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DiamondRock Hospitality Company (NYSE:DRH)

F4Q08 Earnings Call

February 27, 2009 10:00 am ET

Executives

Mark W. Brugger J.D. – Chief Executive Officer

John Williams – President & Chief Operating Officer

Sean M. Mahoney – Chief Financial Officer

Analysts

Patrick Scholes - Friedman, Billings, Ramsey & Co.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

Mike Salinsky - RBC Capital Markets

William Marks - JMP Securities

Chris Woronka - Deutsche Bank Securities

William Truelove - UBS

David Loeb - Robert W. Baird & Co., Inc.

[David Richter] – ABG Investments

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 DiamondRock Hospitality Company earnings conference call. My name is Dan and I’ll be your coordinator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to our host for today’s call, Mr. Mark Brugger. Please proceed sir.

Mark W. Brugger

Thanks Dan. Good morning everyone and welcome to DiamondRock Hospitality’s fourth quarter and full year 2008 earnings conference call. Today I’m joined by John Williams, our President and Chief Operating Officer; as well as Sean Mahoney, our Chief Financial Officer.

Before we begin I would just like to remind everyone that many of our comments today are not historical fact and are considered forward-looking statements under Federal Securities laws and they may not be updated in the future. These statements are subject to numerous risks and uncertainties described in our securities filings. Moreover, as we discuss certain non-GAAP financial measures it may be helpful for you to review the reconciliation to GAAP in either our earnings press release or our 10-K filing.

Before getting into the details, let me start today by addressing the macroeconomic factors impacting our business and how we view the world. The demand for hotel rooms has decreased significantly as it is correlated with GDP growth, corporate profits and unemployment, all of which are obviously declining. Lodging is a cyclical business and this downturn is going to be deep, but we know that it will end and a recovery will occur at some point. Because of the lack of clarity about the overall economy we are not in a position to provide specific 2009 guidance, but we will provide some relevant information to allow investors to model out their own forecasts.

Turning to valuation, DiamondRock like all lodging REITs has seen a significant decline in its stock price over the last year. Today’s opening stock price implies that our hotel portfolio is being valued at a 14% cap rate on 2008 numbers. To provide some perspective, the historical average cap rate for comparable hotels is probably around 9%. Moreover, our stock price implies a value of $120 thousand per hotel key, a significant discount to our estimated replacement cost of probably $300 thousand per key. In short, we believe that when the economy stabilizes and begins to recover there is considerable upside in our stock price.

Now the results for the fourth quarter and full year were in line with guidance which incorporated our negative expectations for fourth quarter fundamentals. For the fourth quarter the company’s same store RevPAR declined by 9.4% and hotel adjusted EBITDA margins contracted by 327 basis points, which reflected the implementation of tight cost controls during the quarter.

For the full year, RevPAR declined 3.3% and hotel adjusted EBITDA margins declined 201 basis points. Full year corporate adjusted EBITDA was $178.8 million and adjusted FFO per share was $1.48. John will provide more details on specific hotel operations and trends in a moment.

For 2009 DiamondRock is focused on two over arching goals, preserving profits and increasing liquidity. To preserve profits our asset managers are working hand-in-hand with our hotel operators to mitigate the impact of deteriorating lodging fundamentals in order to maximize hotel profits. On liquidity, we entered this downturn with arguably the strongest balance sheet of any lodging REIT. During 2008 we generated debt service coverage of close to three times and our net debt to EBITDA ratio was only 4.8 times.

Our debt maturity schedule is favorable with only two near term debt maturities totaling $68 million and we have a number of options to either repay or refinance those assets given the low loan-to-value ratios of these mortgages, the $140 million of availability on our line of credit and the ability to borrow on one of our eight other unencumbered assets. DiamondRock is uniquely positioned with the simplest balance sheet in the lodge industry and has no preferred debt, joint ventures or OP units outstanding.

We will continue our longstanding efforts to improve liquidity and distinguish DiamondRock as the best balance sheet in the space. On that effort, we recently suspended our quarterly dividend and are evaluating options to pay a portion of stock. We are exploring the potential asset sales although we remain disciplined on our hold values and lastly as proof fiduciaries for our shareholders we will continue to explore all avenues to maintain liquidity in this environment to both defend the balance sheet and be well positioned for growth at the appropriate point in the future.

As for an outlook for 2009, the macroeconomic environment lacks sufficient clarity at this time to provide accurate guidance. However, we did want to provide as much relevant information as possible to assist investors and the analysts in deriving their 2009 estimates.

Here is what we can tell you. In 2008 we generated $191 million of hotel adjusted EBITDA before the $30 million of contributions to our hotel FF&E escrow accounts. This is a good baseline for investors to utilize in making their own assumptions about 2009 hotel performance. For 2009 we project approximately $53 million of debt service, including $4.7 million of principal amortization; additionally, 2009 capital expenditures from corporate cash have been curtailed at less than $10 million; and lastly 2009 corporate G&A’s budget of $16 million which includes only $10.5 million of cash expense. We hope that these data points are helpful.

With that, I’ll turn the call over to John.

John Williams

Thanks Mark. We continued to see operating trends worsen across the portfolio in the fourth quarter resulting in a rare, full year negative RevPAR performance. We clearly see an even rarer industry-wide double-digit negative RevPAR in 2009. Therefore our primary focus for the foreseeable future at DiamondRock will be on improving our already strong balance sheet and intensifying our already aggressive asset management activities to preserve profits.

Today I’ll spend a few minutes on Q4 and full year results for the portfolio and provide some insight into trends we see impacting 2009 results, as well as asset management efforts we’re undertaking. Overall occupancy was down 3.6% and rate was down 4.6% in the quarter. For the year occupancy was down 2.2% and rate was down 0.4%.

In New York, which had held up surprisingly well through October, the market experienced a dramatic falloff in the last two periods of the year resulting in our New York Courtyard’s RevPAR declining 16% for the quarter and 1% for the year. The Atlanta and Salt Lake markets were off around 15% in RevPAR for the quarter and 7% for the year. Griffin Gate, benefiting from the Ryder Cup competition, experienced an 8% increase in RevPAR during the fourth quarter. For the year, only 4 of our 20 hotels showed positive RevPAR over 2007; Griffin Gate, LAX, Torrance and Vail.

Revenue deterioration in our portfolio market segment shows a clear and accelerating trend. Group revenue was down about 2% for the year with a decline coming in room nights with rate up just under 2%. Business transient revenue was down almost 8% for the year and 18% for the fourth quarter with virtually the entire decline attributable to lost room nights. The lost business transient room nights were partially replaced by opening discounted rate categories and increasing contract room nights, particularly at our airport hotels.

With the reduced volume across the portfolio, food and beverage sales were off 3.3% for the quarter and 2.5% for the year. Margins were off only 46 and 80 basis points for the quarter and year respectively. On the cost front, we’re generally pleased with the cost containment efforts from our operators which saved over $5 million for the full year in 2008.

Our largest cost category is salaries and wages. For the quarter salaries and wages were down slightly from 2007. However, benefit costs continue to grow, taking overall wage and benefit costs up 1.4%. For the year, wages and benefits were up approximately 1.8% representing 32.8% of sales.

Support costs including property level G&A, repairs and maintenance, and marketing were down 2.4% in the quarter, reflecting stringent cost controls in the hotels. For the year, support costs were down 1.2%. Utilities were up 6.3% for the quarter and 7.6% for the year. Property tax was up 4% for the year. And incentive management fees were down 12.9% for the year.

In 2008 we completed approximately $80 million in capital projects which together with the almost $200 million of capital we’ve invested in 2005, ’06, and ’07 should position our portfolio to outperform over the next several years with little incremental capital investment required.

As Mark indicated, we’ll not provide specific guidance this year due to the unprecedented lack of visibility about the economy. Clearly the trends indicate a challenging year. Our group revenue booking pace for the portfolio at year-end is down about 7%. We continue to see the pace drop off. Pace was up 5.6% as of Q3. The drop-off is all in room nights as rate continues to be up slightly. The Boston Westin and Chicago Marriott continue to benefit from the meeting space we added at the hotels, with group revenue pace up 15 and 2% respectively.

We’re carefully evaluating each of our markets to make sure that we have the right cost structure for the environment. In establishing our own internal forecast, we started with our operator approved budgets and carefully analyzed booking trends at each of our hotels over the past several years among all market segments. Then, considering local market supply and demand conditions, we have made our own estimates of quarterly revenue at each hotel. Our internal analysis resulted in a significant reduction of the operator budgets to reflect the lack of clarity in lodging fundamentals today.

Our objective is to plan ahead for what we consider the inevitable reductions in our operator forecast as they move through the year and gain a clearer picture of the magnitude of the economic downturn. We’re using our internal quarterly revenue forecast to establish the depth of the operator cost cutting initiatives that are implemented at each hotel. In many cases, these objectives will require operating models new to the management teams and a significant relaxation of brand standards. We’ve received excellent cooperation from our managers at both the property and corporate levels thus far.

We have and will continue to closely monitor capital expenses at the hotel as well. As I mentioned, our portfolio is generally renovated and we’ve minimized future capital expenditure. We will spend only about $12.5 million in new projects in 2009 across the portfolio. In addition, we’ve identified approximately $5 million in energy projects with paybacks of under 18 months. Actual cash CapEx expense because of delayed payment for some projects completed in 2008 will be $35 million in 2009, including the energy projects. However, less than $10 million of that will be owner funded with the balance coming from property level [inaudible] escrows.

In summary, our company and asset management is focused on preserving hotel profits in 2009 through revenue management strategies, aggressive cost containment and reduced capital spending.

With that I’ll turn it back to Mark.

Mark W. Brugger

Thank you John. At this time we’d like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Patrick Scholes - Friedman, Billings, Ramsey & Co.

Patrick Scholes - Friedman, Billings, Ramsey & Co.

This is sort of a hypothetical question but in your press release you had a line in here where you may issue common stock as appropriate. I’d like to just hear in your view what would be a scenario today where you would feel it would be appropriate? You know, what type of asset pricing would you pounce on in order to pull the trigger and issue stock?

Mark W. Brugger

Good morning Patrick this is Mark. I think on the equity issue the point is we have a litany of things there to convey that we have a number of options on liquidity and obviously a very illiquid market. Out of all the liquidity options listed there, equity issuance would be the least desirable especially at this stock price. But I think the point we’re trying to make with the litany is we have a number of avenues that are available to us. Some of those avenues aren’t available to other companies and we would hope that investors would take heart that we have, you know, numerous options to explore on the liquidity front, which we think is advantageous for our company.

We don’t have a set number in our head of with individual hold values for assets, based on our estimate of the future cash flows, based on a number of factors. Obviously we always evaluate our stock price in this environment. We think it’s very inexpensive – that its very cheap at the current pricing and wouldn’t be – would be expensive to issue. So we’re constantly evaluating liquidity options.

Patrick Scholes - Friedman, Billings, Ramsey & Co.

You don’t think there would be a scenario where you know there was just an irresistible bank foreclosure on a hotel out there that you would consider issuing common stock if you needed extra liquidity for that?

Mark W. Brugger

That scenario could play out. I think we would be very reluctant to leverage up the company at this point in time, but if there’s an opportunity to match funds and at the same time potentially de-lever the company, that would be something that we would be interested in.

Operator

Your next question comes from Jeffrey Donnelly - Wachovia Capital Markets, LLC.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

Actually Patrick touched on my question – my first question a little bit, but I guess in the same vein, by our math DiamondRock doesn’t really need to sell assets or issue common equity. But as you know you recently listed a good chunk of your portfolio for sale and as you mentioned you opted to or may opt to issue common equity. I guess I’d say it sends something of a mixed message to the market on how you perceive [inaudible] the equity value of the company. And can you talk a little bit about your rationale for the disposition review? I guess to the extent that you’ve learned anything from the bids you’ve received in thus far?

Mark W. Brugger

Why don’t I let John talk about where we are on our asset sale profit and then maybe I’ll follow up with the balance of your questions.

John Williams

Yes, Jeff we have actually been pleasantly surprised with the level of activity on the 9 assets we recently put out. I think as Mark indicated it’s important to understand that we have hold values for each of these assets and we have no intention of taking a number under our hold value. Some of the activity has been at or above and it’s way too early to estimate or predict a conclusion. But as I say we’ve been pleasantly surprised.

I think it’s also important to keep in mind that all of the litany of things as Mark described are really I think as we explained to several of you really just pricing our options in the event raising cash or equity is important to the balance sheet of the company. As you point out the balance sheet is very strong but in pricing asset sales and in pricing asset financings, we’re just trying to understand the cost of each option.

Mark W. Brugger

And Jeff as far as sending mixed messages, I think our position as we have arguably the strongest balance sheet and the best structured balance sheet in the lodge industry, we want to make sure that we’ve done everything, that we’re focused on liquidity and if we can improve our liquidity in our balance sheet we think that’s a big positive for our shareholders. Obviously we wouldn’t do that at a cost that wouldn’t make sense.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

I know you won’t share the hold values for assets individually but I’m curious how are you thinking about coming up with those? I mean, I would imagine every hotel you’re going to have your individual cash flows for, but I guess what kind of discount rates you’re using on I guess call it un-levered or levered equity on those hotels or? Can you share with us a little bit about how you come up with those?

Mark W. Brugger

There’s a whole methodology and I don’t want to go into too much detail, but essentially it’s a discounted cash flow analysis based on a 5 to 7 year hold. We actually look at a variety of discount rates because we’re in an uncertain environment and we set up a matrix based on that. We use an exit cap rate at the end of the 5 to 7 year hold period, based on kind of historic averages for cap rates looking back over a 30 year period.

And the bigger impact, you know, because there’s such a matrix and such sensitivities has to do with some other things, perspectives we may have on an individual market; a supply issue in a particular market; or you know it may be somewhere where we think the demand generators will be less robust, that where we can redeploy that capital elsewhere.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

Do you know in broad strokes, maybe back in say the early ‘90s where transaction prices for hotels fell to versus what replacement costs were on assets at that time? You know, just roughly and how long it took to not necessarily close that gap but at least narrow it meaningfully?

John Williams

Yes, I’d hate to throw out numbers, Jeff, but as you know the RTC portfolios were going out at $0.26 on the $1 so interpolate from there, but as to how long it took to get back, I mean they survived till ’95 and seemed to hold up pretty well. And I think by ’95, ’96 we saw asset prices back up to kind of historic cap rates.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

You know, year-to-date in 2009 – I don’t know if you’ll share this with us, but what’s been happening in your resort destination with Vail Marriott and the Frenchman’s Reef? I mean conventional wisdom out there is those segments would be hit disproportionately hard, at least on the top line as consumers tighten purse strings. But both hotels seemed to perform relatively well in the fourth quarter I guess on a RevPAR basis. What’s happening there?

Mark W. Brugger

In Vail we had a – actually December was, Christmas week in particular was down from a rate standpoint. We lost some of the pricing power that we’d had in previous years and unfortunately were stuck in a situation where we couldn’t re-price and discount rooms to fill the hotel because it would have meant re-pricing the rooms that were already reserved. So Christmas week was down a bit.

In general in Vail we’re seeing a falloff of group business and we’re seeing a falloff in the highest rated leisure. We’ve been able to replace it very effectively particularly in period 2 with lower rated business, so we’re maintaining occupancy and the hotel’s done a fantastic job of managing flow-through.

Frenchman’s Reef is kind of the same story. Group has been a little softer and we’ve had to go to more discounted leisure business. I think it’s too early to tell about flow-through at Frenchman’s in the early part of this year, but in general the pattern is clear. We lose group in highest rated leisure and replace it with discounted business.

Operator

Your next question comes from Mike Salinsky - RBC Capital Markets.

Mike Salinsky - RBC Capital Markets

In the guidance you did provide for 2009 I was wondering if you could provide one additional detail. In 2008 you guys had a very, very sizable tax benefit. What are your expectations for tax benefit in 2009? Does that resort back to a more normalized level or where does that pen out?

Sean M. Mahoney

This is Sean. The 2009 tax benefit we would expect that we will record some level of tax benefit in 2009. The question that we wrestle with internally is as the tax benefit increases, you know, we need to assess whether that asset will get to a level where we can’t support it anymore. As for a future tax [one] complex, we would expect a comparable level probably a little bit inside of that for 2009, a tax benefit.

But it’s very difficult to predict because the tax benefit is derived from our taxable REIT subsidiaries income, which is determined by the relationship between the revenues of that subsidiary and then EBITDA. So across the industry it’s always very difficult for anybody to predict because the relationship of those two items bears so much on what the tax benefit needs to be.

Mike Salinsky - RBC Capital Markets

And your guidance, too, you’re forecasting a pretty sizable increase in G&A. I was just wondering what the driver was behind that as well.

John Williams

The cash G&A about $10.5 is about 5 or 6% cash increase. Some of that’s due to changes in positions with the company with succession [playing] last year. And the change in the stock [grants] as well as succession based.

Sean M. Mahoney

This is Sean. Almost all of the cash increase year-on-year is a result of we have to budget our executive bonuses at targets, but in 2008 we did not pay at that level. So the delta year-on-year is what’s generating the bulk of the change.

Mike Salinsky - RBC Capital Markets

So there’s a chance that could come in significantly lower?

Mark W. Brugger

Yes. If the bonuses were at the similar level that we anticipate they’ll be for 2008, there would be a decrease in cash G&A.

Mike Salinsky - RBC Capital Markets

John, a question for you. I mean you announced a lot of actions you’ve taken to control costs here. Just what kind of delta should we look for between RevPAR and margin? I mean if RevPAR’s down 15% what do you expect margins? Kind of what’s the flow-through essentially?

John Williams

You know we have really kind of tried to stay away from rules of thumb. We’re looking at it at each hotel and our contingency planning is currently being updated to reflect the operators revised guidance from when the budgets were prepared in October and November and to what the brand companies came out with in terms of guidance in their quarterly reports. So I hesitate to give a rule of thumb.

I will say that the flow-throughs that you’ve heard from other companies reflect a tremendous amount of cost control in the hotels. So that when you hear these double-digit RevPAR decreases and you hear 500 to 600 basis point drops in EBITDA margins, by historical standards that’s extremely good cost control. So we’re striving for, you know, individual hotels to push their costing to the levels that reflect the quarterly, not the annual but the quarterly RevPAR and revenue that we see in the hotels. So it’s a hotel by hotel effort and it varies fairly dramatically among the hotels.

Mike Salinsky - RBC Capital Markets

Last January, February, March you took rooms out of service at two of your larger hotels there. Just wondering how January and February trends attract on a year-over-year basis? And what kind of benefit you’re – if you’re still seeing a benefit from that at the Boston Westin Waterfront and the Marriott Downtown in Chicago?

John Williams

Yes, Boston – this is John, Boston we did not have rooms out of service. As a matter of fact we had very little disruption because that was all in that shell retail space that was unused by the hotel and the disruption was minor. In Chicago it was major and that was – but it was not rooms out of service, it was meeting space out of service. And of course meeting space is critical to booking rooms at that hotel so we estimated about $2 million of disruption there and that’s a very favorable comp going into this year.

Mike Salinsky - RBC Capital Markets

Can you talk about how trends have played out though in January and February? A year-over-year basis for those?

John Williams

Yes, in the first period we saw results that were over budget but dramatically under last year. Sort of just slightly better than our internal forecast, but kind of trends continuing as we saw them in the fourth quarter.

Mark W. Brugger

Were you talking about Boston?

John Williams

Oh, I’m sorry. I was talking about the portfolio.

Mark W. Brugger

Michael, is your question about Boston and Chicago or about the portfolio?

Mike Salinsky - RBC Capital Markets

Yes, more specifically Boston and Chicago. I’m just trying to gauge, you know, how much of a benefit we’re going to see in the first quarter from those 2 being back in services more so.

Mark W. Brugger

Oh, okay. Well in Boston I well tell you that the bookings are up about 15% for ’09. On a quarterly basis, you know, we’re seeing declines from last year but lower than portfolio averages. So that’s benefiting from second and third quarter’s strong city wides in Boston, first quarter relatively soft city wides in Boston, and then of course the additional meeting space.

Mike Salinsky - RBC Capital Markets

And Chicago’s fairly similar?

Mark W. Brugger

Chicago’s not up as much. It’s basically down a little bit versus same time last year across the year as of the first period in terms of booking pace. It was up slightly as of the fourth quarter in booking pace.

Operator

Your next question comes from William Marks - JMP Securities.

William Marks - JMP Securities

I had a question somewhat related, so performance year-to-date you gave a little indication of bookings. Are you willing to give a RevPAR performance year-to-date?

Mark W. Brugger

No, we’re not going to give specifics for – all we have in hand is the first period which really isn’t very indicative. So our concern is that would be misleading to give you some of those numbers. And we don’t have period 2 yet and we’re kind of seeing how first quarter plays out accordingly [inaudible] back to numbers.

William Marks - JMP Securities

On your covenants can you give an update of the figures and then we can do the calculations? But there are some numbers we may not have on the leverage and the fixed charge covenant where you stood at the end of the year.

Sean M. Mahoney

This is Sean. At the end of the year our fixed charge coverage was a little under 3 and our leverage ratio was about 41% as of year-end.

William Marks - JMP Securities

When you say a little under 3, so approximately 2.9 or was it?

Sean M. Mahoney

2.9 to 2.

William Marks - JMP Securities

And for John on asset sales and just the market, is there any way to give a comp? You know you talked about I think Mark mentioned you’re trading at a trailing cap rate of 14% and you know if you’re operating income’s dropping by a third this year – I know you said it’s not, but if I were to say it is then you’re trading at a 9 cap rate, is there any way we could look at what’s going on today and what the market is? I doubt there’s a general rule of thumb but have you seen any transactions you can quote?

Mark W. Brugger

No, there are no I would say comparable transactions that you could look to for the hotels that we’re considering selling. And that’s really the difficulty. I mean there’s still a fairly significant divide between buyer and seller expectations, but in terms of our hold values it’s really based on our view of the future and discounting the cash flows back. And it’s a fairly complicated valuation. So we feel that our numbers are very defensible. They may not bear up to market scrutiny and what sellers are willing to put forth. And that’s fine. It all goes into the pricing the options and what it would cost us to do different things if we need to do it.

Operator

Your next question comes from Chris Woronka - Deutsche Bank Securities.

Chris Woronka - Deutsche Bank Securities

You gave the group pace now, I think you said down 7% on revenues and I think it had been up 5. Is that –should we assume that’s all cancellations since third quarter?

John Williams

No, that’s just a slowdown in the bookings so that as of fourth quarter versus same time last year fourth quarter bookings were down a bit. Now they’re down a bit more after the first period versus again the same time last year. So it’s basically saying that the pick up in the first period was not as strong as the pick up was last year first period.

Chris Woronka - Deutsche Bank Securities

Can you talk a little about kind of the behavior of – especially on the group and the corporate transient side in terms of windows and are they canceling? You know, do you get enough time to try to refill or are the cancellations coming last minute? And are the new reservations coming last minute? Or how is that working out?

John Williams

Yes, we haven’t seen a huge pick up in either cancellations or attrition generally. In some hotels we have. I think that the behavior pattern is the same as it was the last go round which is decisions are made very last minute because many players don’t know if they’re actually going to hold the meetings or what the attendance will be if they do. That triggers certain reactions on the part of our operators, so the uncertainty and the last minute pick up of these groups is fairly consistent with the last downturn, so we know how to deal with it.

In terms of the corporate transient, you know, you’re seeing a drop off in the premium rated corporate transient and they’re seeing a pick up in the government and special corporate areas. But overall room nights are down on the corporate side and that’s been a consistent trend.

Chris Woronka - Deutsche Bank Securities

And then just on the expense side can you – I agree, I think your operators and most of the operators have done a pretty fantastic job thus far. I guess the question is at what point do you kind of run out of A, low-hanging fruit and then B, any other kind of fruit? You know, you’re probably structured for the kind of downturn we’re all kind of expecting now, but if things take another leg down is it – you know, at what point do you kind of run out of room there?

John Williams

Well, the low-hanging fruit is picked and eaten. The additional cost cutting measures are believe me under active consideration right now. And as I said in my statement, the actions we’re asking our operators to take are fairly unprecedented even in 2001 and ‘2 relationships, so it has to do with sort of fundamental operating models as well as brand standards. And for the most part the brands have been very cooperative, but we’re into the fairly significant cuts that in some cases are still unprecedented and we’re discussing them actively.

Operator

Your next question comes from William Truelove – UBS.

William Truelove – UBS

My question is about your CapEx discussion or your sentence in the press release, $30 million for 2009 of which $10 million was going to be funded by corporate or $35 million. Is that going to be the differential funded from restricted cash?

John Williams

Yes. The $35 million is cash in 2009, $10 of that will be owner funded; $25 will be from the escrow reserves at the property level, restricted cash.

William Truelove – UBS

And that’s the restricted cash. Okay. Just wanted to be clear on that.

John Williams

And $5 million of that is return on investment energy projects which have a very, very short payback of anywhere from six to 18 months.

Operator

Your next question comes from David Loeb - Robert W. Baird & Co., Inc.

David Loeb - Robert W. Baird & Co., Inc.

Two things, first a relatively simple one, since you have no units I guess the issues surrounding paying your common dividend in stock are really not an issue for you. I understand the SEC has expressed some concerns about REITs that have upward units paying stock dividends. You would be able to, though, because you have no units, right?

Sean M. Mahoney

That’s correct, David. This is Sean.

David Loeb - Robert W. Baird & Co., Inc.

Second, John this one’s really for you, kind of goes back to – I think Jeff Donnelly had asked about your hold values. We modeled your hotels on an asset by asset basis and applied cap rates that we think are reasonable and there are really 4 that look their asset value based on ’09 cash flow only is actually less than what your mortgages are. Throwing out Chicago Marriott because obviously the cash flow was severely impacted by the disruption and long term that isn’t as much of an issue, are the mortgages on most of the encumbered assets assumable? And would you consider selling those at or close to the mortgage amount?

John Williams

Yes, the fixed rate debt, non-recourse debt on the individual assets is assumable. We have not – you know what we look at from a mortgage standpoint is the debt service coverage obviously. And while we have a couple that are close and one that might be a little under in ’09, the hold value is separately determined and frankly I can’t think of a situation where the hold value is lower than the mortgage value.

David Loeb - Robert W. Baird & Co., Inc.

So even though on my simplistic model it might actually create NAV to give these hotels away, you’re saying in a realistic long term analysis of their value there is positive equity in pretty much all of your hotels and positive cash flow in all but one, so no rush to do anything before maturity anyway. Is that fair?

Mark W. Brugger

This is Mark. All of our – you know half of our portfolio is essentially unencumbered. On the encumbered all of them had good debt service coverage last year. Now obviously the cash flows this year are yet to be determined so based on what we’re looking at now, we wouldn’t – you know we’re going to evaluate that as we go, but we’re not proactively trying to give back any hotels.

Operator

Your next question comes from [David Richter] – ABG Investments.

David Richter – ABG Investments

I am all set. My questions have been answered. Thanks.

Operator

At this time there are no further questions in queue. I would now like to turn the call back over to Mr. Brugger for closing remarks.

Mark W. Brugger

Thank you Dan. Let me conclude by saying that we appreciate your continued interest in DiamondRock and we’ll continue to focus on creating value for our shareholders in this very challenging environment. Thank you again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: DiamondRock Hospitality Company F4Q08 (Qtr End 12/31/2008) Earnings Call Transcript
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