Diamondrock Hospitality Co (DRH) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2010 DiamondRock Hospitality Company earnings conference call. My name is Colby and I will be your coordinator today. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed, sir.

Thanks, Colby. Good morning everyone and welcome to DiamondRock Hospitality's first quarter 2010 earnings conference call. Today I am joined by John Williams, our President and Chief Operating Officer, as well as Sean Mahoney, our Chief Financial Officer.

Before we begin, I would just like to remind everyone 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.

Well, let me start the call today by saying that industry fundamentals are recovering faster than we expected, and first quarter hotel operating results for DiamondRock significantly exceeded our internal expectations. Our March RevPAR was up 3.3%, the first positive month of RevPAR growth that our portfolio has experienced since April 2008. We believe this marks an important turning point in operating fundamentals.

Except for a modest decline in our group segment, all other segments showed positive demand growth. We are particularly pleased to welcome back increased demand from the business traveler, our most profitable customer.

For the quarter, our portfolio of 20 hotels gained market share in January to RevPAR of $95.15, a decline of 3.7% from the comparable period, as a 1.8 percentage point gain in occupancy was unable to offset a 6.3% loss in rate. Consistent with industry trends, a number of our hotels showed significant positive momentum as the quarter progressed. For example, our New York City hotels experienced double-digit RevPAR declines in January, and reversing that trend, showed strong RevPAR growth in March and over 15% RevPAR growth in April.

Overall, margins in the quarter were terrific relative to the RevPAR change, as we continued to benefit from aggressive cost controls implemented during the downturn. House profit margins declined only 80 basis points, and EBITDA margins declined only about 100 basis points. As a result, the company generated adjusted EBITDA for the quarter of $18.5 million, and adjusted FFO of $12 million. The FFO results were impacted by the reversal of a $3.1 million accrual for penalty interest associated with the Frenchman's Reef loan which we successfully amended in March, as well as our income tax benefit of $1.6 million, which was reduced by the timing of Frenchman's Reef EDC tax holiday renewal. We fully expect to receive that renewal this summer.

On the balance sheet, DiamondRock continues to have a conservative capital structure and is positioned for growth. We ended the quarter with $785 million of debt which is comprised 100% of property-specific limited recourse debt. Our net debt-to-EBITDA ratio is a healthy 4.9 to 1, and our liquidity is excellent. The Company currently has over $180 million of cash on hand and expects to finish the year with well over $200 million. With no near-term debt maturities, we expect this cash to be substantially deployed into acquisition opportunities and internal ROI projects.

Building upon this advantageous foundation, we've commenced recasting our $200 million corporate revolver to provide even greater flexibility under our covenants and gain additional term. Although we have nothing drawing on the line today, the new revolver will be a useful tool as we move into a more aggressive acquisition mode.

With that, I'll turn the call over to John to discuss fundamentals and the outlook for acquisitions.

Thanks, Mark. Good morning everyone, and thanks for joining us as we enter the middle innings of earnings season. And that's the last baseball analogy you'll ever hear from me.

For DiamondRock's 20-hotel portfolio, the first quarter marked the seventh consecutive quarter of negative RevPAR. However, it also marked the first period of positive RevPAR in almost two years, with RevPAR in period three up 3.3%. Even more encouraging are house profit margins, down only 80 basis points in Q1, even though portfolio revenue was down 4.8% in the quarter.

For the first quarter, overall RevPAR was down 3.7% as a result of a 6.2% decline in average daily rate, partially offset by an occupancy increase of 1.8 percentage points. Occupancy trends have been improving for the past two quarters, and we may be at or near the RevPAR inflection point. If history is any guide, the inflection point for rates should follow in a few periods.

RevPAR comparison was positive in the quarter for seven of our hotels. The Sonoma Renaissance Resort RevPAR was up 13% in the quarter. The Vail Marriott was up 8.2%, and a very positive margin was not included in Vail's first quarter results. The Torrance Marriott was also up 8.2% in RevPAR. Our Atlanta Waverly and Alpharetta hotels are up about 5%, and the Frenchman's Reef resort and Oak Brook Hills Marriott were up 3.4% and 2.4% respectively in RevPAR for the quarter.

RevPAR at our Chicago Marriott and Conrad hotels declined 13.7% and 15.7% respectively in Q1. Most of the damage in Chicago was inflicted in period one due to a very difficult comp, and our operator forecasts for the balance of the year in Chicago are relatively strong. Orlando Airport Marriott and the Midtown East Courtyard had RevPAR declines of low double digits in the quarter.

For the portfolio, all three major segments continued to trend well in the quarter. Business transient revenue was down 6.1%, a notable improvement to the 24% decline in Q4 and 31% decline in Q3 of 2009. Group revenue declined 4.8% in the quarter, compared to 22% down in Q4 of 2009, and leisure transient revenue was down about 3.7%. Lower rated contract and other revenue was up 27%, but that represents only about 5% of our portfolio of rooms revenue.

Room nights sold were up in business transient 1.2%; leisure transient, 2.8%; contract and other, 33.6%; and they were down 1.7% in group in the quarter.

Q1 also continued the positive trend of accelerated short-term bookings. In the quarter, group room nights booked increased over 100% compared to Q1 of 2009, and they were 91% of unrealized group rooms in Q1 of 2008. Cancellation and attrition fees were down 51% and 76% respectively, representing $750,000 of high-margin lost revenue in the quarter.

Portfolio group booking pace for 2010, after adjusting prior years' definite revenues for cancellations and attrition, is off about 3% versus the same time last year as of Q1.

Pace has continued to improve. In light of the short booking window and increased recent booking activity, we're hopeful that the deficit can be reduced within the year for the year's sales activity.

Food and beverage revenue in Q1 was off 3.6%, but margins were up 250 basis points. Vail and Frenchman's Reef were the principal drivers of the margin increase. In Vail, we value-engineered the menu and implemented a new labor scheduling system, and at Frenchman's, we invested $900,000 to consolidate two kitchens into one. The balance of the portfolio held margins flat in food and beverage, in spite of a decline in sales and a very difficult quarter in Chicago. The results reflect our concentration on improving margins at our hotel restaurants.

As a testament to our operators' continuing focus on cost containment efforts in 2010, portfolio labor and benefit costs in Q1 were down 3.8% from Q1 2009, in spite of higher occupancy. And man-hours per occupied room improved 8.6%. Support costs per available room, including property-level G&A, repairs and maintenance, utilities, and sales and marketing, were down 1.4% in the quarter.

Turning to CapEx, we're fortunate that we entered the downturn with a mostly-renovated portfolio and were able appropriately curtail capital spending during this downturn to only necessary or truly value-enhancing projects. We're budgeting to invest approximately $36 million in the portfolio in 2010. The owner funded portion of the 2010 CapEx is budgeted to be $7 million, with the balance coming from property-level reserves. In Q1, we invested $5 million in the portfolio.

Finally, I want to touch on acquisitions. DiamondRock remained disciplined through the last cycle, and has not purchased a hotel in over three years. We have made the macro call that now is a good time to buy. We're beginning to see signs of more lender activism, as a limited number of sales are beginning to establish values and fundamentals begin to stabilize. We're beginning to see in-the-money equity considering sales in response to looming maturities or strategic moves.

Debt continues to come to market, but we remain cautious acquirers of debt. We're meeting with owners, lenders, operators, both brand and third party, and of course brokers. And with our healthy balance sheet, we're aggressively hunting for deals. We have two offers outstanding. However, we will not abandon the discipline of thoughtful underwriting and price integrity just for growth's sake.

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

Thanks, John. As John discussed, although the group window is remarkably short, there are more definitive operating trends occurring in the industry and at our hotels. Based on this increased visibility, DiamondRock is providing full year guidance. Accordingly, we now expect full year 2010 RevPAR to grow by 1% to 3% for our portfolio. And with the current cost controls in place, strong flow-through should allow the company to generate adjusted EBITDA in the range of approximately $114 million to $119 million, and adjusted FFO of $69.5 million to $71.5 million. The adjusted FFO guidance is predicated on our projection of income taxes ranging from a benefit of $1 million to an expense of $2 million, which is why the FFO range is narrower than the EBITDA range. Consequently, we now expect adjusted FFO per share of $0.52 to $0.54 for the full year 2010.

I'd like to conclude the prepared remarks today by complementing my entire management team, which I believe has done an exceptional job in navigating this recent storm, and positioning DiamondRock to be a prime beneficiary of the next lodging cycle.

With that, we would now like to open up the call for any questions you might have. Colby?

(Operator Instructions). Your first question comes from the line comes from the line of Andrew Wittmann with Baird. Please proceed.

Morning guys.

Morning.

I wanted to ask a couple of questions on taxes, and I guess I'll start with Frenchman's Reef. I wanted to get a little bit of your sense of confidence around the tax holiday extension. Mark, you sounded pretty definitive there. Why so confident in that, and can you just give us a little color?

Sure, thanks Andy. Back on Mark's comments, we are confident at this time that we'll be able to get that EDC tax credit extended. The reason we feel so confident, we think it's very important for the USVI to have these tax holidays, and the reason being is that it increases US investment in the USVI which ultimately helps increase tourism which is the life blood of the United States Virgin Islands, which we think is obviously very important for that part of the world.

And the second thing that's really important is that the EDC which is the regime in the USVI stipulates that we need to use local employees to do things like capital expenditures, or sorry, capital projects on the island as well the employees at the hotel. So we think that's very important from a local employment perspective as well for the USVI. So because of those reasons, we're comfortable that we will be granted the tax exemption.

Can you just give us a sense of how common or unusual these kinds of holidays are?

They're very common for hotels in the USVI.

Okay. I guess then just one other question on tax -- you guys get to see all the street estimates out there. It looks like a lot of people probably used last year's tax benefit number in their estimates for 2010. I know that we did. Is that the primary reason why it looks like FFO guidance is being lowered versus where consensus is, versus the EBITDA, which I guess is kind of at or above consensus?

Andy, that's one of the reasons, but the real drivers for the difference in taxes is that the fundamental operating results of our taxable REIT subsidiary are much better than we would have thought, which the better operating results of the TRS obviously has the impact of lowering our tax loss, which ultimately the tax loss is what drives the tax benefits. So that's the first reason.

The second reason is that our leases are beginning to expire at our tax and [REIT subsidiary] and those leases were set based on our original underwriting in 2004, 2005, etc., and are being reset to current levels, which are obviously based on much more trough earnings. So leases that were generating losses in 2009 based simply on their renewal are actually being marked to current market, which would be to generate taxable income.

Andy, this is Mark. This is just to follow up. Yes, so I think you'll see we significantly beat on-street EBITDA. The difference in FFO was driven by the income tax provision, which we hadn't provided previous guidance, so I think people were guessing based on last year's which obviously is a very complex formula of how we pay income taxes here. So that is the differential.

Right. Yes, we appreciate the greater color, that really helps us narrow in. I guess I just want to ask one other question, and I think we saw this in host results a little bit as well. What was the impact of kind of a strong March that wasn't realized on your income statement because of the Marriott quarter that you recognized? Can you quantify the (inaudible--multiple speakers) maybe EBITDA or RevPAR?

Well, in RevPAR, it's probably about 130 basis points. RevPAR would have been better, had we included the March results.

Okay. And that's primarily Boston effect?

Yes.

Okay. Great, I'm done. I'll jump back in if I have any others. Thanks, guys.

Your next question comes from the line of Josh Attie with Citigroup. Please proceed.

Thanks. Do you, what was the rationale for issuing more equity in the quarter, just given how much cash you're already sitting on, and do you plan to put in a new ATM program?

Josh, this is Mark, good morning. On the equity issuance, we completed our second at the market program, we're sitting on about $180 million of cash today. It's really, it's a constant internal discussion about the appropriate amount of cash to have to be competitive in the marketplace. We're seeing more acquisition opportunities and we want to be confident given how competitive it is, especially with some of these recent blind pool lodging REITs out there, that we have enough cash that we can be very aggressive and move quickly on these opportunities as they're emerging. And we're feeling more and more confident that those opportunities are closer at hand, so we want to be well positioned to do that.

And what's the alternative use for the cash if for some reason you stay disciplined on pricing, you don't see anything that is compelling, what would be the second priority for putting that cash to work?

Well the two top priorities are acquisitions, I feel good that we'll find good acquisitions by the end of the year; and the second is, we're looking at significant repositionings of a couple of our assets for return on investment projects, which would be what we think a very valuable use of that cash.

And what's the scope of the CapEx that you're looking at, how much dollars could that consume, not just this year but next year? Is it $200 million or less?

No, it's probably more on the $50 million, $60 million scale.

Okay, thank you.

Your next question comes from the line of Jeffrey Donnelly with Wells Fargo. Please proceed.

Good morning, guys. I apologize if you touched on this on Frenchman's Reef and I may have just missed it. But what specifically is included in your FFO guidance for 2010 as it relates to the Frenchman's Reef tax rate?

We're assuming we get the renewal this summer.

Okay. And how long and again, I'm sorry if you mentioned it, but how long do those last?

Our last one lasted 10 years, they're either 5 or 10 years. We've asked for 10, but 5 is kind of the pro forma and then you just renew it at the end of that term.

Jeff, this is Sean. The impact if we didn't get the extension, which we're very comfortable that we're going to get, would be about $2 million increase of our tax expense.

And you don't have any, particularly after the last year or so, anything that's got tax loss carry forward, or something on that basis, that you might be able to use to at least defer some of that impact on the extent you don't get it?

We do have NOL carry forwards at the USVI that are factored into our guidance.

Okay. And just more broadly, how is demand looking at Frenchman's Reef or more broadly just down in the islands? Are you seeing a recovery, because for a while there it was certainly impacted not only by the economy but by the need for having passports -- have you seen an inflection in your advance bookings since that's more of a destination market?

Yes Jeff, this is John. I think the impact in the islands is more related to air service. And of course St. Thomas has fantastic air service, so we have more or less avoided some of the pitfalls that a lot of the other islands have suffered. This year and last year, last year we had a deficit in our group bookings. We made up for that with discounted transient. This year we had a very good group calendar, and so we've been able to push rate a little bit by re-segmenting the transient side of things. And going forward, we see generally positive trends for St. Thomas.

And actually to stick with you, John, and I asked this question in a prior call but, and I think I ask it again, is now that RevPAR is turning a corner and profitability seems to be around the corner for a hotel owner, how do you think the brands are going to phase back in brand standards, both on I call it the labor side as well as the capital side? I mean do you think we could see expenses come back more quickly than they might normally have in 2010 and '11 on the operating side, and on the -- I guess I'll call it deferred capital type items? Would there be some sort of pent up expenditures in the next two or three years? How do you think those are going to be thought about by the brands?

I think it's kind of a general statement, but we don't have any significant deferred capital. But I think mainly what the brands have been doing is letting people use their FF&E reserve to some extent to pay debt service, and so there will be a requirement. We only have one hotel in that situation, but there will be generally a requirement that people replenish those FF&E reserve escrows.

From an operating standpoint, really the two major savings, well call it three or four major savings -- one major savings area was in management, hotel-level management. And I think that is really kind of a new way of doing business going forward. I don't think there will be a significant recovery in management counts in the hotel. I guess I'm speaking for our hotels primarily. On the hourly labor side, I think there have also been some new paradigms and I think those will persist. But obviously, as volume comes back there are only a certain number of rooms a housekeeper can clean, so they'll be refilling those positions. On the food and beverage side, where we've begun to achieve savings those are going to persist, because it's literally a new way of looking at hotel outlets, in particular restaurants and lounges. So I think that area will last through at least the lion's share of the recovery period.

So I think in general, as we saw last time actually, I think a lot of these cost savings will persist and be looked at as kind of a new way of doing business, just as they were coming out of the last downturn, but some inevitably that are driven purely by volume will of course go back up.

Which, just as a last question, what makes you think the management cuts are going to stick this time around? Because historically they've never, either have never really been touched which maybe tells you there's some fat to be removed, but they always seem to snap back. I guess why this time do you think it will stick?

Well I guess I'm not suggesting universally the counts will stay unchanged, but for the most part where positions have been combined, whether it be among hotels or even within a hotel, I think that is a paradigm that can be maintained at the hotel level. And you're not losing any customer service factor, you're not really overworking your employees, you're simply doing a little bit less with respect to the --. I'm thinking mainly of front office and food and beverage, there are some combinations there that have been made that will persist. And within the kitchens, I think you don't need in most cases a sous chef if you have an executive chef, or vice versa. So there are things that have been done that I think people have kind of scratched their head and said this model works.

Great, thanks.

Your next question comes from the line of Sean Kelley with Bank of America Merrill Lynch. Please proceed.

Great, thanks guys. Just wanted to ask a little bit more about what you're seeing on the acquisition front. Could you guys give us a little sense of what you're seeing in terms the cap rates out there, we know you've been involved in some processes? And I think Mark, you mentioned something by the end of the year, what are your thoughts right now in terms of the environment?

This is Mark. I'll lead off and then turn it over to John. We're seeing a variety of different opportunities, so on the cap rate front, we're seeing more stabilized assets, meaning they've just kind of fluctuated with the market in top-20 MSAs, relatively urban areas, kind of in the 6% to 6.5%, 7%, depending where they are, cap rate range. Probably towards the lower end for the higher quality, full service hotels.

And then we're seeing a number of lenders get more aggressive on hotels that are distressed and maybe have an opportunity to be rebranded. And those are going to be much lower cap rates because you have hotels that are in freefall with independent managers, they haven't made debt service for a while, they have deferred capital. Those may be some of the more interesting opportunities to create some really outside value, so cap rates would probably be less relevant on those type of opportunities. With that I'll turn it over to John just to give you a little bit more color on the market.

Yes Sean, this is John. I agree with Mark's range on cap rates and I would add that another variable is kind of where they fell from peak and how the price would relate to peak earnings, and those are still very low single or double digits on the peak level earnings. I think in terms of the activity out there, I think the combination of the beginnings of evaluations, degree of certainty, because of the transactions that have taken place, I think an increasingly optimistic outlook in terms of fundamentals has kind of given people some guideposts to make decisions on.

And I think those factors are causing some people to get more aggressive, whether it's lenders in dealing with their troubled assets or whether it's owners who are coming to the end of a fund time frame or have strategic moves they need to make within their portfolios. So I think those are positive things, and I think that will help activity kind of get kick-started. Having said that, we are still not looking for any kind of huge level of distressed sales activity or huge level of transactions this year.

Got it. And just in terms of timing, is there, how close do you guys think you are on things, or have most of the processes you've been in so far been a little competitive for -- I mean how should we think of the dollars and the availability of things? Is it really second half at this point for where you think something might break free?

It's a little hard to predict because even though you go through the process on some of these assets, sellers are still a little bit squirrely because there are still some hard decisions to make out there. So it's really hard to predict. I mean as I said, we have two offers outstanding and I don't have a high level of confidence that either one will come in. Having said that, they both could happen. So it's a hard market to predict seller activity in, and I think probably sellers are feeling the same way about buyers to some extent. So having capital is really the key to getting a seller's interest, and of course we do have capital.

Got it, thank you very much.

Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed.

Hey, good morning guys. Just to visit the other side of that trade, would you guys look at selling assets here? Because we know it's really competitive to buy, and is there a chance you can time this and sell stuff now and then hold off a little bit on buying stuff? Is there any of that, I mean how much are trying to time the cycle and be recyclers instead of net buyers?

Good morning Chris, it's Mark. I'll take that one. I think on selling assets, you'll see DiamondRock over the next cycle be a much more aggressive recycler of capital. But since we made the macro call now is a great time to buy, we're being very aggressive on that front. Although there is a shortage of good quality assets for sale, I still think it's a better time to be a buyer than a seller, given where we are in the cycle. So I think you'll probably see us sell our what we'll call non-core assets as we move through the cycle in two or three years, we're more likely to be selling assets. So we look at that, I mean clearly there are some assets in our portfolio that we would not want to be, not own in five years, and we're trying to pick our spots. So you probably won't see us put any hotels on the market in the near term, although we're always open to outlandish offers.

Great. And what's your propensity to take part in a large transaction if that were to come up, and whether that's a portfolio or something else? Have you guys, are you guys kind of operationally geared to look at that?

Yes, I mean one of the wonderful things about our business model is the lodging (inaudible), it's very scalable, even though we don't actually manage the hotels. So I think are we set up for it isn't really a barrier, it's going to be does it create value for our shareholders, is really the threshold question. We've looked at a number of large transactions in the last three or four months, but it all revolves, and I don't think there's a limit given our business model and our management team. It's really about the value proposition of those opportunities. If the right one came up, we'd pursue it, if that answers your question.

Okay. Great, thanks.

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

Hi, good morning. Question on the guidance, and I know you're not giving quarterly guidance. Can you give us some sense of how that RevPAR growth plays out by quarter.

Sure Will, this is Sean. Yes, I'll start with the balance of the year and then I'll give you some more color on each of the quarters. For the balance of the year, we expect to hit our guidance to have RevPAR growth in the 2% to 5% range for the balance of the year. And how that breaks out by quarter, that's between 5% and 6% for the second quarter; flat to negative, maybe 2% in the third quarter; and then up, sort of 3% or 4% in the fourth quarter.

Will, this is Mark. Just to add a little bit more color to the forecast, there's probably some offsetting things going on there. There's some group comparisons. We had an excellent third quarter in Boston last year that's going to be difficult to repeat, although it's hard to forecast some of the short-term group bookings that might be made up. And the fourth quarter, predicting business transient in the fourth quarter is a little bit tricky, the trends are very positive, and guessing markets like New York is probably more art than science at this moment. So the fourth quarter, there might be some upside in the business transient in our view.

What was the number, Sean, you gave for the fourth quarter?

3% or 4%.

3% to 4%, okay. And so Mark, was your comment about tough comps from groups, is that specifically tied to third quarter, or are you just flat to negative?

Yes.

Okay. And just one other question, you may have touched on this, but on the CapEx guidance, or the maintenance CapEx guidance, I can't remember if you call it CapEx or maintenance, but of $36 million -- that went up I guess by a little bit from where it was last quarter. What was the reason for that?

There was just a variety of increases across the portfolio, all very minor, taking it from $35 million to $36 million.

Okay.

Those numbers --.

So those numbers only went up $1 million, okay, I'm sorry.

And there are some estimates in there as well, Will, so I wouldn't take too much credence in that being a signal.

Okay. And then how much of that, sorry, was owner funded?

$7 million.

$7 million, okay. That's all for me, thanks.

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

Morning, guys.

Good morning.

I think most of my questions have been answered. But just looking for a little color on the idea of today being a buyer's market, I think 6 to 12 months ago everyone would have agreed that the buyer's market was going to be here at this time. But I think just this week I saw, I think it was JLL, but one of the brokers talked about the current state being, in currency to the markets, being basically an artificial seller's market because there are so few assets coming to market and so much capital chasing them. John mentioned that he doesn't see 2010 being a big transaction year, I'm not sure if that was for DRH specifically or just the overall market. I'm just wondering, is your view that today is a current buyer's market, really just driven by the fact that fundamentals are going to get better, or is there something else going on in the capital markets that may be making it more of a buyer's market today than, you know -- (technical difficulty)

Ryan, this is Mark, maybe I'll start off. I think we're encouraged by the two offers that we have out now, that there's interesting opportunities that can create value in the current environment. It's never easy to find good acquisitions no matter where you are in the cycle, so it's always difficult. It's never an easy process, but we're encouraged by the opportunities we're seeing. You need to generally bring some value add to the proposition to make it work, to create value, but we do think the cycle is a big driver. We do think that there's probably more difference of opinion about how future results may play out, especially in [bringing] conversion and other opportunities, and that's going to hopefully allow us to find opportunities that are going to create some shareholder value in the near term.

Alright, thanks.

(Operator Instructions). Your next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed.

Good morning, guys. Probably the first question here, just looking at the RevPAR guidance of 1% to 3%, that's a little bit below Marriott's guidance range for the year. How much of that is related to Chicago, the tough comps in Chicago this year, and how much of it's just, or occurrences within your portfolio, and how much of it's really just being more conservative based upon trends materializing?

Yes this is Mark. Actually, Chicago for the balance of the year is going to be decent, it's really not dragging down the portfolio. I think the difference between Marriott is we have a portfolio of 20 hotels, they have a portfolio of 3500 hotels. It's just the difference in our market makeup perhaps. I don't have any special insight into how they determine their guidance, but based on our forecast and our analysis of the group piece in the business transient trends, that's kind of what we base our guidance on, not looking at the rest of the industry.

Okay, that's helpful. Second of all, Sean, question for you -- you talked about a term sheet for the new credit facility. I just was interested in maybe if you could provide some of the terms that you're looking at, how much is the, are there floors going to be in place there, what kind of spread are you looking at?

Mike, we can't really disclose the detailed terms based on our existing agreement with the co-leads. What I can tell you is that from a macro perspective, what we're trying to do or accomplish rather with the line, is to give us incremental term from where we are now, which our line would expire even with the extension option in early 2012, as well as enhance our flexibility under our financial covenants which are pretty restrictive today. So that's our main objective to getting a new line. But with respect to specific terms, we just can't announce that right now.

Okay, it is going to remain unsecured, correct?

That's our objective.

Okay, that's helpful. Then third, just switching over to acquisitions here, what kind of IRRs or target cash-on-cash yield are you guys looking for for acquisitions right now? And has that changed in the past 90 days given the improvement in operating conditions?

Yes, this is Mark. Our underwriting hasn't changed in the last 30 days. We look for unlevered, low double-digit IRRs, that's the basis. Cash-on-cash yield really depends on the type of acquisition, and again we have two offers out. One is more of a asset that's got good cash flow and has a nice recovery story and a strong group bookings. The other is a major turnaround, probably a three- or four-year ramp to get back up to what will probably be double-digit cash yields, if we got that deal. So it's a real mixed bag, depending on the type of acquisition that you're targeting, but as a overall underwriting policy, we're looking for low double-digit unlevered IRRs.

Okay. And finally John, not to leave you out, just a question. I know it's pretty early here, but just looking at the 2009 group that is on the books at this point you're seeing, are you seeing any ability to, are you seeing any upside in rate at this point or are rates still under pressure as you're looking out to '11 for the group bookings?

I think in general the real short-term bookings rates are definitely under pressure. As we look at the comparative rates for the rates booked in the period or in the quarter for the period or quarter, they're clearly below the rates for the balance of the group. As you get further out, I think pricing power is beginning, and I say this very hesitantly, but I think pricing power is beginning to reappear and contract terms are beginning to become more favorable but it's probably too early to declare victory. So I think short-term stuff is going to be under pressure and longer-term stuff there is hope, and we're certainly encouraging our operators to be much more selective for next year's bookings in terms of the patterns that they take and the pricing, and having some confidence about the transient base that they're selling into. So longer term, I think we have begun to increase our expectations, and therefore, both our price and our terms.

That's encouraging. Thanks guys, that's all for me.

Your next question is a follow-up from the line of Josh Attie. Please proceed.

Hey, thanks. Just on the private market pricing, John, I think you mentioned earlier that some of the pricing is low double-digit EBITDA multiples on prior peak earnings, and also you just mentioned that you're targeting low double-digit IRRs. Are those two consistent with each other, and are you willing to pay low double-digit EBITDA multiples on prior (inaudible--multiple speakers)?

Hi Josh, yes, this is John. I was talking about low double-digit cap rates on peak NOIs.

Oh, okay.

Yes, we're really focused on that and when we look at the pricing, obviously, Mark gave you the parameters and I think our underwriting is still somewhat conservative in terms of estimates of out-year RevPAR growth and profit margins, etc. So if we're going to make any adjustments, it might be as we see things a little more clearly, we might raise some of those projections.

Okay, thank you.

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

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

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