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Executives

William McCarten – CEO

John William – COO

Mark Brugger - CFO

Analysts

Jeff Donnelly – Wachovia

William Marks – JMP Securities

Amanda Bryant – Merrill Lynch

David Loeb – Robert W. Baird & Co.

Chris Woronka – Deutsche Bank

DiamondRock Hospitality Co. (DRH) Q4 2007 Earnings Call February 29, 2008 10:00 AM ET

Operator

Welcome to the DiamondRock Hospitality Fourth Quarter 2007 Conference Call. The Company is hosting a live webcast of today’s call which can be assessed on the Company’s website at www.drhc.com in the Investor Relation section.

Many of the comments made today are considered to be forward-looking statements under federal security laws. As described in the SEC filings, these statements are subject to numerous risks and uncertainties which could cause future results to differ from the expressed or implied by our comments. The Company’s not obligated to publicly update or revise the forward-looking statements. In this call, the Company will discuss non-GAAP financial information such as adjusted FFO and adjusted EBITDA, which it believes is useful to investors. You can find the reconciliation of this information to GAAP in today’s earnings press release which is available on the Company’s website and in the Company’s Form 8-K filed with the SEC.

I would now like to welcome management. With us today is Bill McCarten, Chief Executive Officer; John Williams, Chief Operating Officer; and Mark Brugger, Chief Financial Officer. At this time, I would like to turn the call over to Bill McCarten for opening remarks.

William McCarten

Thanks, Francis. Good morning, everyone, and welcome to DiamondRock Hospitality’s 2007 Earnings Conference Call.

Our fourth quarter and full year 2007 results reflect outstanding year-over-year and are among the best in the industry. In addition to turning in strong operating results, we were able to improve the quality of our portfolio with the acquisition of the Westin Boston Waterfront Hotel in January of 2007 and the sale of our lowest RevPAR hotel at an excellent price in December. For the year, same-store RevPAR increased 9.8%. Same-store hotel level EBITDA was up 15% with margins expanding 162 basis points. Adjusted EBIDTA was $202.2 million and adjusted FFO per share was up 12% to a $1.55.

Our strongest performers were the Manhattan Courtyards, no surprise there; the Conrad Chicago, the Austin Renaissance and the Westin Boston Waterfront, which helped to offset soft performance in Atlanta, our weakest market, as well flow through issues at Frenchman’s Reef.

The fourth quarter was similarly outstanding with same-store RevPAR increasing 9.5% and hotel adjusted EBITDA margins up 136 basis points. Generally, the fourth quarter results were quite consistent with the full year.

In view of the economic environment, our 2008 outlook is best summarized with two thoughts: Cautious optimism and high uncertainty. On the one-hand, several specific indicators provide some measure of optimism. Overall supply growth remains a macro positive, although, it’s important to focus on specific markets. Our group pace is positive with revenue up nearly 6%, and we have not yet seen any indication of an emerging cancellation trend. Nearly 70% of our budgeted group revenue is already on the books, and special corporate rates are up a solid 4%. Finally, our primary managers, Marriott and Starwood remain positive in their outlook.

On the other hand, the economy has continued to soften and the credit markets are worse than they were at the end of last year. Our 2008 group pace, while still solid, had moderated over the past six months. While year-over-year performance was outstanding in the fourth quarter, our portfolio’s month-by-month trend compared with our expectations has consistently moderated since last September.

Taking all of this into account, we expect the Company’s same-store RevPAR to increase 2% to 5% with modest profit growth. We have broadened our range in recognition of significantly lower visibility than in any other time during our brief history.

Mark will review our guidance in a minute; and as he will explain, our estimated year-over-year reflects much more modest RevPAR growth and flow-through, higher disruption and some non-comp issues.

The first quarter’s going to be the weakest of the year because of the seasonality of our hotels, a soft Chicago market in the quarter and the impact of renovation disruption at the Chicago Marriott downtown.

Our capital structure continues to be a great competitive advantage. We have low leverage, excellent liquidity and low cost debt with generally long maturities. We continually evaluate the best value creation opportunities for our investment capacity, but we think the acquisition environment will continue to be difficult as there is a gap between seller and buyer expectations that will likely persist for the balance of this year. While unanticipated, we sleep a lot easier knowing that we are well positioned to handle even a severe market downturn without a liquidity problem.

I’ll now turn the call over to John to discuss our specific property performance, our capital expenditure plans and his perspective on the acquisition market. Mark will then follow with specific first quarter guidance and full year guidance. John.

John Williams

Thanks, Bill. I’ll spend just a minute wrapping up our discussion of the 2007 property results and provide some additional perspective on our expected to 2008 hotel performance.

As Bill mentioned, our strongest 2007 performers were the Conrad Chicago, the Manhattan Courtyards, the Austin Renaissance and the Westin Boston Waterfront. Generally, our fourth quarter results were consistent with the full year; although, Atlanta Waverly rebounded with strong group performance and Torrance was strong with an easy comp because of the fourth quarter 2006 renovation. Frenchman’s Reef had good RevPAR growth but continued to struggle with flow through issues, particularly in the fourth quarter.

For 2008, we again expect our strongest performers to be the Westin Boston, the Manhattan Courtyards and the Chicago Conrad. Our Atlanta hotels are expected to remain soft along with the Chicago Marriott downtown and the Salt Lake City Marriott, both of which will be impacted by disruption.

The Westin Boston Waterfront enjoyed over 14% RevPAR growth in 2007, it’s first full year of operation; and it will continue to ramp-up in 2008, especially with the 37,000 square feet of new meeting space we’re adding. Although the Westin is ramping more slowly than we anticipated, it remains on of our strongest growth hotels over the long-term. Citywide conventions in Boston are weighted towards the first half in the year of 2008, so we have work to do booking second half group room nights; and we’ve just signed a large piece of business for July.

On the transient side, we expect the recently opened Boston Renaissance Hotel to have some impact in the market. However, the transient business in the market is growing ad with the new meeting space, we will not need as much as transient business in 2008.

The Manhattan Courtyards enjoyed premium midtown locations in what remains a very strong New York market. Manhattan will experience fairly significant supply increases over the next two or three years, but it will come primarily on the west side and downtown. Our Marriott Courtyards enjoy solid midtown and east side locations, which should effectively insulate them from the new supply.

The Chicago Conrad continues to show great growth as a result of our asset management initiative to reposition the asset as a 4.5 star hotel, so it can enjoy high rates but still keep good flow through. The Conrad is successfully using the Hilton sales engines to capture Hilton’s high end customers in Chicago. In 2007, we effectively built occupancy at the Conrad and future growth will come in average rate.

In 2007, our Atlanta hotels were up slightly in a generally soft market with renovation disruption at the Westin Atlanta North. Our Atlanta hotels are expected to remain somewhat soft in 2008.

Frenchman’s Reef bottom line performance was disappointing in 2007. Although RevPAR was up by a strong 9%, the revenue mix was unfavorable with moderating group demand leading to group and related transient revenue being replaced by lower rated transient. The property was affected by the coastal resorts in Mexico coming back on line. The 2008 outlook is strong with group revenue pace currently up 14%. We’re also focused on cost controls at this hotel and improving profit margins.

The Chicago Marriott Downtown will be impacted by both a soft first quarter market as well as renovation disruption in the first quarter that will displace $2 million of EBITDA. The first quarter in Downtown Chicago market is expected to be soft generally. In January alone, RevPAR was down 7% in the Downtown Chicago market compared to the same time last year. In addition, with the ballrooms out of service, we displaced 7,000 group room nights in January and early February. The lobby renovation has displaced higher rated corporate transient demand, which we’ve replaced with discounted transient impacting the transient average rate in the quarter. Chicago has several new hotels coming into the market in 2008 and 2009, which will have some impact on both our Chicago hotels. Again, the 17,000 square feet of new meeting space at the Chicago Marriott will mitigate the impact of the new supply.

The Salt Lake City Marriott is being impacted by the adjacent development of a $2 billion mix used development called City Creek Center, which when complete will be of enormous benefit to our hotel.

Because of concern about a slowing economy, we’ve already worked with our operators to devise very specific contingency plans for each of our hotels. I’ve been through several cycles in my career and it’s difficult to predict exactly how this year will play out, but we don’t want to overreact. Although we have already begun implementing some of the action items on our contingency plans and we have a whole other level of contingency plans identified, we do not yet see enough softness to implement the more draconian measures. We’ll continue to monitor each hotel’s performance closely and respond quickly and appropriately if we see the business levels deteriorate.

Our capital expenditures came in at $64 million in 2007, about $15 million below our previous estimate. This was primarily due to shifting of some expenditures into the first quarter of 2008. The major projects in 2008 include the completion of the renovation programs at a number of our properties, most significantly the $35 million renovation and meeting space addition at the Chicago Marriott and the $19 million addition of meeting and exhibition space at the Westin Boston Waterfront. These two major projects will be completed on budget and as scheduled, March 7th in Boston and April 8th in Chicago. As you may recall, Marriott is making a non-recoverable contribution of $10 million towards the Chicago project as part of its brand enhancement program. We’ve begun construction on a conversion of an outdated night club at the Austin Renaissance Hotel to a valuable ballroom and catering facility. That project will be on line in the third quarter of this year.

We expect total capital expenditures in 2008 to cost between $70 and $80 million. The Chicago Marriott and the Westin Boston Waterfront projects, which will be completed in the first quarter, represent about half of that total. We also plan to complete the room renovation of the Conrad in the first quarter, a ballroom renovation at Atlanta Alpharetta over the summer and an $8 million guestroom renovation at the Salt Lake City Marriott beginning in the fourth quarter.

Out group booking pace trends remain good, up 6% in revenue over the same time last year. We’ve seen a slowdown in pace, but we have seen no unusual group cancellations or shrinkage; therefore, although we’re watching carefully for indications of softness, we’ve not yet seen it in a measurable degree. Approximately 70% of the group revenue budgeted for 2008 is already on the books. On the cost front, we expect support costs to go up around 6% in the year, including about 7% in utility expense. Salaries, wages and benefits are budgeted to increase about 6.6%, which is a reflection not of only of higher wages and benefit rates, but also reflect the significant increase in banquet and catering volume and man hours resulting from our new meeting space in Chicago, Boston, Austin and Griffin Gate. We estimate that property taxes will be up about 12% for the year.

I did want to touch on the hotel acquisition market. As a general observation, it seems that we’re in a bit of a pause and there’s a gap between seller expectations and buyer expectations that will likely persist for some time. Cap rates are adjusting, but slowly. We clearly see much more movement in cap rates of hotels located in secondary and tertiary markets. It’s our opinion that cap rates will end up 50 to 100 basis points higher in urban and desirable resort markets and 100 to 200 basis points higher in secondary and tertiary markets. Although there are some interesting deals on the market, pricing still has not stabilized and we’re unlikely to find an appropriately priced hotel acquisition for several quarters. We’ll continue to look, but this is time to be very prudent.

With that, I’ll turn it over to Mark for more details on our 2008 outlook.

Mark Brugger

Thank you, John. As Bill mentioned, we are in an uncertain economic environment and accordingly have spent considerably more time than usual in studying macroeconomic indicators and demand factors in determining our RevPAR guidance. We focus very carefully on each of our segments to forecast demand. Our portfolio segmentation is 36% group, 26% leisure and 38% business transient and other.

As John talked about, the group segment continues to show strength as we already have contracts covering 70% of the 2008 budgeted group revenue. Leisure demand is going to be heavily influenced by the softer general economy and we expect reduced demand in resort markets like the Caribbean, but we do see strength from the high-end leisure traveler at Vail and the foreign leisure traveler in New York that is benefited by the weak dollar. The last piece of the puzzle is the business traveler who is often the hardest to forecast. As you know, the slowing economy is putting pressure on corporate profits in a number of industries and inevitably this will moderate the robust business transient demand we have enjoyed for the last several years. We anticipate that the business traveler will get increasingly rate sensitive as the year progresses and companies potentially reduce their travel budgets.

Demand in all segments will be impacted by renovation disruption. In 2008, we expect total renovation disruption in our portfolio to be approximately $2.5 million or $1.5 million more than last year. Putting all these pieces together, we are forecasting RevPAR growth of 2% to 5% and are expecting same-store hotel adjusted EBITDA margins to be flat to last year to down 100 basis points. Margin growth is negatively impacted by several non-recurring items in 2007 that I will discuss in a minute. Adjusted EBITDA is expected in the range of $196 to $209.5 million and adjusted FFO per share to be between $1.60 and $1.69.

Our guidance assumes that house profit margins can be maintained flat to last year at the midpoint of our guidance with a 50 basis point impact at either end of our RevPAR range. There are various levels of savings from the implementation of our contingency plans built into these major assumptions. Additionally, our guidance takes into account that several cost categories below house profit will increase at rates will above the midpoint of our guidance, including incentive management fees up 11%, energy up 7% and property taxes up 12%. We do expect some benefit from moderating property insurance rates in 2008.

As I mentioned, hotel adjusted EBITDA margins are negatively affected by some non-comp items, namely the non-recurring yield support and incentive management fee holidays that benefited our 2007 results by $1.5 million. These non-recurring items coupled with the incremental renovation disruption negatively impact our 2008 adjusted EBITDA margin growth by approximately 50 basis points. Moreover, the Company’s year-over-year adjusted EBITDA growth is negatively impacted from both the sales of SpringHill Suites Buckhead, which contributed $2.4 million of EBITDA to our 2007 result, and from lower interest income, which the Company projects to be $1 million less in 2008.

On the positive side, the moderating revenue growth will benefit FFO as we expect to pay less taxes. In fact, at the midpoint of our guidance, the Company’s tax provision swings from $5 million expense in 2007 to a $3 million benefit in 2008.

Turning to our first quarter: It will be the weakest of the year due to the seasonality of our hotels as well the major impact of the Chicago Marriott Downtown, which is both under extensive renovation and experiencing a soft market in the quarter. The Chicago Marriott will actually generate $4 million less in EBITDA for the first quarter 2008 than it did in the first quarter of 2007.

For our entire portfolio, including hotels under renovation, we expect RevPAR growth in the first quarter to be flat to negative 1%, adjusted EBITDA to be in the range of $28 to $30 million and FFO per share to be in the range of $0.21 to $0.24. I would like to point out that the first quarter represents only 17% of our total revenue for the year, and four our hotels that report on a monthly basis contains only results from January and February.

Lastly, I wanted to comment on our dividend increase and capital structure. Our solid cash flow and conservative balance sheet facilitated our Board of Director’s decision to authorize an increase in our quarterly dividend by over 4% to $0.25 per share. The increased dividend is well covered and represents a payout of about 70% to 75% of our cash available for distribution in 2008 and represents a competitive yield of over 7.5% based on our current stock price.

Turning to our capital structure, going into 2008, we have one of the best balance sheets in the industry and we see it as a significant advantage over some of our peers. We have low leverage with debt to EBITDA of four times. Our debt is almost entirely fixed at an average interest rate of 5.6% with generally long-term maturities. We have excellent liquidity with a $200 million credit facility, as well eight unencumbered hotels that can be financed at any time. As so mentioned, we will continue to evaluate the best ways in which to create shareholder value with our balance sheet capacity over both the short- and long-term.

Not let me turn it back to Bill.

William McCarten

Thanks, Mark. To wrap up, we believe that DiamondRock is well positioned going forward at this stage of the lodging cycle with a great balance sheet and a portfolio of 20 high quality hotels that are concentrated in gateway cities and destination resort locations.

With that, Francis, I think we’re ready to open the line up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Jeff Donnelly with Wachovia. Please proceed.

Jeff Donnelly – Wachovia

Good morning, guys. John, actually if I could start with you, I know you touched on this in your comments, but I guess talk a little bit about hotel pricing. Rather than transactions that you’re seeing, can you talk about I guess what private owners are thinking right now about valuation? I know you’re pretty well connected in the industry and I’m sure you’ve had the benefit of some conversations with folks like that. I’m just curious where their heads are at right now and how they think about values.

John Williams

Jeff, as I mentioned, I think owners are not yet, have not yet come around to the view that there’s going to be significant move in cap rates. I think they recognize in secondary and tertiary markets that cap rates have moved, but I don’t think there’s been enough evidence yet of actual transactions to prove that urban and resort locations will move as well. I think the other key thing in this market as opposed to maybe the last couple of downturns, if this is a downturn, is that there’s a complete lack of distressed real estate on the market. In other words, the sellers out there are really opportunistic sellers. There’s nobody who’s under a great deal of pressure, some in varying degrees obviously, but no one who’s under a great deal of pressure to sell, so there haven’t been the distress sales which generally lead to a major move in valuation.

Jeff Donnelly – Wachovia

I’m curious, though, does that tell you that if they’re I guess not expecting to see any impact on their property values. Nevertheless, I’m sure there are a lot of folks out there that have maturities on their balance sheets in the next 6, 12, 18 months. Do you personally think that we are going to see the stress situation emerge in the next 12 to 18 months? I guess as a follow-on, do you think that could provide attractive investment opportunities for you guys, either in hotel assets or perhaps even hotel debt to the extend you’d consider that?

John Williams

Well, we’re trying to keep our options open, Jeff, in the event that there do become some distressed situations. I think that the level of debt on some of the private equity transactions in the past couple of years would indicate that if there is a turnover required or if there’s a sever downturn, there may be some pressure there. But they generally tend to have the strength in the equity to be able to withstand those, just like the last kind of downturn in the industry, there wasn’t a kind of distressed situation that you saw in the early ‘90s with the S&L crisis. So no, I don’t see a tremendous amount of distressed sales, but there could be some level of that; and we’d like to keep our options open to take advantage of them.

Jeff Donnelly – Wachovia

Just two last questions: One is on group meetings and even transient bookings that you guys are seeing, what observable trend has there been, or has there been one, on I guess I’ll call it “out of room” spend or FEB revenues beyond just the room rate? Has anything emerged there where you’re seeing guests become a little more frugal?

John Williams

Yeah, that shows up in the group mostly and only anecdotally have we heard that there may be some of the event planners, for example, who are getting together with the meeting planners for the first half groups to categorize their spend have reported that some of the groups are leaning towards the minimum spend under their food and beverage contracts. So that would be an indication that there’s some weakening in the out of room spend. But there’s no consistent pattern that we’re seeing. It’s sort of anecdotal.

Jeff Donnelly – Wachovia

Is that, though, where I guess you guys are dialing back your margin expectations most significantly is because of that or is more in the room rate side?

John Williams

Well, that’s definitely a factor, but I would say we’re dialing it back kind of equally between RevPAR and food and beverage.

Jeff Donnelly – Wachovia

Last question actually for Mark on Chicago. I just want to clarify your comments in your press release on the Downtown Chicago Marriott, so I guess bear with me if it requires answering me like I’m a six-year-old. The Chicago Downtown Marriott, you said you will generate $4 million less in EBITDA in Q1 and if I’m hearing you right, that’s split between $2 million in disruption for the renovation and I think another $2 million for I guess business that couldn’t be replaced or what have you. Just be clear, does that imply that means on a full year basis that asset will be down $4 million year-over-year?

Mark Brugger

No, these other quarters are actually up. I mean the group booking pace there for the quarters two through four is actually pretty good, so we’re expecting, it’s the way the citywide layout that we had a great Q1 in 2007. The way the citywides and some other groups layout is not repeating in 2008 for that quarter, but the second quarter looks extremely strong and we see strength in the second and fourth quarter in particular this year.

Jeff Donnelly – Wachovia

So is it possible that asset could just finish flat to up to the year?

Mark Brugger

Yeah, we’re currently (inaudible) it’s going to finish modestly up.

Jeff Donnelly – Wachovia

Thank you.

Operator

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

William Marks – JMP Securities

Great. Thank you and good morning. I was wondering on, just on the guidance, you took the, I believe the RevPAR guidance down from 6-to-8 to 2-to-5, which is probably as big of drop as we’ve seen and I’m wondering if anything has changed since besides the environment? Were any of these projects not planned that you’re working on? What really, I can make some guesses, but can you just tell me what changed things in general over the last three months?

William McCarten

Let me just add a couple things to that. Yeah, we did come out with 6 to 8. I think brand managers were a bit higher back then in the fall too and that guidance was in September, early October, so it’s hard to separate some of the specific budgets on the properties today versus from the overall look in the economy. Clearly the economy has continued to soften and deteriorate during that period of time, so that’s been the lion share of that. Our sense back in the fall, Will, was that given the makeup of our portfolio that we would outperform by about 100 basis points of the broader brand portfolios and generally we still think that. I think Chicago, the disruption in Chicago is perhaps higher than we hoped for and the softness in Chicago in the first quarter is having a fairly significant impact in our total portfolio, clearly for the quarter but even for the year. Downtown Chicago Marriott will probably have close to a 70 basis point impact on the RevPAR growth. So it was a really combination of all those things. Chicago’s the one thing that comes to mind in terms of any specific changes. Frenchman’s was a big disappointment in the fourth quarter, which we talked about and is of concern from a flow through standpoint again also in ’08.

William Marks – JMP Securities

Great. Thank you. In terms of the guidance for ’08 specifically, there’s some markets I think that you’re in that are still very strong, and you mentioned Boston and clearly New York has had good RevPAR to date. Are you expecting a slowdown in some of the stronger markets in your guidance?

John Williams

I think we are generally expecting a slowdown in even the stronger markets, but we’ve got pretty good visibility on particularly Boston and Chicago, so I guess New York is one we’re cautious about. We haven’t seen it yet. We see some replacement for some of the… Well actually, we’ve only seen one major corporate account basically disintegrate which we were easily able to replace. But at some point that the debt, if you will, gives us concern.

William McCarten

Will, even the stronger markets are going to, we do believe they’re going to be more moderate than last year. 10% RevPAR growth, which is roughly where we came in, is really great and very unusual. Even without some of the more recent happenings with the economy, we would have expected some moderation. Well, New York, for example, we believe will stay strong with some caution. We’re still not, wouldn’t be expecting mid-teen RevPAR growth in 2008 there, still well, well above historical averages but not in the mid teens.

William Marks – JMP Securities

Great. Thank you very much.

Operator

Your next question comes from the line of Amanda Bryant with Merrill Lynch. Please proceed.

Amanda Bryant – Merrill Lynch

Great. Thanks. Good morning. I just have two questions for you. First, what does the 2009 convention calendars look like in Boston and Chicago versus 2008? Then the second question would be: What would be the likelihood that you will sell any additional hotels this year. Thanks.

John Williams

Amanda, this is John. In those two markets, Boston is more or less flat, but the trends are a little bit different. In ’09, the bookings at our hotel are dramatically up in 2009; there are a lot of reasons for that. They’ve been selling that hotel for a fairly limited period of time and I think there efforts are really kicking in in ’09 in a big way. But also the city is weighted in different quarters. This year it’s kind of heavily weighted in the first two quarters, which is great because that’s a normally a soft time. But it also impacts the rate because it’s traditionally a lower rated period than the third and fourth quarters.

In Chicago, 2009 has been trumpeted to be a fabulous convention year since 2005, really, and we have no indication that that’s softening in anyway. The patterns are good. The citywide totals are good, and our in-house bookings are quite strong in Chicago for 2009. So that creates all kinds of pricing opportunities. Based on the compression of the citywides and the strong in-house groups, that creates all kinds of pricing opportunities on transient and where you position your rate for the balance of the segments. So in those two cities, it’s a good story. In Chicago, it’s a great story.

Amanda Bryant – Merrill Lynch

Then with respect to your maybe willingness to sell any additional properties this year.

John Williams

We are in the process of, as we do every year, prioritizing our portfolio. We sold Buckhead in December. There are a couple of hotels that we’re considering right now and one of the things we’re considering is how we redeploy those funds if we were to sell the hotels. So yeah, we’re constantly evaluating it. We’ve not identified any specific disposition at this point.

William McCarten

The cautionary note is sort of the disconnect in the marketplace right now in terms of valuation, so we’d have to be comfortable. The one we sold in December, the SpringHill Suites, we think we got a great price for it. Hopefully that won’t be unique, but we got a price and it will really depend on valuation.

Amanda Bryant – Merrill Lynch

Then I guess you’re testing the market now in essence and if you feel like you get a decent price, you’d be more than willing to let something go.

Mark Brugger

Amanda, this is Mark. We’re evaluating and getting opinions of value on a few assets, but we haven’t gone to market with any other assets at this point. We’re not past the market currently.

Amanda Bryant – Merrill Lynch

I understand. Thank you.

Operator

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

David Loeb – Robert W. Baird & Co.

Yeah, just a quick follow-up on Amanda’s question. John, given what you said about cap rates, does that make you think that asset sales are somewhat unlikely given where you see values fit in?

John Williams

It depends, David, I would have to say. I don’t want to be equivocal, but it’s… So many factors go into whether or not you sell an asset. It’s impact on the portfolio; it’s impact on our growth, our ability to redeploy the funds all factor into it. If we could sell an asset, a slow growth asset and we could get an eight cap for the asset, we may very well choose to do that given the current capital environment and alternative uses of that capital. But we’re not going to sell anything that we think has growth in it that would warrant hanging on to it for the benefit of the portfolio.

Mark Brugger

David, this is Mark. The SpringHill Suites Buckhead we sold in December is really the perfect example. It was our lowest RevPAR hotel. It had zero growth in 2008 [sic]and we find a buyer that we would pay us what we considered extraordinary price. So that’s our ideal disposition.

David Loeb – Robert W. Baird & Co.

I know you probably don’t know the answer, but what they were thinking?

William McCarten

They saw potential obviously.

David Loeb – Robert W. Baird & Co.

That’s very political. John, on Chicago supply, there’s a lot of luxury coming into the market, does that affect your thinking about the Conrad or do you think you’ve moved that hotel in the right direction given where that’s coming, or do you see that supply being competitive?

John William

We see great potential in the Conrad. The location of the Conrad is so superior and the way it’s positioned right now as sort of the 4.5 star Hilton product in Chicago gives it a tremendous depth of both group and transient demand to pull from. So yeah, there is the Trump coming on and actually there are more limited service hotels coming on. But we are not concerned at this point about the new supply in Chicago with regard to the Conrad. We think there’s a tremendous growth opportunity at the Conrad, a tremendously deep pool of Hilton room nights to draw from.

David Loeb – Robert W. Baird & Co.

Great. Kind of generally, what kinds of things do you think could go wrong that would make it challenging to hit the low end of your guidance or where do you think there are opportunities in the other extreme that you could beat in ’08?

John Williams

I think it’s really a question of the economy more than anything. Clearly the low end of our guidance does not really assume a significant recession. It clearly assumes lower GDP growth and 2% but not that much lower, but it really doesn’t assume us going negative. So it’s really the economy and what’s going to happen there.

David Loeb – Robert W. Baird & Co.

Thanks.

Operator

(Operator Instructions) Your next question is from the line of Chris Woronka with Deutsche Bank. Please proceed.

Chris Woronka – Deutsche Bank

Good morning, guys. Just if I could drill down a little bit more on the, really on the margin issue, but you mentioned that you’re expecting a fairly big ramp in salary and benefits cost on staffing. I mean if the transient business is declining a little bit, I guess I’m just trying to understand a little bit better where you’d be staffing up or if the higher margin banquet business is increasing kind of understand a little bit better the staffing relationship with that. Thanks.

John Williams

All right, I’ll take a crack at that, Chris. If you think about it, the meeting and banquet space that we’re adding, I was just trying to do it quickly in my head, it totals probably around 75 or 80,000 square feet across the portfolio and the banquet volume associated with that is going to be great. As you know, banquet profit margins are higher than other food and beverage profit margins, but they’re significantly lower than rooms, obviously. So the level… If you can consider a normal banquet operation has about a 40% payroll cost associated with, and these are very round numbers, you can imagine that the increased revenue is going to create significant increased man hours, disproportionately to normal growth year-over-year because of the 75 (inaudible) meeting space.

Chris Woronka – Deutsche Bank

That’s helpful. Thanks.

Operator

Your next question is a follow-up from the line of David Loeb from Baird. Please proceed.

David Loeb – Robert W. Baird & Co.

Just one more if you don’t mind. On Boston, John, can you just give us an idea about what kind of return you expect on the $19 million that you’re investing, and when do you see, starting to see incremental revenues in cash flow as a result of having that meeting space on line?

John Williams

Well we underwrote that, David, we underwrote it pretty conservatively. It’s about a $19 million project. It gets us about 37,000 square feet of incremental space. Now a chunk of that is exhibition space, so that’s not high yielding space. But overall it was well north of the 20% internal rate of return, and I think it was in the first full year of operation. We’ll feel the first initial benefit obviously when it opens in March. But the full year impact in 2009 will be when the north of 20% ROI would (inaudible).

David Loeb – Robert W. Baird & Co.

So you think, you’re talking about on the order of $3.5 to $4 million.

John Williams

Yeah, I don’t remember the specific number, but it was a combination of about 11,000 room nights, incremental room nights, plus the associated catering and banquet revenue.

David Loeb – Robert W. Baird & Co.

Some of that will start this year, but you think that ’09 is the better year for that.

John Williams

Yeah, a big chunk of it will start this year because we’re bringing it on line just as prime season comes in, so we expect a nice return on it this year. Again, I’m going from memory, I remember this, it was well north of 20%, which is our hurdle rate.

David Loeb – Robert W. Baird & Co.

Great. That’s all I had. Thanks.

Operator

There are no other questions in the queue at this time. I’d like to turn the call over to Mr. Bill McCarten for closing remarks.

William McCarten

One clarification we had to one of our answers was on Downtown Chicago. I think Jeff may have asked what the (inaudible) for the total year was and whether our profits were going to be up. I think after the disruption, the revenues are up some and the profits are about flat.

Mark Brugger

Jeff, this is Mark. Just clear, on the revenue line what the renovation and the market impact is up maybe slightly and then on the bottom line it’s up slightly if you take the $2 million adjustment for the renovation impact. So I just want to make sure we were talking apples-to-apples. So with that…

William McCarten

Well thanks a lot for your interest and we look forward to talking to you again. Bye.

Operator

Thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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