Diamondrock Hospitality Co (DRH) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 DiamondRock Hospitality Company earnings conference call. My name is Marissa and I will be your operator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Mr. Mark Brugger, the Chief Executive Officer. Please go ahead.

Thanks, Marissa. Good morning, everyone, and welcome to DiamondRock's third-quarter 2010 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.

As usual, before I 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.

DiamondRock's positive third-quarter results met our internal expectations and reaffirmed our conviction that a sustainable lodging recovery continues to build momentum. Importantly, RevPAR gains in the quarter were led by improvements in average rate, which increased at over two-thirds of our hotels.

With favorable demand trends we continue to benefit from the ability to shift the mix at the hotels away from lower rated segments into higher rated segments, particularly our most profitable segment of business transient. In the quarter, business transient RevPAR was up 16%, while lower rated leisure RevPAR was actually down 2%.

To understand the power of mix shift, you only need to know that the average rate differential was over $30 in these two segments last quarter.

This all leads to the question of how the improved demand trends and mix shift specifically impacted DiamondRock's portfolio. Well, pro forma for acquisitions, RevPAR increased 5% from the comparable period and EBITDA profit margins expanded 33 basis points.

As we discussed in our prior earnings conference call, the Westin Boston faced difficult comparisons after gaining 15% market share in 3Q '09. Excluding the Westin Boston, our RevPAR would have increased 6.8% and profit margins would have been about 100 basis points better.

The Company also reported adjusted EBITDA increased over $2.3 million from the comparable period, and adjusted FFO per share was $0.15.

In the quarter the Company continued executing on its business plan to aggressively pursue attractive investment opportunities. Our deal flow came from diverse sources including financial distress, such as the Allerton deal; our Marriott sourcing relationships, such as the Renaissance Charleston acquisition; or attractively priced opportunities from our relationships, such as the Hilton Minneapolis or Hilton Garden Inn Chelsea acquisitions.

In total, during 2010 we have invested $325 million in four separate transactions. Our three hotel acquisitions are performing exceptionally well and all experienced above-market growth during the third quarter.

The Hilton Minneapolis and the Hilton Garden Inn New York City both grew RevPAR more than 20%, and the Renaissance Charleston's RevPAR increased a strong 13%.

The Allerton Chicago debt deal continues to go as expected, with our foreclosure of equity working its way through the courts. Additionally, we are exercising our other rights under the loan to establish a cash lockbox and collecting close to $2 million in cash interest payments. We continue to be optimistic about our prospects for the well-located Allerton Hotel and are particularly pleased with our basis in the hotel, which we believe is at a 50% discount to replacement costs.

Overall, DiamondRock has terrific liquidity and remains well positioned to actively pursue acquisition opportunities as a result of our low leverage, our undrawn $200 million corporate revolver, 13 unencumbered hotels, and over $90 million of unrestricted corporate cash at year-end.

Additionally we expect strong internal growth from our existing portfolio and through asset management initiatives. The largest opportunity is the renovation and repositioning of the Marriott Frenchman's Reef resort in the US Virgin Islands. John will talk more about this $45 million investment in a minute, and there is a detailed presentation available to you on our website.

Moreover, our asset management team continues to uncover discrete ROI capital projects at our existing hotels that range from energy projects to meeting space expansions. As always, we remain focused on mining value-creation opportunities wherever they may lie.

With that, I will turn the call over to John for a more detailed discussion on fundamentals and acquisitions.

Thank you, Mark. The third quarter continued the operating trends of 2010, with improving RevPAR led for the first time since Q2 of 2008 by average rate increases for the portfolio. Pro forma RevPAR increased 5% for the portfolio in Q3 to approximately $112 as a result of a 2.8% increase in average daily rate and a 170 basis point increase in occupancy. Overall occupancy was relatively strong at 75.5%.

The increase in portfolio RevPAR was driven by improvements in several room segments. Business transient revenue, by far our highest rated segment, was up 16.1%. Group revenue was flat; and leisure and discount transient revenue was down 2.4%.

Lower rated contract and other revenue was up 13% in Q3 but represents only about 4.1% of our total portfolio room revenue, and the increases were concentrated at LAX, Orlando Airport, and Torrance.

As you would expect in the early stages of recovery, rate increases are the result of shifts in segmentation from lower rated leisure and other to higher rated business and group, but more importantly from shifts to higher rate categories within segments.

In the third quarter, corporate and premium demand was very strong. Room nights in these two categories increased 25.4% at a rate 2.7% higher than Q3 2009, resulting in an almost 30% increase in room revenue coming from our highest transient rates categories. In addition, special corporate revenue was up over 16% in the quarter.

Q3 also continued the positive trend of accelerated short-term bookings. In the quarter, for the quarter, group room nights booked increased 36% compared to Q3 2009. Portfolio group booking pace for 2010, after adjusting prior year's definite revenue for cancellations and attrition, is up 3.30% versus same time last year as of Q3.

Pace has improved sequentially in each of the last four quarters. 2011 pace continues to improve. As of Q3, group revenue pace is off 3% versus same time last year, representing continued improvement from Q1 of this year, when pace was off over 15%.

Pro forma EBITDA margins for our hotels improved 33 basis points. Overall cost containment and profit maximization remains a high priority for our asset managers and operators. We have had big wins in changing staffing models, focusing on food and beverage profitability, and portfolio-wide initiatives such as our energy conservation program which ranges from efficiencies in lighting and thermostats to kitchen equipment.

However, overall profit margin improvement was restrained in the third quarter by the performance of our Boston Westin hotel, which faced a very difficult comp; and contractual increases in wages and benefits; and the Marriott Resort in St. Thomas, which incurred lost revenue and incremental operating costs from Hurricane Earl. Margins were also negatively impacted by an almost $900,000 reduction in cancellation and attrition fees in the quarter.

Food and beverage was a mixed story in the quarter. Total food and beverage revenue in Q3 was down slightly as group banquet revenue fell. In spite of lower volume, margins were up slightly. The margin improvement came from improved profitability in the property restaurant outlets and room service, where margins were up over 300 basis points in spite of lower volume.

As we mentioned on prior calls, outlet profitability has been a particular focus of our asset managers for the past year. So these results are very rewarding.

As a testament to our operators' continuing focus on cost containment efforts in 2010, I wanted to share a few highlights. Portfolio labor and benefit costs in Q3 remained relatively flat from Q3 2009 in spite of higher occupancy. Sales per man-hour improved 6.2% in Q3 and man-hours per occupied room improved 6.3%.

Support cost per available room -- including property level G&A, repairs and maintenance, utilities, and sales and marketing -- were up 5% in the quarter due mainly to bonus accruals and Marriott sales initiatives. These two cost categories negatively impacted margins by 81 basis points.

Our third-quarter property taxes are $1 million lower than the comparable period of 2009 and were positively impacted by the third quarter's successful multiyear appeal at the Renaissance Waverly. We continue to be vigilant in our efforts to minimize property taxes at our hotels and are cautiously optimistic that we will resolve several appeals during the fourth quarter.

Turning to CapEx, we're 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 are budgeting to invest approximately $37 million in the portfolio in 2010.

The owner-funded portion of 2010 CapEx is budgeted to be $7 million, with the balance coming from property-level reserves. In Q3 we invested almost $7 million in the portfolio.

Last quarter we told you we were in the final stages of planning a multimillion dollar renovation and repositioning of our Marriott Resort in St. Thomas in the US Virgin Islands. We have studied and planned this project for the past three years, and have now finalized the plans and are moving into the implementation phase.

The resort enjoys an exceptional location on one of the most airline-accessible islands in the Caribbean. As a US territory, the island requires no passport or customs review of US visitors. And of course the language and currency are familiar.

The $45 million renovation and repositioning of this Marriott flagship resort will dramatically enhance guest experience, providing significant rate potential, and improve operating efficiency and provide dramatic energy efficiency and savings. Key elements of the project are -- a major redesign of the resort pool with state-of-the-art features including multiple pools, cascading waterfalls, Bali beds, a sundeck, and a new swim-up bar, all of which will provide a premium resort experience.

Each of the guest rooms and bathrooms will feature new modern design elements to enhance lighting, comfort, and feel. The renowned interior design firm Leo Daly is the designer for the new guest rooms and bathrooms.

A completely new premium spa will be created at the resort. The plans incorporate the creation of a dedicated spa pool, additional treatment rooms, and visual and sensual elements appropriate for a resort spa experience, enabling the resort to attract high-rated groups who will not currently consider the hotel.

A comprehensive redesign of the mechanical plant will allow the hotel to generate its own electricity, improve airflow in common spaces, and replace package terminal air-conditioning units in the guest rooms with a central system. These enhancements will greatly reduce the energy consumption while dramatically improving the guest experience.

In addition, the project will provide for upgrades to the food and beverage outlets, renovation of the main ballroom, balcony upgrades, renovation to the boat dock, and improvements to other facilities designed to enhance the guest experience. The majority of the renovation and repositioning will occur during the summer of 2011, when the Company will close two of the resort's four buildings -- approximately 300 guest rooms -- during the seasonally slow period between May and September.

Marriott International will participate in the funding of the project with a cash contribution and fee concessions. Once complete, the resort will be one of the premier group and leisure destinations in the Caribbean for years to come. Based on the market work of Ernst & Young, Marriott's feasibility team, and our own expertise we expect this $45 million project to have an internal rate of return of over 20%.

Now on to acquisitions. As Mark said, we have been very active this year.

In Q3 we acquired the Charleston Renaissance Hotel. This 166-room hotel enjoys an excellent location in the coveted Historic District. The $39 million purchase price reflects approximately an 8% cap rate on actual forecasted 2010 NOI.

This opportunity was the result of our special sourcing relationship with Marriott International. It was facilitated by leveraging the contractual right of first offer that Marriott enjoyed under its management agreement. Marriott presented us the opportunity at one of our regularly scheduled acquisition pipeline meetings, which enabled us to negotiate a deal with the owner to buy the hotel before it was marketed to other potential buyers.

Also in the quarter we bought the Hilton Garden Inn in the Chelsea district of Manhattan for $69 million. The price reflects a 7% cap rate on actual forecast 2010 NOI, adding to our presence in the rapidly recovering Manhattan lodging market at an attractive going-in yield. The hotel opened in 2007, has very significant growth potential and no significant capital needs.

Our Minneapolis Hilton, acquired in Q2, is performing as expected. Our $155 million investment represents a 7.4% cap rate on actual forecast 2010 NOI.

For Q3, our three acquisition hotels grew RevPAR almost 19% and house profit margins 322 basis points.

The acquisition market has evolved with each passing quarter in 2010. While we focused on financial distress earlier on, with deals like the Allerton, we are seeing more deals come to market for a wide variety of reasons.

There are a number of opportunity funds that have reached the end of their life and need to liquidate. There are hotels with debt coming due in the next year that cannot be refinanced at the current LTV levels. While not truly distressed, these sellers are very motivated.

Additionally, public REITs with a low leverage model continue to have an advantage over private buyers that have traditionally relied on high leverage, which no longer exists. We intend to continue to work hard and opportunistically to find attractive investments to create shareholder value.

Let me conclude my remarks by reiterating a theme Mark hit on earlier. The strengthening lodging recovery is underway, and our positive Q3 results show that continuing trend in revenue and profitability. As business investment and profitability continue to improve and new supply remains constrained, the lodging industry should prosper for a number of years. Mark?

Thanks. As John noted, operating trends continue to show positive momentum and visibility is improving. Accordingly, we are updating our full-year 2010 guidance.

We now expect RevPAR growth of 3% to 5%; adjusted EBITDA of $135 million to $138 million; and adjusted FFO per share of $0.61 to $0.62. The Company's guidance includes only our period of ownership for the three hotel acquisitions, as well as projected cash interest payments of approximately $2.5 million from our senior loan securing the Allerton Hotel.

In concluding the prepared remarks, let me say that we believe DiamondRock is very well positioned to deliver shareholder value through both internal and external opportunities. Our high-quality portfolio, enhanced by our recent acquisitions, is primed to take advantage of the lodging recovery as well as continue to benefit from thoughtful asset management initiatives like the Frenchman's Reef repositioning.

On acquisitions, the Company has already demonstrated the ability to source strong deals in this market, and our fortress balance sheet enables us to opportunistically pursue deals going forward. With that, we would now like to open up the call for any questions that you might have. Operator?

(Operator Instructions) Jeffrey Donnelly, Wells Fargo.

Good morning, folks. Just a first question about the Westin Boston and the market share gains you had last year. How much of that were you able to hold onto in Q3 2010 versus the market?

And maybe as a follow-up, as you think about next year for that asset in particular, do you put in some expectation that we can continue to see market share get handed back a little bit? So there is growth, just maybe not as strong as the local market?

Yes, Jeff. This is John. There are a couple things going on in Boston. First of all, last year the Back Bay hotels opened the year without as much group business on the books as it turned out that they needed, and so they reversed that strategy this year.

So we were able to gain pretty dramatic market share -- double-digit or high teens double-digit market share last year. Since they went into this year with a lot more group room nights on the books, the market share was -- we gave back some of that market share.

In terms of next year, the phenomenon in Boston for us is the more events at the BCEC the better we do, obviously, because we are attached. So fewer events, even though there are more room nights, tends to be a negative for us, which is what happened this year.

Next year we see a fairly flat citywide pattern. But we still anticipate regaining market share just because of our ability to put room nights on the books this year in group.

That's helpful. Now, if I could I guess switch gear to two other properties, the Vail Marriott and Frenchman's Reef, they just tend to have big seasonal shifts. And with those coming up, are you able to give us a sense of how demand and I guess booking pace is looking for -- looking at those two assets, say in Q4 and Q1?

Yes, Q4 at the Vail Marriott is up dramatically in group pace, over 60%. Frenchman's Reef, is that the other one you asked?

Yes, Frenchman's, yes. I was just curious what you were seeing down there.

Frenchman's is down a little bit in the fourth quarter in anticipation of the renovation. Then of course next year pace is off dramatically because they haven't been booking groups for the third and partial -- part of the fourth quarter.

On Frenchman's, to talk a little bit about your renovation plan, I am just guessing but it sounds like you are upscaling Frenchman's a little bit, or at least maybe bringing it back in line. Are you able to just give us some details on maybe where Frenchman's RevPAR index was versus its immediate peers, or maybe its more aspirational peers?

I guess I know what I am looking for. I am wondering how much higher the rate is, for example, like the Ritz St. Thomas. Because given the presentation you put up online, I was trying to think about how much of that incremental EBITDA you see down the road is coming from taking up the rate structure versus lowering its expense structure.

Jeff, this is Mark. I will take that one. On our website we posted a presentation on Frenchman's and the renovation and what we are seeing -- what we project over the next five years. We think the RevPAR there is opportunity.

We have done -- we have commissioned a study to look at the other resorts. Every island is different, so you really have to use a lot of judgment in doing that review. But looking into a number of other resorts in the Caribbean that we think will be competitive, after we do the spa and the resort pool and get the better room product in there, we think there is a tremendous amount of rate potential at the hotel.

The other thing that is going on with this project, and you will see this on the website, is we think margins are going to get substantially better, mostly due to the $15 million mechanical improvement project that we have at the property. So we are going from the local utility generating the power to a new highly efficient self-generated plant.

We are also getting rid of what they call the PTAC units in the room and doing a central pipe system throughout the whole hotel. Obviously $15 million is a big investment, but we think there is substantial return on that. And that should have a great impact on the profit margins for the hotel going forward.

Sounds great. Just one last question. Can you give us some color on what you are seeing in the single asset financing market? Increasingly we are hearing mores signs of aggressiveness returning to hotel financing. I guess I'm curious what you are seeing, just given some of the acquisitions you have done.

If you have had quotes out there, are lenders looking strictly at debt yields? And I guess where have they moved in the last few months?

Increasingly I am hearing signs of people looking at even stabilized EBITDA 2012/2013 levels. Just wanted to get color from you.

Sure, Jeff. This is Sean. You're right, the secured market has gotten much more favorable over the last eight to 12 weeks.

What we are seeing lenders underwrite to now is anywhere from a sort of 12 or 13 debt yield. We are seeing rate come in at the low to mid 5s.

Sunstone obviously put a great mark in the market with the Times Square loan that they announced a few weeks ago. So we think that the secured market is coming back.

We have also heard from our lenders that hotels are going to be much more acceptable inclusion within the CMBS pools that are going to be announced shortly, which is obviously very favorable for us. So we think the secured market has improved rapidly, and we have been talking to lenders to keep abreast of that status.

The LTVs that we are looking at is in the 60% -- is what people are lending to.

Is that 60% on, say, costs, today's transaction cost?

Yes. Yes, but we had not heard people looking into 2012 to underwrite that. I hope that's true.

Okay. Thank you, guys.

Joshua Attie, Citi.

Thank you. Can you talk about some of the hotels that were a drag on growth during the quarter? Maybe the two in Atlanta, the Chicago Marriott, Orlando -- what caused the underperformance versus the rest of the portfolio and also the market average, and what the outlook is for these properties?

Sure. This is John. In Atlanta, our results are pretty heavily skewed by the Waverly Renaissance which is a large hotel. We have known all year that they had a fairly significant third-quarter group pace issue which they were not able to make up.

It's a unique hotel in that it is a regional group meeting facility. So even its RevPAR index is a fairly inconclusive sort of number. They lost share; but it really depends upon the groups that they are able to put in.

They have been hurt by the new supply in midtown and Buckhead and to some extent the renovations downtown, where those hotels, in a weak market, have gone after groups that traditionally they have not competed for. And the Waverly suffered accordingly.

In Chicago, we suffer a little bit by the financial calendar there. But also because Conrad was up almost 15% in RevPAR, they had some margin challenges with mainly with unallocated expenses.

But the Chicago Marriott had a pace in the third quarter which we knew was going to be somewhat problematic, which held down their results. So Chicago was a little bit soft in that regard.

The Orlando market is a very different situation. The situation there is the resort corridor hotels, which had a very tough year last year, went after group business that is really unprecedented for them to go after. So the airport market suffered, because groups that they traditionally cater to were not available.

Thanks. For Chicago specifically, what -- is the outlook for the next 12 months better? Or does the group issue they had in the third quarter persist?

Well, Chicago first of all gained market share, has gained market share over the past 12 months. So our hotels are doing well within the market.

The market has a fairly flat convention calendar next year. However, the transient pace appears to be on an uptick and we expect that to continue. And we are obviously in the initial throes of the special corporate rate negotiations, so we will see how that turns out.

But in general our Chicago hotel -- and we have instructed it to be aggressive -- is charging rates that are fairly aggressive compared to the marketplace. So that may cause cost it a little bit of occupancy in the short term, but we think it is a good long-term strategy.

So we think Chicago next year will be flat on the citywide calendar, but we hope that the transient trends continue to improve.

Thanks. Can you also talk a little bit about the dividend philosophy and how you plan to determine the appropriate payout as the cash flow improves next year? And also what you think the right structure is in terms of a fourth-quarter special dividend or a more regular payout.

Josh, this is Mark. I will take that one. Obviously the dividend -- we are an income company first. It is obviously a focus of our Company. We want to get back to paying dividends as quickly as practically we can.

It's been a discussion with our Board. We had a Board meeting last week where we discussed it. We have another Board meeting coming up in December. It's obviously a topic.

I think for figuring out the going-forward 2011 dividend, we want to see the 2011 budgets. We will understand where we are on cash and on acquisitions over the fourth quarter. There are some things pending that we are trying to evaluate and see how they play out.

And then on the philosophy, you're right. There's kind of two ways to go.

There is the kind of ratcheting up and paying percentage of your cap, then going forward with that. Or doing something that is going to be sustainable throughout an entire cycle, with a special year-end dividend catch-up, if you will, every year depending how good the results are for that particular year.

Our Board has not made a final decision on which way they think is better. There are merits; there are pros and cons to both philosophies. So we will continue to work our way through and report when we have something to announce on that.

Okay, thank you.

Ryan Meliker, Morgan Stanley.

Good morning, guys. I just had a couple things here for you.

First of all, I was wondering. You guys in the press release gave 1Q, 2Q, and 3Q pro forma RevPAR. Do we have what 4Q '09 pro forma RevPAR was?

Then also, when I looked at -- in the press release you break out your hotel operational data. The other fixed expenses, it may not be a huge number, but it was up almost 60% this quarter after being down I guess 10% year-to-date through the first two quarters.

What was going on there? Is that something that is going to reverse itself in 4Q? Just help me understand what is happening there.

Then the third and final item was incentive management fees went down this quarter, while RevPAR went up and margins went up. Can you give us some color as to what is going on there as well? Thanks.

Okay, so three questions. This is Mark. First on IMF, three hotels are paying IMF in our portfolio in the third quarter. There's a couple others on the brink of potentially paying in 2011. Hopefully more of them do, because it means our properties are doing better.

The bulk of the incentive management fees paid in the third quarter were related to the Chicago Marriott, where the manager there gets 20% of the profits. So we always pay incentive management fees there.

The variation between the third quarter in 2010 and the comparable period last year just depends what hotels are doing better and worse. So each one obviously has its own threshold for paying incentive management fees, and it just happened to be the way it played out between which hotels were performing better and which ones performed a little worse.

I guess to our benefit the ones that were in incentive management fees last year, some of those hotels performed a little worse this quarter. And some of the ones that were stars in the quarter are well below the threshold to pay the incentive fees. So that is the story there.

On 4Q '09 pro forma RevPAR, I think the dollar amount for the RevPAR would be -- we are just calculating here -- a little over $103, if that is helpful.

That is helpful. Thank you. Then the other fixed expenses, can you give us some color on what was going on there?

Sure; this is Sean. The fixed expenses that are up are primarily driven both by our rooms department expenses as well as support costs, which are driven by admin as well as sales and marketing costs. What we are seeing on the cost side is bonuses come back this year under the operating costs that obviously were not paid last year, which had an impact on our margins and our operating costs. As well as the sales and marketing, which is primarily driven by the Marriott properties, who instituted Sales Force One during the year. (multiple speakers) specifically --

So that change in cost isn't something that is going to be coming back out in the fourth quarter? It is not just a move from one Q to the next? We should ultimately expect costs and then other fixed expenses to be going up year-over-year given Sales Force One and all the other items you just suggested.

Well, in the third quarter, there were some true-ups in Sales Force One that are a little heavier in the third quarter than we expect that they will be in the fourth quarter. But there are some ongoing expenses, so we do expect that category to trend higher. But third quarter may be a little heavy compared to the run rate.

Then the other number that went up for both periods is ground rent. That is really driven by the addition of the Minneapolis Hilton where we didn't have ground rent for that hotel historically.

All right. Great. That's helpful. Thanks a lot.

David Loeb, Baird.

Hi, guys. I wonder if you could just give a little more detail on the Allerton and where that is in the process? What you think the ultimate outcome is.

Sure, David. This is Mark. Good morning.

The Allerton, we continue to prosecute the foreclosure. That process according to our local counsel takes a while. We would expect it -- hopefully, if that comes to fruition -- to finally gain fee title of the property next spring would be kind of the normal timeline with all the papers that have to be filed and counter papers and etc.

The mezz lender at this point has foreclosed out the equity so that there is only one person behind us. Petra now holds the equity position.

Our understanding is their goal is to try to sell the hotel and get us paid off. In that event we could pay it off under loan documents. But it's hard to predict whether that will occur or not, so I'm not going to speculate.

But our plan is to continue to enforce our rights under the loan documents, proceed with the foreclosure. And then in the spring if we gain ownership then we will look at rebranding opportunities and repositioning the product.

Okay, but at this point the way it is looking in the spring you may end up just getting paid back.

We could get paid back next week. We are not privy to what their marketing efforts are on a day-to-day basis. They are not keeping us informed.

They are obviously working with several potential buyers. They have asked for payoff notices at various points over the last two months. But at this point there is nothing imminent that we are aware of.

But in the meantime you are getting interest?

Yes, we have collected over $2 million.

Okay, great. Thanks.

Andrew Didora, Bank of America Merrill Lynch.

Hi, good morning, Mark, John, and Sean. Just really had a follow-up on Jeff's question from earlier with regards to the financing markets. Obviously you guys have a pretty conservative balance sheet; 13 of the 23 properties are unencumbered.

When would you consider using some asset-based debt? And maybe if you could, remind us of some of your leverage ratio goals at this point in the cycle.

Sure. I think we are -- we have explored some property-level financing over the last month or so on specific assets that probably had a more stable profile vis-a-vis where they were compared to peak cash flows.

I think we would look into actually putting some of the secured financing into place. Obviously we need to get through our corporate cash first before using secured financing. But our view today is that, assuming the proceeds are where we need them to be, the rates today are attractive for secured financing.

We calculate our acquisition capacity at roughly $200 million, of which about $50 million is -- corporate cash is available for that. So the balance of that is either through secured financing or through our corporate line of credit. So that is sort of where we are on the secured market.

This is John. I would just add that on the secured market, the problem is not interest rates or term; the problem is the value calculations. The V in the LTV is calculated on what we consider to be cyclically low cash flows, and so it's not the most efficient way to lever up.

Then to go through quickly what our leverage policy is, we use a multipronged approach to leverage and just what we believe is the appropriate target leverage for a lodging REIT. Generally speaking, the answer is roughly 35% debt-to-cost.

But we measure that my making sure we've got a minimum fixed-charge coverage of about 1.5 times off trough cash flows. We also have a maximum net debt-to-EBITDA off trough EBITDA of about 7.5 times.

We also have a preference to not have cross-collateralized debt. And we also have a preference to keep at least half of our portfolio unencumbered, and we measure that either through EBITDA, number of hotel rooms -- there's various ways to measure that.

But when you put that all together the answer is roughly 35% leverage on debt-to-cost.

Got it. That's very helpful. Just one last one with regard to the Hilton Garden Inn purchase. Now you guys have three limited-service properties here in New York.

Do you think there are additional opportunities for you to acquire limited-service assets in the market? Or are there any other MSAs where you think limited-service would fit into your portfolio well?

Yes, this is John. I think there probably will be additional opportunities in New York City. There is nothing immediate in terms of existing hotels.

In other MSAs we have been clear that in prime top five to 10 MSA urban markets, that we like the limited-service model because of its ability to attract full-service rates and operate under limited-service cost structures.

Got it. Okay. Thank you.

Dennis Forst, KeyBanc.

Yes, good morning, guys. I had a couple of questions.

There were a couple of one-time charges in the third quarter. I am wondering what the outlook is for the fourth quarter. It should be a pretty clean quarter?

Yes, we are hoping for no hurricanes in the fourth quarter. But a lot of the adjustments -- a lot of them were one-time and we expect them to only be in the third quarter and not the fourth quarter.

The hotel acquisition cost for the Chelsea was in the third quarter?

Correct.

Okay, so that won't fall in the fourth quarter.

Then I needed a clarification. I noticed the Waverly numbers, and you had mentioned the Waverly was a weak number. But the EBITDA this year third quarter was more than double last year's third quarter. What was the one-time charges in the Waverly last year?

This is Mark. The Waverly results are impacted by a real estate tax appeal that came through in the third quarter. So you are seeing that benefit flow through in the EBITDA number.

And how big was that?

(inaudible) margins look good. Sean (multiple speakers)?

It was about $1.5 million. The other one-time thing that is impacting our property schedule is the hurricane costs are also in that schedule. This is a follow-up to Ryan's question earlier of about $1.4 million which is being added back for corporate, adjusted EBITDA, and adjusted FFO.

But in our detailed schedules in the back of the press release that $1.4 million is not -- should not be recurring.

Right. Should not that tax adjustment be an offset to that?

That's fair. But of that $1.5 million roughly, a portion of that -- about $0.5 million -- relates to the current year taxes. It was a multiyear appeal.

Okay, Sean.

So it is reversing things that were booked this year.

Dennis, our philosophy is that real estate taxes change constantly. Assessments come through constantly. So we build those into the numbers that we report. That is just a recurring thing when you own real estate.

Okay. Then lastly a stock comp. Traditionally stock comp is higher in the fourth quarter as you make some true-ups; is that true?

No. No, we record stock comp on effectively a straight-line basis over the vesting period. We have some --

It seemed like last year and I think the year before it was relatively high in the fourth quarter.

Well, the management team has changed both with -- the fourth quarter last year had the impact of our old General Counsel.

Okay.

That's stock comp, as well from Bill McCarten, our ex-CEO.

Got you. So this year should be more normal?

The fourth quarter also for us is a longer -- because we were under the -- go by the Marriott period. So our fourth quarter is actually longer than our third quarter as far as financial reporting. So just by that fact you are going to have more weighting of stock comp in the fourth quarter (multiple speakers).

Okay, but in general stock comp should be normal this year's fourth quarter, where it was not last year?

That's correct.

Okay, great. Hey, thanks a lot.

Dan Donlan, Janney Capital.

Thank you. Just going back to the fourth-quarter numbers pro forma, is there any way you could give us what the adjusted margin was as well? And if you want to get back to me on it, that's fine as well.

We're looking through our schedule right now.

The margin for the fourth quarter last year was about 22%.

Okay. And then --

And that's at the hotel adjusted EBITDA line.

Okay. Right. Then room nights for the fourth-quarter 2010, what are you guys assuming there?

It is 1,231,981.

Okay, perfect. That's it for me.

Tim Wengerd, Deutsche Bank.

Thanks, good morning. I was wondering if you guys could provide some commentary on F&B revenues and what you are seeing as far as trends go. Are guests spending less than you may have expected in the recovery? And what types of guests are spending less or more?

Yes, Tim. This is John. The third quarter the trend was pretty clear. They were -- the group spend was down in both food and beverage, and AV and other ancillary spend. That is naturally a result of groups being put on the books in a weaker economic environment.

What is encouraging there, though, is banquet obviously is the most profitable of the food and beverage components; and even with reduced banquet revenue and reduce overall food and beverage revenue our margins were actually up a bit. They were up 300 basis points for the outlets and for room service, which shows that the efficiency that we have tried to put into these operations is paying off.

But we see that trend probably continuing a bit. If you look at Chicago, the RevPAR was up; their overall revenue was down. That is almost exclusively related to group spend. So there should be a bit more of that as the groups that were put on in the lower economic times work their way through the system.

Okay, great. Thanks. Then another question on the Vail Marriott. The RevPAR was up big-time in the third quarter. I was just wondering; I know you said that room nights for the fourth quarter were up 60%. Is that right?

That is on group pace, yes.

Group pace, right.

It is on a relatively small number, I will add.

Okay. How are the booking windows at the Vail Marriott this year compared to last year? Are you able to get any early read on first quarter?

We haven't had budgets come out yet, so relying on pace, the pace reports look pretty good. The booking windows probably are getting a little longer; but I don't think it's a clear-enough trend to really try and identify.

Probably the most important thing in Vail is some of the state groups that just didn't have the budget to meet last year have been able to meet a little bit more this year. And we anticipate that will continue next year. Those groups tend to come in in the second and third quarters.

Okay, all right, great. Thanks.

James Deitzer, RBC Capital Markets.

Thanks for taking the question. Just have a quick one on the New York properties there. The strong rate growth that we see there, how much of that is the mix shift you are talking about? Or it's just some market benefits there in New York?

Well, it is both. One kind of lives off of the others. So as the marketing improves, you reduce your lower rated, particularly OTA types of business, and replace it with the more traditional corporate business, particularly in the case of Third Avenue.

And then in both Chelsea and Fifth Avenue we have been able to move up rate categories within leisure and other discounted rates as well as a pickup in corporate.

So it is both. As the market picks up you are able to discriminate a little bit better in what business you take.

Okay, thanks. I guess if you are forecasting 20%-plus for the Chelsea property, is that potentially possible there in the other two properties there in New York as well for the fourth quarter?

I think -- yes, the overall New York -- I don't think we are forecasting 20% increase. But overall in the marketplace we expect the fourth quarter to be very strong in New York.

Okay. Thank you very much.

[Philip Lepan], Barclays Capital.

Morning, it's [Shelay]. I was wondering if you could provide some more details on your acquisition pipeline and also if you could talk about how Westin Boston is affecting your full-year guidance, if there is any spillover into the fourth quarter. Thanks.

Okay. On the acquisition side, our pipeline, we are looking at a number of opportunities. We have said in the past we have passed on many opportunities this year as the pipeline builds up.

I would say there is nothing imminent in the pipeline right now. But at the same time things can pop up and become imminent that you don't anticipate. So we have several opportunities that are sort of in a dormant stage.

Then with respect to Boston, the fourth quarter is not as weak as the third quarter compared to last year; but it is slightly down in pace. We think the market share situation, because of the dynamics I explained earlier, could persist into the fourth quarter to some extent.

Okay, thanks.

Will Marks, JMP Securities.

Thanks. Hello, everyone. I just had one question on the guidance. Has it changed at all? It's obviously gone up in terms of how you have worded it. But on the same-store basis has it changed?

No -- well, this is Mark. It's about the same as we were projecting. Third quarter came in as expected and fourth quarter generally has coming in as expected as well at our same-store properties.

Okay. Then in terms of looking out to 2011, when do you see comps starting to get challenging?

This is Mark. They are starting -- on the demand basis the comps are starting to get challenged in the third quarter of this year. But we are seeing a lot of positive trends both on the group and particularly on the business transient side that will hopefully drive rate for next year.

Obviously, they are beginning -- the big brand companies are beginning the special rate negotiations now. It is little bit wait-and-see. The ask is pretty aggressive from the brands.

So the economy continues to kind of -- corporate profits are up, which is a big corollary to how we can increase our RevPARs. We feel pretty optimistic about how next year is going to play out.

Great. That's all for me. Thanks.

(Operator Instructions) Ryan Meliker, Morgan Stanley.

Thanks. Actually my questions were just answered, so I am all good. Thank you.

I show no more questions at this time.

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

Ladies and gentlemen, that concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.