UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2009

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-32514

DIAMONDROCK HOSPITALITY COMPANY

Maryland		20-1180098
(State of Incorporation)		(I.R.S. Employer Identification No.)
6903 Rockledge Drive, Suite 800, Bethesda, Maryland		20817
(Address of Principal Executive Offices)		(Zip Code)

(240) 744-1150
(Registrant’s telephone number, including area code)

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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). o Yes þ No

The registrant had 107,972,100 shares of its $0.01 par value common stock outstanding as of May 5, 2009.

 

 

EXPLANATORY NOTE

We are filing this Amendment No.1 (this “Amendment”) to our Quarterly Report on Form 10-Q for the quarter ended March 27, 2009 (the “Original Form 10-Q”), as filed with the Securities and Exchange Commission, or SEC, on May 5, 2009:

•		to amend the certifications of the Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to the Original 10-Q, which inadvertently omitted certain introductory language of paragraph 4 of Item 601(b)(31) of Regulation S-K, and
•		to file as exhibit 10.3 to this Amendment, the Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004 (originally filed as an exhibit to the Company’s Registration Statement on Form S-11 (File no. 333-123065)) and as exhibit 10.4 to this Amendment, the Company’s Amended and Restated Credit Agreement, dated as of February 28, 2007 (originally filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on March 9, 2007), each in its entirety, including all schedules and exhibits thereto.

This Amendment should be read in conjunction with the Original Form 10-Q, which continues to speak as of the date that the Original Form 10-Q was filed. Except as specifically noted above, this Amendment does not modify or update any disclosures in the Original Form 10-Q. Accordingly, this Amendment does not reflect events occurring after the filing of the Original Form 10-Q or modify or update any disclosures that may have been affected by subsequent events.

INDEX

PART I. FINANCIAL INFORMATION

		Page No.
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 27, 2009 and December 31, 2008			1
Condensed Consolidated Statements of Operations For the Fiscal Quarters ended March 27, 2009 and March 21, 2008			2
Condensed Consolidated Statements of Cash Flows For the Fiscal Quarters ended March 27, 2009 and March 21, 2008			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition			11
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3. Defaults Upon Senior Securities			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 5. Other Information			25
Item 6. Exhibits			25
Exhibit 10.3
Exhibit 10.4
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Item I. Financial Statements

DIAMONDROCK HOSPITALITY COMPANY

		March 27, 2009				December 31, 2008
		(Unaudited)
ASSETS
Property and equipment, at cost		$	2,151,416			$	2,146,616
Less: accumulated depreciation			(245,145	)			(226,400	)
			1,906,271				1,920,216
Deferred financing costs, net			3,142				3,335
Restricted cash			28,534				30,060
Due from hotel managers			56,562				61,062
Favorable lease assets, net			40,444				40,619
Prepaid and other assets			31,756				33,414
Cash and cash equivalents			14,283				13,830
Total assets		$	2,080,992			$	2,102,536
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage debt		$	820,352			$	821,353
Senior unsecured credit facility			52,000				57,000
Total debt			872,352				878,353
Deferred income related to key money, net			20,197				20,328
Unfavorable contract liabilities, net			84,007				84,403
Due to hotel managers			34,410				35,196
Accounts payable and accrued expenses			56,720				66,624
Total other liabilities			195,334				206,551
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; 90,147,100 and 90,050,264 shares issued and outstanding at March 27, 2009 and December 31, 2008, respectively			901				901
Additional paid-in capital			1,101,588				1,100,541
Accumulated deficit			(89,183	)			(83,810	)
Total stockholders’ equity			1,013,306				1,017,632
Total liabilities and stockholders’ equity		$	2,080,992			$	2,102,536

The accompanying notes are an integral part of these condensed consolidated financial statements.

DIAMONDROCK HOSPITALITY COMPANY

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008
		(Unaudited)				(Unaudited)
Revenues:
Rooms		$	75,116			$	85,927
Food and beverage			36,890				40,081
Other			6,538				6,855
Total revenues			118,544				132,863
Operating Expenses:
Rooms			19,982				21,160
Food and beverage			26,581				28,928
Management fees			3,327				4,965
Other hotel expenses			46,024				46,453
Depreciation and amortization			18,717				16,687
Corporate expenses			3,769				2,959
Total operating expenses			118,400				121,152
Operating profit			144				11,711
Other Expenses (Income):
Interest income			(83	)			(438	)
Interest expense			11,498				10,695
Total other expenses			11,415				10,257
(Loss) Income before income taxes			(11,271	)			1,454
Income tax benefit			5,978				3,723
Net (loss) income		$	(5,293	)		$	5,177
(Loss) Earnings per share:
Basic and diluted (loss) earnings per share		$	(0.06	)		$	0.05

The accompanying notes are an integral part of these condensed consolidated financial statements.

DIAMONDROCK HOSPITALITY COMPANY

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net (loss) income		$	(5,293	)		$	5,177
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Real estate depreciation			18,717				16,687
Corporate asset depreciation as corporate expenses			34				32
Non-cash ground rent			1,787				1,777
Non-cash financing costs as interest			193				186
Amortization of debt premium and unfavorable contract liabilities			(397	)			(397	)
Amortization of deferred income			(130	)			(122	)
Stock-based compensation			1,207				671
Changes in assets and liabilities:
Prepaid expenses and other assets			1,658				(234	)
Restricted cash			1,383				1,175
Due to/from hotel managers			3,570				2,735
Accounts payable and accrued expenses			(8,886	)			(8,071	)
Net cash provided by operating activities			13,843				19,616
Cash flows from investing activities:
Hotel capital expenditures			(7,293	)			(21,542	)
Receipt of deferred key money			—				5,000
Change in restricted cash			143				(3,930	)
Net cash used in investing activities			(7,150	)			(20,472	)
Cash flows from financing activities:
Repayments of credit facility			(5,000	)			—
Draws on credit facility			—				14,000
Scheduled mortgage debt principal payments			(1,002	)			(680	)
Repurchase of shares			(158	)			(344	)
Payment of dividends			(80	)			(22,819	)
Net cash used in financing activities			(6,240	)			(9,843	)
Net increase (decrease) in cash and cash equivalents			453				(10,699	)
Cash and cash equivalents, beginning of period			13,830				29,773
Cash and cash equivalents, end of period		$	14,283			$	19,074
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		$	11,987			$	11,820
Cash paid for income taxes		$	35			$	93
Capitalized interest		$	19			$	183
Non-Cash Financing Activities:
Unpaid dividends		$	—			$	23,921

The accompanying notes are an integral part of these condensed consolidated financial statements.

DIAMONDROCK HOSPITALITY COMPANY

1. Organization

DiamondRock Hospitality Company (the “Company”) is a lodging-focused real estate company that owns, as of May 5, 2009, 20 premium hotels and resorts. 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 paying the hotel managers a fee based on the revenues and profitability of the hotels and reimbursing all of their direct and indirect operating costs.

As of March 27, 2009, the Company owned 20 hotels, comprising 9,586 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.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of our operating partnership. We are the sole general partner of the operating partnership and currently own, either directly or indirectly, all of the limited partnership units of the operating partnership.

2. Summary of Significant Accounting Policies

Basis of Presentation

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2008, included in our Annual Report on Form 10-K dated February 27, 2009.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of March 27, 2009, and the results of our operations and cash flows for the fiscal quarters ended March 27, 2009 and March 21, 2008. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations.

Our financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Reporting Periods

The results we report in our condensed consolidated statements of operations are based on results of our hotels reported to us by our hotel managers. Our hotel managers use different reporting periods. Marriott, the manager of most of our properties, uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for each of the first three quarters and sixteen or seventeen weeks for the fourth quarter of the year for its domestic managed hotels. In contrast, Marriott, for its non-domestic hotels (including Frenchman’s Reef), Vail Resorts, manager of the Vail Marriott, Noble Management Group, LLC, manager of the Westin Atlanta North at Perimeter, Hilton Hotels Corporation, manager of the Conrad Chicago, and Westin Hotel Management, L.P, manager of the Westin Boston Waterfront Hotel report results on a monthly basis. Additionally, as a REIT, we are required by U.S. federal tax laws to report results on a calendar year basis. As a result, we have adopted the reporting periods used by Marriott for its domestic hotels, except that the fiscal year always ends on December 31 to comply with REIT rules. The first three fiscal quarters end on the same day as Marriott’s fiscal quarters but the fourth quarter ends on December 31 and the full year results, as reported in the statement of operations, always include the same number of days as the calendar year.

Two consequences of the reporting cycle we have adopted are: (1) quarterly start dates will usually differ between years, except for the first quarter which always commences on January 1, and (2) the first and fourth quarters of operations and year-to-date operations may not include the same number of days as reflected in prior years.

While the reporting calendar we adopted is more closely aligned with the reporting calendar used by the manager of most of our properties, one final consequence of the calendar is we are unable to report any results for Frenchman’s Reef, Vail Marriott, Westin Atlanta North at Perimeter, Conrad Chicago, or Westin Boston Waterfront Hotel for the month of operations that ends after its fiscal quarter-end because neither Westin Hotel Management, L.P., Hilton Hotels Corporation, Noble Management Group, LLC, Vail Resorts nor Marriott make mid-month results available to us. As a result, our quarterly results of operations include results from Frenchman’s Reef, the Vail Marriott, the Westin Atlanta North at Perimeter, the Conrad Chicago, and the Westin Boston Waterfront Hotel as follows: first quarter (January, February), second quarter (March to May), third quarter (June to August) and fourth quarter (September to December). While this does not affect full-year results, it does affect the reporting of quarterly results.

Revenue Recognition

Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, golf sales, food and beverage sales, and other hotel department revenues, such as telephone and gift shop sales.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net (loss) income, adjusted for dividends on unvested stock grants, by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net (loss) income, adjusted for dividends on unvested stock grants, by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares issuable in the event of conversion of operating partnership units. No adjustment is made for shares that are anti-dilutive during a period.

We implemented the provisions of FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities, which resulted in no significant impact on current or prior period earnings (loss) per share.

Stock-based Compensation

We account for stock-based employee compensation using the fair value based method of accounting under 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.

Intangible Assets and Liabilities

Intangible assets and liabilities are recorded on non-market contracts assumed as part of the acquisition of certain hotels. We review the terms of agreements assumed in conjunction with the purchase of a hotel to determine if the terms are favorable or unfavorable compared to an estimated market agreement at the acquisition date. Favorable lease assets or unfavorable contract liabilities are recorded at the acquisition date and amortized using the straight-line method over the term of the agreement. We do not amortize intangible assets with indefinite useful lives, but review these assets for impairment if events or circumstances indicate that the asset may be impaired.

Straight-Line Rent

We record rent expense on leases that provide for minimum rental payments that increase in pre-established amounts over the remaining term of the lease on a straight-line basis as required by U.S. GAAP.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain cash and cash equivalents with various high credit-quality financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The state of the overall economy can significantly impact hotel operational performance and thus, impact our financial position. Should any of our hotels experience a significant decline in operational performance, it may affect our ability to make distributions to our stockholders and service debt or meet other financial obligations.

3. Property and Equipment

Property and equipment as of March 27, 2009 (unaudited) and December 31, 2008 consists of the following (in thousands):

		March 27, 2009				December 31, 2008
Land		$	219,590			$	219,590
Land improvements			7,994				7,994
Buildings			1,661,710				1,658,227
Furniture, fixtures and equipment			260,360				259,154
CIP and corporate office equipment			1,762				1,651
			2,151,416				2,146,616
Less: accumulated depreciation			(245,145	)			(226,400	)
		$	1,906,271			$	1,920,216

As of March 27, 2009 we did not have any accrued capital expenditures. As of December 31, 2008, we had accrued capital expenditures of $2.6 million.

4. Capital Stock

Common Shares

We are authorized to issue up to 200,000,000 shares of common stock, $.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by our board of directors.

On April 17, 2009, we completed a follow-on public offering of our common stock. We sold 17,825,000 shares of common stock, including the underwriters’ overallotment of 2,325,000 shares, at an offering price of $4.85 per share. The net proceeds to us, after deduction of offering costs, were approximately $82.1 million.

Preferred Shares

We are authorized to issue up to 10,000,000 shares of preferred stock, $.01 par value per share. Our board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of March 27, 2009 and December 31, 2008, there were no shares of preferred stock outstanding.

Operating Partnership Units

Holders of operating partnership units have certain redemption rights, which enable them to cause our operating partnership to redeem their units in exchange for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option for shares of our common stock on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or our stockholders. As of March 27, 2009 and December 31, 2008, there were no operating partnership units held by unaffiliated third parties.

5. Stock Incentive Plans

As of March 27, 2009, we have issued or committed to issue 3,194,151 shares of our common stock under our 2004 Stock Option and Incentive Plan, as amended, including 1,978,595 shares of unvested restricted common stock and a commitment to issue 466,819 units of deferred common stock.

Restricted Stock Awards

As of March 27, 2009, our officers and employees have been awarded 3,066,967 shares of restricted common stock, including those shares which have since vested. Shares issued to our officers and employees vest over a three-year period from the date of the grant based on continued employment. We measure compensation expense for the restricted stock awards based upon the fair market value of our common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying condensed consolidated statements of operations.

A summary of our restricted stock awards from January 1, 2009 to March 27, 2009 is as follows:

						Weighted-
						Average
		Number of				Grant Date
		Shares				Fair Value
Unvested balance at January 1, 2009			605,809			$	13.02
Granted			1,515,955				2.82
Vested			(135,985	)			15.29
Forfeited			(7,184	)			14.61
Unvested balance at March 27, 2009			1,978,595			$	5.04

The remaining share awards are expected to vest as follows: 62,748 shares during 2009, 631,082 shares during 2010, 779,448 shares during 2011 and 505,317 during 2012. As of March 27, 2009, the unrecognized compensation cost related to restricted stock awards was $8.7 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 28 months. For the fiscal quarters ended March 27, 2009 and March 21, 2008, we recorded $1.1 million and $0.6 million, respectively, of compensation expense related to restricted stock awards.

Deferred Stock Awards

At the time of our initial public offering, we made a commitment to issue 382,500 shares of deferred stock units to our senior executive officers. These deferred stock units are fully vested and represent the promise to issue a number of shares of our common stock to each senior executive officer upon the earlier of (i) a change of control or (ii) five years after the date of grant, which was the initial public offering completion date (the “Deferral Period”). However, if an executive’s service with the Company is terminated for “cause” prior to the expiration of the Deferral Period, all deferred stock unit awards will be forfeited. The executive officers are restricted from transferring these shares until the fifth anniversary of the initial public offering completion date. As of March 27, 2009, we have a commitment to issue 466,819 shares under this plan. The share commitment increased from 382,500 to 466,819 since our initial public offering because current dividends are not paid out but instead are effectively reinvested in additional deferred stock units based on the closing price of our common stock on the dividend payment date.

Stock Appreciation Rights and Dividend Equivalent Rights

In 2008, we awarded our executive officers stock-settled stock appreciation rights (“SARs”) and dividend equivalent rights (“DERs”). The SARs/DERs vest over three years based on continued employment and may be exercised, in whole or in part, at any time after the instrument vests and before the tenth anniversary of issuance. Upon exercise, the holder of a SAR is entitled to receive a number of common shares equal to the positive difference, if any, between the closing price of our common stock on the exercise date and the “strike price.” The strike price is equal to the closing price of our common stock on the SAR grant date. We simultaneously issued one DER for each SAR. The DER entitles the holder to the value of dividends issued on one share of common stock. No dividends are paid on a DER prior to vesting, but upon vesting, the holder of each DER will receive a lump sum equal to the cumulative dividends paid per share of common stock from the grant date through the vesting date. The DER terminates eight years from the grant date. We measure compensation expense of the SAR/DER awards based upon the fair market value of these awards at the grant date. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying condensed consolidated statements of operations.

As of March 27, 2009, we have awarded 300,225 SARs/DERs to our executive officers with an aggregate grant date fair value of approximately $2.0 million. For the fiscal quarters ended March 27, 2009 and March 21, 2008, we recorded approximately $0.2 million and $0.1 million, respectively, of compensation expense related to the SARs/DERs. A summary of our SARs/DERs as of March 27, 2009 is as follows:

						Weighted-
						Average
		Number of				Grant Date
		SARs/DERs				Fair Value
Balance at January 1, 2009			300,225			$	6.62
Granted			—				—
Exercised			—				—
Balance at March 27, 2009			300,225			$	6.62

One-third of the SAR/DER awards vested in 2009 and the remainder are expected to vest as follows: one-third in 2010 and one-third in 2011. As of March 27, 2009, the unrecognized compensation cost related to the SAR/DER awards was $1.3 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 23 months.

6. Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net (loss) income available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is calculated by dividing net (loss) income available to common stockholders, that has been adjusted for dilutive securities, by the weighted-average number of common shares outstanding including dilutive securities. For the fiscal quarter ended March 27, 2009, no effect is shown for the potentially dilutive effect of our restricted stock and SAR’s, as the impact is anti-dilutive in periods when we incur a net loss.

The following is a reconciliation of the calculation of basic and diluted earnings (loss) per share (in thousands, except share and per share data):

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008
		(unaudited)				(unaudited)
Basic Earnings (Loss) per Share Calculation:
Numerator:
Net (loss) income		$	(5,293	)		$	5,177
Less: dividends on unvested restricted common stock			—				(119	)
Net (loss) income after dividends on unvested restricted common stock		$	(5,293	)		$	5,058
Weighted-average number of common shares outstanding—basic			90,551,505				95,173,458
Basic (loss) earnings per share		$	(0.06	)		$	0.05
Diluted Earnings (Loss) per Share Calculation:
Numerator:
Net (loss) income		$	(5,293	)		$	5,177
Less: dividends on unvested restricted common stock			—				(90	)
Net (loss) income after dividends on unvested restricted common stock		$	(5,293	)		$	5,087
Weighted-average number of common shares outstanding—basic			90,551,505				95,173,458
Unvested restricted common stock			—				114,795
Unvested SARs			—				—
Weighted-average number of common shares outstanding—diluted			90,551,505				95,288,253
Diluted (loss) earnings per share		$	(0.06	)		$	0.05

7. Debt

We have incurred limited recourse, property specific mortgage debt in conjunction with certain of our hotels. In the event of default, the lender may only foreclose on the pledged assets; however, in the event of fraud, misapplication of funds and other customary recourse provisions, the lender may seek payment from us. As of March 27, 2009, 12 of our 20 hotel properties were secured by mortgage debt. Our mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios that trigger cash management provisions as well as restrictions on incurring additional debt without lender consent. As of March 27, 2009, we were in compliance with the financial covenants of our mortgage debt.

The following table sets forth information regarding the Company’s debt as of March 27, 2009 (unaudited), in thousands:

		Principal
Property		Balance				Interest Rate
Courtyard Manhattan / Midtown East		$	40,968				5.195	%
Marriott Salt Lake City Downtown			34,108				5.50	%
Courtyard Manhattan / Fifth Avenue			51,000				6.48	%
Marriott Griffin Gate Resort			28,247				5.11	%
Renaissance Worthington			57,400				5.40	%
Frenchman’s Reef & Morning Star Marriott
Beach Resort			62,029				5.44	%
Marriott Los Angeles Airport			82,600				5.30	%
Orlando Airport Marriott			59,000				5.68	%
Chicago Marriott Downtown Magnificent Mile			220,000				5.975	%
Renaissance Austin			83,000				5.507	%
Renaissance Waverly			97,000				5.503	%
Bethesda Marriott Suites						LIBOR + 0.95 (1.45% as of
			5,000			March 27, 2009)
Total mortgage debt			820,352
Senior unsecured credit facility						LIBOR + 0.95 (1.46% as of
			52,000			March 27, 2009)
Total debt		$	872,352
Weighted-Average Interest Rate							5.4	%

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. As of March 27, 2009, we had a $52 million outstanding balance on the Facility. On April 17, 2009, we repaid the $52 million outstanding on the Facility.

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	%

The Facility contains various corporate financial covenants. A summary of the most restrictive covenants is as follows:

						Actual at
		Covenant				March 27, 2009
Maximum leverage ratio(1)			65	%			42.8	%
Minimum fixed charge coverage ratio(2)			1.6	x			2.7	x
Minimum tangible net worth(3)		$738.4 million				$1.3 billion
Unhedged floating rate debt as a percentage of total indebtedness			35	%			6.5	%

The 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
						March 27,
		Covenant				2009
Minimum implied debt service ratio			1.5	x			13.01	%
Maximum unencumbered leverage ratio			65	%			7.9	%
Minimum number of unencumbered borrowing base properties			4				8
Minimum unencumbered borrowing base value		$150 million				$658.9 million
Percentage of total asset value owned by borrowers or guarantors			90	%			100	%

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 on the Facility of $0.3 million and $0.2 million for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively.

8. Dividends

We have paid quarterly cash dividends to common stockholders at the discretion of our board of directors. We intend to issue our next dividend to stockholders of record as of December 31, 2009. The 2009 dividend is intended to be an amount equal to 100% of our 2009 taxable income. Depending on our 2009 liquidity needs, we may elect to pay a portion of our 2009 dividend in shares of our common stock, as permitted by the Internal Revenue Service’s Revenue Procedure 2009-15.

9. Commitments and Contingencies

Litigation

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 operations.

Income Taxes

We had no accruals for tax uncertainties as of March 27, 2009 and March 21, 2008. As of March 27, 2009, all of our federal income tax returns and state tax returns for the jurisdictions in which our hotels are located remain subject to examination by the respective jurisdiction tax authorities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risk factors discussed herein and other factors discussed from time to time in our periodic filings with the Securities and Exchange Commission. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.

Overview

We are a lodging-focused real estate company that owns, as of May 5, 2009, 20 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, 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 Urban- and Resort-Focused Branded Real Estate

We own 20 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.

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 our 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.

Capital Structure

Since our formation in 2004, we have been consistently committed to a 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 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 believe the current economic environment has confirmed the merits of our financing strategy. We believe that we maintain a reasonable amount of fixed interest rate mortgage debt with limited near-term maturities. As of March 27, 2009, we had $872.4 million of debt outstanding, which consisted of $52.0 million outstanding on our senior unsecured credit facility and $820.4 million of mortgage debt. We currently have eight hotels, with an aggregate historic cost of $790 million, which are unencumbered by mortgage debt. As of March 27, 2009, our debt had a weighted-average interest rate of 5.37% and a weighted-average maturity date of 6.1 years. In addition, as of March 27, 2009, 93.5% of our debt was fixed rate.

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. We have taken a number of steps to achieve these goals, as follows:

•

We completed a follow-on public offering of our common stock on April 17, 2009. We sold 17,825,000 shares of common stock, including the underwriters’ overallotment of 2,325,000 shares, at an offering price of $4.85 per share. The net proceeds to us, after deduction of offering costs, were approximately $82.1 million. We continue to evaluate our liquidity needs and financing alternatives, and may choose to sell additional shares of common stock in the future.

•

We repaid the $52 million outstanding on our senior unsecured credit facility on April 17, 2009 with a portion of the proceeds from our follow-on offering.

•

We chose to not pay a 2008 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.

•

Depending on our 2009 liquidity needs, we may elect to pay a portion of our 2009 dividend in shares of our common stock, as permitted by the Internal Revenue Service’s Revenue Procedure 2009-15.

•

We have significantly curtailed capital spending for 2009 and expect to fund approximately $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.

•

As previously announced, we continue to evaluate the process regarding the sale of one or more of our hotels. To date we have not received any bids that we consider attractive compared to our internal valuation.

We have only two near-term mortgage debt maturities totaling $68 million. The debt maturities include $40.2 million coming due on the Courtyard Manhattan/Midtown East on December 11, 2009 and $27.7 million coming due on the Griffin Gate Marriott in January 2010. We have agreed on terms with a lender to provide up to $43 million of mortgage debt with a term of five years on the Courtyard Manhattan/Midtown East and have locked our interest rate at 8.81%. The terms of the loan are still subject to approval of the lender’s credit committee. We cannot provide assurance that this lender will fund the mortgage debt or that the terms of the loan will be satisfactory to us, as we have not yet agreed on definitive documentation nor has the lender completed its due diligence. We are currently assessing the best alternatives to refinance the Griffin Gate Marriott mortgage debt. Our most likely alternatives include repaying the mortgage debt with corporate cash or refinancing the mortgage debt with a new mortgage lender.

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 extensive 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 in order 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 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 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.

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);
	•		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 63% of our total revenues for the fiscal quarter ended March 27, 2009, 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 Marriott and its brands as well as the Westin and Conrad brands.

We also use EBITDA and FFO as measures of the financial performance of our business. See “Non-GAAP Financial Matters.”

Outlook

The United States is currently in the midst of a recession and the operating environment continues to be very challenging. The decline in GDP, employment, corporate profits, consumer spending and business investment has and will continue to negatively impact overall lodging demand. We believe that consumer and commercial spending and lodging demand will continue to decline in 2009. We do not anticipate an improvement in lodging demand until the current economic trends reverse course, particularly the expected continued weakness in the global economy and the lack of liquidity in the credit markets.

We believe that the economic slowdown will continue to significantly affect both the group and transient elements of our business. Based on reservation activity for 2009, we expect that group demand will continue to decline as companies continue to reduce travel expenditures, which will lead to increased cancellations, diminished booking activity and reduced attendance at group events resulting in lower banquet and food and beverage and other revenues. Similarly, the continued reduction in corporate travel budgets will affect the transient business traveler. The general economic trends discussed above make it difficult to predict our future operating results. However, we expect to experience further declines in hotel revenues and profits at our properties.

Our Hotels

The following table sets forth certain operating information for each of our hotels for the fiscal quarter ended March 27, 2009.

																				% Change
				Number of				Occupancy												from 2008
Property		Location		Rooms				(%)				ADR($)				RevPAR($)				RevPAR
Chicago Marriott		Chicago, Illinois			1,198				58.1	%		$	152.01			$	88.29				6.7	%
Los Angeles Airport Marriott		Los Angeles, California			1,004				79.7				115.90				92.38				(10.8	)
Westin Boston Waterfront Hotel (1)		Boston, Massachusetts			793				48.3				160.95				77.70				(17.7	)
Renaissance Waverly Hotel		Atlanta, Georgia			521				60.6				143.51				86.90				(18.3	)
Salt Lake City Marriott Downtown		Salt Lake City, Utah			510				58.3				138.98				81.04				(21.3	)
Renaissance Worthington		Fort Worth, Texas			504				72.1				164.57				118.72				(15.5	)
Frenchman’s Reef & Morning Star Marriott Beach Resort (1)		St. Thomas, U.S. Virgin Islands			502				83.0				282.01				234.19				(11.1	)
Renaissance Austin Hotel		Austin, Texas			492				62.9				156.69				98.51				(16.6	)
Torrance Marriott South Bay		Los Angeles County, California			487				62.6				119.59				74.88				(27.0	)
Orlando Airport Marriott		Orlando, Florida			486				81.8				120.58				98.66				(16.3	)
Marriott Griffin Gate Resort		Lexington, Kentucky			408				49.0				108.41				53.12				(11.1	)
Oak Brook Hills Marriott Resort		Oak Brook, Illinois			386				31.4				118.38				37.17				(18.3	)
Westin Atlanta North at Perimeter (1)		Atlanta, Georgia			369				66.3				109.94				72.90				(27.0	)
Vail Marriott Mountain Resort & Spa (1)		Vail, Colorado			346				79.8				287.44				229.51				(26.1	)
Marriott Atlanta Alpharetta		Atlanta, Georgia			318				57.3				136.01				77.88				(18.5	)
Courtyard Manhattan/Midtown East		New York, New York			312				79.1				200.59				158.76				(28.9	)
Conrad Chicago (1)		Chicago, Illinois			311				56.1				156.42				87.77				(7.4	)
Bethesda Marriott Suites		Bethesda, Maryland			272				56.5				196.94				111.24				(13.8	)
Courtyard Manhattan/Fifth Avenue		New York, New York			185				87.6				202.23				177.22				(21.1	)
The Lodge at Sonoma, a Renaissance Resort & Spa		Sonoma, California			182				40.1				159.39				63.94				(35.8	)
TOTAL/WEIGHTED AVERAGE					9,586				63.7	%		$	155.00			$	98.80				(16.5	)%

Results of Operations

As of March 27, 2009, we owned 20 hotels. Our total assets were $2.1 billion as of March 27, 2009. Total liabilities were $1.1 billion as of March 27, 2009, including $872.4 million of debt. Stockholders’ equity was approximately $1.0 billion as of March 27, 2009.

Comparison of the Fiscal Quarter Ended March 27, 2009 to the Fiscal Quarter Ended March 21, 2008

Our net loss for the fiscal quarter ended March 27, 2009 was $5.3 million compared to net income of $5.2 million for the fiscal quarter ended March 21, 2008.

Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels. Revenues for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively, consisted of the following (in thousands):

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008				% Change
Rooms		$	75,116			$	85,927				(12.6	)%
Food and beverage			36,890				40,081				(8.0	)%
Other			6,538				6,855				(4.6	)%
Total revenues		$	118,544			$	132,863				(10.8	)%

Individual hotel revenues for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively, consist of the following (in millions):

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008				% Change
Chicago Marriott		$	14.7			$	10.9				34.9	%
Los Angeles Airport Marriott			13.0				14.3				(9.1	)%
Frenchman’s Reef & Morning Star Marriott Beach Resort (1)			10.0				11.2				(10.7	)%
Renaissance Worthington			8.5				9.5				(10.5	)%
Renaissance Austin Hotel			7.6				8.2				(7.3	)%
Renaissance Waverly Hotel			7.2				8.7				(17.2	)%
Westin Boston Waterfront Hotel (1)			7.0				8.9				(21.3	)%
Orlando Airport Marriott			6.6				7.5				(12.0	)%
Vail Marriott Mountain Resort & Spa (1)			6.1				8.4				(27.4	)%
Salt Lake City Marriott Downtown			5.6				6.3				(11.1	)%
Torrance Marriott South Bay			4.6				5.8				(20.7	)%
Courtyard Manhattan/Midtown East			4.5				6.0				(25.0	)%
Marriott Griffin Gate Resort			3.7				4.0				(7.5	)%
Bethesda Marriott Suites			3.5				3.6				(2.8	)%
Marriott Atlanta Alpharetta			3.1				3.6				(13.9	)%
Oak Brook Hills Marriott Resort			3.0				3.3				(9.1	)%
Courtyard Manhattan/Fifth Avenue			2.9				3.4				(14.7	)%
Westin Atlanta North at Perimeter (1)			2.5				3.7				(32.4	)%
The Lodge at Sonoma, a Renaissance Resort & Spa			2.2				3.0				(26.7	)%
Conrad Chicago (1)			2.2				2.6				(15.4	)%
Total		$	118.5			$	132.9				(10.8	)%

Our total revenues declined $14.4 million or 10.8%, from $132.9 million for the fiscal quarter ended March 21, 2008 to $118.5 million for the fiscal quarter ended March 27, 2009, reflecting the continued weakness in the lodging fundamentals. The decline reflects a 16.5 percent decline in RevPAR as a result of a 10.4 percent decrease in ADR and a 4.8 percentage point decrease in occupancy. The comparison of the first quarter of 2009 to the first quarter of 2008 is positively impacted by disruption from the renovation of the Chicago Marriott, which was ongoing during the first quarter of 2008. Excluding the Chicago Marriott from our 2009 and 2008 first fiscal quarters would increase our RevPAR contraction by approximately 2.4 percentage points. In addition, the first quarter 2009 results of operations for our Marriott-managed hotels include five additional days as compared to the first quarter of 2008.

The majority of our customers fall into three broad categories: business transient, group and leisure and other business. In the first quarter of 2009, business transient room revenue, which represented approximately 28% of our total room revenue, decreased approximately 28% from the first quarter of 2008 as discretionary business travel has declined in response to the current economic recession. Group revenue, which represented approximately 36% of our total room revenue, decreased approximately 9% from the first quarter of 2008 due to groups increasingly renegotiating rates and an overall decline in demand. Revenue from leisure and other business, which represented 36% of our total room revenue, decreased approximately 11% from the first quarter of 2008 as overall consumer spending has declined in response to the current economic recession.

Food and beverage revenues decreased 8.0% from 2008, reflecting a decline in both banquet and outlet revenues. Other revenues, which primarily represent spa, golf, parking and attrition and cancellation fees, decreased 4.6% from 2008.

The following are the key hotel operating statistics for our hotels for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively.

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008				% Change
Occupancy %			63.7	%			68.5	%		(4.8) percentage points
ADR		$	155.00			$	172.91				(10.4	)%
RevPAR		$	98.80			$	118.37				(16.5	)%

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 fiscal quarters ended March 27, 2009 and March 21, 2008, respectively, consist of the following (in millions):

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008				% Change
Rooms departmental expenses		$	20.0			$	21.2				(5.7	)%
Food and beverage departmental expenses			26.6				28.9				(8.0	)%
Other hotel expenses			37.8				39.0				(3.1	)%
Base management fees			3.1				3.6				(13.9	)%
Incentive management fees			0.2				1.4				(85.7	)%
Property taxes			6.0				5.1				17.6	%
Ground rent—Contractual			0.4				0.5				(20.0	)%
Ground rent—Non-cash			1.8				1.8				—
Total hotel operating expenses		$	95.9			$	101.5				(5.5	)%

Our hotel operating expenses decreased $5.6 million or 5.5%, from $101.5 million for the fiscal quarter ended March 21, 2008 to $95.9 million for the fiscal quarter ended March 27, 2009. Due to the decreased occupancy levels at our hotels, we have worked with our hotel managers to lower operating expenses. As a result of these cost-containment measures, and an overall decline in occupancy, we have reduced the rooms, food and beverage and other hotel departmental expenses. The primary driver for the decrease in these operating expenses is an overall decline in wages and benefits. We expect the decreases in the rooms, food and beverage, and other hotel departmental expenses to continue in 2009.

Management fees are calculated as a percentage of total revenues, as well as the level of operating profit at certain hotels. Therefore, the decline in base management fees is due to the overall decline in revenues at our hotels. We pay incentive management fees only at certain of our hotels based on operating profits. The decrease in incentive management fees of approximately $1.2 million is due to the decline in operating profits at those hotels.

Depreciation and amortization. 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 $2.0 million from $16.7 million for the fiscal quarter ended March 21, 2008 to $18.7 million for the fiscal quarter ended March 27, 2009. This increase is primarily the result of having additional assets in service as of March 27, 2009, resulting in higher depreciation expense.

Corporate expenses. Our corporate expenses increased from $3.0 million for the fiscal quarter ended March 21, 2008 to $3.8 million for the fiscal quarter ended March 27, 2009, due primarily to an increase in stock-based compensation expense. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees.

Interest expense. Our interest expense increased $0.8 million from $10.7 million for the fiscal quarter ended March 21, 2008 to $11.5 million for the fiscal quarter ended March 27, 2009. The increase in interest expense is primarily attributable to the first fiscal quarter of 2009 having five additional days of interest expense compared to the first fiscal quarter of 2008 as well as higher capitalized interest recorded in the first quarter of 2008. The 2009 interest expense was comprised of mortgage debt ($11.0 million), amortization of deferred financing costs ($0.2 million) and interest and unused facility fees on our credit facility ($0.3 million). The 2008 interest expense is comprised of mortgage debt ($10.3 million), amortization of deferred financing costs ($0.2 million) and interest and unused facility fees on our credit facility ($0.2 million).

As of March 27, 2009, we had property-specific mortgage debt outstanding on twelve of our hotels. On all but one of the 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 as of March 27, 2009 on our draws under the credit facility was 1.46% as compared to 3.99% as of March 21, 2008. The Company had $52.0 million drawn on the credit facility as of March 27, 2009. Our weighted-average interest rate on all debt as of March 27, 2009 was 5.4%.

Interest income. Interest income decreased $0.3 million from $0.4 million for the fiscal quarter ended March 21, 2008 to $0.1 million for the fiscal quarter ended March 27, 2009 due to lower interest rates in 2009.

Income taxes. We recorded an income tax benefit for income taxes from continuing operations of $6.0 million and $3.7 million for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively. The first quarter 2009 income tax benefit was incurred on the $15.7 million pre-tax loss of our taxable REIT subsidiary, or TRS, for the fiscal quarter ended March 27, 2009, together with foreign income tax expense of $0.2 million related to the taxable REIT subsidiary that owns the Frenchman’s Reef & Morning Star Marriott Beach Resort. The first quarter 2008 income tax benefit was incurred on the $10.5 million pre-tax loss of our TRS for the fiscal quarter ended March 21, 2008, together with foreign income tax expense of $0.4 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.

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 our 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 Financing Strategy

Since our formation in 2004, we have been consistently committed to a 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 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 believe the current economic environment has confirmed the merits of our financing strategy. We believe that we maintain a reasonable amount of fixed interest rate mortgage debt with limited near-term maturities. As of March 27, 2009, we had $872.4 million of debt outstanding, which consisted of $52.0 million outstanding on our senior unsecured credit facility and $820.4 million of mortgage debt. We currently have eight hotels, with an aggregate historic cost of $790 million, which are unencumbered by mortgage debt. As of March 27, 2009, our debt had a weighted-average interest rate of 5.37% and a weighted-average maturity date of 6.1 years. In addition, as of March 27, 2009, 93.5% of our debt was fixed rate.

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. We have taken a number of steps to achieve these goals, as follows:

	•		We completed a follow-on public offering of our common stock in April 2009. We sold 17,825,000 shares of common stock, including the underwriters’ overallotment of 2,325,000 shares, at an offering price of $4.85 per share. The net proceeds to us, after deduction of offering costs, were approximately $82.1 million. We continue to evaluate our liquidity needs and financing alternatives, and may choose to sell additional shares of common stock in the future.
	•		We repaid the $52 million outstanding on our senior unsecured credit facility on April 17, 2009 with a portion of the proceeds from our follow-on offering.
	•		We chose to not pay a 2008 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.
	•		Depending on our 2009 liquidity needs, we may elect to pay a portion of our 2009 dividend in shares of our common stock, as permitted by the Internal Revenue Service’s Revenue Procedure 2009-15.
	•		We have significantly curtailed capital spending for 2009 and expect to fund approximately $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.
	•		As previously announced, we continue to evaluate the process regarding the sale of one or more of our hotels. To date we have not received any bids that we consider attractive compared to our internal valuation.

We have only two near-term mortgage debt maturities totaling $68 million. The debt maturities include $40.2 million coming due on the Courtyard Manhattan/Midtown East on December 11, 2009 and $27.7 million coming due on the Griffin Gate Marriott in January 2010. We have agreed on terms with a lender to provide up to $43 million of mortgage debt with a term of five years on the Courtyard Manhattan/Midtown East and have locked our interest rate at 8.81%. The terms of the loan are still subject to the approval of the lender’s credit committee. We cannot provide assurance that this lender will fund the mortgage debt or that the terms of the loan will be satisfactory to us, as we have not yet agreed on definitive documentation nor has the lender completed its due diligence. We are currently assessing the best alternatives to refinance the Griffin Gate Marriott mortgage debt. Our most likely alternatives include repaying the mortgage debt with corporate cash or refinancing the mortgage debt with a new mortgage lender.

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. On April 17, 2009, we repaid the outstanding balance of $52.0 million under the Facility with a portion of the proceeds from our follow-on public offering of common stock.

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				55% to				50% to				Less Than
		Greater				60%				55%				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
						March 27,
		Covenant				2009
Maximum leverage ratio(1)			65	%			42.8	%
Minimum fixed charge coverage ratio(2)			1.6	x			2.7	x
Minimum tangible net worth(3)		$738.4 million				$1.3 billion
Unhedged floating rate debt as a percentage of total indebtedness			35	%			6.5	%

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
						March 27,
		Covenant				2009
Minimum implied debt service ratio			1.5	x			13.01	x
Maximum unencumbered leverage ratio			65	%			7.9	%
Minimum number of unencumbered borrowing base properties			4				8
Minimum unencumbered borrowing base value		$150 million				$658.9 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			1.7	x

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 on the Facility of $0.3 million and $0.2 million for the fiscal quarters ended March 27, 2009 and March 21, 2008, respectively. As of March 27, 2009, we had $52.0 million outstanding on the Facility with a capacity to borrow an additional $148.0 million.

Sources and Uses of Cash

Our principal sources of cash are revenues from operations, borrowing under mortgage debt, draws on the Facility and the proceeds from our equity offerings. Our principal uses of cash are debt service, asset acquisitions, capital expenditures, operating costs, corporate expenses and dividends.

Cash Provided by Operating Activities. Our cash provided by operating activities was $13.8 million for the fiscal quarter ended March 27, 2009, which is the result of our $5.3 million net loss adjusted for the impact of several non-cash charges, including $18.7 million of depreciation, $1.8 million of non-cash straight line ground rent, $0.2 million of amortization of deferred financing costs, and $1.2 million of stock compensation, offset by $0.4 million of amortization of unfavorable agreements, $0.1 million of amortization of deferred income and unfavorable working capital changes of $2.3 million.

Our cash provided by operating activities was $19.6 million for the fiscal quarter ended March 21, 2008, which is the result of our $5.2 million net income adjusted for the impact of several non-cash charges, including $16.7 million of depreciation, $1.8 million of non-cash straight line ground rent, $0.2 million of amortization of deferred financing costs, and $0.7 million of stock compensation, offset by $0.4 million of amortization of unfavorable agreements, $0.1 million of amortization of deferred income and unfavorable working capital changes of $4.4 million.

Cash Used In Investing Activities. Our cash used in investing activities was $7.2 million for the fiscal quarter ended March 27, 2009. During the fiscal quarter ended March 27, 2009, we incurred capital expenditures at our hotels of $7.3 million and an increase in restricted cash of $0.1 million.

Our cash used in investing activities was $20.5 million for the fiscal quarter ended March 21, 2008. During the fiscal quarter ended March 21, 2008, we incurred capital expenditures at our hotels of $21.5 million and a decrease in restricted cash of $4.0 million, which was offset by the receipt of $5.0 million of key money related to the Chicago Marriott Downtown.

Cash Provided by Financing Activities. Our cash used in financing activities was $6.2 million for the fiscal quarter ended March 27, 2009 consisted of $1.0 million of scheduled debt principal payments and $0.2 million of share repurchases and $5.0 million in repayments of our credit facility.

Our cash used in financing activities was $9.8 million for the fiscal quarter ended March 21, 2008 consisted of $0.7 million of scheduled debt principal payments, $0.3 million of share repurchases, and $22.8 million of dividend payments offset by $14.0 million in draws under our credit facility.

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 chose not to pay a 2008 fourth quarter dividend and we intend to issue our next dividend to our stockholders of record as of December 31, 2009. We expect the 2009 dividend will be an amount equal to 100% of our 2009 taxable income. Depending on our 2009 liquidity needs, we may elect to pay a portion of our 2009 dividend in shares of our common stock, as permitted by the Internal Revenue Service’s Revenue Procedure 2009-15.

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 March 27, 2009, we have set aside $27.1 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.

DiamondRock has made extensive capital investments in its hotels during 2006 to 2008 and now nearly all of its hotels are fully-renovated. As a result, the Company has significantly curtailed capital spending for 2009. In 2009, the Company plans to commence or complete approximately $35 million of capital improvements at its hotels, approximately $10.0 million of which will be funded from corporate cash. The Company spent approximately $7.3 million on capital improvements at its hotels during the first fiscal quarter, including the completion of a significant guestroom renovation at the Salt Lake City Marriott, almost all of which was funded by the hotel’s escrow funds.

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 (loss) income 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.

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008
		(in thousands)
Net (loss) income		$	(5,293	)		$	5,177
Interest expense			11,498				10,695
Income tax benefit			(5,978	)			(3,723	)
Real estate related depreciation and amortization			18,717				16,687
EBITDA		$	18,944			$	28,836

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, which defines FFO as net (loss) income (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization. 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 assessing our results.

		Fiscal Quarter				Fiscal Quarter
		Ended				Ended
		March 27, 2009				March 21, 2008
		(in thousands)
Net (loss) income		$	(5,293	)		$	5,177
Real estate related depreciation and amortization			18,717				16,687
FFO		$	13,424			$	21,864

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 initially 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 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. The Company accounts 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. The Company records 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 fiscal quarters.

New Accounting Pronouncements Not Yet Implemented

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.

Item 3. Qualitative Disclosure 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, to which we expect to be exposed in the future, is interest rate risk. The face amount of our outstanding debt at March 27, 2009 was approximately $872.4 million, of which $57.0 million or 6.5% was variable rate debt. As of March 27, 2009, the fair value of the $815.4 million of fixed-rate debt was approximately $703.5 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 $33.1 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 $35.5 million.

Item 4. 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 Securities 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 has 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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions 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.

PART II

Item 1. Legal Proceedings

We are not involved in any material litigation nor, to our knowledge, is any material litigation 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 none of which is expected to have a material impact on our business, financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

The following exhibits are filed as part of this Form 10-Q:

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)).
	3.2.2			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)).

Exhibit
	10.1			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 March 6, 2008).
	10.2			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 March 6, 2008).
	10.3			Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004.
	10.4			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.
	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.

SIGNATURE

Pursuant to the requirements 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.

December 7, 2009				DiamondRock Hospitality Company
/s/ Sean M. Mahoney				/s/ Michael D. Schecter
Sean M. Mahoney				Michael D. Schecter
Executive Vice President and				Executive Vice President,
Chief Financial Officer				General Counsel and Corporate Secretary

EXHIBIT INDEX

Exhibit
	10.1			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 March 6, 2008).
	10.2			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 March 6, 2008).
	10.3			Agreement of Limited Partnership of DiamondRock Hospitality Limited Partnership, dated as of June 4, 2004.
	10.4			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.
	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 10.3

AGREEMENT OF LIMITED PARTNERSHIP

OF

DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP

TABLE OF CONTENTS

		Page
ARTICLE 1 — DEFINED TERMS			1
ARTICLE 2 — ORGANIZATIONAL MATTERS			13
Section 2.1 Formation and Continuation			13
Section 2.2 Name			13
Section 2.3 Registered Office and Agent; Principal Office			13
Section 2.4 Power of Attorney			13
Section 2.5 Term			15
ARTICLE 3 — PURPOSE			15
Section 3.1 Purpose and Business			15
Section 3.2 Powers			15
ARTICLE 4 — CAPITAL CONTRIBUTIONS			15
Section 4.1 Capital Contributions of the Partners			15
Section 4.2 Future Issuances of Additional Partnership Interests			16
Section 4.3 Contribution of Proceeds of Issuance of REIT Shares			18
Section 4.4 Other Contribution Provisions			18
Section 4.5 No Preemptive Rights			18
Section 4.6 No Interest on Capital			18
ARTICLE 5 — DISTRIBUTIONS			19
Section 5.1 Requirement and Characterization of Distributions			19
Section 5.2 Amounts Withheld			20
Section 5.3 Distributions Upon Liquidation			20
Section 5.4 Revisions to Reflect Issuance of Additional Partnership Interests			20
ARTICLE 6 — ALLOCATIONS			20
Section 6.1 Allocations For Capital Account Purposes			20
ARTICLE 7 — MANAGEMENT AND OPERATIONS OF BUSINESS			21
Section 7.1 Management			21
Section 7.2 Certificate of Limited Partnership			25
Section 7.3 Restrictions on General Partner Authority			26
Section 7.4 Reimbursement of the General Partner and the Company; DRIPs and Repurchase Programs			26
Section 7.5 Outside Activities of the General Partner			28
Section 7.6 Contracts with Affiliates			28
Section 7.7 Indemnification			29
Section 7.8 Liability of the General Partner			30
Section 7.9 Other Matters Concerning the General Partner			31
Section 7.10 Title to Partnership Assets			32
Section 7.11 Reliance by Third Parties			32

		Page
ARTICLE 8 — RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS			33
Section 8.1 Limitation of Liability			33
Section 8.2 Management of Business			33
Section 8.3 Outside Activities of Limited Partners			33
Section 8.4 Return of Capital			33
Section 8.5 Rights of Limited Partners Relating to the Partnership			34
Section 8.6 Redemption Right			34
ARTICLE 9 — BOOKS, RECORDS, ACCOUNTING AND REPORTS			36
Section 9.1 Records and Accounting			36
Section 9.2 Taxable Year and Fiscal Year			37
Section 9.3 Reports			37
ARTICLE 10 — TAX MATTERS			37
Section 10.1 Preparation of Tax Returns			37
Section 10.2 Tax Elections			37
Section 10.3 Tax Matters Partner			37
Section 10.4 Organizational Expenses			39
Section 10.5 Withholding			39
ARTICLE 11 — TRANSFERS AND WITHDRAWALS			40
Section 11.1 Transfer			40
Section 11.2 Transfer of the Company’s General Partner Interest and Limited Partner Interest; Extraordinary Transactions			40
Section 11.3 Limited Partners’ Rights to Transfer			41
Section 11.4 Substituted Limited Partners			43
Section 11.5 Assignees			43
Section 11.6 General Provisions			43
ARTICLE 12 — ADMISSION OF PARTNERS			44
Section 12.1 Admission of Successor General Partner			44
Section 12.2 Admission of Additional Limited Partners			44
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership			45
ARTICLE 13 — DISSOLUTION, LIQUIDATION AND TERMINATION			45
Section 13.1 Dissolution			45
Section 13.2 Winding Up			46
Section 13.3 Compliance with Timing Requirements of Regulations			48
Section 13.4 Rights of Limited Partners			48
Section 13.5 Notice of Dissolution			48
Section 13.6 Termination of Partnership and Cancellation of Certificate of Limited Partnership			49
Section 13.7 Reasonable Time for Winding-Up			49
Section 13.8 Waiver of Partition			49
Section 13.9 Liability of Liquidator			49

		Page
ARTICLE 14 — AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS			49
Section 14.1 Amendments			49
Section 14.2 Meetings of the Partners			51
ARTICLE 15 — ARBITRATION OF DISPUTES			51
ARTICLE 16 — GENERAL PROVISIONS			52
Section 16.1 Addresses and Notice			52
Section 16.2 Titles and Captions			52
Section 16.3 Pronouns and Plurals			53
Section 16.4 Further Action			53
Section 16.5 Binding Effect			53
Section 16.6 Creditors			53
Section 16.7 Waiver			53
Section 16.8 Counterparts			53
Section 16.9 Applicable Law			53
Section 16.10 Invalidity of Provisions			54
Section 16.11 No Rights as Shareholders			54
Section 16.12 Entire Agreement			54

EXHIBITS

Exhibit A		—		Partners Contributions and Partnership Interests
Exhibit B		—		Capital Account Maintenance
Exhibit C		—		Special Allocation Rules
Exhibit D		—		Notice of Redemption

AGREEMENT OF LIMITED PARTNERSHIP
OF
DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP

THIS AGREEMENT OF LIMITED PARTNERSHIP, dated as of June 4, 2004 (this “Agreement”), is entered into by and between DiamondRock Hospitality Company (the “Company”), a Maryland corporation, as the General Partner of DiamondRock Hospitality Limited Partnership, a Delaware limited partnership (the “Partnership”), and DiamondRock Hospitality, LLC, a Delaware limited liability company, as the initial Limited Partner of the Partnership (the “Initial Limited Partner”), together with any other Persons who become Partners of the Partnership as provided herein.

WHEREAS, the Partnership was formed as a limited partnership under the laws of the State of Delaware pursuant to a Certificate of Limited Partnership filed on May 26, 2004;

WHEREAS, effective as of the date of admission of any other Persons who become Partners of the Partnership as provided herein, DiamondRock Hospitality, LLC as the Initial Limited Partner intends to withdraw as a limited partner of the Partnership and the Partnership intends to redeem the Limited Partner Interests held by such Initial Limited Partner for nominal consideration;

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE 1 — DEFINED TERMS

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

“Act” means the Delaware Revised Uniform Limited Partnership Act, as it may be amended, supplemented or restated from time to time, and any successor to such statute.

“Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Sections 4.2 and 12.2 hereof and who is shown as such on the books and records of the Partnership.

“Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each Partnership taxable year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Adjusted Capital Account as of the end of the relevant Partnership taxable year.

“Adjusted Property” means any property, the Carrying Value of which has been adjusted pursuant to Exhibit B hereof. Once an Adjusted Property is deemed contributed to the Partnership for federal income tax purposes upon a termination thereof pursuant to Section 708 of the Code, such property shall thereafter constitute a Contributed Property until the Carrying Value of such property is further adjusted pursuant to Exhibit B hereof.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have meanings correlative to the foregoing. No officer, director or shareholder of the General Partner shall be considered an Affiliate of the General Partner solely as a result of serving in such capacity or being a shareholder of the General Partner.

“Agreed Value” means (i) in the case of any Contributed Property as of the time of its contribution to the Partnership, the 704(c) Value of such property, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (ii) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder. The aggregate Agreed Value of any Contributed Property contributed or deemed contributed by each Partner is as set forth on Exhibit A.

“Agreement” means this Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time, including by way of adoption of a Certificate of Designations, including any exhibits attached hereto.

“Arbitrator” has the meaning set forth in Article 15 hereof.

“Articles of Incorporation” means the Articles of Incorporation of the Company filed with the Maryland State Department of Assessments and Taxation, as amended or restated from time to time.

“Assignee” means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

“Available Cash” means, with respect to any period for which such calculation is being made, (i) the sum of:

(a) the Partnership’s Net Income or Net Loss, as the case may be, for such period (without regard to adjustments resulting from allocations described in Sections 1.A through 1.E of Exhibit C);

(b) Depreciation and all other noncash charges deducted in determining Net Income or Net Loss for such period;

(c) the amount of any reduction in the reserves of the Partnership referred to in clause (ii)(f) below (including, without limitation, reductions resulting because the General Partner determines such amounts are no longer necessary);

(d) the excess of proceeds from the sale, exchange, disposition, or refinancing of Partnership property for such period over the gain recognized from such sale, exchange, disposition, or refinancing during such period (excluding Terminating Capital Transactions); and

(e) all other cash received by the Partnership for such period that was not included in determining Net Income or Net Loss for such period.

(ii) less the sum of:

(a) all interest, principal and other debt payments made by the Partnership during such period but not included in determining Net Income or Net Loss for such period;

(b) capital expenditures made by the Partnership during such period;

(c) investments made by the Partnership during such period in any entity (including loans made thereto) to the extent that such investments are not otherwise described in clause (ii)(a) or (ii)(b);

(d) all other expenditures and payments not deducted in determining Net Income or Net Loss for such period;

(e) any amount included in determining Net Income or Net Loss for such period that was not received by the Partnership during such period;

(f) the amount of any increase in reserves of the Partnership during such period which the General Partner determines to be necessary or appropriate in its sole and absolute discretion; and

(g) the amount of any working capital accounts and other cash or similar balances which the General Partner determines to be necessary or appropriate, in its sole and absolute discretion.

Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, or take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership.

“Book-Tax Disparities” means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Exhibit B and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in Bethesda, Maryland are authorized or required by law to close.

“Capital Account” means the Capital Account maintained for a Partner pursuant to Exhibit B hereof.

“Capital Contribution” means, with respect to any Partner, any cash, cash equivalents and the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Sections 4.1, 4.2, 4.3 or 4.4 hereof.

“Carrying Value” means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such Contributed Property or Adjusted Property, as the case may be, charged to the Partners’ Capital Accounts following the contribution of or adjustment with respect to such property; and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.

“Cash Amount” means an amount of cash equal to the Value on the Valuation Date of the REIT Shares Amount.

“Certificate of Designations” means an amendment to this Agreement that sets forth the designations, rights, powers, duties and preferences of holders of any Partnership Interests issued pursuant to Section 4.2.A, which amendment is in the form of a certificate signed by the General Partner and appended to this Agreement. A Certificate of Designations is not the exclusive manner in which such an amendment may be effected. The General Partner may adopt a Certificate of Designations without the consent of the Limited Partners to the extent permitted pursuant to Section 14.1.B hereof.

“Certificate of Limited Partnership” means the Certificate of Limited Partnership relating to the Partnership filed in the office of the Secretary of State of the State of Delaware, as amended from time to time in accordance with the terms hereof and the Act.

“Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any succeeding law.

“Common Unit” means a Partnership Unit which is designated as a Common Unit and which has the rights, preferences and other privileges designated herein in respect of Common Unitholders. The allocation of Common Units among the Partners shall be set forth on Exhibit A, as may be amended from time to time.

“Common Unitholder” means a Partner that holds Common Units.

“Company” means DiamondRock Hospitality Company, a Maryland corporation, or its successor, as the case may be.

“Company Debt Securities” has the meaning set forth in Section 4.2.C of this Agreement.

“Consent” means the consent or approval of a proposed action by a Partner given in accordance with Section 14.2 hereof.

“Contributed Property” means each property or other asset, in such form as may be permitted by the Act (but excluding cash), contributed or deemed contributed to the Partnership (including deemed contributions to the Partnership on reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute a Contributed Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes.

“Conversion Factor” means 1.0, provided that in the event that the Company (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares; (ii) subdivides its outstanding REIT Shares or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purpose that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, subdivision or combination. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event (provided, however, if a Notice of Redemption is given prior to such a record date and the Specified Redemption Date is after such a record date, then the adjustment to the Conversion Factor shall, with respect to such Redeeming Partner, be retroactive to the date of such Notice of Redemption, provided that such dividend, distribution, subdivision or combination occurs as of the effective date of such event). It is intended that adjustments to the Conversion Factor are to be made in order to avoid unintended dilution or anti-dilution as a result of transactions in which REIT Shares are issued, redeemed or exchanged without a corresponding issuance, redemption or exchange of Common Units or of Preferred Units that are convertible into Common Units. If, prior to a Specified Redemption Date, Rights (other than Rights issued pursuant to an employee benefit plan or other compensation arrangement) were issued and have expired, and such Rights were issued with an exercise price that, together with the purchase price for such Rights, was below fair market value in relation to the security or other property to be

acquired upon the exercise of such Rights, and such Rights were issued to all holders of outstanding REIT Shares or the General Partner cannot in good faith represent that the issuance of such Rights benefited the Limited Partners, then the Conversion Factor applicable upon a Notice of Redemption shall be equitably adjusted in a manner consistent with anti-dilution provisions in warrants and other instruments in the case of such a below market issuance or exercise price. A similar equitable adjustment to protect the value of Common Units shall be made in all events if any Rights issued under a “Shareholder Rights Plan” became exercisable and expired prior to a Specified Redemption Date.

“Depreciation” means, for each taxable year or other period, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner.

“Distribution Period” has the meaning set forth in Section 5.1.B hereof.

“Extraordinary Transaction” means, with respect to the Company, the occurrence of one or more of the following events: (i) a merger (including a triangular merger), consolidation or other combination with or into another Person (other than in connection with a change in the Company’s state of incorporation or organizational form); (ii) the direct or indirect sale, lease, exchange or other transfer of all or substantially all of its assets in one transaction or a series of related transactions; (iii) any reclassification, recapitalization or change of its outstanding equity interests (other than a change in par value, or from par value to no par value, or as a result of a split, dividend or similar subdivision); or (iv) the adoption of any plan of liquidation or dissolution of the Company (whether or not in compliance with the provisions of this Agreement).

“Filing Date” has the meaning set forth in Article 15 hereof.

“Full Distribution Period” has the meaning set forth in Section 5.1.B hereof.

“General Partner” means the Company, in its capacity as the general partner of the Partnership, or any Person who becomes a successor general partner of the Partnership.

“General Partner Interest” means a Partnership Interest held by the General Partner, in its capacity as general partner. A General Partner Interest may be expressed as a number of Partnership Units.

“IRS” means the Internal Revenue Service, which administers the internal revenue laws of the United States.

“Incapacity” or “Incapacitated” means, (i) as to any natural person which is a Partner, death, total physical disability or entry by a court of competent jurisdiction of an order adjudicating him or her incompetent to manage his or her Person or estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its certificate of incorporation; (iii) as to any partnership or limited liability company which is a Partner, the dissolution and commencement of winding up of the partnership or the limited liability company; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee) or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect; (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner; (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors; (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above; (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties; (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof; (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment; or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay.

“Indemnitee” means (i) any Person made a party to a proceeding by reason of his, her or its status as (a) the Company (b) the General Partner or (c) a director or officer of the Company, the General Partner or the Partnership and (ii) such other Persons (including Affiliates of the Company, General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion.

“Independent Director” means a person who is not an officer or employee of the Company or an affiliate or a lessee or manger of any Property.

“IPO Event” means an initial public offering of equity interests in the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended, involving the sale of an aggregate of [$50,000,000] or more of equity interests in the Company, whether involving a primary offering or a combined primary and secondary offering, pursuant to which such equity interests become listed on a U.S. national securities exchange or any national securities association or any national exchange.

“Limited Partner” means any Person (including the Company) named as a Limited Partner on Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Limited Partner of the Partnership.

“Limited Partner Interest” means a Partnership Interest of a Limited Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled, as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units.

“Liquidating Event” has the meaning set forth in Section 13.1.A hereof.

“Liquidator” has the meaning set forth in Section 13.2.A hereof.

“Net Income” means, for any taxable period, the excess, if any, of the Partnership’s items of income and gain for such taxable period over the Partnership’s items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for on Exhibit B. If an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to the special allocation rules in Exhibit C, Net Income or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item.

“Net Loss” means, for any taxable period, the excess, if any, of the Partnership’s items of loss and deduction for such taxable period over the Partnership’s items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for on Exhibit B. If an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to the special allocation rules in Exhibit C, Net Loss or the resulting Net Income, whichever the case may be, shall be recomputed without regard to such item.

“Newly Issued Unit” has the meaning set forth in Section 5.1 hereof.

“New Securities” has the meaning set forth in Section 4.2.B hereof.

“Nonrecourse Built-in Gain” means, with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

“Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

“Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).

“Notice of Redemption” means the Notice of Redemption substantially in the form of Exhibit D to this Agreement.

“Partner” means a General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners collectively.

“Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

“Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).

“Partner Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

“Partnership Debt Securities” has the meaning set forth in Section 4.2.C of this Agreement.

“Partnership Interest” means an ownership interest in the Partnership representing a Capital Contribution by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units.

“Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

“Partnership Record Date” means the record date established by the General Partner for (i) the distribution of Available Cash with respect to Common Units pursuant to Section 5.1 hereof, which record date shall, unless otherwise determined by the General Partner, be the same as the record date established by the Company for a distribution to its common shareholders of some of all of its portion of such distribution, or (ii) if applicable, determining the Partners entitled to vote on or consent to any proposed action for which the consent or approval of the Partners is sought pursuant to Section 14.2 hereof.