Diamondrock Hospitality Co (DRH) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2010 DiamondRock Hospitality Company earnings conference call. My name is Michael, and I will be your coordinator for today. At this time, all participants are in 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 will now turn the presentation over to your host for today's conference, Mr. Mark Brugger, Chief Executive Officer. You may proceed.

Thanks, Michael. Good morning, everyone and welcome to DiamondRock' fourth-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. As usual, 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 law and may not be updated in the future. These statements are subject to risks and uncertainties described in our security 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.

We are pleased to report that 2010 was a very successful year for both the Lodging industry and DiamondRock in particular. The Company was able to achieve all of its major objectives, including impressive portfolio growth, completing accretive acquisitions, enhancing our already strong balance sheet, and now, returning to paying quarterly dividends. Our internal growth was the result of increased demand in a number of segments, none more important than the return of the highly profitable business transient customer. In addition, group demand improved significantly during 2010. Our premium hotel portfolio was well positioned to capture this increase in demand.

Fourth quarter RevPAR grew 8.3%, with the majority of that growth coming from an increase in average rate. Importantly, we saw pricing power continue to return as 18 of our 23 Hotels were able to increase average rates during the quarter. For the full year, 2010, RevPAR improved 4.8%. Profit margins in the quarter were excellent. The aggressive management was able to drive hotel profitability as a result of vigilant cost containment efforts. Fourth quarter EBITDA margins increased a robust 398 basis points. Even removing the positive impact of property tax reductions, profit margins in the quarter expanded by approximately 200 basis points. For the full year, profit margins were better by 153 basis points. As a result of good top and bottom line growth, the Company generated adjusted EBITDA of $51.2 million for the fourth quarter, and $138.5 million for the full year. Adjusted FFO per share was $0.22 for the fourth quarter, and $0.63 for the full year. It is worth noting that these results exceeded both guidance and consensus.

Turning to acquisitions, 2010 marked the return of an acquisition environment that favored well-positioned public rates. DiamondRock deployed $326 million in four major acquisitions, which ranged from taking advantage of distressed debt opportunity in downtown Chicago to acquiring a core holding in New York City at an attractive 8.5 cap rate. These 2010 hotel acquisitions achieved excellent growth with combined RevPAR increasing 11.5%. Moreover, we continued to execute our acquisition strategy, and subsequent to year-end, we entered into a purchase and sale agreement to acquire a hotel under development in Time's Square. This acquisition will be our fourth hotel in New York City. John will provide more details on these acquisitions as well as our pipeline in a moment.

At this time, we would like to provide an update on our one distressed debt opportunity, the Allerton Chicago hotel. As we previously reported, the loan matured more than a year ago and is in default. We continue to prosecute the foreclosure with the next hearing scheduled for later this month. In the meantime, we continue to collect interest on the loan. We ultimately anticipate one of two outcomes later this year. Either completion of the foreclosure, giving us an attractive cost basis as owner of the hotel or alternatively getting repaid the note in full at a substantial profit.

Now, before turning the call over to John, I did want to touch on the terrific balance sheet. In 2010, we greatly enhanced our already strong balance sheet and today have net debt to enterprise value of less than 25%. Moreover, the Company is very liquid and has great financial flexibility with approximately $200 million of unrestricted cash, 13 of unencumbered Hotels, and an undrawn $200 million Corporate revolver. Our balance sheet will allow us to take advantage of this excellent acquisition market, and as John will discuss, we are looking at an exciting pipeline of opportunities. In addition, we will generate significant free cash flow in 2011, and appropriately, the board has re-instituted quarterly dividends by declaring $0.08 per share payable in cash to our shareholders of record as of March 25. With that, I will turn the call over to John.

Thanks, Mark. The fourth quarter continued the positive operating trends of 2010 with improving RevPAR led for the second consecutive quarter by average rate increases for the portfolio. Pro forma RevPAR increased 8.3% for the portfolio for Q4 to $111.61 as a result of a 4.4% increase in average daily rate and 2.5% increase in occupancy.

For the year, RevPAR was up 4.8%, comprised of 2.7% increase in occupancy and a 1% increase in rate. The increase in portfolio RevPAR in Q4 was driven by improvements in several room segments. Business transient revenue, by far the highest rated segment, was up 14.4%. Group revenue was up 5.7%, and leisure and discount transient revenue was up 3.9%. Lower rated contract and other revenue was up 12.4% in Q4, but represents only 3.8% of our total portfolio room revenue and the increases were concentrated at our three airport hotels. These positive trends in segmentation accelerated throughout the year. As expected, 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 fourth quarter, corporate and premium demand was very strong. Room nights in these two categories increased 19% at a rate 7% higher than Q4, 2009 resulting in a 27% increase in rooms revenue coming from the highest transient rate categories. In addition, special corporate revenue was up over 14% in the quarter. Q4 also continued the positive trend of accelerated short term group bookings. In the quarter, for the quarter, group room nights booked increased 28% compared to Q4 2009. These trends also accelerated throughout the year. 2011 group revenue pace continues to improve. As of Q4, group revenue pace is up slightly versus the same time last year, representing continued improvement from Q1 of 2010, when 2011 pace was off over 15%.

In Q4, pro forma EBITDA margins for our portfolio improved 398 basis points with approximately half of the increase due to successful property tax appeals. For the year, EBITDA margins were up 153 basis points. Cancellation and attrition fees in Q4 were off just 13%, versus 52% for the full year, a dramatic improvement and a strong indication of improved group revenue actualization.

Total food and beverage revenue in Q4 was up 2.9%. Food and beverage departmental margins increased 153 basis points in the quarter. For the year, food and beverage revenues were up 2.2%, with margins up an impressive 168 basis points. The margin improvement in both Q4 and the full year came from improved profitability in the property restaurant outlets and room service, where margins for the full year were up over 400 basis points on just a 1% increase in revenue. For the year, we were able to reduce portfolio kitchen costs by almost $1 million. As we mentioned before, 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 continued focus on cost containment efforts in 2010 , I wanted to share is a few highlights. Portfolio labor and benefit costs in 2010 were up just 1.5% in spite of higher occupancy. Sales per man hour improved 4.7% in 2010 ; man hours per occupied room improved 5.4% for the year; and support costs per available room including property level G&A, repairs and maintenance, utilities, and sales and marketing were up 3.3%, due mainly to bonus accruals and Marriott sales initiatives. Full year property taxes are $4.9 million lower than 2009, after successful property tax appeals at the Atlanta Renaissance and the New York Courtyards, as well beneficial reassessments at our Chicago hotels.

Turning to CapEx, we are fortunate that we entered the downturn with a mostly renovated portfolio, allowing us to appropriately curtail capital spending without negatively impacting business. In 2010, we invested approximately $31.5 million in the portfolio, including $10.6 million of owner-funded capital, with a balance coming from property level reserves. Last quarter, we detailed the $45 million renovation and repositioning project we've developed for the Marriott Saint Thomas Frenchman's Reef Resort. This Marriott flagship hotel will become Marriott's premier group and transient Caribbean resort. The repositioning will provide significant rate potential, improved operating efficiency, and dramatic energy efficiency and savings. We described the key elements of this exciting project last quarter, and we've included the description in our press release. The project will commence May 1 and conclude in October. Two of the four Resort buildings will be closed, approximately 300 rooms, during the seasonably slower period and will impact EBITDA by approximately $5.5 million in 2011.

Now, on to acquisitions. As Mark said, we have been very active this year, we acquired three Hotels in 2010. The 821 room Minneapolis Hilton, the Hilton Garden Inn in Manhattan's Chelsea district, and the Charleston Renaissance. We also acquired the first mortgage secured by the 443 room Allerton Hotel on North Michigan Avenue in Chicago. Two of the four acquisitions were off market. The four acquisitions put $325 million of investors capital to work accretively. We recently announced that we've contracted to purchase at completion development project at 42nd and Broadway in Time's Square. The hotel will be branded and will be between 250 and 400 rooms, representing an investment of $115 million to $180 million, depending upon the final approved room count.

On a pro forma basis, the three acquisition Hotels grew RevPAR 11.5% and EBITDA margins 287 basis points in 2010 , significantly out performing our underwriting. We will continue to be active on the acquisition front and will remain disciplined in our underwriting. The three Hotels bought last year were bought at cap rates on budgeted 2011 NOI of 8.3%. DiamondRock continues to have an exciting acquisition of pipeline opportunities. We are seeing a number of motivated sellers come to market, particularly as debts mature. We anticipate that trend will continue.

Today we are actively pursuing 8 projects with a value of over $500 million. These opportunities are in a broad range of markets such as Los Angeles, Seattle, Denver, Manhattan and Miami. The acquisition market remains very competitive and consummating these and other opportunities will remain challenging, but we anticipate a healthy acquisition environment in 2011, and we have a clear strategy and proving sourcing ability with a proving closing record to capitalize on it. The recovering Lodging market, as demonstrated by accelerating positive trends we've discussed, should persist as increasing business investment, recovering consumer confidence, and constrained industry supply provide a very healthy environment for sustained growth in the Lodging

Thanks. As Joan noted, positive momentum in the lodging fundamentals is continuing and our visibility is improving. We are particularly optimistic because these favorable trends are enhanced by the backdrop of constrained new hotel supply projected to be less than half of its historical average in 2011. Accordingly, our outlook is for the hotel industry to deliver RevPAR growth of 6% to 8% in 2011. We also expect DiamondRock's comparable 2011 RevPAR growth to be in the range of 6% to 8%. Of course, in order to provide investors a clearer picture of the Company's true performance, Frenchman's results are excluded because of the significant disruption from its re-positioning. Based on its RevPAR outlook, we expect DiamondRock rock to generate adjusted EBITDA of $156 million to $160 million, despite being impacted by $5.5 million of renovation disruption at Frenchman's Reef. Accordingly, adjusted FFL is expected to range from $100 million to $103 million which assumes income tax expense of $7 million to $9 million. This translates into adjusted FFO per share of $0.60 to $0.62.

I would note that the guidance does vary from some analyst models we have reviewed. This is mainly attributable to three things. One, share count adjusted for the January equity offering. Two, Frenchman's renovation disruption number, and three, Corporate income tax provisions which are non cash. In concluding the repaired remarks, let me say that we believe DiamondRock is extremely well positioned to deliver shareholder values for both internal growth 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's already demonstrated the ability to source value, enhancing deals in this market, and our strong balance sheet enables us to opportunistically pursue deals going forward.

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

(Operator Instructions)

Your first question comes from the line of Eli Hackle of Goldman Sachs.

Just a question on the acquisition environment -- it's more of a broad based questions -- how do you know as a cycle progresses when the time really is to start slowing down some of the acquisitions and hold off until the next cycle? Last year, maybe it was a little easier as we were clearly in the first year, but as we move in throughout 2011 and 2012, how do you start making those decisions? Thank you.

Okay. Eli. This is John. Thanks for that question.

I think it is all about the underwriting of the assets. As we underwrite the assets, we look at current year, current year trends, and then project that, obviously, into the future depending on what is going on in the local market.In the case of Charleston, for example, Boeing is building a plant to assemble the dreamliner there. Clearly, that's got a multi-year positive impact on growth in the marketplace.

As far as trying to peg the macro trends, we all try to peg the macro trends, and we were fortunate last time we made the last acquisition in Boston a good year ahead of when things really went south. But, I think, we obviously read the macro market along with everyone else, and we pay attention to it, but we put a lot more effort into our local market underwriting and just try and make sure that the trends we see in the local market have some lifecycle.

Our next question comes from the line of William Marks of JMP Securities.

Thank you. Good morning, John. Good morning, Mark, Sean. I had a question, starting with -- you made a comment about leisure, as we go move through the cycle you displaced leisure travel with business travel. I am curious what your portfolio will look like at that point. You have a fair number of leisure assets, but what is the real breakdown today versus what it could be?

I will take that one. This is John again.

In the last peak, we ran about 33% or 34% commercial transient business; we ran about 35% to 36% group with the balance being leisure and other, and I think that is probably where we are headed. I think Minneapolis has probably moved us a little firmer into the group category, but the real swing in the destination resorts is between group and leisure. And that is where the strategy comes in, obviously, as you see leisure weaken, you bulk up on group and vice versa.

But, I would think, as we get back into the next stage of the recovery --I think we will continue to see the trends in business transient strengthen at the expense of lower-rated leisure and other, as well as lower-rated OTA's and things like that.

Okay.

Also, when you listed some acquisition location targets, I think I heard Miami and Los Angeles -- for the most part, though, is it an urban and is a business travel focus, or are you looking at more resort locations, as well?

I think our strategy is pretty well stated. We are looking in urban markets for both business, transient, and convention hotels. We are also looking at destination leisure markets. By destination I mean air service or a very strong and proven drive-in market. So, that is our strategy and that is what we are executing against.

This is Mark.

Just to add, we spend a lot of time -- we continue to spend a lot of time on research and trend-to-target markets. You obviously need to continue to be opportunistic in a competitive market, but there's probably -- there's 20 markets of the top 35 that we've targeted of higher growth that are market to be in, so we use that as a screen as opportunities come in. We probably have a little broader market -- acquisition market targets than some of our peers, but we spend a lot of time trying to figure out what markets we think are going to outperform before we decide to pursue any opportunity.

Okay.

Then just a last question on the guidance. Can you be specific at all on G&A growth? What we should expect to see this year?

Yes. This is Sean.

G&A year-over-year should be relatively flat to 2010.

Okay. Great. Thank you.

Our next question comes from the line of Chris Woronka of Deutsche Bank.

Good morning, guys. Really, a couple of housekeeping things.

Can you tell us how much incentive fees were up for the quarter and how you are thinking of those for '11?

Sure, Chris. This is Sean again.

They were up for the quarter -- it was $2.7 million for the fourth quarter, compared to $1.6 million last year. For the full year, they were up about 19%, 5.2 versus 4.3. In 2010 , IMF was earned in our Chicago, Austin, and Griffin Gate assets. Those assets will continue earning IMF in 2011, plus Minneapolis, Courtyard Midtown, Charleston, and Worthington will all switch over into IMF into 2011, as well, which is reflected within our

Okay. Great.

just based on some rough math, it looks like if we back out the property tax adjustments in the fourth quarter, your hotel expenses were up about 3.5%, that would include the incentive fee increases. Is that 3% plus the IMF difference -- is that a rough ballpark the way we could think about it for this year?

Well, Chris, I think it depends on what you count as operating expenses. If you take it all the way down to EBITDA, I think our expenses were up significantly less than 3%. I will have to get the exact number. If you take it down to house profit, for example, then the 3% may be a pretty good number, but a lot depends on the below the line stuff, including property tax and incentive management fees.

Chris, this is Sean again.

A big driver for 2011 is going to be the impact of property taxes on 2011. It is a double-edged sword in the sense that our fourth quarter we had very positive news on the property taxes. For next year, you are going to have the reverse of that than 2011, which is going to impact our margins about 70 basis points in 2011 because of the reversal effectively of that, of property taxes.

Right, and just to follow-up on that is the next question. How many appeals do you have still going on? I believe you only record the refunds when you receive the cash, is that right?

Correct. When we receive the cash or when we receive legal notification that we have earned the award, we still have appeals on about roughly half of our portfolio. Some of those appeals are multi-year, and we are obviously rigorously going through the appeals there is to make sure that we get the best outcome for the Company.

Okay.

And then, just, finally, on the acquisitions, you mention that you are looking at, are there any fixer uppers in those, or are they all pretty much stabilized?

It runs the spectrum. We've got a -- fixer upper might be a little too strong. We have got some renovation work to do in a couple of them. There is a brand change opportunity in a couple of them and a couple of them are work with existing operators, so it kind of runs the spectrum.

Okay. Very good. Thank you, guys.

Chris, I wanted to clear up one thing. On the below-house profit or the change in operating costs all the way down to EBITDA, I think for the year of 2010 , we were less than 1%, probably a lot because of the property tax, but also I think our operators did a great job of containing cost. I don't have that comparable number for 2011. We will have to get that for

And your next question comes from the line of Jeff Donnelly of Wells Fargo Securities.

Good morning, guys.

Mark, I am just curious on the New York City development that you guys are committed to, New York can be somewhat notorious for construction delays. I am just curious what assumptions you guys have made around timing issues. How confident are you at this early point that it can be delivered in 2013 without any material slips?

Just to give you status update, they are currently in the process for demolition on the site. They are applying for the permits to do the foundation work which they can do despite not having final numbers on the room count, because there are variances they are trying to seek to get a bigger hotel. We feel very comfortable that it will be done in 2013, but nothing is for certain. We have the -- entitlements are there for the base hotel already, so that is behind us, and it is a relatively straight-forward construction project, so 2013 seems like a reasonable delivery date.

And just, that's towards the end of the year, end of that year, I should say?

It is difficult to know, but probably mid-year, give or take.

Okay.

To switch gears, this is for Mark or for John, can you talk about trends in full service per key -- or full service hotel pricing on a per key basis? I know not all transactions are apples to apples, but I am curious of what your view would be on what the increase in per key prices has been over the last, say, 12 months and what you're expecting that could be over the next 6 to 12 months given the transactions that you've heard of brokers bringing to market? Do you have any sense there?

Yes. Jeff, it is difficult to track that because every deal is unique. It feels like things were at a bigger discount replacement cost a year ago than they are today. It is clearly a key metric that we focus on when we look at acquisitions, but it is really the yield and the projected yield, and IRR, obviously, that is most important to us in underwriting, so it is an interesting stats but I think if you look at the data, I know we have a lot of detailed information on a number of deals that we did, obviously, (technical difficulty) but a lot of the ones that we didn't do. And, it is a little too easy to say it is trends in per key versus individual issues or ground leases, a below market or above market management agreement, other things that are impacting those per key numbers.

Okay.

Then, I'm curious, then, sticking with transactions, what are you guys seeing in the resort segment, because that is one of the niches in the market that just doesn't seem to have a recovery in transaction volume or pricing yet? Do you see that turning in the near future?

Jeff, this is John.

I think what we are seeing there is a lot more distress in that resort market. You take Phoenix and Tucson, for example, the Westin in Tucson just went through a bankruptcy reorganization and the price per key that came out of that evaluation was astounding, astoundingly low. In Phoenix, I think they are just beginning to see the beginning of a recovery, so to the extent those assets are able to be preserved through the beginning of a recovery, you may start to see some transaction activity on those, but I think that market was particularly hard hit, and I think people are in a survival mode in that market, so the real pure distress, unless a lender is forced to bring it to market, the real pure distressed properties are probably not seeing the light of day right now.

But is it at a point where you guys think there's opportunities for you to be had or is it just that demand has not filled back in convincingly enough to go after some of those resort assets.

We would definitely go after the resort assets if they become available wither through distress or through a normal sale process. We see that market recovering. As I said, it has been late recovering, particularly in the destination resorts in the southwest, but it is clearly a market we believe in.

Last question -- it's two or three parts to it. Maybe you can give out little comfort on just urban select service properties, specifically their prices and return prospects just because we've seen more and more folks, including DiamondRock going after urban Courtyards and Hilton Garden Inns? And per key prices are understandably outsized versus their suburban counterparts, but I'm just curious, how do you think about replacement prices on those assets versus their full-service counterparts in the same sub-market? Would you guess that for the select service assets, they 10% to 20% lower or more versus a comparable full service asset, if you will?

I will try that, first. I think there are probably a bigger discount to replacement cost on the full service hotels because of the operating costs associated with them. I think on a limited service, we have some pretty good visibility, particularly in Manhattan on what replacement costs are, and I think they are trading at or near replacement costs at this point.

I think the model there that we like so much is the ability to get virtually full service rates with the lower cost limited service operating model, and I think a lot of people see that as well. We did that initially when we formed the Company. We got to two Courtyards very early on in Manhattan, and I think that model has proven to be a very profitable model.

Jeff, I would add, we looked at a lot of data. We think the replacement cost is $400,000 or $500,000 for a limited-service hotel and between $650,000 and $1 million depending on the quality and the FMB and the meeting space for most full-services hotels in New York City, but we are big believers on the limited service in the urban markets like Manhattan. If you look at our EBITDA margins on our limited-services hotels in the fourth quarter, they ranged between 40% and 52% which is astonishing, with average rates for the Courtyards that we had in midtown of over $250, so the rate differential isn't that great and the flow through is substantially higher than what you are see in the full-service hotels, particularly what we are making because we don't have the banquets and outlets. And, many of those outlets actually lose money in the big hotels.

Probably, the second part of my question is then, do you think that compared to their full-service counterparts, that -- I will call it potential profit per key at one of these urban select-service assets is the same or even potentially higher than their full-service counterparts?

Yes.

Okay.

We've looked at data, particularly in downturns because you can manage the cost structure much better. We've seen that the profit per key in the downturn particularly can be much greater than some of these full-service hotels.

Okay. Great. Thanks, guys.

Our next question comes from the line Sule Laypan of Barclay's Capital.

It is actually Sule.

You mentioned your 13 unencumbered hotels and I was just wondering what's your position on eventually leveraging those up in the future to fund acquisitions? And, what would be a target number of hotels that will remain unencumbered?

Sule, this is Sean.

I think it's -- one of the core tenants of our capital structure philosophy is that we want to keep a significant portion of our portfolio unencumbered. That being said, with 13 unencumbered hotels, there is a handful of hotels that in this market, I think, would garner very attractive debt terms today, so that is something we are always looking at and investigating. The secured markets are very active right now. We are seeing LTV's in the 65% range, which would have been unheard of a year ago for the secured market, and it is really a function of the CMBS market heating up again. We are seeing rates in the mid- to high 5%, depending on where the 10 year treasuries -- they have been pretty volatile over the last month or so, but they're -- we feel good that you can get attractive secured financing today on highly stable institutional quality assets, which those 13 unencumbered hotels represent.

Okay. Thanks.

Your next question comes from the line of Bryan Maher, of Citadel Securities.

Good morning.

A couple of quick questions, as it relates to your guidance excluding Frenchman's reef, to the extend Frenchman's reef has profits in the first quarter and the fourth quarter, wouldn't we be adding that in the number that you are putting out as your outlook?

Right. Bryan, this is Mark.

Just to clarify, so we exclude it for the stats when we talk about RevPAR, but it is included for the full year in both EBITDA and FFO.

Okay. Great.

As it relate to the income tax expenses, $7 million to $9 million, what is really driving that?

Sure, Bryan. This is Sean.

There are three big drivers to the increase of the income tax expense on the year-over-year. The first is the obvious of improved hotel operations result in higher income taxes. The second is about six or seven of our leases renewed in 2011. These leases that will renew in 2011 were leases that were entered into in the prior downturn and were generating significant tax losses on an individual lease basis for 2010, which has an impact on the comparability between years; and then the third, is that the leases we renewed in 2010 had to be renewed under the economic outlook at the time of the renewal, which would have been the beginning of 2010 , which was a very negative outlook, so those leases are actually generating above what would be a current market

Okay. Thanks for that.

And then, just, lastly, on the Allerton loan, what, is the old up there? How long do you think that the current borrower can protract this situation?

That is a good question, Bryan. This is Mark.

We have a next hearing set for March. I think the judges in this environment are apt to give borrowers everybody's apples in the foreclosure process, so in March we will have a better feel on how quickly they will go, but they still have appeal rites and it just takes a while to wind itself through the court system in Illinois.

Thanks. That's all I had.

(Operator Instructions)

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

Thanks.

Can we talk about the guidance a little bit?If you exclude Frenchman's Reef, what kind of flow through -- RevPAR EBITDA flow through does it assume for the other 22 hotels at the low end and the high end?

Run margins?

Yes. Or just if the multiple RevPAR is up 6%, what is the growth rate for EBITDA for the 22 hotels?

Well, the guidance supply, if you think about the midpoint, about 100 basis points of margin improvement, and it would be 70 basis points higher except for the tough comp due to the property taxes, if that gives you a better handle on the growth rate.

It helps a little bit. I am trying to figure out what the -- at the midpoint of the guidance, what the EBITDA growth rate would be. If I look at the pro forma -- it looks like the portfolio did $161 million in 2010 of property EBITDA, and if I take that number and I grow it at -- if I assume 2 times flow through, if I take that $161 million, I grow it at 14%, I get to call it $183 million, $184 million. If I take out G&A of what you said it was going to be, $16.5 million, and I take out the renovation disruption of $5.5million and then I add in the loan interest income, I get the $164 million at the midpoint. I am trying to figure out how you get to the low end. What kind of growth rate that would imply for the other 22 hotels?

Josh, this is Sean.

If you look at our expected 2011 results at the midpoint, excluding Frenchman's Reef, you should expect hotel adjusted EBITDA to grow approximately 9% on the RevPAR growth. From a flow through perspective on house profit, it's north of 50% flow through is assumed within the guidance.

So, 9% growth for the other 22 hotels at the midpoint?

Correct.

On 7% RevPAR.

That is right.

And what was -- so, in that $161 million, what was the amount of the property tax refund?

The property taxes -- it varied by hotel, but net-net, our property taxes are going to increase over $5 million next year, and that is driven by our Chicago assets, our New York assets, our Atlanta Waverly asset, as well as the contractual increase in property taxes at our Boston Weston.

So that is the main reason why at that time midpoint the growth is only 9% on 7% RevPAR?

Right. The property taxes are a big driver of hurting our growth on the bottom line next year.

Okay.

I'm sorry, $5 million is the increase, but what was -- if I wanted to adjust that $161 million and make it a normalized number what was the amount of the one time refund that we would back out?

I think probably between $2.5 million roughly would be the -- in the year, for the year, one-time refund that relates to this year. The prior year, about half of that related to 2010 , and the other half related to prior year, so the total refund of close to $5 million, half of which related to 2010 , and roughly half of which related to

And that is why it goes up by $5 million in 2011?

That is right.

Okay. Thank you.

Thank you, Josh.

There are no further questions at this time. I would now like to turn the call over to Mark Brugger for closing remarks.

Thank you, everyone. We appreciate your continued interest in DiamondRock and we 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 good day.