market strategy.

Okay, thanks.

Thank you.

Your next question comes from the line of Joshua Attie with Citi.

Thank you. I think you said at the end of your prepared remarks that you expect a slower demand recovery than in the past. Maybe you can share with us some of the macroeconomics you have or what's kind of driving that view.

Josh, this is Mark. The thinking -- are you a V person or more of a U type recovery, we are planning for a slower demand recovery, and that's what we're anticipating, but that's based on kind of a macro view that the economy is going to take a little longer to get out of this deep recession than in the prior two cycles. That's our thinking based on kind of a macro view that the economy's going to slowly crawl out of this over the next 24 months.

So when you look at -- do you think that your view is more conservative than just to kind of put it in perspective, so we can each make our own assumptions -- when you look at consensus GDP forecasts, do you feel like you're below that?

Yeah, I think our perspective is below that. And when I talk to some other industry executives, I think our general thinking is more conservative on the recovery than other people. So, it's just a world view more than anything specific.

Okay, thanks a lot. That's helpful.

Thanks, Josh.

Your next question comes from the line of Ryan Meliker with Morgan Stanley.

Hey guys. I'm sorry if I missed this, but I was just hoping to get some color on where your group bookings stand right now for 2010. What's the pace for group demand and pace for group rates, and if you have an idea of how much of your group demand that you are expecting to realize in 2010, you already have on the books, that would be helpful as well. Thank you.

I didn't hear that last part of the question.

Just an idea of what percentage of total group demand that you are expecting to realize in 2010, you currently have on the books and how much you still have yet to book.

The numbers I will give you are as of period 1, and again we adjusted the last year numbers to reflect actual cancellations and attrition. We are down 5.8% as of period 1, for the year 2010. 4% of that is room nights and 1.9% of that is rate. Now, as of period 13, or the fourth quarter last year, that 5.8% number was about 7.9%. Just to give you an order of magnitude. Unadjusted that same number is 17% and change. It is a significant difference when you adjust for last year's actual cancellations and attrition. As of fourth quarter in 2008 , 76% of '09's total group business was on the books. That's a revenue number. So we picked up the balance of it in the year for the year. This year if we do the same thing, we theoretically would wind up 5.8% down. We anticipate, given the short-term nature of group bookings right now, that we will be able to pick those room nights up, albeit possibly at a lower rate, and we're hoping that overall revenue, we can at least close the deficit and hopefully turn it into positive

That's helpful. So, it sounds like you have about 70% of your group room nights on the books right now. I'm sure you don't want to give guidance, but maybe you can help me understand, out of that remaining 30% that's going to be booked in the year for the year, do you have an idea of where you think those rates might be versus the rates you currently have on the books, or where were they in 2009 and would 2010 be different?

It's a little hard to answer that because it's such a fluid situation. To give you an example, Marriott systemwide group bookings in the first two weeks of January, not that this is particularly impactful as a trend, but 33% of their total group bookings across their North American system in the first two weeks of January were 14 days from the day they were booked to the day they occupied the hotel. That is an incredible number. So, it's very hard to project. But I can tell you that In the fourth quarter of 2009, out in the quarter for the quarter bookings were up 47% in room nights. The rate was up over last year's pickup rate -- in other words, in the quarter for the quarter in 2008 -- that rate was higher, but the rate was lower than the average rate for the quarter. So the room nights you're picking up are lower rated, but they are better than they were in the same period the year before. So all that tells you that there is an awful lot up in the air, and it is very hard to make accurate projections based on what we are seeing.

Fair enough. Thanks for the color.

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Good morning, guys. You guys talked a decent amount market by market, kind of talking about your expectations, gave a little bit of color in terms of revenue. I know you guys aren't giving guidance. If you look at some of the consensus forecasts are out there right now, in terms of RevPAR, where would you think your margins would be down in 2010 at this point based upon what you're looking at the property level, personnel increases, real estate taxes and things of that nature.

Yes Michael, this is Mark. I think that would be giving guidance, so we'll probably stay away from that question.

Okay, any color you can provide in terms of expenses?

John can speak a little bit more about some of the trends we're seeing in the expenses and what we expect overall for 2010, which I think is a more challenging expense environment.

Yes Mike, it's a situation where you are taking a lot of contingency in the second half of '08 and all of ' 09. There is a certain amount of what I call battle fatigue out there where some of the operators feel they have given as much as they can give. The main pressure areas are going to be wages and benefits, and increased volume and the incremental costs associated with increased volume. Where we are trying to have an impact are two areas, housekeeping and food and beverage, and specifically in food and beverage, we have done a best practices.

We have a couple hotels that are clear leaders in terms of food costs and labor costs, man-hours per cover, things like that. We have had those chefs go to other hotels and spend a week with their counterparts at those hotels, and we are starting to see some results there. We have further challenged the properties by doing an in-depth analysis per outlet in our portfolio and fully allocated costs, and shown them what their real bottom line is in each one of these outlets. And, we've challenged them to tell us how they can make those outlets profitable because very few of them are when you fully allocate costs, and we are in the midst of that exercise. We anticipate we will get results, but of course we will run into brand standard issues as we go down that path. We are not giving up, and that's a big hit area if we are able to achieve something. On the housekeeping side, there are some opportunities in the way you allocate rooms, stay over rooms versus check out rooms. There are ways to allocate those among housekeepers that allow the housekeepers to make more money and us to be more efficient. There are some roadblocks there that we have to work through, and we are in the process of doing that.

That's very helpful actually. Second of all, just curious, do you have any bids outstanding now on properties and what has been the deal volume you have seen come across the desk as well as through the Marriott pipeline over the last couple of months?

Yes Michael, this is Mark. First part, the number of bids, we have put out a number of bids -- I wouldn't say a lot, we've put out a number of bids -- and we are in the process of looking at a couple of assets right now. As far as the Marriott pipeline, we've started those meetings. They're seeing what you would anticipate -- the early stages of a lot of deals that may be coming over the next 12 months. Stuff that is more actionable in the near term -- our hotels, which I would refer to as potentially broken boxes which may not be fixable. They have negative cash flow, and in some ways by their very nature and design -- maybe they're part of a mix-use development and were ill conceived from the get go -- may never make a positive house profit. Those obviously wouldn't be attractive to us. The stuff that probably is higher quality and more attractive is now in the early stages of potentially being in trouble, but it is still a number of months or quarters from becoming an actionable hotel transaction.

Finally in light of Frenchman's Reef, as you look at your projections for 2010, are there any properties that could come close to debt covenants or other Capex covenants or things of that nature, or is this kind of just really a one off opportunity and the rest of the portfolio is pretty well positioned at this point?

It's kind of a two-part question. In light of this, we've done a comprehensive review of all the non financial covenants -- non monetary covenants in our other loan documents, and we think that won't be an issue at any other hotel. As far as coming close to cover debt service, last year we basically covered debt service in all of our 10 hotels that still have debt, and I think we missed collectively by $161,000 or something. This year there are a more that are probably -- depending on kind of the trajectory of the economy and fundamentals -- more that may not make debt service, but we will do a comprehensive analysis and make sure there is equity value in the hotels as we continue to potentially feed those hotels. There is nothing that we are in discussions with the servicer about at the moment.

The one thing -- this is Sean, Mike -- that I'll add to that. On a handful of our loans, we have cash trap provisions, and we're expecting we're likely going to enter into the cash trap provisions on a couple of our loans based on 2009 numbers.

Okay, thanks guys

Thanks, Michael.

Your next question comes from the line of Smedes Rose with KBW.

Hi, it's Smedes. I don't know if you would be willing to do this, but could you provide what you think a one point change in RevPAR, what your sensitivity would be on an EBITDA basis?

Yes Smedes, this is Mark. It is difficult because I think there is not only the RevPAR, but it's going to be a component of the F and D flow through depending on the mix shift. That's going to really have a....

Well assuming kind of what you've talked about -- that occupancies will be okay, but rate continues to decline, so the one point in RevPAR change will be that same kind of mix?

Smedes, this is John. If it is 100% REIT, we assume about an 80% flow through -- negative flow through -- maybe slightly less than that. You can do the math on that. In terms of combination of occupancy and rate. It is closer to 40% to 50% negative flow through. Again, you can do the math. Those are the parameters.

Okay, thanks. Any thoughts on the balance of your ATM program? Would you expect to exhaust that over the course of the first quarter or any color on that?

Yes, I'd say we have about $25 million left on that program. We're going to evaluate the stock price on the markets. It's on to a constant debate with our cash balance of how we're feeling about the acquisition opportunities we are currently looking at, and we're feeling better about that. So, depending how both the stock price and how we're feeling about acquisitions will determine whether we execute on that program or not.

Thank you.

Your next question comes from the line of Jeffrey Donnelly.

Just two last questions, one on Frenchman's -- and I apologize if you touched on this in your comments -- but, what is the magnitude of the capital work you need to do there, and when do you expect that'll be completed?

The work that we are in discussions with the loan servicer regard correcting some balcony work, replacing a couple of balconies -- a number of balconies at the hotel -- that's probably somewhere between $1.5 million and $2 million based on our current survey of work. It is a number of different -- if you've never been to that property -- it's a lot of different buildings involved in that resort, so it would be staged over the next couple years in the off-season to minimize the disruption.

Meaning the balcony work would be staged? There's not additional work beyond that?

Well, we're looking at potentially repositioning the hotel. So there may be other -- you know, we're looking at potentially making self-generated energy and running a four pipe system. We are looking at repositioning the pool, and redoing the main pool. There's a lot of things that are under consideration with that property. We are trying to work the balcony work in concert with thinking about an overall project to maximize our returns at the resort.

But, it's just the balcony work that was required by the loan?

Correct.

I guess maybe a question for John around brand standards. I'm curious when you think about the brands, how do you think they begin to phase back in -- I guess I will call them brand standards in 2010, 2011, and 2012 -- as profitability returns, not so much the labor aspect but the capital investment side. My concern is that the brands -- I guess we'll say lay claim to the first few dollars of incremental cash flow for owners in the next few years. Do you have any sense of how that would work?

We are not out of compliance with brand standards at any of the hotels from a capital standpoint. We went into this downturn with a great portfolio and great shape. There are a couple of hotels where I would say we have deferred capital to the point that we'll have to maybe replenish it at a faster than run rate level, but only a couple. And I don't -- Marriott has not really had to waive brand standards for us in any of our hotels. Hilton at the Conrad has not, and we're certainly in compliance at the Boston Westin. We probably have some issue in Atlanta with Starwood to deal with, but they're not major.

What about more broadly, though, than just the DiamondRock portfolio, do you think it could prove to be a catalyst beyond 2010 where brand standards are imposed on -- I'm not sure if it's necessarily TVs or new soft goods -- or two years from now we see the next new amenity war, if you will -- do you think that that could be somewhat of a catalyst to owners out there who aren't able to fund those investments, or do you just not think brands are going to be that aggressive in the next two to three years?

I think Jeff, in general, the brands have a recent history of working with owners. I don't think there will be an appetite among the ownership franchise community to basically allow the brands to get out of control, if you will. I think the brands do run the risk always of getting into amenity creep and amenity wars. I think each of the brands, in our experience, have a pretty active owner and franchise group that are listened s\to. I don't anticipate that they're going to do anything that is detrimental to the owners in any sense, and keep in mind you have one of the major brands that is owned by Blackstone and that certainly gives a level of logic that maybe hasn't exist before.

Jeff, this Mark. Just to add onto that, I think as far as a catalyst for transactions -- what we've talked to Marriott about in their pipeline meeting isn't so much the properties that the brand managed -- generally, those are in pretty good shape as far as brand standards -- but some of the franchise properties where a franchisee may have 20 hotels, they may have three or four in the red zone, if you will and they don't have the capital to reposition those. Maybe it is in everyone's best interest to figure out how they can sell those three of four hotels -- someone that can afford to put the capital in to reposition them and do what's right for the properties -- which would also give that franchise owner proceeds to potentially plow into other assets that need capital. That could be a potential way to generate a transaction. We are currently looking at that.

That's what I was thinking about. Do you think that is a deep well or just kind of only now being formed?

Unfortunately, I think it is a deep well if you're willing to go into very tertiary markets. When you start talking about the prime markets that we want to be in, I think there are limited opportunities.

Thanks, guys.

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

I just have one more for you. You probably saw that LaSalle is acquiring a hotel in DC at six cap on ' 09. We calculate 5.7 cap without the inauguration benefit. Is that market for full service hotels in major markets?

I think everyone is still trying to figure out what market is and it will be defined over the next 10 major transactions that trade. I think everyone is grasping at is that a rich valuation or is that going to be the new market valuation of what things will trade for. I think we are still early to that show and we will figure it out as we go over the next few transactions. But before we leave you, I did want to loop back on your prior question about 2010 expense category projections, and Sean's got the numbers in front of him now.

Hey David, how are you? It's Sean. For 2010 interest, you should expect a range from anywhere from $48 million to $49 million. On the G&A I will break it out between cash and non-cash, our cash G&A for 2010 will range from $10.5 million to $11 million and our non-cash G&A will be between $4 million and $4.5 million. And then with respect to capital expenditures, John mentioned $30 million as our 2010 estimated capital expenditures, and that can get broken out between $6 million of owner funded capital expenditures and $24 million of escrow funded capital expenditures.

How about tax?

Taxes I think are probably -- I'm not in a position to give guidance on taxes only because where we are vis-a-vis our net operating losses from a tax basis perspective, we are pumping up against requiring valuation allowances going forward ,and I really can't look that far ahead with respect to whether we're going to meet a valuation allowance next year or not. So, I'm going to decline right now.

Got it, and Mark to come back on to whether it's rich or not. What is your impression for that asset? Was that one you guys looked at, and if 6 is the new reality, where does that put you relative to your desire to make acquisitions? In other words, is that a satisfactory going-in cap rate to get you the kind of long-term returns that you want?

We did take a look at the asset -- I think on the kind of $400,000 key range, it is a great market. We would love to be in DC. It is a great asset. Sofitel is not a brand we're familiarity with. We haven't done a lot of business -- or, we've done no business with (inaudible) before. We have a lack of understanding or hesitation entering into a long-term management agreement with them. As far as valuations, LaSalle trades at a higher multiple than us, so it is probably more accretive for them to do a transaction like that than it would be for us. We are trying to do the best deal we can do in the marketplace, and I'd love to come back with a deal that has a better cap rate than that when we announce our first transaction after three years of being absent in the market.

David, this is John. I might just add to that, because we did look at this hotel. I don't think it was the cap rate -- we didn't get to that number -- but, I don't think it was the cap rate that was our biggest concern. We like the location. We like the asset. It is a good physical asset. The management contract, though, with a brand like Sofitel, while they are doing a great job in the marketplace, and I'm sure LaSalle is going to be able to do a great job managing them. We were a little concerned about the terms of the encumbrance and the potential downside associated with that. So, I would say from a valuation standpoint, while it appears a bit rich, given the market, given the location and given the tragic cash flows you are applying the cap rate to, I don't think that was our principle problem with the deal.

Great, that's helpful. Thank you both.

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

Thank you. You mentioned that consensus numbers were too high. I assume you were referring to FFO per share?

Correct.

And any thoughts on -- it looks like I'm showing a consensus number of EBITDA for 2010 of $108 million, do you care to comment on that? Same view perhaps if I can put words in your mouth.

Yes, if that's the consensus EBITDA number you are showing, we believe that number is too high as well.

Thank you.

At this time we have no more questions in the queue. I would like to turn the call back over to Mr. Mark Brugger for any closing remarks.

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.