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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2008
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 001-32514
 
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
 
     
Maryland   20-1180098
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
     
6903 Rockledge Drive, Suite 800
Bethesda, Maryland
(Address of Principal Executive Offices)
  20817
(Zip Code)
 
Registrant’s telephone number, including area code: (240) 744-1150
 
Securities registered pursuant to Section 12(b) of the Act:
 
         
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $.01 par value     New York Stock Exchange  
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for these purposes, but without conceding, that all executive officers and Directors are “affiliates” of the Registrant) as of June 13, 2008, the last business day of the Registrant’s most recently completed second fiscal quarter, was $1.1 billion (based on the closing sale price of the Registrant’s Common Stock on that date as reported on the New York Stock Exchange).
 
The registrant had 90,050,264 shares of its $0.01 par value common stock outstanding as of February 27, 2009.
 
Documents Incorporated by Reference
 
Proxy Statement for the registrant’s 2009 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2008, is incorporated by reference in Part III herein.
 


 

 
DIAMONDROCK HOSPITALITY COMPANY
 
INDEX
 
                 
        Page
 
      Business     3  
      Risk Factors     10  
      Unresolved Staff Comments     27  
      Properties     28  
      Legal Proceedings     41  
      Submission of Matters to a Vote of Security Holders     41  
 
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     42  
      Selected Financial Data     45  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     47  
      Quantitative and Qualitative Disclosures About Market Risk     67  
      Financial Statements and Supplementary Data     68  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     68  
      Controls and Procedures     68  
      Other Information     68  
 
      Directors and Executive Officers of the Registrant     68  
      Executive Compensation     68  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     68  
      Certain Relationships and Related Transactions     68  
      Principal Accounting Fees and Services     68  
 
      Exhibits and Financial Statement Schedules     69  


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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
Certain statements in this Annual Report on Form 10-K, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Item 1A “Risk Factors” of this Annual Report on Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
 
References in this Annual Report on Form 10-K to “we,” “our,” “us” and the Company refer to DiamondRock Hospitality Company, including as the context requires, DiamondRock Hospitality Limited Partnership, as well as our other direct and indirect subsidiaries.
 
PART I
 
Item 1.   Business
 
Overview
 
We are a lodging focused real estate company that owns, as of February 27, 2009, twenty premium hotels and resorts that contain approximately 9,600 guestrooms. We are committed to maximizing stockholder value through investing in premium full service hotels and, to a lesser extent, premium urban limited service hotels located throughout the United States. Our hotels are concentrated in key gateway cities and in destination resort locations and are all operated under a brand owned by one of the top three national brand companies (Marriott International, Inc. (“Marriott”), Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) or Hilton Hotels Corporation (“Hilton”)).
 
We are owners, as opposed to operators, of hotels. As an owner, we receive all of the operating profits or losses generated by our hotels, after we pay the hotel managers a fee based on the revenues and profitability of the hotels and reimburse all of their direct and indirect operating costs.
 
As an owner, we create value by acquiring the right hotels with the right brands in the right markets, prudently financing our hotels, thoughtfully re-investing capital in our hotels, implementing profitable operating strategies, approving the annual operating and capital budgets for our hotels, closely monitoring the performance of our hotels, and deciding if and when to sell our hotels. In addition, we are committed to enhancing the value of our operating platform by being open and transparent in our communications with investors, monitoring our corporate overhead and following corporate governance best practice.
 
We differentiate ourselves from our competitors because of our adherence to three basic principles:
 
  •  high quality urban and resort focused branded real estate;
 
  •  conservative capital structure; and
 
  •  thoughtful asset management.
 
High Quality Urban and Resort Focused Branded Real Estate
 
We own twenty premium hotels and resorts in North America. These hotels and resorts are primarily categorized as upper upscale as defined by Smith Travel Research and are generally located in high barrier to entry markets with multiple demand generators.


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Our properties are concentrated in five key gateway cities (New York City, Los Angeles, Chicago, Boston and Atlanta) and in destination resort locations (such as the U.S. Virgin Islands and Vail, Colorado). We believe that gateway cities and destination resorts will achieve higher long-term growth because they are attractive business and leisure destinations. We also believe that these locations are better insulated from new supply due to relatively high barriers to entry and expensive construction costs.
 
We believe that the higher quality lodging assets create more dynamic cash flow growth and superior long-term capital appreciation.
 
In addition, a core tenet of our strategy is to leverage national hotel brands. We strongly believe in the value of powerful national brands because we believe that they are able to produce incremental revenue and profits compared to similar unbranded hotels. In particular, we believe that branded hotels outperform unbranded hotels in an economic downturn. Dominant national hotel brands typically have very strong reservation and reward systems and sales organizations, and all of our hotels are operated under a brand owned by one of the top three national brand companies (Marriott, Starwood or Hilton) and all but two of the hotels are managed by the brand company directly. Generally, we are interested in owning only those hotels that are operated under a nationally recognized brand or acquiring hotels that can be converted into a nationally branded hotel.
 
Conservative Capital Structure
 
Since our formation in 2004, we have been consistently committed to a conservative and flexible capital structure with prudent leverage levels. During 2004 though early 2007, we took advantage of the low interest rate environment by fixing our interest rates for an extended period of time. Moreover, during the recent peak in the commercial real estate market, we maintained low financial leverage by funding the majority of our acquisitions through the issuance of equity. This strategy allowed us to maintain a conservative balance sheet with a moderate amount of debt. During the peak years, we believed, and present events have confirmed, that it would be inappropriate to increase the inherent risk of a highly cyclical business through a highly levered capital structure.
 
The current economic environment has confirmed the merits of our conservative financing strategy. We maintain a reasonable amount of inexpensive fixed interest rate mortgage debt with limited near-term maturities. As of December 31, 2008, we had $878.4 million of debt outstanding, which consists of $57 million outstanding on our senior unsecured credit facility and $821.4 million of mortgage debt. We currently have eight hotels, with an aggregate historic cost of $0.8 billion, which are unencumbered by mortgage debt. As of December 31, 2008, our debt has a weighted-average interest rate of 5.44% and a weighted-average maturity date of 6.3 years. In addition, 92.9% of our debt is fixed rate and over 80% of it matures in 2015 or later. We expect that we will be able to either refinance or repay the $68 million of debt coming due in 2009 and 2010 with a combination of cash on hand, proceeds from refinancing the mortgage debt on the existing mortgaged hotels or incurring new mortgage debt on one or more of our unencumbered hotels. If efficient mortgage debt is unavailable, we have the ability to repay such debt with drawings under our $200 million senior unsecured credit facility, which had over $140 million available as of December 31, 2008. We may also consider raising equity capital to repay such debt.
 
We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.


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During the current recession, our corporate goals and objectives are focused on preserving and enhancing our liquidity. While there can be no assurance that we will be able to accomplish any or all of these steps, we have taken, or are evaluating, a number of steps to achieve these goals, as follows:
 
  •  We chose to not pay a fourth quarter dividend and we intend to pay our next dividend to our stockholders of record as of December 31, 2009. We expect the 2009 dividend will be in an amount equal to 100% of our 2009 taxable income.
 
  •  We are assessing whether to utilize the Internal Revenue Service’s Revenue Procedure 2009-15 in order to pay a portion of our 2009 dividend in shares of our common stock and the remainder in cash.
 
  •  We also have significantly curtailed capital spending for 2009 and expect to fund less than $10 million in capital expenditures in 2009, compared to an average of $35 million per year of owner-funded capital expenditures during 2006, 2007 and 2008.
 
  •  We are considering the sale of one or more of our hotels.
 
  •  We may issue common stock.
 
  •  We have amended our senior unsecured credit facility to reduce the risk of default under one of our financial covenants. We may seek further amendments to our credit facility to make additional changes to the financial covenants.
 
  •  We have engaged mortgage brokers to determine potential options for additional property-specific mortgage debt or the refinancing of our two mortgages that mature prior to the end of January 2010.
 
Our current liquidity strategy is to take reasonable steps to further delever the Company in the near term, focusing on reducing amounts outstanding under our credit facility. If we achieve this goal, we believe that we will be uniquely positioned among lodging REITs as we will have limited outstanding corporate debt and no preferred equity. Once we repay or refinance the $68 million of mortgage debt coming due at the end of 2009, we will have no property-level debt maturing prior to 2015. In the longer term, we may use any accumulated cash to acquire hotels that fit our long-term strategic goals or to repurchase shares of our common stock. There can be no assurances that we will be able to achieve any elements of our current liquidity strategy.
 
As of December 31, 2008, 93.5% of our outstanding debt consisted of property specific mortgage debt. All of such mortgage debt was borrowed by unique special purpose entities 100% owned by us. Moreover, all of our property specific mortgage debt consists of single property mortgages that do not contain any cross-default, financial covenants or general recourse provisions to any assets outside of the special purpose entities, including our parent company or our operating partnership. Only our credit facility includes a corporate guarantee or financial covenants, but the amount outstanding under our credit facility as of December 31, 2008 comprised less than 7% of our outstanding debt. As a result, in the event that the current recession becomes a more severe financial crisis, we generally expect to have the flexibility to isolate debt issues at any property without placing other assets in jeopardy.
 
Thoughtful Asset Management
 
We believe that we are able to create significant value in our portfolio by utilizing our management’s extensive experience and our innovative asset management strategies. Our senior management team has an established broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, project managers and contractors and other key industry participants.
 
In the current economic environment, we believe that our deep lodging experience, our network of industry relationships and our asset management strategies uniquely position us to minimize the impact of declining revenues on our hotels. In particular, we are focused on controlling our property-level and corporate expenses, as well as working closely with our managers to optimize the mix of business at our hotels to maximize potential revenue. Our property-level cost containment includes the implementation of aggressive contingency plans at each of our hotels. The contingency plans include controlling labor expenses, eliminating of hotel staff positions, adjusting food and beverage outlet hours of operation and not filling open positions. In


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addition, our strategy to significantly renovate nearly all of the hotels in our portfolio from 2006 to 2008 resulted in the flexibility to significantly curtail our planned capital expenditures for 2009 and even into 2010.
 
We use our broad network to maximize the value of our hotels. Under the regulations governing REITs, we are required to engage a hotel manager that is an eligible independent contractor through one of our subsidiaries to manage each of our hotels pursuant to a management agreement. Our philosophy is to negotiate management agreements that give us the right to exert significant influence over the management of our properties, annual budgets and all capital expenditures, and then to use those rights to continually monitor and improve the performance of our properties. We cooperatively partner with the managers of our hotels in an attempt to increase operating results and long-term asset values at our hotels. In addition to working directly with the personnel at our hotels, our senior management team also has long-standing professional relationships with our hotel managers’ senior executives, and we work directly with these senior executives to improve the performance of our portfolio.
 
We believe we can create significant value in our portfolio through innovative asset management strategies such as rebranding, renovating and repositioning. We are committed to regularly evaluating our portfolio to determine if we can employ these value-added strategies at our hotels. From 2006 to 2008 we completed a significant amount of capital reinvestment in our hotels — completing projects that ranged from room renovations, to a total renovation and repositioning of the hotel, to the addition of new meeting space, spa or restaurant repositioning. In connection with our renovations and repositionings, our senior management team and our asset managers are individually committed to completing these renovations on time, on budget and with minimum disruption to our hotels. As we have significantly renovated nearly all of the hotels in our portfolio, we have chosen to substantially reduce capital expenditures beginning in 2009.
 
Our Company
 
We commenced operations in July 2004. Since our formation, we have sought to be open and transparent in our communications with investors, to monitor our corporate overhead and to follow corporate governance best practices. We believe that we have the most transparent disclosure in the industry, consistently going beyond the minimum legal requirements and industry practice; for example, we provide quarterly operating performance data on each of our hotels enabling our investors to evaluate our successes and our failures. In addition, we have been able to acquire and finance our hotels, asset manage them, complete close to $200 million of capital expenditures on time and on budget, and comply with the complex accounting and legal requirements of a public company with fewer than 20 employees and total corporate expenses in 2008 of approximately $14.0 million. Finally, we believe that we comply with best practices in corporate governance in that we have an active and majority-independent Board of Directors that is elected annually by a majority of our stockholders, we do not have any substantial corporate or statutory anti-takeover devices and our directors and officers own a meaningful amount of our stock.
 
As of December 31, 2008, we owned 20 hotels that contained 9,586 hotel rooms, located in the following markets: Atlanta, Georgia (3); Austin, Texas; Boston, Massachusetts; Chicago, Illinois (2); Fort Worth, Texas; Lexington, Kentucky; Los Angeles, California (2); New York, New York (2); Northern California; Oak Brook, Illinois; Orlando, Florida; Salt Lake City, Utah; Washington D.C.; St. Thomas, U.S. Virgin Islands; and Vail, Colorado.
 
Our Relationship with Marriott
 
Investment Sourcing Relationship
 
We have an investment sourcing relationship with Marriott, a leading worldwide hotel brand, franchise and management company. Pursuant to this relationship, Marriott has provided us with an early opportunity to bid on hotel acquisition and investment opportunities known to Marriott. Historically, this relationship has generated a large number of additional acquisition opportunities, with many of the opportunities being “off-market” transactions, meaning that they are not made generally available to other real estate investment companies. However, we have not entered into a binding agreement or commitment setting forth the terms of


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this investment sourcing relationship. As a result, we cannot assure you that our investment sourcing relationship with Marriott will continue or not be modified.
 
Our senior management team periodically meets with senior representatives of Marriott to explore how to further our investment sourcing relationship in order to maximize the value of the relationship to both parties.
 
In early 2007, the market to acquire hotels became too robust and we suspended our acquisition activities for the remainder of 2007 and for all of 2008. We actively monitor the acquisition market and may resume acquisitions at some point when we believe market conditions warrant, at which point, we believe our investment sourcing relationship with Marriott will prove to be valuable.
 
Key Money and Yield Support
 
Marriott has contributed to us certain amounts in exchange for the right to manage hotels we have acquired or the completion of certain brand enhancing capital projects. We refer to these amounts as “key money.” Marriott has provided us with key money of approximately $22 million in the aggregate in connection with our acquisitions of six of our hotels, $10 million of which was provided to us for the Chicago Marriott in exchange for a commitment to complete the renovation of certain public spaces and meeting rooms at the hotel.
 
In addition, Marriott has provided us with operating cash flow guarantees for certain hotels and has funded shortfalls of actual hotel operating income compared to a negotiated target net operating income. We refer to these guarantees as “yield support.” Marriott provided us with a total of $3.7 million of yield support for the Oak Brook Hills Marriott Resort, Orlando Airport Marriott and SpringHill Suites Atlanta Buckhead, all of which we earned during fiscal years 2006 and 2007. We are not entitled to any further yield support at any of our hotels.
 
Investment in DiamondRock
 
In connection with our July 2004 private placement and our 2005 initial public offering, Marriott purchased an aggregate of 4.4 million shares of our common stock at the same purchase price as all other investors. Marriott has since sold the majority of its shares in DiamondRock, but it still owns a substantial number of shares of our common stock.
 
Our Corporate Structure
 
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotels are owned by subsidiaries of our operating partnership, DiamondRock Hospitality Limited Partnership. We are the sole general partner of our operating partnership and currently own, either directly or indirectly, all of the limited partnership units of our operating partnership. In order for the income from our hotel investments to constitute “rents from real properties” for purposes of the gross income test required for REIT qualification, we must lease each of our hotels to a wholly-owned subsidiary of our taxable REIT subsidiary, or TRS, or an unrelated third party. We currently lease all of our domestic hotels to TRS lessees. In turn our TRS lessees must engage a third party management company to manage the hotels. However, we may structure our properties which are not subject to U.S. federal income tax differently from the structures we use for our U.S. properties. For example, the Frenchman’s Reef & Morning Star Marriott Beach Resort is held by a United States Virgin Islands corporation, which we have elected to be a TRS.


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The following chart shows our corporate structure as of the date of this report:
 
(CHART)
 
Environmental Matters
 
Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property.
 
Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real estate facilities for personal injury or


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improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.
 
Prior to closing any property acquisition, we obtain Phase I environmental assessments in order to attempt to identify potential environmental concerns at the properties. These assessments are carried out in accordance with an appropriate level of due diligence and will generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures. We cannot assure you that these assessments will discover every environmental condition that may be present on a property.
 
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our present properties.
 
Competition
 
The hotel industry is highly competitive and our hotels are subject to competition from other hotels for guests. Competition is based on a number of factors, including convenience of location, brand affiliation, price, range of services, guest amenities, and quality of customer service. Competition is specific to the individual markets in which our properties are located and will include competition from existing and new hotels operated under brands in the full-service, select-service and extended-stay segments. We believe that properties flagged with a Marriott, Starwood or Hilton brand will enjoy the competitive advantages associated with their operations under such brand. These national brands reservation systems and national advertising, marketing and promotional services combined with the strong management expertise they provide enable our properties to perform favorably in terms of both occupancy and room rates relative to other brands and non-branded hotels. These brands guest loyalty programs generate repeat guest business that might otherwise go to competing hotels. Increased competition may have a material adverse effect on occupancy, ADR and RevPAR or may require us to make capital improvements that we otherwise would not undertake, which may result in decreases in the profitability of our hotels.
 
We face competition for the acquisition of hotels from institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. Some of these competitors have substantially greater financial and operational resources than we have and may have greater knowledge of the markets in which we seek to invest. This competition may reduce the number of suitable investment opportunities offered to us and increase the cost of acquiring our targeted hotel investments.
 
Employees
 
We currently employ 17 full-time employees. We believe that our relations with our employees are good. None of our employees is a member of any union; however, the employees working for our hotel managers at the Courtyard Manhattan/Fifth Avenue, Frenchman’s Reef & Morning Star Marriott Beach Resort and the Westin Boston Waterfront Hotel are currently represented by labor unions and are subject to collective bargaining agreements.
 
Legal Proceedings
 
We are not involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us, other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and not expected to have a material adverse impact on our business, financial condition or results of operations.


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Regulation
 
Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
 
Insurance
 
We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy. In addition, we carry earthquake and terrorism insurance on our properties in an amount and with deductibles, which we believe are commercially reasonable. We do not carry insurance for generally uninsured losses such as loss from riots, war or acts of God. Certain of the properties in our portfolio are located in areas known to be seismically active or subject to hurricanes and we believe we have appropriate insurance for those risks, although they are subject to higher deductibles than ordinary property insurance.
 
Most of our hotel management agreements generally provide that we are responsible for obtaining and maintaining property insurance, business interruption insurance, flood insurance, earthquake insurance (if the hotel is located in an “earthquake prone zone” as determined by the U.S. Geological Survey) and other customary types of insurance related to hotels and the manager is responsible for obtaining general liability insurance, workers’ compensation and employer’s liability insurance.
 
Available Information
 
We maintain an internet website at the following address: www.drhc.com. The information on our website is neither part of nor incorporated by reference in this Annual Report on Form 10-K.
 
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission, or SEC, in accordance with the Securities Exchange Act of 1934, as amended, or Exchange Act. These include our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and exhibits and amendments to these reports, and Section 16 filings. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
 
Item 1A.   Risk Factors
 
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be adversely affected.
 
Risks Related to the Current Recession and Credit Crisis
 
The lack of availability and terms of financing have adversely affected the amounts, sources and costs of capital available to us.
 
The ownership of hotels is very capital intensive. We finance the acquisition of our hotels with a mixture of equity and long-term debt while we traditionally finance renovations and operating needs with cash provided from operations or with borrowings from our corporate credit facility. Typically, when we acquire a hotel, we seek a five to ten year loan secured by a mortgage on the hotel. These loans have a large balloon payment due at their maturity. Generally, we find it more efficient to place a significant amount of debt on a


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small number of our hotels and we try to keep a significant number of our hotels unencumbered. With the exception of borrowings under our corporate credit facility in the ordinary course of operating our business, we have only borrowed money to refinance existing debt or to acquire new hotels.
 
In the current recession and related capital and credit crisis, it is very difficult for most companies, especially for companies in cyclical industries such as lodging, to borrow money. Over the last 10 years, a significant percentage of hotel loans were made by lenders who quickly sold such loans to securitized lending vehicles, such as commercial mortgage backed security (CMBS) pools. The market for new CMBS issuances has significantly declined, with such lenders making very few loans, significantly shrinking the available debt capital available to hotel owners. In addition, the remaining lenders have also significantly reduced their lending as financial institutions delever and suffer losses on their existing lending portfolios.
 
Approximately 8% of our existing debt (approximately $68 million) matures in 2009 and 2010. We expect that it will be very difficult to refinance such loans on terms acceptable to us, or at all. Although we believe that we have the capacity to repay such loans with a combination of cash on hand and a draw under our corporate credit facility, there can be no assurance that our credit facility will be available to repay such maturing debt as draws under our credit facility are subject to certain financial covenants. In addition, the current U.S. and global economic and financial crisis has severely constrained the credit markets resulting in the bankruptcies and mergers of large financial institutions and significant investment in and control by government bodies of financial institutions to avoid further liquidity and bank failures. If one or more of the financial institutions that support our existing credit facility fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under the credit facility.
 
If we are unable to repay our maturing debt using cash on hand and a draw under our corporate credit facility, we may be forced to choose from a number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more hotels or issuing common or preferred equity at disadvantageous terms, including unattractive prices or defaulting on the mortgage debt and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our stockholders.
 
The scarcity of equity and debt capital has frozen the market for buying and selling hotels.
 
The scarcity of capital has frozen the market for buying and selling hotels. Currently, buyers of hotels are finding it extremely difficult to borrow. Even if they are able to obtain debt, lenders are lending lesser amounts and are requiring more restrictive terms and conditions. At the same time, private equity sources have materially reduced their commitments and the stock prices of public companies, including DiamondRock, have significantly declined making it more difficult to sell stock without diluting existing stockholders. As a result of the difficulties in the equity and debt markets, buyers have less ability to pay the purchase prices that sellers are seeking. This has resulted in a sizeable gap between the prices sellers ask for hotels and the prices buyers are able to pay for hotels.
 
We believe the current stress in the capital markets makes it very difficult for us to sell any of our hotels at attractive prices or to buy additional hotels. As a result, we may not be able to carry out our long-term strategy of acquiring hotels at inexpensive prices during the current downturn.
 
Our liquidity strategy may cause stockholder dilution and reduce our funds from operations in the future.
 
We have a liquidity strategy of reducing, to the extent reasonable, amounts outstanding on our corporate credit facility by the end of 2009 and thereby position ourselves as having little or no outstanding corporate debt or preferred stock. Once we refinance or repay the two small pieces of mortgage debt coming due at the end of 2009 and beginning of 2010, we will have no property level debt maturing prior to 2015. In addition to utilizing the positive cash flow from our operations, we are evaluating a number of other possible options in order to implement this strategy, including:
 
  •  reducing the cash portion of our dividend through paying a portion of our dividend in common stock,


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  •  selling one or more hotels, and
 
  •  incurring property-level debt or issuing common stock.
 
There can be no assurance we will be able to achieve any element of this liquidity strategy and each of the options that we are evaluating may have adverse consequences.
 
If we reduce the cash portion of our dividend through paying a portion of our 2009 dividend in the form of common stock there may be negative consequence to our stockholders. Under IRS Revenue Procedure 2009-15, up to 90% of any such taxable dividend for 2009 could be payable in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend in income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. Furthermore, issuing shares of stock in connection with our 2009 dividend may result in substantial dilution to our existing stockholders.
 
If we sell one of more of our hotels, in the current market, we will likely receive lesser proceeds from such sales than we would receive during a stronger economic environment. Furthermore, we could sell such hotels for less than our investment in the hotels. In addition, by selling a hotel and using the proceeds to repay relatively inexpensive debt, depending on the price received for the hotel and the interest rate on our debt, we may reduce our future funds from operations.
 
If we issue common stock at the current low prices we will substantially dilute our existing stockholders.
 
We also may seek to amend our credit facility to further reduce the risk of breaching one or more of our financial covenants. In exchange for such an amendment, our lenders may ask us to provide mortgages on certain of our unencumbered assets and reduce the size of our credit facility. Either of such changes may result in us having less flexibility in the future. In addition, we may need to pay higher borrowing costs, as we believe the borrowing costs under our credit facility is substantially below the current market.
 
Our credit facility covenants may constrain our options.
 
Our corporate credit facility contains several financial covenants, the most constraining of which limits the amount of debt we may incur compared to the value of our hotels (our leverage covenant) and the amount of debt service we pay compared to our cash flow (our debt service coverage covenant). If we were to default under either of these covenants, we would be obligated to repay all amounts outstanding under our credit facility and our credit facility would terminate. These two financial covenants constrain us from incurring material amounts of additional debt or from selling properties that generate a material amount of income. In addition, if the economy declines more than we expect our risk of defaulting under these covenants would increase. If that occurs, we may be forced to sell one or more hotels at unattractive prices, or agree to unfavorable debt terms, which could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our stockholders.


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A continued or worsening recession could result in further declines in our average daily room rates, occupancy and RevPAR, and thereby have a material adverse effect on our results of operations.
 
The current recession has adversely affected our operating results by causing declines in average daily room rates, occupancy and RevPAR. The performance of the lodging industry has traditionally been closely linked with the general economy. The combination of the housing crisis, dislocated credit markets, rising unemployment rates, decreases in airline capacity and low consumer confidence are affecting how and where people travel. In addition, companies are expected in the near-term to continue to eliminate or significantly reduce business travel. We are experiencing reduced demand for our hotel rooms. Although we are working closely with our hotel managers to control costs, we can give you no assurance that, despite such measures, our operating results will not continue to decline. If a property’s occupancy or room rates drop to the point where its revenues are insufficient to cover its operating expenses, then we would be required to spend additional funds for that property’s operating expenses. A continued or worsening recession would result in further declines in average daily room rates, occupancy and RevPAR, and thereby have a material adverse effect on our results of operations.
 
Risks Related to Our Business and Operations
 
Our business model, especially our concentration in premium full-service hotels, can be highly volatile.
 
We own hotels, a very different asset class from many other REITs. A typical office REIT, for example, has long-term leases with third party tenants, which provides a relatively stable long-term stream of revenue. Our TRS, on the other hand, does not enter into a lease with a hotel manager. Instead, our TRS engages the hotel manager pursuant to a management agreement and pays the manager a fee for managing the hotel. The TRS receives all the operating profit or losses at the hotel. Moreover, virtually all hotel guests stay at the hotel for only a few nights, so the rate and occupancy at each of our hotels changes every day. As a result, we may have highly volatile earnings.
 
In addition to fluctuations related to our business model, our hotels are and will continue to be subject to various long-term operating risks common to the hotel industry, many of which are beyond our control, including:
 
  •  dependence on business and commercial travelers and tourism, both of which vary with consumer and business confidence in the strength of the general economy;
 
  •  competition from other hotels that may be located in our markets;
 
  •  an over-supply or over-building of hotels in our markets, which could adversely affect occupancy rates and revenues at our properties;
 
  •  increases in energy and transportation costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
 
  •  increases in operating costs due to inflation and other factors that may not be offset by increased room rates; and
 
  •  changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance.
 
In addition, our hotels are mostly in the premium full-service segment of the hotel business that tends to have the best operating results in a strong economy and the worst results in a weak economy as many travelers choose lower cost and more limited service hotels. In periods of weak demand, such as during the current recession, profitability is negatively affected by the relatively high fixed costs of operating premium full-service hotels when compared to other classes of hotels.
 
The occurrence of any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.


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Our portfolio is highly concentrated in a handful of core markets.
 
We expect that in 2009 more than 70% of our earnings will be derived from our hotels in five gateway cities (New York City, Boston, Chicago, Los Angeles and Atlanta) and three destination resorts (Frenchman’s Reef, Vail Marriott, and the Lodge at Sonoma) and as such, the operations of these hotels will have a material impact on our overall results of operations. This concentration in our portfolio may lead to increased volatility in our results. If the current recession is more severe or prolonged in any of these cities compared to the United States as a whole, the popularity of any of these destinations resorts decreases, or a manmade or natural disaster or casualty or other damage occurs to one of our key hotels, our overall results of operations may be adversely affected.
 
Our hotels are subject to significant competition.
 
Currently, we believe the supply and demand in the markets where our hotels are located is in balance and, with few exceptions, the markets are very competitive. However, a material increase in the supply of new hotel rooms to a market can quickly destabilize that market and existing hotels can experience rapidly decreasing RevPAR and profitability. If such over-building occurs in one or more of our major markets, we may experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders. In particular, we own the Renaissance Worthington located in Fort Worth, Texas, a market that is currently characterized by a relatively stable hotel supply and modestly growing business and transient demand. The city of Fort Worth has decided to heavily subsidize the building of a 600-room hotel owned and operated by Omni Hotels. The new Omni hotel is located within a close proximity to our hotel and is expected to destabilize the local hotel market and significantly decrease the operating profits from our hotel, which could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our stockholders.
 
Investments in hotels are illiquid and we may not be able to respond in a timely fashion to adverse changes in the performance of our properties.
 
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties or investments in our portfolio in response to changing economic, financial and investment conditions may be limited. The real estate market is affected by many factors that are beyond our control, including:
 
  •  adverse changes in international, national, regional and local economic and market conditions;
 
  •  changes in supply of competitive hotels;
 
  •  changes in interest rates and in the availability, cost and terms of debt financing;
 
  •  changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
 
  •  the ongoing need for capital improvements, particularly in older structures;
 
  •  changes in operating expenses; and
 
  •  civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters and acts of war or terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001, which may result in uninsured losses.
 
It may be in the best interest of our stockholders to sell one or more of our hotels in the future. We cannot predict whether we will be able to sell any hotel property or investment at an acceptable price or otherwise on reasonable terms and conditions particularly during this current recession and related capital and credit crisis. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property or loan.


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These facts and any others that would impede our ability to respond to adverse changes in the performance of our hotel properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our stockholders.
 
In the event of natural disasters, terrorist attacks, significant military actions, outbreaks of contagious diseases or other events for which we may not have adequate insurance, our operations may suffer.
 
One of our major hotels, Frenchman’s Reef & Morning Star Marriott Beach Resort, is located on the side of a cliff facing the ocean in the United States Virgin Islands, which is in the so-called “hurricane belt” in the Caribbean. The hotel was partially destroyed by a hurricane in the mid-1990’s and since then has been damaged by subsequent hurricanes. In addition, three of our hotels, the Los Angeles Airport Marriott, the Torrance Marriott South Bay and The Lodge at Sonoma, a Renaissance Resort & Spa, are located in areas that are seismically active. Finally, eight of our hotels are located in metropolitan markets that have been, or may in the future be, targets of actual or threatened terrorist attacks, including New York City, Chicago, Boston and Los Angeles. These hotels are each material to our financial results. Chicago Marriott, Westin Boston Waterfront Hotel, Los Angeles Airport Marriott, Frenchman’s Reef & Morning Star Marriott Beach Resort, Courtyard Manhattan/Midtown East, Conrad Chicago, Torrance Marriott South Bay, the Lodge at Sonoma, and Courtyard Manhattan/Fifth Avenue constituted approximately 13.9%, 10.5%, 8.5%, 7.9%, 4.6%, 4.0%, 3.6%, 2.6% and 2.6%, respectively, of our total revenues in 2008. Additionally, even in the absence of direct physical damage to our hotels, the occurrence of any natural disasters, terrorist attacks, significant military actions, outbreaks of contagious diseases, such as SARS or the avian bird flu, or other casualty events affecting the United States, will likely have a material adverse effect on business and commercial travelers and tourists, the economy generally and the hotel and tourism industries in particular. While we cannot predict the impact of the occurrence of any of these events, such impact could result in a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
We have acquired and intend to maintain comprehensive insurance on each of our hotels, including liability, terrorism, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. We cannot assure you that such coverage will be available at reasonable rates or with reasonable deductibles. For example, Frenchman’s Reef & Morning Star Marriott Beach Resort has a high deductible if it is damaged due to a wind storm. Various types of catastrophic losses, like earthquakes, floods, losses from foreign terrorist activities such as those on September 11, 2001, or losses from domestic terrorist activities such as the Oklahoma City bombing may not be insurable or are generally not insured because of economic infeasibility, legal restrictions or the policies of insurers. Future lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could have a material adverse effect on our results of operations and ability to obtain future financing.
 
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from that particular hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position with regard to the damaged or destroyed property.
 
With or without insurance, damage to any of our hotels, or to the hotel industry generally, due to fire, hurricane, earthquake, terrorism, outbreaks such as avian bird flu or other man-made or natural disasters or casualty events could materially and adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders.


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We are subject to risks associated with our ongoing need for renovations and capital improvements as well as financing for such expenditures.
 
In order to remain competitive, our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:
 
  •  construction cost overruns and delays;
 
  •  a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms;
 
  •  the renovation investment not resulting in the returns on investment that we expect;
 
  •  disruptions in the operations of the hotel as well as in demand for the hotel while capital improvements are underway; and
 
  •  disputes with franchisors/hotel managers regarding compliance with relevant management/franchise agreements.
 
The costs of these capital improvements could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
In addition, we may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to maintain our REIT tax status. As a result, our ability to fund capital expenditures, or investments through retained earnings, is very limited. Consequently, we rely upon the availability of debt or equity capital to fund our investments and capital improvements, but due to the current recession and capital markets crisis, these sources of funds are currently either unavailable or not available on reasonable terms and conditions.
 
Our hotel portfolio is not diverse by brand or manager and there are risks associated with using Marriott’s brands on most of our hotels and having Marriott manage most of our hotels.
 
Our success depends in part on the success of Marriott.
 
Seventeen of our current hotels utilize brands owned by Marriott. As a result, our success is dependent in part on the continued success of Marriott and its brands. In light of the current economic conditions affecting the lodging industry, we believe that building brand value has become even more critical to increase demand and build customer loyalty. If market recognition or the positive perception of these Marriott brands is reduced or compromised, the goodwill associated with Marriott branded hotels may be adversely affected and the results of operations of our hotels may be adversely affected. As a result, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Our success depends in part on maintaining good relations with Marriott.
 
We have pursued, and continue to pursue, hotel investment opportunities referred to us by Marriott, and we intend to work with Marriott as our preferred hotel management company. Marriott is paid a fee based on gross revenues of the hotels they manage while we only benefit from operating profits at our hotels. Thus, it is possible that Marriott may desire to undertake operating strategies, or encourage us to add amenities or undertake renovations, which are designed to generate significant gross revenues, but an unreasonably small return on investment.
 
Due to the differences in how each company earns its money, which company is responsible for operating losses and capital expenditures, and tensions between an individual hotel and the brand standards of a large chain, there are natural conflicts between an owner of a hotel and a brand company, such as Marriott. These differing objectives could result in deterioration in our relationship with Marriott and may adversely affect our


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ability to execute business strategies, which in turn would have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Over the last several years, Marriott has been involved in contractual and other disputes with owners of the hotels it manages. Although we currently maintain good relations with Marriott, we cannot assure you that disputes between us and Marriott regarding the management of our properties will not arise. Should our relationship with Marriott deteriorate, we believe that two of our competitive advantages (namely our ability to work with senior executives at Marriott to improve the asset management of our hotels and our investment sourcing relationship) could be eliminated, which may have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Our results of operations are highly dependent on the management of our hotel properties by third-party hotel management companies, including Marriott.
 
In order to qualify as a REIT, we cannot operate our hotel properties or control the daily operations of our hotel properties. Our TRS lessees may not operate these hotel properties and, therefore, they must enter into third-party hotel management agreements with one or more eligible independent contractors (including Marriott). Thus, third-party hotel management companies that enter into management contracts with our TRS lessees will control the daily operations of our hotel properties.
 
Under the terms of the hotel management agreements that we have entered into, or that we will enter into in the future, our ability to participate in operating decisions regarding our hotel properties is limited. We currently rely, and will continue to rely, on these hotel management companies to adequately operate our hotel properties under the terms of the hotel management agreements. We do not have the authority to require any hotel property to be operated in a particular manner or to govern any particular aspect of its operations (for instance, setting room rates). Thus, even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, ADRs and operating profits, we may not have sufficient rights under our hotel management agreements to enable us to force the hotel management company to change its method of operation. We can only seek redress if a hotel management company violates the terms of the applicable hotel management agreement with the TRS lessee, and then only to the extent of the remedies provided for under the terms of the hotel management agreement. Our current management agreements are generally non-terminable, subject to certain exceptions for cause, and in the event that we need to replace any of our hotel management companies pursuant to termination for cause, we may experience significant disruptions at the affected properties, which may have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Our ownership of properties through ground leases exposes us to the risk that we may have a difficulty financing such properties, may sell such properties for a lower price or may lose such properties upon breach or termination of the ground leases.
 
We acquired interests in four hotels (Bethesda Marriott Suites, Courtyard Manhattan/Fifth Avenue, the Salt Lake City Marriott Downtown and the Westin Boston Waterfront Hotel), the parking lot associated with another hotel (Renaissance Worthington) and two golf courses associated with two additional hotels (Marriott Griffin Gate Resort and Oak Brook Hills Marriott Resort) by acquiring a leasehold interest in land underlying the property. We may acquire additional hotels in the future through the purchase of hotels subject to ground leases. In the past, from time to time, secured lenders have been unwilling to lend, or otherwise charged higher interest rates, for loans secured by a leasehold mortgage compared to loans secured by a fee simple mortgage. In addition, at any given time, investors may be disinterested in buying properties subject to a ground lease and may pay a lower price for such properties than for a comparable property in fee simple or they may not purchase such properties at any prices, so we may find that we will have a difficult time selling a property subject to a ground lease or may receive less proceeds from such sale. Finally, as lessee under ground leases, we are exposed to the possibility of losing the hotel, or a portion of the hotel, upon termination, or an earlier breach by us, of the ground lease, which could result in a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.


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Due to restrictions in our hotel management agreements, mortgage agreements and ground leases, we may not be able to sell our hotels at the highest possible price (or at all).
 
Our current hotel management agreements are long-term and contain certain restrictions on selling our hotels, which may affect the value of our hotels.
 
The hotel management agreements that we have entered into, and those we expect to enter into in the future, contain provisions restricting our ability to dispose of our hotels which, in turn, may have an adverse affect on the value of our hotels. Our hotel management agreements generally prohibit the sale of a hotel to:
 
  •  certain competitors of the manager;
 
  •  purchasers who are insufficiently capitalized; or
 
  •  purchasers who might jeopardize certain liquor or gaming licenses.
 
In addition, there are rights of first refusal in the hotel management agreement for the Salt Lake City Marriott Downtown and in both the franchise agreement and management agreement for the Vail Marriott Mountain Resort & Spa. These rights of first refusal might discourage certain purchasers from expending resources to conduct due diligence and making an offer to purchase these hotels from us, thus resulting in a lower sales price.
 
Finally, our current hotel management agreements contain initial terms ranging from ten to forty years and certain agreements have renewal periods, exercisable at the option of the property manager, of ten to forty-five years. Because our hotels would have to be sold subject to the applicable hotel management agreement, the term length of a hotel management agreement may deter some potential purchasers and could adversely impact the price realized from any such sale. To the extent we receive less sale proceeds, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to stockholders.
 
Our mortgage agreements contain certain provisions that may limit our ability to sell our hotels.
 
In order to assign or transfer our rights and obligations under certain of our mortgage agreements, we generally must:
 
  •  obtain the consent of the lender;
 
  •  pay a fee equal to a fixed percentage of the outstanding loan balance; and
 
  •  pay any costs incurred by the lender in connection with any such assignment or transfer.
 
These provisions of our mortgage agreements may limit our ability to sell our hotels which, in turn, could adversely impact the price realized from any such sale. To the extent we receive less sale proceeds, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to stockholders.
 
Our ground leases contain certain provisions that may limit our ability to sell our hotels.
 
Our ground lease agreements with respect to Bethesda Marriott Suites, Salt Lake City Marriott Downtown and the Westin Boston Waterfront Hotel require the consent of the lessor for assignment or transfer. These provisions of our ground leases may limit our ability to sell our hotels which, in turn, could adversely impact the price realized from any such sale. In addition, at any given time, investors may be disinterested in buying properties subject to a ground lease and may pay a lower price for such properties than for a comparable property in fee simple or they may not purchase such properties at any price. Accordingly, we may find it difficult to sell a property subject to a ground lease or may receive lower proceeds from any such sale. To the extent we receive less sale proceeds, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to stockholders.


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We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.
 
One component of our long-term business strategy is expansion through acquisitions. However, we may not be successful in identifying or completing acquisitions that are consistent with our strategy particularly during this current recession and related capital and credit crisis. We compete with institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. This competition for hotel investments may increase the price we pay for hotels and these competitors may succeed in acquiring those hotels that we seek to acquire. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater financial resources, may not be dependent on third-party financing, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable hotels may increase in the future, which would increase demand for these hotels and the prices we must pay to acquire them. If we pay higher prices for hotels, our returns on investment and profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect, especially if we cannot obtain financing without paying higher borrowing costs, and may result in stockholder dilution.
 
Our success depends on senior executive officers whose continued service is not guaranteed.
 
We depend on the efforts and expertise of our senior executive officers to manage our day-to-day operations and strategic business direction. The loss of any of their services could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Seasonality of the hotel business can be expected to cause quarterly fluctuations in our earnings.
 
The hotel industry is seasonal in nature. Generally, our earnings are higher in the second and fourth quarters. As a result, we may have to enter into short-term borrowings in our first and third quarters in order to offset these fluctuations in earnings and to make distributions to our stockholders.
 
The Employee Free Choice Act could substantially increase the cost of doing business.
 
A number of members of the United States Congress and President Obama have stated that they support the Employee Free Choice Act, which, if enacted, would discontinue the current practice of having an open process where both the union and the employer are permitted to educate employees regarding the pros and cons of joining a union before having an election by secret ballot. Under the Employee Free Choice Act, the employees would only hear the union’s side of the argument before making a commitment to join the union. The Act would permit unions to quietly collect employee signatures supporting the union without notifying the employer and permitting the employer to explain its views before a final decision is made by the employees. Once a union has collected signatures from a majority of the employees, the employer would have to recognize, and bargain with, the union. If the employer and the union fail to reach agreement on a collective bargaining contract within a set number of days, both sides would be forced to submit their respective proposals to binding arbitration and a federal arbitrator would be permitted to create an employment contract binding on the employer. We believe that if the Employee Free Choice Act is enacted, a number of our hotels could become unionized.
 
Currently, we have only three hotels whose manager employs a unionized workforce. In general, the wages and benefits of our non-union hotels are consistent with the wages and benefits of unionized hotels in their respective markets. However, unionized hotels are generally subject to a number of work rules which could decrease operating margins at our hotels. If that is the case, we believe that the unionization of our remaining hotels may result in a significant decline in the profitability and value of those hotels, which could have a material adverse effect on our business, results of operations, financial condition and ability to pay distributions to our stockholders.


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Risks Related to Our Debt and Financing
 
Our existing indebtedness contains financial covenants that could limit our operations and our ability to make distributions to our stockholders.
 
Our existing credit facility contains financial and operating covenants, such as net worth requirements, fixed charge coverage, debt ratios and other limitations that restrict our ability to make distributions or other payments to our stockholders, sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions without the consent of the lenders. In addition, our existing property-level debt contains restrictions (including cash management provisions) that may under circumstances specified in the loan agreements prohibit our subsidiaries that own our hotels from making distributions or paying dividends, repaying loans to us or other subsidiaries or transferring any of their assets to us or another subsidiary. Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions. The terms of our debt may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. This could cause one or more of our lenders to accelerate the timing of payments and could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
There is refinancing risk associated with our debt.
 
Our typical debt contains limited principal amortization, therefore the vast majority of the principal must be repaid at the maturity of the loan in a so-called “balloon payment.” At the maturity of these loans, assuming we do not have sufficient funds to repay the debt, we will need to refinance this debt. Because of the current financial market crisis, we would have a very difficult time refinancing debt today, if we could at all. In addition, we locked in our fixed-rate debt at a very favorable point in time when we were able to obtain interest rate, principal amortization and other terms which we are unlikely to see for some time. As a result, when we refinance our debt, we currently expect prevailing interest rates and other factors to result in paying a greater amount of debt service, which will adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms or at all, we may be forced to dispose of our hotels on disadvantageous terms, potentially resulting in losses that could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders. See “Risks Related to the Current Recession and Credit Crisis.”
 
If we default on our secured debt in the future, the lenders may foreclose on our hotels.
 
All of our indebtedness for borrowed money, except our credit facility, is secured by single property first mortgages on the applicable property. In addition, we may place mortgages on our hotel properties to secure our line of credit in the future. If we default on any of the secured loans or the secured credit facility, the lender will be able to foreclose on the property pledged to the relevant lender under that loan. While we have maintained certain of our hotels unencumbered by mortgage debt, we have a relatively high loan-to-value on a number of our hotels which are subject to mortgage loans and, as a result, those mortgaged hotels may be at an increased risk of default and foreclosure due to lower operating performance and cash flows in the current recession.
 
In addition to losing the property, a foreclosure may result in recognition of taxable income. Under the Internal Revenue Code, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we did not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay distributions may be adversely affected.


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Future debt service obligations may adversely affect our operating results, require us to liquidate our properties, jeopardize our tax status as a REIT and limit our ability to make distributions to our stockholders.
 
In the future, we and our subsidiaries may be able to incur substantial additional debt, including secured debt. We expect, due to current economic conditions, that borrowing costs on new and refinanced debt will be more expensive. Our existing debt, and any additional debt borrowed in the future could subject us to many risks, including the risks that:
 
  •  our cash flow from operations will be insufficient to make required payments of principal and interest;
 
  •  we may be vulnerable to adverse economic and industry conditions;
 
  •  we may be required to dedicate a substantial portion of our cash flow from operations to the repayment of our debt, thereby reducing the cash available for distribution to our stockholders, funds available for operations and capital expenditures, future investment opportunities or other purposes;
 
  •  the terms of any refinancing is likely not as favorable as the terms of the debt being refinanced; and
 
  •  the use of leverage could adversely affect our stock price and the ability to make distributions to our stockholders.
 
If we violate covenants in our future indebtedness agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on favorable terms, if at all.
 
Higher interest rates could increase debt service requirements on our floating rate debt and refinanced debt and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future investment opportunities or other purposes. We may obtain in the future one or more forms of interest rate protection — in the form of swap agreements, interest rate cap contracts or similar agreements — to “hedge” against the possible negative effects of interest rate fluctuations. However, hedging is expensive, there is no perfect hedge, and we cannot assure you that any hedging will adequately mitigate the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations. In addition, we may be subject to risks of default by hedging counter-parties.
 
Risks Related to Regulation, Taxes and the Environment
 
The Frenchman’s Reef and Morning Star Marriott Beach Resort is the subject of a tax holiday which may expire in 2010.
 
Our hotel located in the U.S. Virgin Islands is subject to a tax holiday, which enables us to pay taxes at 10 percent of the statutory tax rate of 37.4 percent in the U.S. Virgin Islands. That tax holiday is set to expire in February 2010. While we are diligently working to extend the tax holiday, we may not be successful. If we are unsuccessful, our hotel will be subject to taxes at the full statutory rate.
 
Noncompliance with governmental regulations could adversely affect our operating results.
 
Environmental matters.
 
Our hotels are, and the hotels we acquire in the future will be, subject to various federal, state and local environmental laws. Under these laws, courts and government agencies may have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. A person that arranges for the disposal or treatment, or transports for disposal or treatment, a hazardous substance at a


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property owned by another person may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property.
 
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, certain laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.
 
We could be responsible for the costs associated with a contaminated property. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We cannot assure you that future laws or regulations will not impose material environmental liabilities or that the current environmental condition of our hotels will not be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
 
We may face liability regardless of:
 
  •  our knowledge of the contamination;
 
  •  the timing of the contamination;
 
  •  the cause of the contamination; or
 
  •  the party responsible for the contamination of the property.
 
Although we have taken and will take commercially reasonable steps to assess the condition of our properties, there may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest. In addition, we are obligated to indemnify our lenders for any liability they may incur in connection with a contaminated property.
 
The presence of hazardous substances or petroleum contamination on a property may adversely affect our ability to sell the property and could cause us to incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to our stockholders.
 
Americans with Disabilities Act and other changes in governmental rules and regulations.
 
Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or private litigants winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.
 
Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
 
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic reactions. As a result, the presence of mold to which our hotel guests or employees could be exposed at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, exposure to mold by our


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guests or employees, management company employees or others could expose us to liability if property damage or adverse health concerns arise.
 
A portion of our revenues may be attributable to operations outside of the United States, which will subject us to different legal, monetary and political risks, as well as currency exchange risks, and may cause unpredictability in a significant source of our cash flows that could adversely affect our ability to make distributions to our stockholders.
 
We may acquire selective hotel properties outside of the United States. International investments and operations generally are subject to various political and other risks that are different from and in addition to risks in U.S. investments, including:
 
  •  the enactment of laws prohibiting or restricting the foreign ownership of property;
 
  •  laws restricting us from removing profits earned from activities within the foreign country to the United States, including the payment of distributions, i.e., nationalization of assets located within a country;
 
  •  variations in the currency exchange rates, mostly arising from revenues made in local currencies;
 
  •  change in the availability, cost and terms of mortgage funds resulting from varying national economic policies;
 
  •  changes in real estate and other tax rates and other operating expenses in particular countries; and
 
  •  more stringent environmental laws or changes in such laws.
 
In addition, currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Liabilities arising from differing legal, monetary and political risks as well as currency fluctuations could adversely affect our financial condition, operating results and our ability to make distributions to our stockholders. In addition, the requirements for qualifying as a REIT limit our ability to earn gains, as determined for federal income tax purposes, attributable to changes in currency exchange rates. These limitations may significantly limit our ability to invest outside of the United States or impair our ability to qualify as a REIT.
 
Any properties we invest in outside of the United States may be subject to foreign taxes.
 
We may invest in additional hotel properties located outside the United States. Jurisdictions outside the United States will generally impose taxes on our hotel properties and our operations within their jurisdictions. To the extent possible, we will structure our investments and activities to minimize our foreign tax liability, but we will likely incur foreign taxes with respect to non-U.S. properties. Moreover, the requirements for qualification as a REIT may preclude us from always using the structure that minimizes our foreign tax liability. Furthermore, as a REIT, we and our stockholders will derive little or no benefit from the foreign tax credits arising from the foreign taxes we pay. As a result, foreign taxes we pay will reduce our income and available cash flow from our foreign hotel properties, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
 
Risks Related to Our Status as a REIT
 
We cannot assure you that we will remain qualified as a REIT.
 
We believe we are qualified to be taxed as a REIT for our taxable year ended December 31, 2008, and we expect to continue to qualify as a REIT for future taxable years, but we cannot assure you that we have qualified, or will remain qualified, as a REIT.
 
The REIT qualification requirements are extremely complex and official interpretations of the federal income tax laws governing qualification as a REIT are limited. Certain aspects of our REIT qualification are beyond our control. For example, we will fail to qualify as a REIT if one of our hotel managers acquires


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directly or constructively more than 35% of our stock. Accordingly, we cannot be certain that we will be successful in operating so that we can remain qualified as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT.
 
Moreover, our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT.
 
If we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, or otherwise cease to be a REIT, we will be subject to federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay any such tax. Unless we were entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
 
Maintaining our REIT qualification contains certain restrictions and drawbacks.
 
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
 
To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. For example, we may not lease to our TRS any hotel which contains gaming. Thus, compliance with the REIT requirements may hinder our ability to operate solely to maximize profits.
 
Failure to make required distributions would subject us to tax.
 
In order to remain qualified as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. As a result, for example, of differences between cash flow and the accrual of income and expenses for tax purposes, or of nondeductible expenditures, our REIT taxable income in any given year could exceed our cash available for distribution. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in a particular year.
 
The formation of our TRSs and TRS lessees increases our overall tax liability.
 
Our domestic TRSs are subject to federal and state income tax on their taxable income. The taxable income of our TRS lessees currently consists and generally will continue to consist of revenues from the hotels leased by our TRS lessees plus, in certain cases, key money payments (amounts paid to us by a hotel management company in exchange for the right to manage a hotel we acquire), net of the operating expenses for such properties and rent payments to us. Such taxes could be substantial. Our non-U.S. TRSs also may be subject to tax in jurisdictions where they operate.
 
We incur a 100% excise tax on transactions with our TRSs that are not conducted on an arms-length basis. For example, to the extent that the rent paid by one of our TRS lessees exceeds an arms-length rental amount, such amount potentially is subject to the excise tax. While we believe we structure all of our leases on an arms-length basis, upon an audit, the IRS might disagree with our conclusion.


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You may be restricted from transferring our common stock.
 
In order to maintain our REIT qualification, among other requirements, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws to include various kinds of entities) during the last half of any taxable year (other than the first year for which a REIT election is made). In addition, the REIT rules generally prohibit a manager of one of our hotels from owning, directly or indirectly, more than 35% of our stock and a person who holds 35% or more of our stock from also holding, directly or indirectly, more than 35% of any such hotel management company. To qualify for and preserve REIT status, our charter contains an aggregate share ownership limit and a common share ownership limit. Generally, any shares of our stock owned by affiliated owners will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.
 
If anyone transfers or owns shares in a way that would violate the aggregate share ownership limit or the common share ownership limit (unless such ownership limits have been waived by our board of directors), or prevent us from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then we will consider the initial intended transfer or ownership to be null and void from the outset. The intended transferee or owner of those shares will be deemed never to have owned the shares. Anyone who acquires or owns shares in violation of the aggregate share ownership limit, the common share ownership limit (unless such ownership limits have been waived by our board of directors) or the other restrictions on transfer or ownership in our charter bears the risk of a financial loss when the shares are redeemed or sold if the market price of our stock falls between the date of purchase and the date of redemption or sale.
 
Risks Related to Our Organization and Structure
 
Provisions of our charter may limit the ability of a third party to acquire control of our company.
 
Our charter provides that no person may beneficially own more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock, except certain “look-through entities,” such as mutual funds, which may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock. Our board of directors has waived this ownership limitation for certain investors in the past. Our bylaws waive this ownership limitation for certain other classes of investors. These ownership limitations may prevent an acquisition of control of our company by a third party without our board of directors’ approval, even if our stockholders believe the change of control is in their best interests.
 
Our charter also authorizes our board of directors to issue up to 200,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Furthermore, our board of directors may, without any action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to issue. Issuances of additional shares of stock may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.
 
Certain advance notice provisions of our bylaws may limit the ability of a third party to acquire control of our company.
 
Our bylaws provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to our board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the bylaws and (b) with respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the board of


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directors may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) provided that the board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws. These advance notice provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.
 
Provisions of Maryland law may limit the ability of a third party to acquire control of our company.
 
The Maryland General Corporation Law, or the MGCL, has certain restrictions on a “business combination” and “control share acquisition” which we have opted out of. If an affirmative majority of votes cast by a majority of stockholders entitled to vote approve it, our board of directors may opt in to such provisions of the MGCL. If we opt in, and the stockholders approve it, these provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests.
 
Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to take certain actions that may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.
 
We have entered into an agreement with each of our senior executive officers that provides each of them benefits in the event his employment is terminated by us without cause, by him for good reason, or under certain circumstances following a change of control of our company.
 
We have entered into an agreement with each of our senior executive officers that provides each of them with severance benefits if his employment is terminated under certain circumstances following a change of control of our company. Certain of these benefits and the related tax indemnity could prevent or deter a change of control of our company that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
 
You have limited control as a stockholder regarding any changes we make to our policies.
 
Our board of directors determines our major policies, including our investment objectives, financing, growth and distributions. Our board may amend or revise these policies without a vote of our stockholders. This means that our stockholders will have limited control over changes in our policies.
 
Changes in market conditions could adversely affect the market price of our common stock.
 
As with other publicly traded equity securities, the value of our common stock depends on various market conditions that may change from time to time. Among the market conditions that may affect the value of our common stock are the following:
 
  •  the extent of investor interest in our securities;
 
  •  the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
 
  •  the underlying asset value of our hotels;
 
  •  investor confidence in the stock and bond markets, generally;
 
  •  national and local economic conditions;
 
  •  changes in tax laws;
 
  •  our financial performance; and
 
  •  general stock and bond market conditions.


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The market value of our common stock is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions. Consequently, our common stock may trade at prices that are greater or less than our net asset value per share of common stock. If our future earnings or cash distributions are less than expected, it is likely that the market price of our common stock will diminish.
 
Further issuances of equity securities may be dilutive to current stockholders.
 
We expect to issue additional shares of common stock or preferred stock to raise the capital necessary to finance hotel acquisitions, refinance debt, or pay portions of future dividends. In addition, we may issue preferred stock or units in our operating partnership, which are redeemable on a one-to-one basis for our common stock, to acquire hotels. Such issuances could result in dilution of stockholders’ equity.
 
Future offerings of debt securities or preferred stock, which would be senior to our common stock upon liquidation and for the purpose of distributions, may cause the market price of our common stock to decline.
 
In the future, we may increase our capital resources by making additional offerings of debt or equity securities, which may include senior or subordinated notes, classes of preferred stock and/or common stock. We will be able to issue additional shares of common stock or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings could significantly dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred stock and debt, if issued, could have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest.
 
Item 1B.   Unresolved Staff Comments
 
None.


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Item 2.   Our Properties
 
Overview
 
The following table sets forth certain operating information for each of our hotels owned during the year ended December 31, 2008. This information includes periods prior to our acquisition of these hotels unless otherwise indicated:
 
                                             
                                % Change
 
        Number of
    Average
                from 2007
 
Property
 
Location
  Rooms     Occupancy (%)     ADR ($)     RevPAR ($)     RevPAR(1)  
 
Chicago Marriott
  Chicago, Illinois     1,198       73.1 %   $ 208.74     $ 152.51       (7.8 )%
Los Angeles Airport Marriott
  Los Angeles, California     1,004       84.5       114.51       96.79       2.2  
Westin Boston Waterfront Hotel
  Boston, Massachusetts     793       69.1       203.40       140.55       (2.4 )
Renaissance Waverly
  Atlanta, Georgia     521       66.8       142.19       94.95       (5.5 )
Salt Lake City Marriott Downtown
  Salt Lake City, Utah     510       65.4       135.49       88.67       (6.9 )
Renaissance Worthington
  Fort Worth, Texas     504       73.3       174.46       127.82       (2.0 )
Frenchman’s Reef & Morning Star Marriott Beach Resort
  St. Thomas, U.S. Virgin Islands     502       79.8       238.09       190.07       (0.8 )
Renaissance Austin
  Austin, Texas     492       68.6       161.09       110.50       (5.5 )
Torrance Marriott South Bay
  Los Angeles County, California     487       78.3       124.03       97.10       0.5  
Orlando Airport Marriott
  Orlando, Florida     486       72.8       117.43       85.48       (7.4 )
Marriott Griffin Gate Resort
  Lexington, Kentucky     408       64.1       145.33       93.10       4.7  
Oak Brook Hills Marriott Resort
  Oak Brook, Illinois     386       52.2       132.39       69.12       (11.5 )
Westin Atlanta North at Perimeter
  Atlanta, Georgia     369       61.5       136.74       84.13       (9.6 )
Vail Marriott Mountain Resort & Spa
  Vail, Colorado     346       64.4       237.18       152.80       1.6  
Marriott Atlanta Alpharetta
  Atlanta, Georgia     318       59.6       147.89       88.20       (5.1 )
Courtyard Manhattan/Midtown East
  New York, New York     312       88.3       302.57       267.17       (1.4 )
Conrad Chicago
  Chicago, Illinois     311       75.6       238.42       180.35       (4.0 )
Bethesda Marriott Suites
  Bethesda, Maryland     272       69.8       191.34       133.61       (2.2 )
Courtyard Manhattan/Fifth Avenue
  New York, New York     185       87.8       300.36       263.80       (1.2 )
The Lodge at Sonoma, a Renaissance Resort & Spa
  Sonoma, California     182       69.3       224.47       155.54       (1.8 )
                                             
TOTAL/WEIGHTED AVERAGE(1)
        9,586       71.8 %   $ 176.73     $ 126.95       (3.3 )%
                                             
 
 
(1) Total hotel statistics and the percentage change from 2007 RevPAR reflect the comparable period in 2007 to our 2008 ownership period for our 2007 acquisition and disposition.


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The following table sets forth information regarding our investment in each of our owned hotels as of December 31, 2008:
 
                                         
                        Total
       
        Year
  Number of
    Total
    Investment
       
Property
 
Location
  Opened   Rooms     Investment     per Room        
                  (In thousands)              
 
Chicago Marriott
  Chicago, Illinois   1978     1,198     $ 335,887     $ 280,373          
Los Angeles Airport Marriott
  Los Angeles, California   1973     1,004       133,075       132,545          
Westin Boston Waterfront Hotel
  Boston, Massachusetts   2006     793       350,010       441,375          
Renaissance Waverly
  Atlanta, Georgia   1983     521       130,869       251,189          
Salt Lake City Marriott Downtown
  Salt Lake City, Utah   1981     510       62,458       122,468          
Renaissance Worthington
  Fort Worth, Texas   1981     504       87,088       172,793          
Frenchman’s Reef & Morning Star Marriott Beach Resort
  St. Thomas, U.S. Virgin Islands   1973/1984     502       87,138       173,582          
Renaissance Austin
  Austin, Texas   1986     492       112,192       228,033          
Torrance Marriott South Bay
  Los Angeles County, California   1985     487       76,055       156,171          
Orlando Airport Marriott
  Orlando, Florida   1983     486       83,341       171,485          
Marriott Griffin Gate Resort
  Lexington, Kentucky   1981     408       60,142       147,407          
Oak Brook Hills Marriott Resort
  Oak Brook, Illinois   1987     386       82,168       212,870          
Westin Atlanta North at Perimeter
  Atlanta, Georgia   1987     369       65,675       177,980          
Vail Marriott Mountain Resort & Spa
  Vail, Colorado   1983/2002     346       69,715       201,490          
Marriott Atlanta Alpharetta
  Atlanta, Georgia   2000     318       40,763       128,184          
Courtyard Manhattan/Midtown East
  New York, New York   1998     312       79,269       254,067          
Conrad Chicago
  Chicago, Illinois   2001     311       124,574       400,559          
Bethesda Marriott Suites
  Bethesda, Maryland   1990     272       48,009       176,504          
Courtyard Manhattan/Fifth Avenue
  New York, New York   1990     185       45,687       246,955          
The Lodge at Sonoma, a Renaissance Resort & Spa
  Sonoma, California   2001     182       36,348       199,712          
                                         
Total/Weighted Average
        9,586     $ 2,110,463       220,161          
                                     
 
Our Hotels
 
Bethesda Marriott Suites
 
Bethesda Marriott Suites is located in the Rock Spring Corporate Office Park near downtown Bethesda, Maryland, with convenient access to Washington, D.C.’s Beltway (I-495) and the I-270 Technology Corridor. Rock Spring Corporate Office Park contains several million feet of office space and includes companies such as Marriott and Lockheed Martin Corp., as well as the National Institute of Health. The hotel contains 272 guestrooms, all of which are suites, and 5,000 square feet of total meeting space.
 
The hotel was built in 1990. We completed the refurbishment of guestrooms during 2006. The hotel lobby was renovated in 2007 and converted into a Marriott “great room.”


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We acquired the hotel in 2004. We hold the property pursuant to a ground lease. The current term of the ground lease will expire in 2087.
 
Chicago Marriott
 
The Chicago Marriott opened in 1978 and contains 1,198 rooms, 60,000 square-feet of meeting space, and three food and beverage outlets. The 46-story hotel sits amid the world-famous shops and restaurants on Michigan Avenue, in the heart of downtown Chicago.
 
We completed a $35 million renovation of the hotel in April 2008. The renovation, which began in the third quarter of 2007, included a complete redo of all the meeting rooms and ballrooms, adding 17,000 square feet of new meeting space, reconcepting and relocating the restaurant, expanding the lobby bar and creating a Marriott “great room” in the lobby.
 
We acquired the hotel in 2006. We own a fee simple interest in the hotel.
 
Conrad Chicago
 
The Conrad Chicago opened in 2001 as a Le Meridien and contains 311 rooms, 33 of which are suites, and 13,000 square-feet of meeting space. The property is located on several floors within the 17-story former McGraw-Hill Building, amid Chicago’s Magnificent Mile. The Conrad Chicago rises above the Westfield North Bridge Shopping Centre and the Nordstrom department store on North Michigan Avenue. The property is approximately one half block away from our Chicago Marriott.
 
The Conrad Chicago changed management to Hilton in November 2005 and had its official “Conrad launch” in June 2006. Conrad Hotels has approximately 25 luxury properties worldwide, but currently just three are open in the United States. Conrad Hotels are Hilton’s competitor to Marriott’s Ritz-Carlton brand or Starwood’s St. Regis brand.
 
In 2008, we completed a renovation of the guestrooms, corridors, and front entrance.
 
We acquired the hotel in 2006. We own a fee simple interest in the hotel.
 
Courtyard Manhattan/Fifth Avenue
 
The Courtyard Manhattan/Fifth Avenue is located on 40th Street, just off of Fifth Avenue in Midtown Manhattan, across the street from the New York Public Library. The hotel is situated in a convenient tourist and business location. It is within walking distance from Times Square, Broadway theaters, Grand Central Station, Rockefeller Center and the Empire State Building. The hotel includes 185 guestrooms.
 
We completed significant capital improvements in 2005 and 2006 in connection with our re-branding, renovation and repositioning plan. The capital improvement plan included a complete renovation of the guestrooms, new furniture and bedding for the guestrooms, renovation of the bathrooms with granite vanity tops, installation of a new exercise facility, construction of a boardroom meeting space and modifications to make the hotel more accommodating to persons with disabilities.
 
We acquired the hotel in 2004. We hold the property pursuant to a ground lease. The term of the ground lease expires in 2085, inclusive of one 49-year extension.
 
Courtyard Manhattan/Midtown East
 
The Courtyard Manhattan/Midtown East is located in Manhattan’s East Side, on Third Avenue between 52nd and 53rd Streets. The hotel has 312 guestrooms and 1,500 square feet of meeting space.
 
Prior to 1998, the building was used as an office building, but then was completely renovated and opened in 1998 as a Courtyard by Marriott. We completed a guestroom and public space renovation during 2006.
 
We acquired the hotel in 2004. We hold a fee simple interest in a commercial condominium unit, which includes a 47.725% undivided interest in the common elements in the 866 Third Avenue Condominium; the


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rest of the condominium is owned predominately (48.2%) by the building’s other major occupant, Memorial Sloan-Kettering. The hotel occupies the lobby area on the 1st floor, all of the 12th-30th floors and its pro rata share of the condominium’s common elements.
 
Frenchman’s Reef & Morning Star Marriott Beach Resort
 
The Frenchman’s Reef & Morning Star Marriott Beach Resort is a 17-acre resort hotel located in St. Thomas, U.S. Virgin Islands. The hotel is located on a hill overlooking Charlotte Amalie Harbor and the Caribbean Sea. The hotel has 502 guestrooms, including 27 suites, and approximately 60,000 square feet of meeting space. The hotel caters primarily to tourists, but also attracts group business travelers.
 
The Frenchman’s Reef section of the resort was built in 1973 and the Morning Star section of the resort was built in 1984. Following severe damage from a hurricane, the entire resort was substantially rebuilt in 1996 as part of a $60 million capital improvement.
 
We acquired the hotel in 2005 and own a fee simple interest in the hotel.
 
Los Angeles Airport Marriott
 
The Los Angeles Airport Marriott was built in 1973 and has 1,004 guestrooms, including 19 suites, and approximately 55,000 square feet of meeting space. The hotel guestrooms underwent a significant renovation in 2006 and the meeting rooms were renovated in 2007. The hotel attracts both business and leisure travelers due to its convenient location minutes from Los Angeles International Airport (LAX), the fourth busiest airport in the world. The property attracts large groups due to its significant amount of meeting space, guestrooms and parking spaces.
 
We acquired the hotel in 2005 and own a fee simple interest in the hotel.
 
Marriott Atlanta Alpharetta
 
The Marriott Atlanta Alpharetta is located in the city of Alpharetta, Georgia, approximately 22 miles north of Atlanta. Alpharetta is located in North Fulton County, a rapidly growing, very affluent county, which is characterized by being the national or regional headquarters of a number of large corporations, and it contains a large network of small and mid-sized companies supporting these corporations. The hotel is located in the Windward Office Park near several major corporations, including ADP, AT&T, McKesson, Siemens, Nortel and IBM. The hotel provides all of the amenities that are desired by business guests and is one of the few full-service hotels in a market predominately characterized by chain-affiliated select-service hotels.
 
The hotel opened in 2000. The hotel includes 318 guestrooms and 9,000 square feet of meeting space. We renovated the hotel meeting space during 2008.
 
We acquired the hotel in 2005 and own a fee simple interest in the hotel.
 
Marriott Griffin Gate Resort
 
Marriott Griffin Gate Resort is a 163-acre regional resort located north of downtown Lexington, Kentucky. The resort has 408 guestrooms, including 21 suites, as well as 13,000 square feet of meeting space. The resort contains three distinct components: the seven story main hotel and public areas, the Griffin Gate Golf Club, with a Rees Jones-designed 18-hole golf course, and The Mansion (which was originally constructed in 1854 and was Lexington’s first AAA 4-Diamond restaurant). The hotel is near all the area’s major corporate office parks and regional facilities of a number of major companies such as IBM, Toyota, Lexel Corporation and Lexmark International. The hotel also is located in proximity to downtown Lexington, the University of Kentucky, the historic Keeneland Horse Track and the Kentucky Horse Park.
 
The hotel originally opened in 1981. In 2003, the prior owner, Marriott, initiated a major renovation and repositioning of the resort, with an approximate $10 million capital improvement plan. We completed the renovation plan in 2005. The renovation included a complete guestroom and guestroom corridor renovation, as


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well as a renovation of the exterior façade. We also significantly renovated the public space at the hotel. In 2007, we added a spa, repositioned and redesigned the restaurants, and added meeting space to the hotel.
 
We acquired the hotel in 2004. We own a fee simple interest in the hotel, The Mansion, and most of the Griffin Gate Golf Club. However, approximately 54 acres of the golf course are held pursuant to a ground lease. The ground lease runs through 2033 (inclusive of four five-year renewal options), and contains a buyout right beginning at the end of the term in 2013 and at the end of each five-year renewal term thereafter. We are the sub-sublessee under another minor ground lease of land adjacent to the golf course, with a term expiring in 2020.
 
Oak Brook Hills Marriott Resort
 
In July 2005, we acquired the Oak Brook Hills Resort & Conference Center, replaced the existing manager with an affiliate of Marriott and re-branded the hotel as the Oak Brook Hills Marriott Resort. The hotel underwent a significant renovation in 2006 and early 2007. The resort was built in 1987 and has 386 guestrooms, including 37 suites. The hotel markets itself to national and regional conferences by providing over 40,000 square feet of meeting space at a hotel with a championship golf course that is convenient to both O’Hare and Chicago Midway airports and is near downtown Chicago. The resort is located in Oak Brook, Illinois.
 
The hotel is located on approximately 18 acres that we own in fee simple. The hotel is adjacent to an 18-hole, approximately 110-acre, championship golf course that we lease pursuant to a ground lease, which has approximately 40 years remaining, including renewal terms. Rent for the entire initial term of the ground lease has been paid in full.
 
Orlando Airport Marriott
 
The Orlando Airport Marriott was built in 1983 and has 486 guestrooms, including 14 suites, and approximately 26,000 square feet of meeting space. The hotel underwent a significant renovation in 2006. The hotel has a resort-like setting yet is well-located in a successful commercial office park five minutes from the Orlando International Airport. The hotel serves predominantly business transient guests as well as small and mid-size groups that enjoy the hotel’s amenities as well as its proximity to the airport.
 
We acquired the hotel in 2005 and own a fee simple interest in the hotel.
 
Renaissance Austin
 
The Renaissance Austin opened in 1986 and includes 492 rooms (14 of which were added in 2006), 60,000 square feet of meeting space, a restaurant, lounge and delicatessen. The hotel converted an adjacent lounge into high-end meeting space during 2008. The hotel is situated in the heart of Austin’s Arboretum area, near the major technology firms located in Austin, including Dell, Motorola, IBM, Samsung and National Instruments. In close proximity are office complexes, high-end shopping and upscale restaurants. The hotel is 12 miles from downtown Austin, home of the 6th Avenue Historic District, the State Capitol, and the University of Texas.
 
We acquired the hotel in 2006 and own a fee simple interest in the hotel.
 
Renaissance Waverly
 
The Renaissance Waverly opened in 1983 and includes 521 rooms, 65,000 square feet of meeting space, and multiple food and beverage outlets. The Renaissance Waverly consists of a 13-story rectangular tower with an impressive atrium rising to the top floor. The Renaissance Waverly is connected to the Galleria shopping complex and the 320,000 square-foot Cobb Galleria Centre convention facility. The Galleria office complex is within Atlanta’s 2nd largest office sub-market and in close proximity to Home Depot’s world headquarters, as well as offices for IBM, Lockheed Martin and Coca-Cola. Within walking distance of the property are the Cumberland Mall, and the new $145 million, 2,750-seat, Cobb Energy Performing Arts Center, which opened in 2007.


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We acquired the hotel in 2006 and own a fee simple interest in the hotel.
 
Renaissance Worthington
 
The Renaissance Worthington is Fort Worth’s only AAA Four Diamond hotel. It has 504 guestrooms, including 30 suites, and approximately 57,000 total square feet of meeting space. The hotel is located in downtown Fort Worth in Sundance Square, a sixteen-block retail area. It is also near Fort Worth’s Convention Center, which hosts a wide range of events, including conventions, conferences, sporting events, concerts and trade and consumer shows.
 
The hotel was opened in 1981 and underwent $4 million in renovations in 2002 and 2003.
 
Supply and demand in the Fort Worth hotel market was relatively stable until a newly constructed hotel owned and managed by Omni Hotels was opened in January 2009. We expect the Fort Worth Omni to be a very strong competitor as it is located next to the convention center and the cost of the hotel was heavily subsidized by the City of Fort Worth.
 
We acquired a fee simple interest in the hotel in 2005. A portion of the land under the parking garage (consisting of 0.28 acres of the entire 3.46 acre site) is subject to three co-terminus ground leases. Each of the ground leases extends to July 31, 2022 and provides for three successive renewal options of 15 years each. The ground leases provide for adjustments to the fixed ground rent payments every ten years during the term.
 
Salt Lake City Marriott Downtown
 
The Salt Lake City Marriott Downtown has 510 guestrooms, including 6 suites, and approximately 22,300 square feet of meeting space. The hotel’s rooms underwent a significant renovation in late 2008 and into early 2009. The hotel is located in downtown Salt Lake City across from the Salt Palace Convention Center near Temple Square. Demand for the hotel is generated primarily by the Convention Center, the Church of Jesus Christ of Latter-Day Saints, the University of Utah, government offices and nearby ski destinations.
 
The hotel is located next to the City Creek Project, one of the largest urban redevelopment projects in the United States. Currently, the owner of the City Creek Project, an affiliate of the Church of Jesus Christ of Latter-Day Saints, has cleared a 20 acre parcel of land between the hotel and Temple Square, the location of the Salt Lake Temple and Salt Lake Tabernacle, and is in the process of constructing a high-end mixed use project consisting of retail, office and residential. The project is expected to be completed in 2012. Until the completion of the project, the hotel is expected to experience some disruption. After the completion of the project, it is expected to be an amenity and demand-driver for the hotel.
 
We acquired the hotel in 2004. We hold ground lease interests in the hotel and the extension that connects the hotel to City Creek Project. The term of the ground lease for the hotel runs through 2056, inclusive of five ten-year renewal options. The term of the ground lease for the extension of the hotel (containing approximately 1,078 square feet) runs through 2017.
 
The Lodge at Sonoma, a Renaissance Resort & Spa
 
The Lodge at Sonoma, a Renaissance Resort & Spa, was built in 2000 and is located in the heart of the Sonoma Valley wine country, 45 miles from San Francisco, in the town of Sonoma, California. Numerous wineries are located within a short driving distance from the resort. The area is served by the Sacramento, Oakland and San Francisco airports. Leisure demand is generated by Sonoma Valley and Napa Valley wine country attractions. Group and business demand is primarily generated from companies located in San Francisco and the surrounding Bay Area, and some ancillary demand is generated from the local wine industry.
 
We acquired the hotel in 2004. We own a fee simple interest in the hotel, which is comprised of the main two-story Lodge building, including 76 guestrooms and 18 separate cottage buildings, containing the remaining 102 guestrooms and 4 suites. The Raindance Spa is located in a separate two-story building at the rear of the cottages. The hotel also has 22,000 square feet of meeting and banquet space.


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Torrance Marriott South Bay
 
The Torrance Marriott South Bay was built in 1985 and has 487 guestrooms, including 11 suites, and approximately 23,000 square feet of indoor and outdoor meeting space. The hotel underwent a significant renovation in 2006 and 2007. The hotel is located in Los Angeles County in Torrance, California, a major automotive center. Three major Japanese automobile manufacturers, Honda, Nissan and Toyota, have their U.S. headquarters in the Torrance area and generate significant demand for the hotel. It is also adjacent to the Del Amo Fashion Center mall, one of the largest malls in America.
 
We acquired the hotel in 2005 and own a fee simple interest in the hotel.
 
Westin Atlanta North at Perimeter
 
In May 2006, we acquired the Westin Atlanta North at Perimeter. The 20-story hotel opened in 1987 and contains 369 rooms and 20,000 square-feet of meeting space. The property is located within the Perimeter Center sub-market of Atlanta, Georgia. Comprising over 23 million square-feet of office space, Perimeter Center is one of the largest office markets in the southeast, representing substantial levels of corporate demand including: UPS, Hewlett Packard, Microsoft, Newell Rubbermaid and GE.
 
We acquired our fee simple interest in the hotel in 2006. We completed guestroom and lobby renovations during 2007.
 
Westin Boston Waterfront Hotel
 
In January 2007, we acquired the Westin Boston Waterfront Hotel. The hotel opened in June 2006 and contains 793 rooms and 69,000 square feet of meeting space. The hotel is attached to the recently built 1.6 million square foot Boston Convention and Exhibition Center, or BCEC, and is located in the Seaport District. The Westin Boston Waterfront Hotel includes a full service restaurant, a lobby lounge, a Starbucks licensed café, a 400-car underground parking facility, a fitness center, an indoor swimming pool, a business center, a gift shop and retail space.
 
The retail space is a separate three-floor, 100,000 square foot building attached to the Westin Boston Waterfront Hotel. In this building, we completed the construction of 37,000 square feet of meeting and exhibition space at a cost of approximately $19 million. When the remaining retail space is leased to third-party tenants, we or the tenants will complete the necessary tenant improvements.
 
We also acquired a leasehold interest in a parcel of land with development rights to build a 320 to 350 room hotel. The expansion hotel, should we decide to build it, will be located on a 11/2 acre parcel of developable land that is immediately adjacent to the Westin Boston Waterfront Hotel. The expansion hotel is expected to have 320 to 350 rooms and 100 underground parking spaces and, upon construction, could also be attached to the BCEC. We are still investigating the cost to construct and the potential returns associated with, an expansion hotel and have not concluded whether or not to pursue this portion of the project.
 
Vail Marriott Mountain Resort & Spa
 
The Vail Marriott Mountain Resort & Spa is located at the base of Vail Mountain in Vail, Colorado. The hotel has 346 guestrooms, including 61 suites, and approximately 21,000 square feet of meeting space.
 
The hotel is approximately 150 yards from the Eagle Bahn Express Gondola, which transports guests to the top of Vail Mountain, the largest single ski mountain in North America, with over 5,289 acres of skiable terrain. The hotel is located in Lionshead Village, the center of which was recently completely renovated to create a new European-inspired plaza which includes luxury condominiums and a small 36 room hotel, as well as equipment rentals, ski storage, lockers, ski and snowboard school, shopping and an après ski restaurant and bar; dining and shopping opportunities; and a winter ice-skating plaza and entertainment venues.
 
The hotel opened in 1983 and underwent a luxurious renovation of the public space, guest rooms and corridors in 2002. We acquired the hotel in 2005 and completed the renovation of certain meeting space and pre-function space during 2006.


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We own a fee simple interest in the hotel.
 
Our Hotel Management Agreements
 
We are a party to hotel management agreements with Marriott for sixteen of the twenty properties. The Vail Marriott Mountain Resort & Spa is managed by an affiliate of Vail Resorts and is under a long-term franchise agreement with Marriott; the Westin Atlanta North at Perimeter is managed by Noble Management Group, LLC; the Conrad Chicago is managed by Conrad Hotels USA, Inc., a subsidiary of Hilton; and the Westin Boston Waterfront Hotel is managed by Westin Hotel Management, L.P. a subsidiary of Starwood.
 
Each hotel manager is responsible for (i) the hiring of certain executive level employees, subject to certain veto rights, (ii) training and supervising the managers and employees required to operate the properties and (iii) purchasing supplies, for which we generally will reimburse the manager. The managers provide centralized reservation systems, national advertising, marketing and promotional services, as well as various accounting and data processing services. Each manager also prepares and implements annual operations budgets subject to our review and approval. Each of our management agreements limit our ability to sell, lease or otherwise transfer the hotels unless the transferee (i) is not a competitor of the manager, (ii) assumes the related management agreements and (iii) meets specified other conditions.
 
Term
 
The following table sets forth the agreement date, initial term and number of renewal terms under the respective hotel management agreements for each of our hotels. Generally, the term of the hotel management agreements renew automatically for a negotiated number of consecutive periods upon the expiration of the initial term unless the property manager gives notice to us of its election not to renew the hotel management agreement.
 
             
    Date of
       
    Agreement   Initial Term  
Number of Renewal Terms
 
Austin Renaissance
  6/2005   20 years   Three ten-year periods
Atlanta Alpharetta Marriott
  9/2000   30 years   Two ten-year periods
Atlanta Westin North at Perimeter
  5/2006   10 years   Two five-year periods
Bethesda Marriott Suites
  12/2004   21 years   Two ten-year periods
Boston Westin Waterfront
  5/2004   20 years   Four ten-year periods
Chicago Marriott Downtown
  3/2006   32 years   Two ten-year periods
Conrad Chicago
  11/2005   10 years   Two five-year periods
Courtyard Manhattan/Fifth Avenue
  12/2004   30 years   None
Courtyard Manhattan/Midtown East
  11/2004   30 years   Two ten-year periods
Frenchman’s Reef & Morning Star Marriott Beach Resort
  9/2000   30 years   Two ten-year periods
Los Angeles Airport Marriott
  9/2000   30 years   Two ten-year periods
Marriott Griffin Gate Resort
  12/2004   20 years   One ten-year period
Oak Brook Hills Marriott Resort
  7/2005   30 years   None
Orlando Airport Marriott
  11/2005   30 years   None
Renaissance Worthington
  9/2000   30 years   Two ten-year periods
Salt Lake City Marriott Downtown
  12/2001   30 years   Three fifteen-year periods
The Lodge at Sonoma, a Renaissance Resort & Spa
  10/2004   20 years   One ten-year period
Torrance Marriott South Bay
  1/2005   40 years   None
Waverly Renaissance
  6/2005   20 years   Three ten-year periods
Vail Marriott Mountain Resort & Spa
  6/2005   151/2 years   None


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Amounts Payable under our Hotel Management Agreements
 
Under our current hotel management agreements, the property manager receives a base management fee and, if certain financial thresholds are met or exceeded, an incentive management fee. The base management fee is generally payable as a percentage of gross hotel revenues for each fiscal year. The incentive management fee is generally based on hotel operating profits and is typically equal to between 20% and 25% of hotel operating profits, but the fee only applies to that portion of hotel operating profits above a negotiated return on our invested capital. We refer to this excess of operating profits over a return on our invested capital as “available cash flow.”
 
The following table sets forth the base management fee and incentive management fee, generally due and payable each fiscal year, for each of our properties:
 
         
    Base Management
  Incentive
    Fee(1)   Management Fee(2)
 
Austin Renaissance
  3%   20%(3)
Atlanta Alpharetta Marriott
  3%   25%(4)
Atlanta North at Perimeter Westin
  3%(5)   10%(6)
Bethesda Marriott Suites
  3%   50%(7)
Boston Westin Waterfront
  2.5%   20%(8)
Chicago Marriott Downtown
  3%   20%(9)
Conrad Chicago
  2.5%(10)   15%(11)
Courtyard Manhattan/Fifth Avenue
  5.5%(12)   25%(13)
Courtyard Manhattan/Midtown East
  5%   25%(14)
Frenchman’s Reef & Morning Star Marriott Beach Resort
  3%   25%(15)
Los Angeles Airport Marriott
  3%   25%(16)
Marriott Griffin Gate Resort
  3%   20%(17)
Oak Brook Hills Marriott Resort
  3%   20% or 30%(18)
Orlando Airport Marriott
  3%   20% or 25%(19)
Renaissance Worthington
  3%   25%(20)
Salt Lake City Marriott Downtown
  3%   20%(21)
The Lodge at Sonoma, a Renaissance Resort & Spa
  3%   20%(22)
Torrance Marriott South Bay
  3%   20%(23)
Waverly Renaissance
  3%   20%(24)
Vail Marriott Mountain Resort & Spa
  3%   20%(25)
 
 
(1) As a percentage of gross revenues.
 
(2) Based on a percentage of hotel operating profits above a negotiated return on our invested capital as more fully described in the following footnotes.
 
(3) Calculated as a percentage of operating profits in excess of the sum of (i) $5.9 million and (ii) 10.75% of certain capital expenditures.
 
(4) Calculated as a percentage of operating profits in excess of the sum of (i) $4.1 million and (ii) 10.75% of certain capital expenditures.
 
(5) The base management fee was 2% of gross revenues for fiscal years 2007 and 2008, as the hotel did not achieve the unlevered yield targets for those periods.
 
(6) Calculated as a percentage of operating profits in excess of the sum of (i) $7.0 million and (ii) 10.75% of certain capital expenditures.
 
(7) Calculated as a percentage of operating profits in excess of the sum of (i) the payment of certain loan procurement costs, (ii) 10.75% of certain capital expenditures, (iii) an agreed-upon return on certain


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expenditures and (iv) the value of certain amounts paid into a reserve account established for the replacement, renewal and addition of certain hotel goods. The owner’s priority expires in 2023.
 
(8) Calculated as a percentage of operating profits in excess of the sum of (i) actual debt service and (ii) 15% of cumulative and compounding return on equity, which results with each sale.
 
(9) Calculated as 20% of net operating income before base management fees. There is no owner’s priority.
 
(10) The base management fee will be equal to 2.5% of gross revenues for fiscal years 2008 and 2009 and 3% for fiscal years thereafter.
 
(11) Calculated as a percentage of operating profits after a pre-set dollar amount ($8.6 million in 2008) of owner’s priority. Beginning in fiscal year 2011, the incentive management fee will be based on 103% of the prior year cash flow.
 
(12) The base management fee will be equal to 5.5% of gross revenues for fiscal years 2010 through 2014 and 6% for fiscal year 2015 and thereafter until the expiration of the agreement. Also, beginning in 2008, the base management fee increased to 5.5% due to operating profits exceeding $4.7 million in 2007, and beginning in 2011, the base management fee may increase to 6.0% at the beginning of the next fiscal year if operating profits equal or exceed $5.0 million.
 
(13) Calculated as a percentage of operating profits in excess of the sum of (i) $5.5 million and (ii) 12% of certain capital expenditures, less 5% of the total real estate tax bill (for as long as the hotel is leased to a party other than the manager).
 
(14) Calculated as a percentage of operating profits in excess of the sum of (i) $7.9 million and (ii) 10.75% of certain capital expenditures.
 
(15) Calculated as a percentage of operating profits in excess of the sum of (i) $9.2 million and (ii) 10.75% of certain capital expenditures.
 
(16) Calculated as a percentage of operating profits in excess of the sum of (i) $10.3 million and (ii) 10.75% of certain capital expenditures.
 
(17) Calculated as a percentage of operating profits in excess of the sum of (i) $6.1 million and (ii) 10.75% of certain capital expenditures.
 
(18) Calculated as a percentage of operating profits in excess of the sum of (i) $8.1 million and (ii) 10.75% of certain capital expenditures. The percentage of operating profits is 20% except from 2011 through 2025 when it is 30%.
 
(19) Calculated as a percentage of operating profits in excess of the sum of (i) $8.9 million and (ii) 10.75% of certain capital expenditures. The percentage of operating profits is 20% except from 2011 through 2021 when it is 25%.
 
(20) Calculated as a percentage of operating profits in excess of the sum of (i) $7.6 million and (ii) 10.75% of certain capital expenditures.
 
(21) Calculated as a percentage of operating profits in excess of the sum of (i) $6.2 million and (ii) 10.75% of capital expenditures.
 
(22) Calculated as a percentage of operating profits in excess of the sum of (i) $3.6 million and (ii) 10.75% of capital expenditures.
 
(23) Calculated as a percentage of operating profits in excess of the sum of (i) $7.5 million and (ii) 10.75% of certain capital expenditures.
 
(24) Calculated as a percentage of operating profits in excess of the sum of (i) $10.3 million and (ii) 10.75% of certain capital expenditures.
 
(25) Calculated as a percentage of operating profits in excess of the sum of (i) $7.4 million and (ii) 11% of certain capital expenditures. The incentive management fee rises to 25% if the hotel achieves operating profits in excess of 15% of our invested capital.
 
We recorded $28.6 million and $29.8 million of management fees during the years ended December 31, 2008 and 2007, respectively. The management fees for the year ended December 31, 2008 consisted of $9.7 million of incentive management fees and $18.9 million of base management fees. The management fees


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for the year ended December 31, 2007 consisted of $11.1 million of incentive management fees and $18.7 million of base management fees.
 
Our Franchise Agreements
 
The following table sets forth the terms of the hotel franchise agreements for our two franchised hotels:
 
             
    Date of
  Initial
   
    Agreement   Term(1)  
Franchise Fee
 
Vail Marriott Mountain Resort & Spa
  6/2005   16 years   6% of gross room sales plus 3% of gross food and beverage sales
Atlanta Westin North at Perimeter
  5/2006   20 years   7% of gross room sales plus 2% of food and beverage sales(2)
 
 
(1) There are no renewal options under either franchise agreement.
 
(2) The franchise fee was equal to 2% of gross room and food and beverage sales for fiscal year 2006, 3% of gross room sales and 2% of gross food and beverage sales for fiscal year 2007, 4% of gross room sales and 2% of gross food and beverage sales for 2008. The franchise fee will increase to 7% of gross room sales and 2% of gross food and beverage sales thereafter.
 
We recorded $2.8 million, $2.7 million and $2.2 million of franchise fees during the years ended December 31, 2008, 2007 and 2006, respectively.
 
Our Ground Lease Agreements
 
Four of our hotels are subject to ground lease agreements that cover all of the land underlying the respective hotel:
 
  •  The Bethesda Marriott Suites hotel is subject to a ground lease that runs until 2087. There are no renewal options.
 
  •  The Courtyard Manhattan/Fifth Avenue is subject to a ground lease that runs until 2085, inclusive of one 49-year renewal option.
 
  •  The Salt Lake City Marriott Downtown is subject to two ground leases: one ground lease covers the land under the hotel and the other ground lease covers the portion of the hotel that extends into the City Creek Project. The term of the ground lease covering the land under the hotel runs through 2056, inclusive of our renewal options, and the term of the ground lease covering the extension runs through 2017.
 
  •  The Westin Boston Waterfront is subject to a ground lease that runs until 2099. There are no renewal options.
 
In addition, two of the golf courses adjacent to two of our hotels are subject to ground lease agreements:
 
  •  The golf course that is part of the Marriott Griffin Gate Resort is subject to a ground lease covering approximately 54 acres. The ground lease runs through 2033, inclusive of our renewal options. We have the right, beginning in 2013 and upon the expiration of any 5-year renewal term, to purchase the property covered by such ground lease for an amount ranging from $27,500 to $37,500 per acre, depending on which renewal term has expired. The ground lease also grants us the right to purchase the leased property upon a third party offer to purchase such property on the same terms and conditions as the third party offer. We are also the sub-sublessee under another minor ground lease of land adjacent to the golf course, with a term expiring in 2020.
 
  •  The golf course that is part of the Oak Brook Hills Marriott Resort is subject to a ground lease covering approximately 110 acres. The ground lease runs through 2045 including renewal options.
 
Finally, a portion of the parking garage relating to the Renaissance Worthington is subject to three ground leases that cover, contiguously with each other, approximately one-fourth of the land on which the parking


38


 

garage is constructed. Each of the ground leases has a term that runs through July 2067, inclusive of the three 15-year renewal options.
 
These ground leases generally require us to make rental payments (including a percentage of gross receipts as percentage rent with respect to the Courtyard Manhattan/Fifth Avenue ground lease) and payments for all, or in the case of the ground leases covering the Salt Lake City Marriott Downtown extension and a portion of the Marriott Griffin Gate Resort golf course, our tenant’s share of, charges, costs, expenses, assessments and liabilities, including real property taxes and utilities. Furthermore, these ground leases generally require us to obtain and maintain insurance covering the subject property.
 
The following table reflects the annual base rents of our ground leases:
 
             
   
Property
 
Term(1)
 
Annual Rent
 
Ground leases under hotel:   Bethesda Marriott Suites   Through 10/2087   $457,971(2)
    Courtyard Manhattan/Fifth Avenue(3)(4)   10/2007-9/2017   $906,000
        10/2017-9/2027   1,132,812
        10/2027-9/2037   1,416,015
        10/2037-9/2047   1,770,019
        10/2047-9/2057   2,212,524
        10/2057-9/2067   2,765,655
        10/2057-9/2067   3,457,069
        10/2077-9/2085   4,321,336
             
    Salt Lake City Marriott        
    Downtown       Greater of $132,000 or 2.6%
    (Ground lease for hotel)   Through-12/2056   of annual gross room sales
             
    (Ground lease for extension)   1/2008-12/2012   $10,277
        1/2013-12/2017   11,305
             
    Westin Boston Waterfront Hotel(5) (Base Rent)   Through 5/2012   $0
        6/2012-5/2016   500,000
        6/2016-5/2021   750,000
        6/2021-5/2026   1,000,000
        6/2026-5/2031   1,500,000
        6/2031-5/2036   1,750,000
        6/2036-6/2099   No base rent
             
    (Percentage Rent)   Through 6/2016   0% of annual gross revenue
        7/2016-6/2026   1.0% of annual gross revenue
        7/2026-6/2036   1.5% of annual gross revenue
        7/2036-6/2046   2.75% of annual gross revenue
        7/2046-6/2056   3.0% of annual gross revenue
        7/2056-6/2066   3.25% of annual gross revenue
        7/2066-6/2099   3.5% of annual gross revenue
             
Ground leases under parking garage:   Renaissance Worthington   Through-7/2012   $36,613
        8/2012-7/2022   40,400
        8/2022-7/2037   46,081
        8/2037-7/2052   51,764
        8/2052-7/2056   57,444


39


 

             
   
Property
 
Term(1)
 
Annual Rent
 
Ground leases under golf course:   Marriott Griffin Gate Resort   9/2003-8/2008   $90,750
        9/2008-8/2013   99,825
        9/2013-8/2018   109,800
        9/2018-8/2023   120,750
        9/2023-8/2028   132,750
        9/2028-8/2033   147,000
    Oak Brook Hills Marriott Resort   10/1985-9/2025   $1(6)
 
 
(1) These terms assume our exercise of all renewal options.
 
(2) Represents rent for the year ended December 31, 2008. Rent will increase annually by 5.5%.
 
(3) The ground lease term is 49 years. We have the right to renew the ground lease for an additional 49 year term on the same terms then applicable to the ground lease.
 
(4) The total annual rent includes the fixed rent noted in the table plus a percentage rent equal to 5% of gross receipts for each lease year, but only to the extent that 5% of gross receipts exceeds the minimum fixed rent in such lease year.
 
(5) Total annual rent under the ground lease is capped at 2.5% of hotel gross revenues during the initial 30 years of the ground lease.
 
(6) We have the right to extend the term of this lease for two consecutive renewal terms of ten years each with rent at then market value.
 
Subject to certain limitations, an assignment of the ground leases covering the Courtyard Manhattan/Fifth Avenue, a portion of the Marriott Griffin Gate Resort golf course and the Oak Brook Hills Marriott Resort golf course do not require the consent of the ground lessor. With respect to the ground leases covering the Salt Lake City Marriott Downtown hotel and extension, Bethesda Marriott Suites and Westin Boston Waterfront, any proposed assignment of our leasehold interest as ground lessee under the ground lease requires the consent of the applicable ground lessor. As a result, we may not be able to sell, assign, transfer or convey our ground lessee’s interest in any such property in the future absent the consent of the ground lessor, even if such transaction may be in the best interests of our stockholders.

40


 

Debt
 
As of December 31, 2008, we had approximately $878.4 million of outstanding debt. The following table sets forth our debt obligations on our hotels.
 
                         
    Principal
               
    Balance
            Amortization
 
Property
  (in thousands)    
Interest Rate
  Maturity   Date Provisions  
 
Bethesda Marriott Suites
  $ 5,000     LIBOR + 0.95 (1.42%
as of December 31,
2008)
  7/2010     Interest Only  
Frenchman’s Reef & Morning Star
                       
Marriott Beach Resort
    62,240     5.44%   8/2015     30 years (1)
Marriott Griffin Gate Resort
    28,434     5.11%   1/2010     25 years  
Los Angeles Airport Marriott
    82,600     5.30%   7/2015     Interest Only  
Courtyard Manhattan/Fifth Avenue
    51,000     6.48%   6/2016     30 years (2)
Courtyard Manhattan/Midtown East
    41,238     5.195%   12/2009     25 years  
Orlando Airport Marriott
    59,000     5.68%   1/2016     30 years (3)
Salt Lake City Marriott Downtown
    34,441     5.50%   1/2015     20 years  
Renaissance Worthington
    57,400     5.40%   7/2015     30 years (4)
Chicago Marriott
    220,000     5.975%   4/2016     30 years (5)
Austin Renaissance Hotel
    83,000     5.507%   12/2016     Interest Only  
Waverly Renaissance Hotel
    97,000     5.503%   12/2016     Interest Only  
Senior unsecured credit facility(6)
    57,000     LIBOR + 0.95 (2.84%
as of December 31,
2008)
  2/2011     Interest Only  
                         
Total
  $ 878,353                  
                         
 
 
(1) The debt had a three-year interest only period that expired in August 2008. The debt is currently amortizing based on a thirty-year schedule.
 
(2) The debt has a five-year interest only period that commenced in May 2006. After the expiration of that period, the debt will amortize based on a thirty-year schedule.
 
(3) The debt has a five-year interest only period that commenced in December 2005. After the expiration of that period, the debt will amortize based on a thirty-year schedule.
 
(4) The debt has a four-year interest only period that commenced in July 2005. After the expiration of that period, the debt will amortize based on a thirty-year schedule.
 
(5) The debt has a 3.5 year interest only period that commenced in April 2006. After the expiration of that period, the debt will amortize based on a thirty-year schedule.
 
(6) The senior unsecured credit facility matures in February 2011. We have a one-year extension option that will extend the maturity to 2012.
 
Item 3.   Legal Proceedings
 
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance and none of which is expected to have a material impact on our financial condition or results of operation.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of our stockholders during the fourth quarter of the fiscal year ended December 31, 2008.


41


 

 
PART II
 
Item 5.   Market for our common stock and related stockholder matters
 
Market Information
 
Our common stock trades on the New York Stock Exchange, or NYSE, under the symbol “DRH”. The following table sets forth, for the indicated period, the high and low closing prices for the common stock, as reported on the NYSE:
 
                 
    Price Range  
    High     Low  
 
Year Ended December 31, 2007
               
First Quarter
  $ 19.28     $ 16.91  
Second Quarter
  $ 20.94     $ 18.14  
Third Quarter
  $ 21.44     $ 15.57  
Fourth Quarter
  $ 19.16     $ 14.98  
Year Ended December 31, 2008
               
First Quarter
  $ 15.14     $ 11.50  
Second Quarter
  $ 14.41     $ 11.72  
Third Quarter
  $ 12.07     $ 8.65  
Fourth Quarter
  $ 9.93     $ 2.63  
Year Ending December 31, 2009
               
First Quarter (through February 27, 2009)
  $ 5.35     $ 2.96  
 
The closing price of our common stock on the NYSE on February 26, 2009 was $3.00 per share.
 
In order to maintain our qualification as a REIT, we must make distributions to our stockholders each year in an amount equal to at least:
 
  •  90% of our REIT taxable income determined without regard to the dividends paid deduction, plus;
 
  •  90% of the excess of our net income from foreclosure property over the tax imposed on such income by the U.S. Internal Revenue Code of 1986, as amended (the “Code”), minus;
 
  •  Any excess non-cash income.
 
We have paid quarterly cash dividends to common stockholders at the discretion of our Board of Directors. In December 2008, we announced that we would not pay any further dividends in 2008, and we intend to pay our next dividend to our stockholders of record as of December 31, 2009. The 2009 dividend will be an amount equal to 100% of our 2009 taxable income. We are currently assessing whether to utilize the Internal Revenue Service’s Revenue Procedure 2009-15 that permits us to pay a portion of that dividend in shares of common stock and the remainder in cash. The following table sets forth the dividends on common shares for the years ended December 31, 2008 and 2007:
 
             
        Dividend
 
Payment Date
 
Record Date
 
per Share
 
 
April 2, 2007
  March 23, 2007   $ 0.24  
June 22, 2007
  June 15, 2007   $ 0.24  
September 18, 2007
  September 7, 2007   $ 0.24  
January 10, 2008
  December 31, 2007   $ 0.24  
April 1, 2008
  March 21, 2008   $ 0.25  
June 24, 2008
  June 13, 2008   $ 0.25  
September 16, 2008
  September 5, 2008   $ 0.25  


42


 

As of February 27, 2009, there were 17 record holders of our common stock and we believe we have more than a thousand beneficial holders. In order to comply with certain requirements related to our qualification as a REIT, our charter, subject to certain exceptions, limits the number of common shares that may be owned by any single person or affiliated group to 9.8% of the outstanding common shares.
 
Equity compensation plan information.  The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, the 2004 Stock Option and Incentive Plan, as amended, as of December 31, 2008. See Note 5 to the accompanying consolidated financial statements for a complete description of the 2004 Stock Option and Incentive Plan, as amended.
 
Equity Compensation Plan Information
 
                         
                Number of Securities
 
                Remaining Available for
 
    Number of Securities to
    Weighted-Average
    Future Issuance Under
 
    be Issued Upon Exercise
    Exercise Price of
    Equity Compensation Plans
 
    of Outstanding Options,
    Outstanding Options,
    (Excluding Securities
 
Plan Category
  Warrants and Rights     Warrants and Rights     Reflected in Column (a))  
    (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    300,225     $ 12.59       6,275,471  
Equity compensation plans not approved by security holders
                 
                         
Total
    300,225     $ 12.59       6,275,471  
                         
 
Repurchases of equity securities.  We did not repurchase equity securities during the fourth quarter of 2008.


43


 

The following graph provides a comparison of cumulative total stockholder return for the period from May 25, 2005 (the date of our initial public offering) through December 31, 2008, among DiamondRock Hospitality Company, the Standard & Poor’s 500 Index (the “S&P 500 Total Return”) and Morgan Stanley REIT Index (the “RMZ Total Return”).
 
The total return values were calculated assuming a $100 investment on May 25, 2005 with reinvestment of all dividends in (i) our common stock, (ii) the S&P 500 Total Return, and (iii) the RMZ Total Return. The total return values do not include any dividends declared, but not paid, during the period.
 
(PERFORMANCE GRAPH)
 
                                                   
      May 25,
    December 31,
    December 31,
    December 31,
    December 31,
      2005     2005     2006     2007     2008
DiamondRock Hospitality Company Total Return
    $ 100.00       $ 117.58       $ 185.72       $ 163.19       $ 59.00  
RMZ Total Return
    $ 100.00       $ 111.73       $ 151.85       $ 126.32       $ 78.36  
S&P 500 Total Return
    $ 100.00       $ 106.07       $ 122.82       $ 129.58       $ 81.64  
                                                   


44


 

Item 6.   Selected Financial Data
 
The selected historical financial information as of and for the years ended December 31, 2008, 2007, 2006 and 2005 and the period from May 6, 2004 to December 31, 2004, has been derived from our audited historical financial statements. The selected historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006, and the related notes contained elsewhere in this Annual Report on Form 10-K.
 
We present the following two non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) EBITDA; and (2) FFO. We caution investors that amounts presented in accordance with our definitions of EBITDA and FFO may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. EBITDA and FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and FFO may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA and FFO can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. Under this section, as required, we include a quantitative reconciliation of EBITDA and FFO to the most directly comparable GAAP financial performance measure, which is net income (loss).
 
                                         
                            Period from
 
                            May 6,
 
    Year Ended     2004 to
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
 
    2008     2007     2006     2005     2004  
    Historical (in thousands, except for per share data)  
 
Revenues:
                                       
Rooms
  $ 444,070     $ 456,719     $ 316,051     $ 149,336     $ 5,137  
Food and beverage
    211,475       217,505       143,259       63,196       1,508  
Other
    37,689       36,709       25,741       14,254       429  
                                         
Total revenues
    693,234       710,933       485,051       226,786       7,074  
                                         
Operating expenses:
                                       
Rooms
    105,868       104,672       73,110       36,801       1,455  
Food and beverage
    145,181       147,463       96,053       47,257       1,267  
Other hotel expenses and management fees
    257,038       253,817       182,556       95,647       3,445  
Impairment of favorable lease asset
    695                          
Corporate expenses
    13,987       13,818       12,403       13,462       4,114  
Depreciation and amortization
    78,156       74,315       51,192       27,072       1,053  
                                         
Total operating expenses
    600,925       594,085       415,314       220,239       11,334  
                                         
Operating income (loss)
    92,309       116,848       69,737       6,547       (4,260 )
Interest income
    (1,648 )     (2,399 )     (4,650 )     (1,548 )     (1,333 )
Interest expense
    50,404       51,445       36,934       17,367       773  
Gain on early extinguishment of debt
          (359 )                  
                                         
Income (loss) before income taxes
    43,553       68,161       37,453       (9,272 )     (3,700 )
Income tax benefit (expense)
    9,376       (5,264 )     (3,750 )     1,200       1,582  
                                         
Income (loss) from continuing operations
    52,929       62,897       33,703       (8,072 )     (2,118 )
Income from discontinued operations, net of tax
          5,412       1,508       736        
                                         
Net income (loss)
  $ 52,929     $ 68,309     $ 35,211     $ (7,336 )   $ (2,118 )
                                         


45


 

                                         
                            Period from
 
                            May 6,
 
    Year Ended     2004 to
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
 
    2008     2007     2006     2005     2004  
    Historical (in thousands, except for per share data)  
 
Earnings (loss) per share:
                                       
Continuing operations
  $ 0.56     $ 0.66     $ 0.49     $ (0.21 )   $ (0.12 )
Discontinued operations
          0.06       0.02       0.02        
                                         
Basic and diluted earnings (loss) per share
  $ 0.56     $ 0.72     $ 0.51     $ (0.19 )   $ (0.12 )
                                         
Cash dividends declared per common share
  $ 0.75     $ 0.96     $ 0.72     $ 0.38     $  
                                         
FFO(1)
  $ 131,085     $ 140,003     $ 87,573     $ 20,254     $ (1,065 )
                                         
EBITDA(2)
  $ 172,113     $ 200,150     $ 127,890     $ 36,268     $ (1,874 )
                                         
 
                                         
    December 31,  
    2008     2007     2006     2005     2004  
 
Balance sheet data (in thousands):
                                       
Property and equipment, net
  $ 1,920,216     $ 1,938,832     $ 1,686,426     $ 870,562     $ 285,642  
Cash and cash equivalents
    13,830       29,773       19,691       9,432       76,983  
Total assets
    2,102,536       2,131,627       1,818,965       966,011       391,691  
Total debt
    878,353       824,526       843,771       431,177       180,772  
Total other liabilities
    206,551       226,819       190,266       71,446       15,332  
Stockholders’ equity
    1,017,632       1,080,282       784,928       463,388       195,587  
 
 
(1) FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) determined in accordance with GAAP, excluding gains (losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). The calculation of FFO may vary from entity to entity, thus our presentation of FFO may not be comparable to other similarly titled measures of other reporting companies. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
 
FFO is a supplemental industry-wide measure of REIT operating performance, the definition of which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002). Since the introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical GAAP cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical GAAP cost accounting to be insufficient by themselves. Accordingly, we believe FFO (combined with our primary GAAP presentations) help improve our stockholders’ ability to understand our operating performance. We only use FFO as a supplemental measure of operating performance. The following is a reconciliation between net income (loss) and FFO (in thousands):
 
                                         
                            Period from
 
                            May 6,
 
                            2004 to
 
    Year Ended December 31,     December 31,
 
    2008     2007     2006     2005     2004  
 
Net income (loss)
  $ 52,929     $ 68,309     $ 35,211     $ (7,336 )   $ (2,118 )
Real estate related depreciation and amortization(a)
    78,156       75,477       52,362       27,590       1,053  
Gain on property disposal, net of tax
          (3,783 )                  
                                         
FFO
  $ 131,085     $ 140,003     $ 87,573     $ 20,254     $ (1,065 )
                                         
 
(a) Amounts for the years ended December 31, 2007, 2006, and 2005 include $1.2 million, $1.2 million and $0.5 million, respectively, of depreciation expense included in discontinued operations.

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(2) EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure for us and for our stockholders and is a complement to net income and other financial performance measures provided in accordance with GAAP. We use EBITDA to measure the financial performance of our operating hotels because it excludes expenses such as depreciation and amortization, taxes and interest expense, which are not indicative of operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on a variety of factors unrelated to the hotels’ financial performance, we can more accurately assess the financial performance of our hotels. Under GAAP, hotels are recorded at historical cost at the time of acquisition and are depreciated on a straight-line basis. By excluding depreciation and amortization, we believe EBITDA provides a basis for measuring the financial performance of hotels unrelated to historical cost. However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation between net income (loss) and EBITDA (in thousands):
 
                                         
                            Period from
 
                            May 6,
 
                            2004 to
 
    Year Ended December 31,     December 31,
 
    2008     2007     2006     2005     2004  
 
Net income (loss)
  $ 52,929     $ 68,309     $ 35,211     $ (7,336 )   $ (2,118 )
Interest expense
    50,404       51,445       36,934       17,367       773  
Income tax (benefit) expense(a)
    (9,376 )     4,919       3,383       (1,353 )     (1,582 )
Real estate related depreciation and amortization(b)
    78,156       75,477       52,362       27,590       1,053  
                                         
EBITDA
  $ 172,113     $ 200,150     $ 127,890     $ 36,268     $ (1,874 )
                                         
 
(a) Amounts for the years ended December 31, 2007, 2006, and 2005 include $0.3 million, $0.4 million and $0.2 million, respectively, of income tax benefit included in discontinued operations.
 
(b) Amounts for the years ended December 31, 2007, 2006, and 2005 include $1.2 million, $1.2 million and $0.5 million, respectively, of depreciation expense included in discontinued operations.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Forward-Looking Statements” and “Risk Factors” contained in our SEC filings.
 
Overview
 
We are a lodging focused real estate company that owns, as of February 28, 2009, twenty premium hotels and resorts that contain approximately 9,600 guestrooms. We are committed to maximizing stockholder value through investing in premium full service hotels and, to a lesser extent, premium urban limited service hotels located throughout the United States. Our hotels are concentrated in key gateway cities and in destination


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resort locations and are all operated under a brand owned by one of the top three national brand companies (Marriott, Starwood or Hilton).
 
We are owners, as opposed to operators, of hotels. As an owner, we receive all of the operating profits or losses generated by our hotels, after we pay the hotel managers a fee based on the revenues and profitability of the hotels and reimburse all of their direct and indirect operating costs.
 
As an owner, we create value by acquiring the right hotels with the right brands in the right markets, prudently financing our hotels, thoughtfully re-investing capital in our hotels, implementing profitable operating strategies, approving the annual operating and capital budgets for our hotels, closely monitoring the performance of our hotels, and deciding if and when to sell our hotels. In addition, we are committed to enhancing the value of our operating platform by being open and transparent in our communications with investors, monitoring our corporate overhead and following corporate governance best practice.
 
We differentiate ourselves from our competitors because of our adherence to three basic principles:
 
  •  high quality urban and resort focused branded real estate;
 
  •  conservative capital structure; and
 
  •  thoughtful asset management.
 
High Quality and Resort Focused Branded Real Estate
 
We own twenty premium hotels and resorts in North America. These hotels and resorts are all categorized as upper upscale as defined by Smith Travel Research and are generally located in high barrier to entry markets with multiple demand generators.
 
Our properties are concentrated in five key gateway cities (New York City, Los Angeles, Chicago, Boston and Atlanta) and in destination resorts (such as the U.S. Virgin Islands and Vail, Colorado). We believe that gateway cities and destination resorts will achieve higher long-term growth because they are attractive business and leisure destinations. We also believe that these locations are better insulated from new supply due to relatively high barriers to entry and expensive construction costs.
 
We believe that the higher quality lodging assets create more dynamic cash flow growth and superior long-term capital appreciation.
 
A core tenet of our strategy is to leverage national hotel brands. We strongly believe in the value of powerful national brands because we believe that they are able to produce incremental revenue and profits compared to similar unbranded hotels. In particular, we believe that branded hotels outperform unbranded hotels in an economic downturn. Dominant national hotel brands typically have very strong reservation and reward systems and sales organizations, and all of our hotels are operated under a brand owned by one of the top three national brand companies (Marriott, Starwood or Hilton) and all but two of the hotels are managed by the brand company directly. Generally, we are interested in owning only those hotels that are operated under a nationally recognized brand or acquiring hotels that can be converted into a nationally branded hotel.
 
Conservative Capital Structure
 
Since our formation in 2004, we have been consistently committed to a conservative and flexible capital structure with prudent leverage levels. During 2004 though early 2007, we took advantage of the low interest rate environment by fixing our interest rates for an extended period of time. Moreover, during the recent peak in commercial real estate market, we maintained low financial leverage by funding the majority of our acquisitions through the issuance of equity. This strategy allowed us to maintain a conservative balance sheet with a moderate amount of debt. During the peak years, we believed, and present events have confirmed, that it would be inappropriate to increase the inherent risk of a highly cyclical business through a highly levered capital structure.
 
The current economic environment has confirmed the merits of our conservative financing strategy. We maintain a reasonable amount of inexpensive fixed interest rate mortgage debt with limited near-term


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maturities. As of December 31, 2008, we had $878.4 million of debt outstanding, which consists of $57 million outstanding on our senior unsecured credit facility and $821.4 million of mortgage debt. We currently have eight hotels, with an aggregate historic cost of $0.8 billion, which are unencumbered by mortgage debt. As of December 31, 2008, our debt has a weighted-average interest rate of 5.44% and a weighted-average maturity date of 6.3 years. In addition, 92.9% of our debt is fixed rate and over 80% of it matures in 2015 or later. We expect that we will be able to either refinance or repay the $68 million of debt coming due in 2009 and 2010 with a combination of cash on hand, proceeds from refinancing the mortgage debt on the existing mortgaged hotels or incurring new mortgage debt on one or more of our unencumbered hotels. If efficient mortgage debt is unavailable, we have the ability to repay such debt with drawings under our $200 million senior unsecured credit facility, which had over $140 million available as of December 31, 2008. We may also consider raising equity capital to repay such debt.
 
We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.
 
During the current recession, our corporate goals and objectives are focused on preserving and enhancing our liquidity. While there can be no assurance that we will be able to accomplish all or any of these steps, we have taken, or are evaluating, a number of steps to achieve these goals, as follows:
 
  •  We chose to not pay a fourth quarter dividend and we intend to pay our next dividend to our stockholders of record as of December 31, 2009. We expect the 2009 dividend will be in an amount equal to 100% of our 2009 taxable income.
 
  •  We are assessing whether to utilize the Internal Revenue Service’s Revenue Procedure 2009-15 in order to pay a portion of our 2009 dividend in shares of our common stock and the remainder in cash.
 
  •  We also have significantly curtailed capital spending for 2009 and expect to fund less than $10 million in capital expenditures in 2009, compared to an average of $35 million per year of owner-funded capital expenditures during 2006, 2007 and 2008.
 
  •  We are considering the sale of one or more of our hotels.
 
  •  We may issue common stock.
 
  •  We have amended our senior unsecured credit facility to reduce the risk of default under one of our financial covenants. We may seek further amendments to our credit facility to make additional changes to the financial covenants.
 
  •  We have engaged mortgage brokers to determine potential options for additional property-specific mortgage debt or the refinancing of our two mortgages that mature prior to January 2010.
 
Our current liquidity strategy is to take reasonable steps to further delever the Company in the near term, focusing on reducing amounts outstanding under our credit facility. If we achieve this goal, we believe that we will be uniquely positioned among lodging REITs as we will have limited outstanding corporate debt and no preferred equity. Once we repay or refinance the $68 million of mortgage debt coming due at the end of 2009, we will have no property-level debt maturing prior to 2015. In the longer term, we may use any accumulated cash to acquire hotels that fit our long-term strategic goals or to repurchase shares of our common stock. There can be no assurances that we will be able to achieve any elements of our current liquidity strategy.
 
As of December 31, 2008, 93.5% of our outstanding debt consisted of property specific mortgage debt. All of such mortgage debt was borrowed by unique special purpose entities 100% owned by us. Moreover, all of our property specific mortgage debt consists of single property mortgages that do not contain any cross-default, financial covenants or general recourse provisions to any assets outside of the special purpose entities, including the company or our operating partnership. Only our credit facility includes a corporate guarantee or


49


 

financial covenants, but the amount outstanding under our credit facility as of December 31, 2008 comprised less than 7% of our outstanding debt. As a result, in the event that the current recession becomes a more severe financial crisis, we generally expect to have the flexibility to isolate debt issues at any property without placing other assets in jeopardy.
 
Thoughtful Asset Management
 
We believe that we are able to create significant value in our portfolio by utilizing our management’s extensive experience and our innovative asset management strategies. Our senior management team has an established broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, project managers and contractors and other key industry participants.
 
In the current economic environment, we believe that our deep lodging experience, our network of industry relationships and our asset management strategies uniquely position us to minimize the impact of declining revenues on our hotels. In particular, we are focused on controlling our property-level and corporate expenses, as well as working closely with our managers to optimize the mix of business at our hotels to maximize potential revenue. Our property-level cost containment includes the implementation of aggressive contingency plans at each of our hotels. The contingency plans include controlling labor expenses eliminating of hotel staff positions, adjusting food and beverage outlet hours of operation and not filling open positions. In addition, our strategy to significantly renovate nearly all of the hotels in our portfolio from 2006 to 2008 resulted in the flexibility to significantly curtail our planned capital expenditures for 2009 and even into 2010.
 
We use our broad network to maximize the value of our hotels. Under the regulations governing REITs, we are required to engage a hotel manager that is an eligible independent contractor through one of our subsidiaries to manage each of our hotels pursuant to a management agreement. Our philosophy is to negotiate management agreements that give us the right to exert significant influence over the management of our properties, annual budgets and all capital expenditures, and then to use those rights to continually monitor and improve the performance of our properties. We cooperatively partner with the managers of our hotels in an attempt to increase operating results and long-term asset values at our hotels. In addition to working directly with the personnel at our hotels, our senior management team also has long-standing professional relationships with our hotel managers’ senior executives, and we work directly with these senior executives to improve the performance of our portfolio.
 
We believe we can create significant value in our portfolio through innovative asset management strategies such as rebranding, renovating and repositioning. We are committed to regularly evaluating our portfolio to determine if we can employ these value-added strategies at our hotels. During 2006 to 2008 we completed a significant amount of capital reinvestment in our hotels — completing projects that ranged from room renovations, to a total renovation and repositioning of the hotel, to the addition of new meeting space, spa or restaurant repositioning. In connection with our renovations and repositionings, our senior management team and our asset managers are individually committed to completing these renovations on time, on budget and with minimum disruption to our hotels. As we have significantly renovated nearly all of the hotels in our portfolio, we have chosen to minimize capital expenditures beginning in 2009.
 
Key Indicators of Financial Condition and Operating Performance
 
We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
 
  •  Occupancy percentage;
 
  •  Average Daily Rate (or ADR);


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  •  Revenue Per Available Room (or RevPAR);
 
  •  Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA); and
 
  •  Funds From Operations (or FFO).
 
Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 64% of our total revenues for each of the years ended December 31, 2008 and 2007 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.
 
Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing strategies of competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of our hotel managers and the brands we have licensed.
 
We also use EBITDA and FFO as measures of the financial performance of our business. See “Non-GAAP Financial Matters.”
 
Overview of 2008 Results and Outlook for 2009
 
After several years of above-average growth in the lodging industry, the United States is now in a recession and the operating environment has become very challenging. Historically, economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand and each of these indicators dramatically deteriorated during 2008. The deterioration accelerated sharply in the fourth quarter of 2008 and we expect that such economic indicators will further weaken during 2009. As a result, our revenue declined in 2008 compared to 2007 and we currently expect that our hotel revenues will contract further during 2009.
 
Compared to 2007, the peak year in the most recent lodging cycle, transient demand has noticeably declined, particularly among customers in the corporate and leisure segments that comprise approximately 60% of our room sales. The recession has resulted in reduced travel as well as a heightened focus on reducing the cost of travel. During 2008, the impact was primarily reflected in lower occupancy at our hotels, as the ADR was flat compared to 2007. We expect a significant decline in both our ADR and occupancy percentages in 2009. Moreover, in an uncertain economy where consumers and corporations have a negative outlook, it is very difficult to accurately forecast the behavior of these individual travelers, beyond the obvious conclusion that lodging demand will decline in 2009 compared to 2008. We believe that a number of these individual travelers will continue to postpone or eliminate travel, or travel on a reduced budget, until consumer and business sentiment improves.
 
We are working closely with our hotel managers at our hotels to control our operating costs. However, certain of our cost categories are increasing at a rate greater than the current rate of inflation, including wages, benefits, utilities and real estate taxes. The combination of declining revenues and increasing operating costs will impact our operating results throughout 2009. In addition, certain of our markets will experience new hotel supply in 2009, the most significant of which is in Fort Worth, Texas, where we have one hotel. We are also concerned with pressures from potential unionization at our hotels in light of the proposed Employee Free Choice Act. As a result, we are increasing wages and benefits at certain of our hotels to decrease the likelihood of unionization.
 
Although negative operating trends are likely to extend for some period of time, we expect operating results to improve when general economic conditions improve. However, given the current financial markets crisis and general economic conditions, there can be no assurances that our operating results will not continue


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to decrease for the foreseeable future. However, we believe that we are generally well-positioned for the recession with a strong balance sheet.
 
The following table sets forth certain operating information for each of our hotels owned during the year ended December 31, 2008.
 
                                             
                                % Change
 
        Number of
    Average
                from 2007
 
Property
 
Location
  Rooms     Occupancy (%)     ADR ($)     RevPAR ($)     RevPAR(1)  
 
Chicago Marriott
  Chicago, Illinois     1,198       73.1 %   $ 208.74     $ 152.51       (7.8 )%
Los Angeles Airport Marriott
  Los Angeles, California     1,004       84.5       114.51       96.79       2.2  
Westin Boston Waterfront Hotel
  Boston, Massachusetts     793       69.1       203.40       140.55       (2.4 )
Renaissance Waverly
  Atlanta, Georgia     521       66.8       142.19       94.95       (5.5 )
Salt Lake City Marriott Downtown
  Salt Lake City, Utah     510       65.4       135.49       88.67       (6.9 )
Renaissance Worthington
  Fort Worth, Texas     504       73.3       174.46       127.82       (2.0 )
Frenchman’s Reef & Morning
  St. Thomas, U.S.                                        
Star Marriott Beach Resort
  Virgin Islands     502       79.8       238.09       190.07       (0.8 )
Renaissance Austin
  Austin, Texas     492       68.6       161.09       110.50       (5.5 )
Torrance Marriott South Bay
  Los Angeles County, California     487       78.3       124.03       97.10       0.5  
Orlando Airport Marriott
  Orlando, Florida     486       72.8       117.43       85.48       (7.4 )
Marriott Griffin Gate Resort
  Lexington, Kentucky     408       64.1       145.33       93.10       4.7  
Oak Brook Hills Marriott Resort
  Oak Brook, Illinois     386       52.2       132.39       69.12       (11.5 )
Westin Atlanta North at Perimeter
  Atlanta, Georgia     369       61.5       136.74       84.13       (9.6 )
Vail Marriott Mountain Resort & Spa
  Vail, Colorado     346       64.4       237.18       152.80       1.6  
Marriott Atlanta Alpharetta
  Atlanta, Georgia     318       59.6       147.89       88.20       (5.1 )
Courtyard Manhattan/Midtown East
  New York, New York     312       88.3       302.57       267.17       (1.4 )
Conrad Chicago
  Chicago, Illinois     311       75.6       238.42       180.35       (4.0 )
Bethesda Marriott Suites
  Bethesda, Maryland     272       69.8       191.34       133.61       (2.2 )
Courtyard Manhattan/Fifth Avenue
  New York, New York     185       87.8       300.36       263.80       (1.2 )
The Lodge at Sonoma, a Renaissance Resort & Spa
  Sonoma, California     182       69.3       224.47       155.54       (1.8 )
                                             
TOTAL/WEIGHTED AVERAGE(1)
        9,586       71.8 %   $ 176.73     $ 126.95       (3.3 )%
                                             
 
 
(1) Total hotel statistics and the percentage change from 2007 RevPAR reflect the comparable period in 2007 to our 2008 ownership period for our 2007 acquisition and disposition.
 
Results of Operations
 
Comparison of the Year Ended December 31, 2008 to the Year Ended December 31, 2007
 
As of December 31, 2008, we owned twenty hotels. Our total assets were $2.1 billion as of December 31, 2008. Total liabilities were $1.1 billion as of December 31, 2008, including $878.4 million of debt. Stockholders’ equity was approximately $1.0 billion as of December 31, 2008.
 
Revenues.  Revenues consisted primarily of the room, food and beverage and other revenues from our hotels. Revenues for the years ended December 31, 2008 and 2007 consisted of the following (in thousands):
 
                 
    Year Ended December 31,  
    2008     2007  
 
Rooms
  $ 444,070     $ 456,719  
Food and beverage
    211,475       217,505  
Other
    37,689       36,709  
                 
Total revenues
  $ 693,234     $ 710,933  
                 


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The following are the pro forma key hotel operating statistics for the years ended December 31, 2008 and 2007, respectively. The pro forma hotel operating statistics presented below include the results of operations of the Westin Boston Waterfront Hotel under previous ownership for the period from January 1, 2007 to January 30, 2007.
 
                     
    Year Ended December 31,      
    2008     2007     % Change
 
Occupancy%
    71.8 %     74.0 %   (2.2) percentage points
ADR
  $ 176.73     $ 177.49     (0.4)%
RevPAR
  $ 126.95     $ 131.33     (3.3)%
 
Our total revenues decreased 2.5 percent, from $710.9 million for the year ended December 31, 2007 to $693.2 million for the year ended December 31, 2008. The decrease is primarily due to a 3.3 percent decline in RevPAR, driven by a 0.4 percent decrease in ADR and a 2.2 percentage point decrease in occupancy, as well as lower food and beverage revenue. Nearly all of our hotels experienced revenue declines for the year ended December 31, 2008 as compared to the year ended December 31, 2007, reflecting the impact of the current recession on all of our markets. The negative trends accelerated sharply in the fourth quarter of 2008. In addition, revenue at the Chicago Marriott was adversely impacted by a major renovation in the first half of 2008.
 
Individual hotel revenues for the years ended December 31, 2008 and 2007 consisted of the following (in millions):
 
                         
    Year Ended December 31,     Increase
 
    2008     2007     (Decrease)  
 
Chicago Marriott
  $ 96.2     $ 103.3     $ (7.1 )
Westin Boston Waterfront(1)
    73.0       68.9       4.1  
Los Angeles Airport Marriott
    59.1       58.9       0.2  
Frenchman’s Reef & Morning Star Marriott Beach Resort
    54.7       54.7        
Renaissance Worthington
    38.3       39.8       (1.5 )
Renaissance Austin
    35.7       36.3       (0.6 )
Renaissance Waverly
    35.2       38.0       (2.8 )
Courtyard Manhattan / Midtown East
    31.7       32.1       (0.4 )
Marriott Griffin Gate Resort
    28.2       27.1       1.1  
Vail Marriott Mountain Resort & Spa
    27.8       28.1       (0.3 )
Conrad Chicago
    27.4       28.5       (1.1 )
Torrance Marriott South Bay
    25.1       25.2       (0.1 )
Salt Lake City Marriott Downtown
    24.9       26.4       (1.5 )
Oak Brook Hills Marriott Resort
    24.6       27.2       (2.6 )
Orlando Airport Marriott
    24.4       25.9       (1.5 )
Westin Atlanta North at Perimeter
    18.3       19.4       (1.1 )
The Lodge at Sonoma, a Renaissance Resort & Spa
    18.1       18.8       (0.7 )
Courtyard Manhattan / Fifth Avenue
    18.0       18.3       (0.3 )
Bethesda Marriott Suites
    17.6       18.0       (0.4 )
Marriott Atlanta Alpharetta
    14.9       16.0       (1.1 )
                         
Total
  $ 693.2     $ 710.9     $ (17.7 )
                         


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(1) The Westin Boston Waterfront Hotel was acquired on January 31, 2007. The year ended December 31, 2007 includes the operations for the period from January 31, 2007 (date of acquisition) to December 31, 2007.
 
Hotel operating expenses.  Hotel operating expenses consist primarily of operating expenses of our hotels, including non-cash ground rent expense. The operating expenses for the years ended December 31, 2008 and 2007 consisted of the following (in millions):
 
                 
    Year Ended December 31,  
    2008     2007  
 
Rooms departmental expenses
  $ 105.9     $ 104.7  
Food and beverage departmental expenses
    145.2       147.5  
Other hotel expenses
    194.7       191.0  
Base management fees
    18.9       19.5  
Yield support
          (0.8 )
Incentive management fees
    9.7       11.1  
Property taxes
    23.9       23.3  
Ground rent — Contractual
    2.0       1.9  
Ground rent — Non-cash
    7.8       7.8  
                 
Total hotel operating expenses
  $ 508.1     $ 506.0  
                 
 
Our hotel operating expenses increased $2.1 million from $506.0 million for the year ended December 31, 2007 to $508.1 million for the year ended December 31, 2008. Our operating expenses, which consist of both fixed and variable costs, are primarily impacted by changes in occupancy, inflation and revenues, though the effect on specific costs will differ. The increase from 2007 is primarily attributable to an increase in departmental and other operating expenses due to higher wages and benefits and higher energy costs at our hotels. In addition, 2007 benefited from $0.8 million in yield support being recognized. The increase is partially offset by lower base and incentive management fees due to lower revenues and operating profits in 2008.
 
Impairment of favorable lease asset.  We recorded an impairment loss of $0.7 million on the favorable leasehold asset related to our option to develop a hotel on an undeveloped parcel of land adjacent to the Westin Boston Waterfront Hotel during 2008. The fair market value of this option declined from $12.8 million to $12.1 million as of December 31, 2008.
 
Depreciation and amortization.  Our depreciation and amortization expense increased $3.9 million from $74.3 million for the year ended December 31, 2007 to $78.2 million for the year ended December 31, 2008. The increase is due to increased capital expenditures in 2008, primarily consisting of the significant capital projects at the Chicago Marriott and the Westin Boston Waterfront Hotel. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced.
 
Corporate expenses.  Corporate expenses principally consisted of employee related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses increased from $13.8 million for the year ended December 31, 2007 to $14.0 million for the year ended December 31, 2008 primarily due to an increase in stock-based compensation, payroll and professional fees, partially offset by lower dead deal costs in 2008.
 
Interest expense.  Our interest expense totaled $50.4 million for the year ended December 31, 2008. This interest expense is related to mortgage debt ($47.0 million), amortization of deferred financing costs ($0.8 million) and interest and unused facility fees on our credit facility ($2.6 million). As of December 31, 2008, we had property-specific mortgage debt outstanding on twelve of our hotels. On all but one of these


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hotels, we have fixed-rate secured debt, which bears interest at rates ranging from 5.11% to 6.48% per year. Amounts drawn under the credit facility bear interest at a variable rate that fluctuates based on the level of outstanding indebtedness in relation to the value of our assets from time to time. The weighted-average interest rate on our credit facility was 2.84% as of December 31, 2008. We had $57.0 million drawn on the credit facility as of December 31, 2008. Our weighted-average interest rate on all debt as of December 31, 2008 was 5.44%.
 
Interest income.  Our interest income decreased $0.8 million from $2.4 million for the year ended December 31, 2007 to $1.6 million for the year ended December 31, 2008. The decrease from the comparable period in 2007 is primarily due to lower interest rates earned on our corporate cash in 2008.
 
Income taxes.  We recorded a benefit for income taxes from continuing operations of $9.4 million for the year ended December 31, 2008 based on the $25.4 million pre-tax loss of our TRS for the year ended December 31, 2008, offset by foreign income tax expense of $0.3 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort.
 
Comparison of the Year Ended December 31, 2007 to the Year Ended December 31, 2006
 
As of December 31, 2007, we owned twenty hotels. Our total assets were $2.1 billion as of December 31, 2007. Total liabilities were $1.1 billion as of December 31, 2007, including $824.5 million of debt. Stockholders’ equity was approximately $1.1 billion as of December 31, 2007. Our net income for the year ended December 31, 2007 was $68.3 million. We acquired one hotel during the year ended December 31, 2007 and five hotels during the year ended December 31, 2006. Accordingly, the current period results are not comparable to the results for the corresponding period in 2006.
 
Revenues.  Revenues consisted primarily of the room, food and beverage and other revenues from our hotels. Revenues for the years ended December 31, 2007 and 2006 consisted of the following (in thousands):
 
                 
    Year Ended December 31,  
    2007     2006  
 
Rooms
  $ 456,719     $ 316,051  
Food and beverage
    217,505       143,259  
Other
    36,709       25,741  
                 
Total revenues
  $ 710,933     $ 485,051  
                 
 
The following pro forma key hotel operating statistics for the years ended December 31, 2007 and 2006 presented below include the prior year operating statistics for the comparable period in 2006 to our 2007 ownership period. Same-store RevPAR for the full year 2007 increased 9.8 percent from $118.64 to $130.21 as compared to the same period in 2006, driven by a 6.2 percent increase in the average daily rate and a 2.4 percentage point increase in occupancy (from 71.7 percent to 74.1 percent).
 
                     
    Year Ended December 31,      
    2007     2006     % Change
 
Occupancy%
    74.1 %     71.7 %   2.4 percentage points
ADR
  $ 175.66     $ 165.43     6.2%
RevPAR
  $ 130.21     $ 118.64     9.8%
 
Our total revenues increased $225.8 million, from $485.1 million for the year ended December 31, 2006 to $710.9 million for the year ended December 31, 2007. This increase includes amounts that are not comparable year-over-year as follows:
 
  •  $68.9 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
  •  $36.0 million increase from the Renaissance Waverly, which was purchased in December 2006;


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  •  $34.5 million increase from the Renaissance Austin, which was purchased in December 2006;
 
  •  $25.1 million increase from the Conrad Chicago, which was purchased in November 2006;
 
  •  $22.0 million increase from the Chicago Marriott, which was purchased in March 2006; and
 
  •  $6.5 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006.
 
The remaining increase of $32.8 million is attributable to a $24.5 million increase in room revenue and an $8.3 million increase in food and beverage and other operating revenue at the comparable hotels. The increase in room revenue was the result of a 9.9% increase in comparable hotel RevPAR which was primarily due to a 6.7% increase in ADR and a 2.2% increase in occupancy at the comparable hotels.
 
Hotel operating expenses.  Our hotel operating expenses from continuing operations totaled $506.0 million for the year ended December 31, 2007. Hotel operating expenses consisted primarily of operating expenses of our hotels, including approximately $7.8 million of non-cash ground rent expense. The operating expenses for the years ended December 31, 2007 and 2006 consisted of the following (in millions):
 
                 
    Year Ended December 31,  
    2007     2006  
 
Rooms departmental expenses
  $ 104.7     $ 73.1  
Food and beverage departmental expenses
    147.5       96.1  
Other hotel expenses
    191.0       137.8  
Base management fees
    19.5       13.8  
Yield support
    (0.8 )     (2.7 )
Incentive management fees
    11.1       8.4  
Property taxes
    23.3       16.0  
Ground rent — Contractual
    1.9       1.8  
Ground rent — Non-cash
    7.8       7.4  
                 
Total hotel operating expenses
  $ 506.0     $ 351.7  
                 
 
Our hotel operating expenses increased $154.3 million from $351.7 million for the year ended December 31, 2006 to $506.0 million for the year ended December 31, 2007. This increase includes amounts that are not comparable year-over-year as follows:
 
  •  $47.3 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
  •  $25.7 million increase from the Renaissance Waverly, which was purchased in December 2006;
 
  •  $24.4 million increase from the Renaissance Austin, which was purchased in December 2006;
 
  •  $16.9 million increase from the Chicago Marriott, which was purchased in March 2006;
 
  •  $16.7 million increase from the Conrad Chicago, which was purchased in November 2006; and
 
  •  $4.6 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006.
 
The remaining increase of $18.7 million is attributable to an increase in departmental and other operating expenses at the comparable hotels as well as lower yield support recognized in 2007 compared to 2006.
 
In connection with entering into certain management agreements with Marriott, Marriott provided us with limited operating cash flow guarantees (“yield support”) for those hotels. The yield support was designed to protect us from the disruption often associated with changing the hotel’s brand or manager or undergoing significant renovations. Across our portfolio, we were entitled to up to $0.8 million of yield support in 2007 for Oak Brook Hills Marriott and $0.1 million (classified in discontinued operations on the accompanying statement of operations) for the Buckhead SpringHill Suites. We recognized all of our entitled yield support in 2007.


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Depreciation and amortization.  Our depreciation and amortization expense from continuing operations totaled $74.3 million for the year ended December 31, 2007. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $23.1 million from $51.2 million for the year ended December 31, 2006 to $74.3 million for the year ended December 31, 2007. This increase includes amounts that are not comparable year-over-year as follows:
 
  •  $10.4 million increase from the Westin Boston Waterfront Hotel, which was newly built in 2006 and purchased in January 2007;
 
  •  $3.6 million increase from the Renaissance Waverly, which was purchased in December 2006;
 
  •  $3.0 million increase from the Renaissance Austin, which was purchased in December 2006;
 
  •  $3.3 million increase from the Conrad Chicago, which was purchased in November 2006;
 
  •  $1.0 million increase from the Westin Atlanta North at Perimeter, which was purchased in May 2006; and
 
  •  $2.5 million increase from the Chicago Marriott, which was purchased in March 2006.
 
The remaining decrease of $0.7 million is attributable to lower depreciation expense in 2007 compared to 2006 as more assets were fully depreciated in 2007 due to renovations taking place at many hotels resulting in FFE being replaced.
 
Corporate expenses.  Corporate expenses principally consisted of employee related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses increased from $12.4 million for the year ended December 31, 2006 to $13.8 million for the year ended December 31, 2007, due primarily to an increase in stock-based compensation expense and dead deal costs. In 2007, we explored several strategic alternatives, including the potential acquisition of two separate lodging companies as well as the potential sale of our company to a private equity firm. In connection with the latter effort, we incurred approximately $600,000 of expenses before abandoning the transaction because of difficulties in the debt markets.
 
Interest expense.  Our interest expense totaled $51.4 million for the year ended December 31, 2007. This interest expense is related to mortgage debt incurred (or in one case assumed) in connection with our acquisition of our hotels ($47.9 million), amortization and write-off of deferred financing costs ($0.8 million) and interest and unused facility fees on our credit facility ($2.7 million). As of December 31, 2007, we had property-specific mortgage debt outstanding on twelve of our hotels. 99.4% of our debt carried fixed interest rates and bears interest at rates ranging from 5.11% to 6.48% per year. Our weighted-average interest rate as of December 31, 2007 was 5.6%.
 
Interest income.  We recorded interest income of $2.4 million for the year ended December 31, 2007. Interest income decreased from the comparable period in 2006 as a result of incremental interest earned on cash received from our follow-on offerings during 2006.
 
Gain on early extinguishment of debt.  During the year ended December 31, 2007, we repaid our $18.4 million fixed-rate mortgage debt on the Bethesda Marriott Suites and replaced it with a $5.0 million variable-rate mortgage. In connection with this transaction, we recognized a gain on the early extinguishment of $0.4 million, which is comprised of the write-off of the related debt premium of $2.5 million offset by a prepayment penalty of $2.0 million and the write-off of deferred financing costs of $0.1 million.


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Discontinued operations.  Income from discontinued operations was the result of the sale of the SpringHill Suites Atlanta Buckhead on December 21, 2007. The following table summarizes the income from discontinued operations for the year ended December 31, 2007 (in thousands):
 
         
Revenues
  $ 6,483  
         
Pre-tax income from operations
    1,284  
Gain on disposal, net of $0.1 million of income taxes
    3,783  
Income tax benefit from operations of related TRS
    345  
         
Income from discontinued operations
  $ 5,412  
         
 
Income taxes.  We recorded an expense for income taxes from continuing operations of $5.3 million for the year ended December 31, 2007 based on the $9.3 million pre-tax income of our TRS for the year ended December 31, 2007, together with foreign income tax expense of $1.0 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort.
 
Liquidity and Capital Resources
 
The current recession and related financial crisis has resulted in deleveraging attempts throughout the global financial system. As banks and other financial intermediaries reduce their leverage and incur losses on their existing portfolio of loans, the amount of capital that they are able to lend has materially decreased. As a result, it is a very difficult borrowing environment for all borrowers, even those that have strong balance sheets. While we have low leverage and a significant number of high quality unencumbered assets, we are uncertain if we could currently obtain new debt, or refinance existing debt, on reasonable terms in the current market.
 
Owning full service urban and resort hotels is a capital intensive enterprise. Full service urban and resort hotels are expensive to acquire or build and require regular significant capital expenditures to satisfy guest expectations. However, even with the current depressed cash flows, we project that our operating cash flow will be sufficient to pay for almost all of our liquidity and other capital needs over the medium term. At present, we only project the need for additional capital to refinance or repay the $68 million of debt that is maturing in December 2009 and January 2010 and for the acquisition of additional hotels or repurchase of additional shares of our common stock, should we decide to make either of those investments. We currently expect that we will either be able to refinance the debt coming due at the end of 2009 or repay such debt with a draw on our existing credit facility or by incurring new mortgage debt on one or more of our unencumbered hotels. We may also consider raising equity capital to repay such debt.
 
Our short-term liquidity requirements consist primarily of funds necessary to fund future distributions to our stockholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotels, including capital expenditures as well as payments of interest and principal. We currently expect that our operating cash flows will be sufficient to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our credit facility.
 
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, expansions and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, cash provided by operations and borrowings, as well as through the issuances of additional equity or debt securities. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us.


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Our Financing Strategy
 
Since our formation in 2004, we have consistently committed to maintaining a conservative and flexible capital structure with prudent leverage levels. During 2004 though early 2007, we took advantage of the low interest rate environment by fixing our debt rates for an extended period of time. Moreover, during the recent peak in the commercial real estate market, we maintained low financial leverage by funding the majority of our acquisitions through the issuance of equity. This strategy allowed us to maintain a conservative balance sheet with a moderate amount of debt. During the peak years, we believed, and present events have confirmed, that it would be inappropriate to increase the inherent risk of a highly cyclical business through a highly levered capital structure.
 
We remain committed to maintaining a conservative capital structure with a low level of leverage that is predominately comprised of long-term fixed-rate debt. However, we maintain the flexibility to modify these strategies if we believe fundamental changes have occurred in the capital or lodging markets.
 
As of December 31, 2008, our debt has a weighted-average interest rate of 5.44% and a weighted-average maturity date of 6.3 years. In addition, 92.9% of our debt is fixed rate. As of December 31, 2008, we had $878.4 million of debt outstanding. Two of our mortgages representing 8% of our total outstanding debt will mature, one in December 2009 and the other in January 2010. We currently expect that we will either be able to refinance the debt coming due at the end of 2009 or repay such debt with a combination of cash on hand, a draw on our credit facility, and by incurring new mortgage debt on one or more of our unencumbered hotels or possibly the issuance of equity. After these two mortgages mature, we do not have any significant mortgages that mature prior to 2015. Our credit facility will expire in February 2012, including a one year extension subject to our compliance with certain conditions.
 
We have a strong preference toward fixed-rate long-term limited recourse single property specific debt. When possible and desirable, we will seek to replace short-term sources of capital with long-term financing. In addition to property specific debt and our credit facility, we intend to use other financing methods as necessary, including obtaining from banks, institutional investors or other lenders, bridge loans, letters of credit, and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our investments. In addition, we may issue publicly or privately placed debt instruments.
 
We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions and financings so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.
 
During the current recession, our corporate goals and objectives are focused on preserving and enhancing our liquidity. While there can be no assurance that we will be able to accomplish all or any of these steps, we have taken, or are evaluating, a number of steps to achieve these goals, as follows:
 
  •  We chose to not pay a fourth quarter dividend and we intend to pay our next dividend to our stockholders of record as of December 31, 2009. The 2009 dividend will be in an amount equal to 100% of our 2009 taxable income.
 
  •  We are assessing whether to utilize the Internal Revenue Service’s Revenue Procedure 2009-15 in order to pay a portion of our 2009 dividend in shares of our common stock and the remainder in cash.
 
  •  We also have significantly curtailed all capital spending for 2009 and expect to fund less than $10 million in capital expenditures in 2009, compared to an average of $35 million per year of owner-funded capital expenditures during 2006, 2007 and 2008.
 
  •  We are considering the sale of one or more of our hotels.
 
  •  We may issue common stock.


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  •  We have amended our senior unsecured credit facility to reduce the risk of default under one of our financial covenants. We may seek further amendments to our credit facility to make additional changes to the financial covenants.
 
  •  We have engaged mortgage brokers to determine potential options for additional property-specific mortgage debt or the refinancing of our two mortgages that mature prior to January 2010.
 
Our current liquidity strategy is to take reasonable steps to further delever the Company in the near term, focusing on reducing amounts outstanding under our credit facility. If we achieve this goal, we believe that we will be uniquely positioned among lodging REITs as we will have limited outstanding corporate debt and no preferred equity. Once we repay or refinance the $68 million of mortgage debt coming due at the end of 2009, we will have no property-level debt maturing prior to 2015. In the longer term, we may use any accumulated cash to acquire hotels that fit our long-term strategic goals or to repurchase shares of our common stock. There can be no assurances that we will be able to achieve any elements of our current liquidity strategy.
 
Share Repurchase Program
 
On February 27, 2008, our Board of Directors authorized a program to repurchase up to 4.8 million shares of our common stock. As of December 31, 2008, we had purchased the full 4.8 million shares under the program at an average price of $10.15 per share. We retired all repurchased shares on their respective settlement dates.
 
Credit Facility
 
We are party to a four-year, $200.0 million unsecured credit facility (the “Facility”) expiring in February 2011. We may extend the maturity date of the Facility for an additional year upon the payment of applicable fees and the satisfaction of certain other customary conditions.
 
Interest is paid on the periodic advances under the Facility at varying rates, based upon either LIBOR or the alternate base rate, plus an agreed upon additional margin amount. The interest rate depends upon our level of outstanding indebtedness in relation to the value of our assets from time to time, as follows:
 
                                 
    Leverage Ratio  
    60% or Greater     55% to 60%     50% to 55%     Less Than 50%  
 
Alternate base rate margin
    0.65 %     0.45 %     0.25 %     0.00 %
LIBOR margin
    1.55 %     1.45 %     1.25 %     0.95 %
 
Our Facility contains various corporate financial covenants. A summary of the most restrictive covenants is as follows:
 
         
        Actual at
        December 31,
    Covenant   2008
 
Maximum leverage ratio(1)
  65%   41.0%
Minimum fixed charge coverage ratio(2)
  1.6x   2.9x
Minimum tangible net worth(3)
  $738.4 million   $1.2 billion
Unhedged floating rate debt as a
       
percentage of total indebtedness
  35%   7.1%
 
 
(1) “Maximum leverage ratio” is determined by dividing the total debt outstanding by the net asset value of our corporate assets and hotels. Hotel level net asset values are calculated based on the application of a contractual capitalization rate (which range from 7.5% to 8.0%) to the trailing twelve month hotel net operating income.
 
(2) On December 15, 2008, we amended the Facility to modify the fixed charge ratio covenant so that it is a trailing four consecutive quarter test, rather than a single quarter test.


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(3) “Tangible net worth” is defined as the gross book value of our real estate assets and other corporate assets less our total debt and all other corporate liabilities.
 
Our Facility requires that we maintain a specific pool of unencumbered borrowing base properties. The unencumbered borrowing base assets are subject to the following limitations and covenants:
 
         
        Actual at
        December 31,
    Covenant   2008
 
Minimum implied debt service ratio
  1.5x   12.67x
Maximum unencumbered leverage ratio
  65%   8.1%
Minimum number of unencumbered borrowing base properties
  4   8
Minimum unencumbered borrowing base value
  $150 million   $703.0 million
Percentage of total asset value owned by borrowers or
       
guarantors
  90%   100%
 
If we were to default under any of the above covenants, we would be obligated to repay all amounts outstanding under our Facility and our Facility would terminate. Our ability to comply with two most restrictive financial covenants, the maximum leverage ratio and the fixed charge coverage ratio, depend primarily on our EBITDA. The following table shows the impact of various hypothetical scenarios on those two covenants.
 
                                         
          EBITDA Change from 2008  
    Covenant     -10%     -20%     -30%     -40%  
 
Maximum leverage ratio
    65 %     45 %     51 %     58 %     67 %
Minimum fixed charge coverage ratio
    1.6 x     2.6 x     2.3 x     2.0 x     1.7x  
 
In addition to the interest payable on amounts outstanding under the Facility, we are required to pay an amount equal to 0.20% of the unused portion of the Facility if the unused portion of the Facility is greater than 50% and 0.125% if the unused portion of the Facility is less than 50%. We incurred interest and unused credit facility fees of $2.6 million, $2.7 million and $0.8 million for the years ended 2008, 2007 and 2006, respectively, on the credit facility. As of December 31, 2008, we had $57 million outstanding under the Facility. On February 5, 2009, we repaid $5.0 million of the outstanding amount under the Facility.
 
Sources and Uses of Cash
 
Our principal sources of cash are cash from operations, borrowings under mortgage financings, draws on our credit facility and the proceeds from offerings of our common stock. Our principal uses of cash are debt service, asset acquisitions, capital expenditures, operating costs, corporate expenses and dividends.
 
Cash From Operations.  Our cash provided by operating activities was $129.5 million for the year ended December 31, 2008, which is the result of our $52.9 million net income adjusted for the impact of several non-cash charges, including $78.2 million of depreciation, $7.8 million of non-cash ground rent, $0.8 million of amortization of deferred financing costs, $0.8 million of yield support received , $0.7 million of loss on asset impairment and $4.0 million of stock compensation, offset by $1.7 million of amortization of unfavorable agreements, $0.6 million of amortization of deferred income and unfavorable working capital changes of $13.5 million.
 
Our cash provided by operations was $148.7 million for the year ended December 31, 2007, which is the result of our net income, adjusted for the impact of several non-cash charges, including $75.5 million of real estate and corporate depreciation, $7.8 million of non-cash straight line ground rent, $0.8 million of amortization of deferred financing costs and loan repayment losses, $1.8 million of yield support received, $3.0 million non-cash deferred income tax expense and $3.6 million of restricted stock compensation expense, offset by negative working capital changes of $5.0 million, gain on sale of assets of $3.8 million, $0.4 million of key money amortization, $1.8 million amortization of debt premium and unfavorable contract liabilities.


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Our cash provided by operations was $92.8 million for the year ended December 31, 2006, which is the result of our net income, adjusted for the impact of several non-cash charges, including $52.4 million of real estate and corporate depreciation, $7.4 million of non-cash straight line ground rent, $0.9 million of amortization of deferred financing costs and loan repayment losses, $2.1 million non-cash deferred income tax expense and $3.0 million of restricted stock compensation expense, offset by negative working capital changes of $4.7 million, $0.3 million of key money amortization, $1.5 million amortization of debt premium and unfavorable contract liabilities.
 
Cash From Investing Activities.  Our cash used in investing activities of continuing operations was $56.7 million, $351.3 million and $561.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. During the year ended December 31, 2008, we incurred capital expenditures at our hotels of $65.1 million which was offset by an increase in restricted cash of $3.4 million and the receipt of $5.0 million of key money related to the Chicago Marriott Downtown.
 
During the year ended December 31, 2007, we utilized $331.3 million of cash for the acquisition of the Boston Westin Waterfront Hotel. During the year ended December 31, 2007, we incurred normal recurring capital expenditures at our hotels of $56.4 million. In addition, we received $35.4 million in net proceeds from the sale of the SpringHill Suites Buckhead and $5.3 million of key money related to the Chicago Marriott Downtown renovation ($5 million) and the Conrad Chicago ($0.3 million).
 
During the year ended December 31, 2006, we incurred normal recurring capital expenditures at our other hotels of $64.3 million. In addition, we received $1.5 million of key money related to the Los Angeles Marriott Renovation. In addition, we utilized $500.7 million of cash for the acquisition of the following hotels (in millions):
 
         
Chicago Marriott
  $ 85.9  
Westin Atlanta North at Perimeter
    59.6  
Conrad Chicago
    117.4  
Renaissance Austin
    107.7  
Renaissance Waverly
    130.1  
         
Total
  $ 500.7  
         
 
Cash From Financing Activities.  Approximately $88.8 million of cash was used in financing activities for the year ended December 31, 2008, which consisted of $3.2 million of scheduled debt principal payments, $49.4 million of share repurchases and $93.0 million of dividend payments offset by $57.0 million of net draws under our credit facility.
 
Approximately $212.7 million of cash was provided by financing activities for the year ended December 31, 2007. The cash provided by financing activities for the year ended December 31, 2007 primarily consists of $317.6 million of net proceeds from sales of our common stock, $108.0 million in draws under our credit facilities, and $5.0 million of proceeds from the new mortgage debt of the Bethesda Marriott Suites. The cash provided by financing activities for the year ended December 31, 2007 was offset by the $108.0 million in repayments of the credit facilities, $20.4 million related to the early extinguishment of the Bethesda Marriott Suites mortgage ($18.4 million in principal repayment and a $2.0 million prepayment penalty), $3.2 million of scheduled debt principal payments, $1.2 million payment of financing costs, $2.7 million of share repurchases, and $82.3 million of dividend payments.
 
Approximately $479.2 million of cash was provided by financing activities for the year ended December 31, 2006. The cash provided by financing activities for the year ended December 31, 2006 primarily consists of $79.5 million of proceeds from a short-term loan incurred in conjunction with the acquisition of the Chicago Marriott, $451 million of proceeds from the mortgage debt of the Chicago Marriott ($220 million), the Courtyard Manhattan/Fifth Avenue ($51 million), the Renaissance Austin Hotel ($83 million) and the Renaissance Waverly Hotel ($97 million) and $336.4 million of net proceeds from sales of our common stock. The cash provided by financing activities for the year ended December 31, 2006 was offset by the $322.5 million repayment of mortgage debt, including the $220 million variable-rate mortgage assumed in the


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acquisition of the Chicago Marriott, the $23 million variable-rate mortgage debt on the Courtyard Manhattan/Fifth Avenue and the $79.5 million short-term loan incurred in conjunction with the acquisition of the Chicago Marriott, the $12 million net repayment of the Company’s senior secured credit facility, $3.2 million of scheduled debt principal payments, $1.8 million payment of financing costs, $3.1 of employee taxes on issued shares, $1.4 million of issuance costs, and $43.7 million of dividend payments.
 
Dividend Policy
 
We intend to distribute to our stockholders dividends equal to our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS and TRS lessees, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:
 
  •  90% of our REIT taxable income determined without regard to the dividends paid deduction, plus
 
  •  90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus
 
  •  any excess non-cash income.
 
We have paid quarterly cash dividends to common stockholders at the discretion of our Board of Directors. We announced in December that we would not pay any further dividends in 2008, and we intend to issue our next dividend to our stockholders of record as of December 31, 2009. The 2009 dividend will be an amount equal to 100% of our 2009 taxable income. Also, we are assessing whether to utilize the Internal Revenue Service’s Revenue Procedure 2009-15 that permits us to pay a portion of that dividend in shares of common stock and the remainder in cash. The following table sets forth the dividends on common shares for the years ended December 31, 2008, 2007 and 2006:
 
             
        Dividend per
 
Payment Date
 
Record Date
  Share  
 
April 11, 2006
  March 24, 2006   $ 0.18  
June 22, 2006
  June 16, 2006   $ 0.18  
September 19, 2006
  September 8, 2006   $ 0.18  
January 4, 2007
  December 21, 2006   $ 0.18  
April 2, 2007
  March 23, 2007   $ 0.24  
June 22, 2007
  June 15, 2007   $ 0.24  
September 18, 2007
  September 7, 2007   $ 0.24  
January 10, 2008
  December 31, 2007   $ 0.24  
April 1, 2008
  March 21, 2008   $ 0.25  
June 24, 2008
  June 13, 2008   $ 0.25  
September 16, 2008
  September 5, 2008   $ 0.25  
 
Capital Expenditures
 
The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture and fixtures at our hotels. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management or franchise agreement. As of December 31, 2008, we have set aside $27.3 million for capital projects in property improvement funds. Funds held in property improvement funds for one hotel are typically not permitted to be applied to any other property.
 
We believe that that ensuring that our hotels are fully renovated provides our hotels with competitive advantages over their direct competitors and helps us maximize cash flows from our hotels. We have made


63


 

significant capital investments in our hotels and now nearly all of our hotels are fully renovated. As a result, we expect to significantly curtail our capital expenditures in 2009 and 2010. For the year ended December 31, 2008, we incurred approximately $65.1 million of capital improvements at our hotels, of which approximately 40% was paid from corporate funds and the remainder from property improvement escrows. The most significant projects are as follows:
 
  •  Chicago Marriott Downtown: We completed a $35 million renovation of the hotel. Approximately $10 million was paid from corporate funds, with the balance coming from the hotel’s property improvement escrow and a contribution from Marriott International. The project included a complete renovation of all the meeting and ballrooms, adding 12,000 square feet of new meeting space, reconcepting and relocating the restaurant, expanding the lobby bar and creating a Marriott “great room” in the lobby. The project began in the third quarter of 2007 and was substantially completed in April 2008.
 
  •  Westin Boston Waterfront: We completed the construction of additional meeting rooms in the building attached to the hotel in March 2008. The $19 million project included the creation of over 37,000 square feet of meeting/exhibit space. The project began in the third quarter of 2007 and was substantially completed in the first quarter of 2008.
 
  •  Conrad Chicago: We completed a renovation of the guestrooms and corridors during the first quarter and the front entrance repositioning in the third quarter of 2008.
 
  •  Salt Lake City: In the fourth quarter of 2008, we began a significant guestroom renovation at the hotel which was completed in January 2009, almost all of which was funded by the hotel’s property improvement escrow.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Non-GAAP Financial Measures
 
We use the following two non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) EBITDA and (2) FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.
 
EBITDA represents net income (loss) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.
 
                         
    Year Ended December 31,  
    2008     2007     2006  
    (In thousands)  
 
Net income
  $ 52,929     $ 68,309     $ 35,211  
Interest expense
    50,404       51,445       36,934  
Income tax (benefit) expense(1)
    (9,376 )     4,919       3,383  
Real estate related depreciation and amortization(2)
    78,156       75,477       52,362  
                         
EBITDA
  $ 172,113     $ 200,150     $ 127,890  
                         


64


 

 
(1) Amounts for the years ended December 31, 2007 and 2006 include $0.3 million and $0.4 million, respectively, of income tax benefit included in discontinued operations.
 
(2) Amounts for the years ended December 31, 2007 and 2006 include $1.2 million and $1.2 million, respectively, of depreciation expense included in discontinued operations.
 
We compute FFO in accordance with standards established by NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure.
 
                         
    Year Ended December 31,  
    2008     2007     2006  
    (In thousands)  
 
Net income
  $ 52,929     $ 68,309     $ 35,211  
Real estate related depreciation and amortization(1)
    78,156       75,477       52,362  
Gain on property transaction, net of taxes
          (3,783 )      
                         
FFO
  $ 131,085     $ 140,003     $ 87,573  
                         
 
 
(1) Amounts for the years ended December 31, 2007 and 2006 include $1.2 million and $1.2 million, respectively, of depreciation expense included in discontinued operations.
 
Critical Accounting Policies
 
Our consolidated financial statements include the accounts of the DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:
 
Investment in Hotels.  Acquired hotels, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets are recorded at fair value in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Additions to property and equipment, including current buildings, improvements, furniture, fixtures and equipment are recorded at cost. Property and equipment are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and land improvements and one to ten years for furniture and equipment. Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We typically enter into a new hotel management agreement based on market terms at the time of acquisition. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating


65


 

purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.
 
We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying value of the investments in hotels may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of an investment in a hotel exceed the hotel’s carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the estimated fair market value is recorded and an impairment loss recognized.
 
Revenue Recognition.  Hotel revenues, including room, golf, food and beverage, and other hotel revenues, are recognized as the related services are provided.
 
Stock-based Compensation.  We account for stock-based employee compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), Share- Based Payment. We record the cost of awards with service conditions based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. No awards with performance-based or market-based conditions have been issued.
 
Income Taxes.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
 
We have elected to be treated as a REIT under the provisions of the Internal Revenue Code and, as such, are not subject to federal income tax, provided we distribute all of our taxable income annually to our stockholders and comply with certain other requirements. In addition to paying federal and state income tax on any retained income, we are subject to taxes on “built-in-gains” on sales of certain assets. Additionally, our taxable REIT subsidiaries are subject to federal, state and foreign income tax.
 
Inflation
 
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.
 
Seasonality
 
The operations of hotels historically have been seasonal depending on location, and accordingly, we expect some seasonality in our business. Historically, we have experienced approximately two-thirds of our annual income in the second and fourth quarters.
 
New Accounting Pronouncements
 
There are no new unimplemented accounting pronouncements that are expected to have a material impact on our results of operations, financial position or cash flows.


66


 

Contractual Obligations
 
The following table outlines the timing of payment requirements related to the consolidated mortgage debt and other commitments of our operating partnership as of December 31, 2008.
 
                                         
    Payments Due by Period  
          Less Than
    1 to 3
    4 to 5
       
    Total     1 Year     Years     Years     After 5 Years  
    (In thousands)  
 
Long-Term Debt Obligations including interest
  $ 1,200,518     $ 93,136     $ 190,399     $ 102,318     $ 814,665  
Operating Lease Obligations — Ground Leases and Office Space
    645,471       3,688       6,158       5,541       630,084  
                                         
Total
  $ 1,845,989     $ 96,824     $ 196,557     $ 107,859     $ 1,444,749  
                                         
 
Item 7a.   Quantitative and Qualitative Disclosures About Market Risk and Risk Factors
 
Quantitative and Qualitative Disclosures about Market Risk
 
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and, which we expect to be exposed in the future, is interest rate risk. The face amount of our outstanding debt at December 31, 2008 was approximately $878.4 million, of which $62.0 million or 7.1% was variable rate debt. As of December 31, 2008, the fair value of the $816.4 million of fixed-rate debt was approximately $688.9 million. If market rates of interest were to increase by 1.0%, or approximately 100 basis points, the decrease in the fair value of our fixed-rate debt would be $33.9 million. On the other hand, if market rates of interest were to decrease by one percentage point, or approximately 100 basis points, the increase in the fair value of our fixed-rate debt would be $36.4 million.


67


 

Item 8.   Financial Statements and Supplementary Data
 
See Index to the Financial Statements on page F-1.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to give reasonable assurances that information we disclose in reports filed with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during the Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. See Management’s Report on Internal Control Over Financial Reporting on page F-2.
 
Item 9B.   Other Information
 
None.
 
PART III
 
The information required by Items 10-14 is incorporated by reference to our proxy statement for the 2009 annual meeting of stockholders (to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report).
 
Item 10.   Directors and Executive Officers of the Registrant
 
Information on our directors and executive officers is incorporated by reference to our 2009 proxy statement.
 
Item 11.   Executive Compensation
 
The information required by this item is incorporated by reference to our 2009 proxy statement.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated by reference to our 2009 proxy statement.
 
Item 13.   Certain Relationships and Related Transactions
 
The information required by this item is incorporated by reference to our 2009 proxy statement.
 
Item 14.   Principal Accounting Fees and Services
 
The information required by this item is incorporated by reference to our 2009 proxy statement.


68


 

 
PART IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
1. Financial Statements
 
Included herein at pages F-1 through F-30.
 
2. Financial Statement Schedules
 
The following financial statement schedule is included herein at pages F-31 through F-32:
 
Schedule III — Real Estate and Accumulated Depreciation
 
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted.
 
3. Exhibits
 
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index on pages 72 through 73 of this report, which is incorporated by reference herein.


69


 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland, on February 27, 2009.
 
DIAMONDROCK HOSPITALITY COMPANY
 
  By: 
/s/  Michael D. Schecter
Name:     Michael D. Schecter
  Title:  Executive Vice President, General
Counsel and Corporate Secretary
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
  By: 
/s/  Mark W. Brugger
Name:     Mark W. Brugger
  Title:  Chief Executive Officer
 
Date: February 27, 2009
 
  By: 
/s/  John L. Williams
Name:     John L. Williams
  Title:  President and Chief Operating Officer and Director
 
Date: February 27, 2009
 
  By: 
/s/  Sean M. Mahoney
Name:     Sean M. Mahoney
  Title:  Executive Vice President and Chief
Financial Officer
 
Date: February 27, 2009


70


 

  By: 
/s/  William W. McCarten
Name:     William W. McCarten
  Title:  Chairman
 
Date: February 27, 2009
 
  By: 
/s/  Daniel J. Altobello
Name:     Daniel J. Altobello
  Title:  Director
 
Date: February 27, 2009
 
  By: 
/s/  W. Robert Grafton
Name:     W. Robert Grafton
  Title:  Lead Director
 
Date: February 27, 2009
 
  By: 
/s/  Maureen L. McAvey
Name:     Maureen L. McAvey
  Title:  Director
 
Date: February 27, 2009
 
  By: 
/s/  Gilbert T. Ray
Name:     Gilbert T. Ray
  Title:  Director
 
Date: February 27, 2009


71


 

EXHIBIT INDEX
 
         
Exhibit
   
Number
 
Description of Exhibit
 
  3 .1.1   Articles of Amendment and Restatement of the Articles of Incorporation of DiamondRock Hospitality Company (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  3 .1.2   Amendment to the Articles of Amendment and Restatement of the Articles of Incorporation of DiamondRock Hospitality Company (incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 9, 2007)
  3 .2.1   Second Amended and Restated Bylaws of DiamondRock Hospitality Company (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  3 .2.1   Amendment No. 1 to Second Amended and Restated Bylaws of DiamondRock Hospitality Company (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2006)
  4 .1   Form of Certificate for Common Stock for DiamondRock Hospitality Company (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .1   Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004 (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .2   Form of Hotel Management Agreement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .3   Form of TRS Lease (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .4*   2004 Stock Option and Incentive Plan (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .5*   Form of Restricted Stock Award Agreement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .6*   Form of Incentive Stock Option Agreement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .7*   Form of Non-Qualified Stock Option Agreement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .8*   Form of Deferred Stock Award Agreement (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123809)
  10 .9*   Form of Indemnification Agreement between DiamondRock Hospitality Company and its directors and officers (incorporated by reference to the Registrant’s Registration Statement on Form S-11 filed with the Securities and Exchange Commission (File no. 333-123065))
  10 .10   Amended and Restated Credit Agreement, dated as of February 28, 2007 by and among DiamondRock Hospitality Limited Partnership, DiamondRock Hospitality Company, Wachovia Bank, National Association, as Agent, Wachovia Capital Markets, LLC, as Sole Lead Arranger and as Book Manager, each of Bank of America, N.A., Calyon New York Branch and The Royal Bank Of Scotland PLC, as a Syndication Agent, and Citicorp North America, Inc., as Documentation Agent (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2007)
  10 .11*   Form of Severance Agreement, dated as of March 9, 2007 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2007)
  10 .12*   Form of Stock Appreciation Right (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2008)
  10 .13*   Form of Dividend Equivalent Right (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2008)


72


 

         
Exhibit
   
Number
 
Description of Exhibit
 
  10 .14   First Amendment to Amended and Restated Credit Agreement, dated as of December 15, 2008 by and among DiamondRock Hospitality Limited Partnership, DiamondRock Hospitality Company, Wachovia Bank, National Association, as Agent, Wachovia Capital Markets, LLC, as Sole Lead Arranger and as Book Manager, each of Bank of America, N.A., KeyBank National Association and The Royal Bank Of Scotland PLC, as a Syndication Agent, and Citigroup North America, Inc., as Documentation Agent and Wells Fargo, National Association and Merrill Lynch Bank USA, as lenders (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2008)
  10 .15*   Form of Amemdment No. 1 to Dividend Equivalent Rights Agreement under the DiamondRock Hospitality Company 2004 Stock Option and Incentive Plan (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2008)
  12 .1   Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
  21 .1   List of DiamondRock Hospitality Company Subsidiaries
  23 .1   Consent of KPMG LLP
  31 .1   Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
  31 .2   Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
  32 .1   Certification of Chief Executive Officer and Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
 
 
* Exhibit is a management contract or compensatory plan or arrangement.

73


 

DIAMONDROCK HOSPITALITY COMPANY
INDEX TO FINANCIAL STATEMENTS
 
         
    Page
 
    F-2  
    F-3  
    F-5  
    F-6  
    F-7  
    F-8  
    F-9  
    F-31  


F-1


 

 
Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
 
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
 
Management has used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008. KPMG LLP, an independent registered public accounting firm, has audited the Company’s financial statements and issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2008.
 
/s/ Mark W. Brugger
Chief Executive Officer
 
/s/ Sean M. Mahoney
Executive Vice President and Chief Financial Officer
 
February 27, 2009


F-2


 

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors
DiamondRock Hospitality Company:
 
We have audited the consolidated financial statements of DiamondRock Hospitality Company and subsidiaries (the “Company”) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DiamondRock Hospitality Company and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DiamondRock Hospitality Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2009, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG LLP
 
McLean, Virginia
February 27, 2009


F-3


 

Report of Independent Registered Public Accounting Firm
 
The Board of Directors of
DiamondRock Hospitality Company:
 
We have audited DiamondRock Hospitality Company’s (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated February 27, 2009, expressed an unqualified opinion on those consolidated financial statements.
 
/s/  KPMG LLP
 
McLean, Virginia
February 27, 2009


F-4


 

DIAMONDROCK HOSPITALITY COMPANY
 
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
 
                 
    2008     2007  
    (In thousands, except share amounts)  
 
ASSETS
Property and equipment, at cost
  $ 2,146,616     $ 2,086,933  
Less: accumulated depreciation
    (226,400 )     (148,101 )
                 
      1,920,216       1,938,832  
Restricted cash
    30,060       31,736  
Due from hotel managers
    61,062       68,153  
Favorable lease assets, net
    40,619       42,070  
Prepaid and other assets
    33,414       17,043  
Cash and cash equivalents
    13,830       29,773  
Deferred financing costs, net
    3,335       4,020  
                 
Total assets
  $ 2,102,536     $ 2,131,627  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
               
Mortgage debt
  $ 821,353     $ 824,526  
Senior unsecured credit facility
    57,000        
                 
Total debt
    878,353       824,526  
Deferred income related to key money, net
    20,328       15,884  
Unfavorable contract liabilities, net
    84,403       86,123  
Due to hotel managers
    35,196       36,910  
Dividends declared and unpaid
          22,922  
Accounts payable and accrued expenses
    66,624       64,980  
                 
Total other liabilities
    206,551       226,819  
                 
Stockholders’ Equity:
               
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding
           
Common stock, $.01 par value; 200,000,000 shares authorized; 90,050,264 and 94,730,813 shares issued and outstanding at December 31, 2008 and 2007, respectively
    901       947  
Additional paid-in capital
    1,100,541       1,145,511  
Accumulated deficit
    (83,810 )     (66,176 )
                 
Total stockholders’ equity
    1,017,632       1,080,282  
                 
Total liabilities and stockholders’ equity
  $ 2,102,536     $ 2,131,627  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


F-5


 

DIAMONDROCK HOSPITALITY COMPANY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008, 2007 and 2006
 
                         
    2008     2007     2006  
    (In thousands, except share and per share amounts)  
 
Revenues:
                       
Rooms
  $ 444,070     $ 456,719     $ 316,051  
Food and beverage
    211,475       217,505       143,259  
Other
    37,689       36,709       25,741  
                         
Total revenues
    693,234       710,933       485,051  
                         
Operating Expenses:
                       
Rooms
    105,868       104,672       73,110  
Food and beverage
    145,181       147,463       96,053  
Management fees
    28,569       29,764       19,473  
Other hotel expenses
    228,469       224,053       163,083  
Depreciation and amortization
    78,156       74,315       51,192  
Impairment of favorable lease asset
    695              
Corporate expenses
    13,987       13,818       12,403  
                         
Total operating expenses
    600,925       594,085       415,314  
                         
Operating income
    92,309       116,848       69,737  
                         
Interest income
    (1,648 )     (2,399 )     (4,650 )
Interest expense
    50,404       51,445       36,934  
Gain on early extinguishment of debt
          (359 )      
                         
Total other expenses (income)
    48,756       48,687       32,284  
                         
Income before income taxes
    43,553       68,161       37,453  
Income tax benefit (expense)
    9,376       (5,264 )     (3,750 )
                         
Income from continuing operations
    52,929       62,897       33,703  
Income from discontinued operations, net of tax
          5,412       1,508  
                         
Net income
  $ 52,929     $ 68,309     $ 35,211  
                         
Earnings per share:
                       
Continuing operations
  $ 0.56     $ 0.66     $ 0.49  
Discontinued operations
          0.06       0.02  
                         
Basic and diluted earnings per share
  $ 0.56     $ 0.72     $ 0.51  
                         
Weighted-average number of common shares outstanding:
                       
Basic
    93,064,790       94,199,814       67,534,851  
                         
Diluted
    93,116,162       94,265,245       67,715,661  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


F-6


 

DIAMONDROCK HOSPITALITY COMPANY
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2008, 2007 and 2006
 
                                         
    Common Stock     Additional
    Accumulated
       
    Shares     Par Value     Paid-In Capital     Deficit     Total  
    (In thousands, except share amounts)  
 
Balance at December 31, 2005
    50,819,864     $ 508     $ 491,951     $ (29,071 )   $ 463,388  
Sale of common stock in secondary offering, less placement fees and expenses of $1,361
    25,070,000       251       334,792             335,043  
Dividends of $0.72 per common share
                216       (48,892 )     (48,676 )
Issuance and amortization of stock grants, net
    301,768       3       (41 )           (38 )
Net income
                      35,211       35,211  
                                         
Balance at December 31, 2006
    76,191,632       762       826,918       (42,752 )     784,928  
                                         
Sale of common stock in secondary offerings, less placement fees and expenses of $380
    18,342,500       183       317,372             317,555  
Dividends of $0.96 per common share
                358       (91,733 )     (91,375 )
Issuance and amortization of stock grants, net
    196,681       2       863             865  
Net income
                      68,309       68,309  
                                         
Balance at December 31, 2007
    94,730,813       947       1,145,511       (66,176 )     1,080,282  
                                         
Share repurchases
    (4,800,000 )     (48 )     (48,776 )           (48,824 )
Dividends of $0.75 per common share
                437       (70,563 )     (70,126 )
Issuance and vesting of common stock grants, net
    119,451       2       3,369             3,371  
Net income
                      52,929       52,929  
                                         
Balance at December 31, 2008
    90,050,264     $ 901     $ 1,100,541     $ (83,810 )   $ 1,017,632  
                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


F-7


 

DIAMONDROCK HOSPITALITY COMPANY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008, 2007 and 2006
 
                         
    2008     2007     2006  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net income
  $ 52,929     $ 68,309     $ 35,211  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Real estate depreciation
    78,156       75,477       52,362  
Corporate asset depreciation as corporate expenses
    164       172       165  
Non-cash financing costs as interest
    808       779       874  
Non-cash ground rent
    7,755       7,823       7,403  
Gain on disposal of asset, net of taxes
          (3,783 )      
Impairment of favorable lease asset
    695              
Gain on early extinguishment of debt, net
          (359 )      
Amortization of debt premium and unfavorable contract liabilities
    (1,720 )     (1,807 )     (1,516 )
Amortization of deferred income
    (557 )     (392 )     (316 )
Yield support received
    797       1,803        
Non-cash yield support recognized
          (894 )     (1,804 )
Stock-based compensation
    3,981       3,584       3,037  
Deferred income tax (benefit) expense
    (10,128 )     2,952       2,084  
Changes in assets and liabilities:
                       
Prepaid expenses and other assets
    (2,183 )     (347 )     815  
Due to/from hotel managers
    1,773       (6,795 )     (5,231 )
Restricted cash
    (1,773 )     1,217       (1,007 )
Accounts payable and accrued expenses
    (1,196 )     959       723  
                         
Net cash provided by operating activities
    129,501       148,698       92,800  
                         
Cash flows from investing activities:
                       
Hotel acquisitions
          (331,325 )     (500,736 )
Proceeds from sale of asset, net
          35,405        
Hotel capital expenditures
    (65,116 )     (56,412 )     (64,260 )
Receipt of deferred key money
    5,000       5,250       1,500  
Change in restricted cash
    3,449       (4,210 )     1,724  
                         
Net cash used in investing activities
    (56,667 )     (351,292 )     (561,772 )
                         
Cash flows from financing activities:
                       
Proceeds from mortgage debt
          5,000       530,500  
Repayments of mortgage debt
          (18,392 )     (322,500 )
Repayments of credit facility
    (116,000 )     (108,000 )     (36,000 )
Draws on credit facility
    173,000       108,000       24,000  
Scheduled mortgage debt principal payments
    (3,173 )     (3,233 )     (3,244 )
Prepayment penalty on early extinguishment of debt
          (1,972 )      
Payment of financing costs
    (123 )     (1,237 )     (1,791 )
Proceeds from sale of common stock
          317,935       336,405  
Payment of costs related to sale of common stock
          (380 )     (1,361 )
Repurchase of shares
    (49,434 )     (2,720 )     (3,077 )
Payment of dividends
    (93,047 )     (82,325 )     (43,701 )
                         
Net cash (used in) provided by financing activities
    (88,777 )     212,676       479,231