Diamondrock Hospitality Co (DRH) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2009 DiamondRock Hospitality Company earnings conference call. My name is Deanna and I'll be your coordinator for today. (Operator Instructions.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Good morning, everyone, and welcome to DiamondRock Hospitality's second quarter 2009 earnings conference call. Today I'm joined by John Williams, our President and Chief Operating Officer, as well as Sean Mahoney, our Chief Financial Officer.

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

As you already know, the US travel industry continues to face significant challenges from sharp reductions in demand caused by the current recession. Many of the macroeconomic indicators that correlate with hotel demand remain negative, although some are showing signs of moderating.

The second quarter results for our portfolio of 20 hotels reflects the continuing negative operating environment for lodging. RevPAR declined 22.2% in the quarter and 19.9% year-to-date. The year-to-date RevPAR decline was led by a 12.8% decrease in rate and a 5.9 percentage point reduction in occupancy.

However, as a testament to our portfolio and branding strategy, our portfolio of hotels continued to gain market share. Year-to-date, our hotels have increased their market share, measured by RevPAR penetration, over 7 percentage points.

Margins have been a relatively solid story. Even with the significant loss in revenue, the house profit margin decline in the second quarter was limited to 499 basis points and adjusted EBITDA margins to 604 basis points.

The cost containment efforts of our asset managers and hotel operators are working. John will discuss those efforts in more detail in a moment.

For the Company, in second quarter we generated revenue of $143.6 million, adjusted EBITDA of $32.6 million, and adjusted FFO per share of $0.24.

Turing to the balance sheet. DiamondRock has historically focused on maintaining a conservative balance sheet and a straightforward capital structure. As of the end of the second quarter, the Company's ratio of net debt to trailing four quarters of adjusted EBITDA was 5.2 times. The Company currently maintains more than $80 million of cash, including $30 million of restricted cash.

Somewhat unique in our space, we have no joint ventures or corporate debt outstandings, including no preferred equity, no convertible debt and no outstanding borrowings on our corporate revolver.

After the completion of the Courtyard Midtown East refinancing later this year, and potentially satisfying the Griffin Gate maturity with cash on hand, we will have no material maturities until late 2014 and practically half of our hotels will be unencumbered. Moreover, all of our debt is comprised of nonrecourse, subject to certain limited exceptions, property-specific mortgage debt.

In these credit constrained times, we remain focused on our balance sheet strength and liquidity to both weather the storm and, at the appropriate time, position DiamondRock to create shareholder value by buying hotels in what inevitably is going to be a buyers' market for the disciplined few with the balance sheets to take advantage of it.

Our liquidity is enhanced through our positive free cash flow, our ability to pay a portion of our dividends in stock, our unencumbered pool of hotels, our untapped $200 million corporate revolver, and by having the ability to raise cash in future equity offerings. We believe that DiamondRock is well positioned, but we'll remain vigilant about our balance sheet and we'll continue to focus on ways to utilize the balance sheet to create value for our shareholders.

As for the outlook, the lack of visibility remains too high to provide meaningful guidance at this time. However, we want to continue to provide as much relevant information as possible to assist investors and analysts in deriving their own estimates. Here's what we can tell you. For the full year 2009 we project approximately $51 million of total debt service, $10 million of owner-funded capital projects, $10.5 million of cash corporate G&A, and re-taxable capital income of $35 million to $45 million, which will be the basis for determining the amount of our 2009 dividends. We hope that this information is helpful.

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

Thanks, Mark. We continued to see negative operating trends across the portfolio in the second quarter. With hotels in several of our major markets losing RevPAR at accelerating rates, we're still playing defense, implementing creative and unprecedented cost saving measures across the portfolio.

At the same time, we're working with our operators to uncover additional revenue sources and new market segment opportunities in order to enhance market share and maximize profits.

Overall, portfolio occupancy was down 6.7 percentage points to 69% and average daily rate was down 14.6% to $159.30 in the quarter. GOP margin, as Mark mentioned, was down 499 basis points.

New York and Chicago were our most challenging markets in the second quarter. Our New York Courtyards had RevPAR declines in excess of 30%. Our Chicago hotel suffered mid-20's percent RevPAR declines, and our Los Angeles and Atlanta properties experienced around 20% declines. Our best performing hotels were in Boston and the Caribbean, where our Westin Boston and Frenchman's Reef Marriott were relative bright spots with RevPAR declines of only 3.9% and 5.9%, respectively.

It's very hard to see many positives in the tragic market we've been in for over a year, but our portfolio has gained market share throughout, validating our brand strategy.

All three major segments were meaningfully negative in the second quarter. Business transient revenue, traditionally the most profitable business, was down an astounding 37% for the quarter. The lost business transient room nights were partially replaced by opening discounted rate categories and increasing contract room nights, particularly at our airport hotels. This change in mix is a major contributor to the decline in portfolio average daily rate.

Leisure and other revenue in the quarter was down 7%, almost entirely in rate. Leisure faces easier comparisons as it was already under stress in the comparable period, and we've seen the demand to be induced with discounting in this segment, which is not true with the business traveler.

Group revenue was down about 23%, with the decline mainly coming in room nights, with rate down just 6%.

With the reduced volume across the portfolio, food and beverage sales were off nearly 20% for the quarter, resulting in F&B margins off 230 basis points for the quarter.

We continue to see group revenue booking pace drop off, as it has for six quarters. Pace was off 14.5% as of Q1 and stood down 19% by the end of Q2, as short-term pickup in rooms became even more difficult. The drop-off is, again, primarily in room nights as rate is down less than 4%.

The Westin Boston Group business this year continues to benefit from its new meeting space, with pace up 4.4%. For 2010, group revenue booking pace for our portfolio is off 16.4% versus same time last year. As we've said in the past, we believe this comparison is clouded by cancellations not being reflected in last year's numbers and the shorter-term nature of current bookings.

On the cost front, we remain vigilant about cost savings and maintaining profit margins. Our largest cost area, salaries and wages, were down about 14% in the quarter; however, benefit costs were down just 7%. So overall, wage and benefit costs were down about 12% in the quarter. Support costs, including property-level G&A, repairs and maintenance and marketing, were down almost 13% in the quarter.

Productivity was better in the quarter, reflecting contingency plans implemented over the past year. Rooms' cost per occupied room was 4% better, man-hours POR was better by 8%, and incentive management fees for the second quarter were down over 60%, or $1.9 million.

With almost $300 million of capital invested in our properties over the past five years, our overall portfolio is in good condition and will require much less capital over the next several years. We've budgeted $35 million for capital expenditures in our hotels for 2009, with approximately $25 million of that amount coming from FF&E reserve funds. The budget includes $5 million in energy ROI projects, most with paybacks of one to three years.

Our cost containment plans are expected to save approximately $10 million in 2009. 65% of the savings come from reduced labor costs as positions are eliminated and hours reduced. The $10 million in savings from our 2009 cost containment initiatives is in addition to the $5 million in savings from the plans we implemented in 2008, as well as the substantial savings incorporated into the original 2009 operator prepared budgets.

Our asset managers, in conjunction with our hotel operators, continue to work diligently to search for additional savings, knowing that we face more difficult margin comparisons in the second half of this year. Areas of particular focus include additional housekeeping efficiencies and food and beverage outlet profitability.

On the acquisition front, sellers remain reluctant to bring institutional quality hotels to market in this environment and opportunities remain limited. Our observation on distressed assets is that many lenders are postponing the inevitable and it will be at least early to mid-2010 before many of these assets reach a tipping point to become opportunities.

However, we're looking for opportunities and have recently resumed our acquisition pipeline meetings with senior executives of Marriott International. We remain optimistic that very good buying opportunities will result from this downturn; we just don't know exactly when yet.

With that, I'll turn it back over to Mark.

Thanks, John. As you have heard, the operating environment for lodging is difficult and we expect that to continue for the next several quarters. During these times, our team will remain focused on having a strong balance sheet, ample liquidity and maximizing profits through aggressive asset management initiatives that leverage the best learnings in the industry.

With that said, we believe that DiamondRock is well positioned for the future. With a high-quality portfolio and one of the best capital structures in the industry, we expect to take advantage of the acquisition market at the appropriate time to create value for our shareholders.

Now, we'd like to open it up the call for your questions. Operator?

(Operator Instructions.) We have a question from the line of David Loeb from Baird. Please proceed.

Hi. I had a couple. John, you just talked a little bit abut opportunities. I wonder if you could talk a little bit about when you think the timing of assets that are currently beginning to default actually turns into assets for sale. And do you think pricing is going to be advantageous early in that process, or do you think the prices are going to fall as we more ahead into a situation where there's more and more distress?

David, Hi. That's a pretty hard question to answer, obviously, given the uncertainties in the securitized market and all that we think has to be done from a precedent standpoint before people are comfortable understanding what the process is going to look like. We think once those precedents are set, it could begin to happen more quickly.

But if you look at what we're seeing today, it's really the most troubled assets that really don't have much opportunity for success and, therefore, you don't get many bidders at the foreclosure auctions. But we are seeing I would say a very slow trickle of assets come to market. But just nothing that we've seen that fits our profile at this point.

Okay. So, when -- just to drill a little deeper into the hard part of that, do you think as we get more and more hotels hitting distress or reaching maturity on their CMBS mortgages and not being able to replace those, do you think that the pricing is going to continue to decline on those assets? Do you think we're going to see cap rate expansion, or do you think that the best opportunities are going to be earlier?

Again, I only use history as a guide. I mean, the opportunities in the last go-round, in 2002 and 2003, were pretty limited. Pricing didn't necessarily deteriorate as we went through that. But again, the early ones were the most troubled. And as we came out and sellers began to see opportunities to sell, whether they were lenders or owners, the volume increased as we went through the cycle. I would expect the same thing this time.

Okay. And on the cost control front, as the RevPAR change is starting to shift over from more occupancy into more rate, and as you begin to lap some of your cost saving initiatives, what do you think the prospects are for margins in the second half? And as you look into next year, against easier comparisons, but if we continue to have flatter or moderately down RevPAR, do you think that it's going to be tougher to get margin -- to keep margins inline?

Obviously, David, we're focused pretty intently on that very question in the second half, and particularly 2010, because we frankly see all trends pointing to a negative RevPAR 2010 environment. And as you point out, a lot of hard work has gone into cutting costs at this point.

We're looking very, very hard with all of our operators for additional opportunities. And as things get tougher, again, if the last cycle is any guide, even when we thought we'd reached the point where there weren't many more opportunities, we found some more opportunities. So, whether it's housekeeping or food and beverage, the two big hitters, we are looking very, very hard for additional opportunities to save. Because, as you point out, the comps are going to be tough in the second half and even tougher next year.

Great. That's very helpful. I may come back for more later. Thank you.

We have a question from the line of Will Marks, JMP Securities. Please proceed.

Hi, yes. Good morning, guys.

Good morning.

I had a question on -- first of all, a simple question on share count. And you've given some guidance on that. Should we assume that -- you also gave dividend guidance. Should we assume that it's a cash dividend or any thoughts there?

Well, this is Mark. On the share count, I think the press release says a pretty accurate number for you to use in your model. As far as the dividend, what we've said before is that we're going to see where we are at the end of the year. We've had discussions with our board about utilizing the [rev-proc] that allows you to pay a significant portion in stock. And they'll make a final determination later in the year.

Okay. Great. And on next year, I understand on the cost side and then John's comment about expecting negative RevPAR next year. Can you talk about what -- particularly the first half of next year, what makes it a difficult comp? Is it because you're going to -- prices are going to be lower in 2010? Is it because you had groups that decided not to cancel because it would have cost just as much and so they ended up booking -- or vacating their stay in 2009 and they won't in 2010?

Well, I think the toughest comparison is going to be created by the average rate challenge that we've have next year as occupancy stabilizes, or even begins to increase at some point next year. So, when you have volume increase on top of the pretty dramatic cuts that we've made this year in the hotels, it's going to be hard to keep costs out. But that's what we're working on identifying right now, is how we can keep those costs out. But difficult comp comes because your volume will increase at some point next year while your rates will still be challenged.

Will, this is Mark. I would just add you're going into 2010 with no pricing -- with very little pricing power in most of these categories. And we're going to have to see where corporations budget travel for next year. That'll obviously have an impact.

But when you think about the special core rate negotiation going on beginning in September, when you think about the meeting planners booking the groups into next year, clearly the leverage is on the buy side right now of that equation. And so, it's going to take time for them to tell us to rebuild that pricing power, even as demand starts to kind of rekindle itself. So, we just see it as a slower process going into 2010.

Okay. And a last question. Just on current levels of occupancy. It seems that most companies have been saying that occupancy is starting to firm, at least a little bit. Where is this -- where is the new demand coming from? I guess -- it sound like it's almost all leisure. Is that -- would you say that's accurate?

Well, this time of year you would expect that anyway, Will. But yes, it's discounted rate categories. So, it's demand that you're inducing on the leisure side and maybe capturing from other lower-priced, traditionally lower-priced competitors on the corporate demand side or group side. But it generally is in what I would categorize as discounted categories, whether it be mid-week or weekend.

Okay, great. That's all for me. Thank you.

Thanks, Will.

You have a question from the line of Dennis Forst, KeyBanc. Please proceed.

I had a couple. First, in terms of cost cutting, have you had any conversations with your outside managers about possibly, in this environment, taking less of a management fee? Clearly, you've gone to everybody else that you do business with to try and cut costs.

Yes, Dennis. This is Mark. As far as renegotiating our fees with -- there's two major components. There's the base fee, which is a portion of the gross revenues at the hotel. So, it automatically adjusts as the revenues decline. I think the Marriotts of the world and the Starwoods of the world would be loathe to open up their contracts to us to help you out there.

The second major component is incentive management fees, which at some properties can be bigger than the base management fees. But those have declined dramatically. They're down 60% for us in this quarter. So, in essence, they've taken their fair share of pain on this downside in trying to help the margins so far.

Dennis, I would add -- this is John. I would add that they have been -- the brands have been very, very cooperative when it comes to brand standard issues, whether it be a product issue or a service issue, where they feel there's opportunity to help us either save capital or increase our cost cutting or decrease our costs, they have been extremely cooperative this time around, as they were last time. So, as Mark says, opening up the contracts is probably not an option, but they have been very cooperative.

In the unfortunately scenario that this type of an economy goes through the end of 2010, is there much more that you can do on cost savings or have you pretty much rang that pretty much as tight as you can get?

As I said, we are looking very hard for additional cost opportunities. We'll find some additional cost opportunities. It wont' be on the scale of what we've found thus far. But as the economy worsens, I think everyone's going to look harder and harder for opportunities to save money. I would say -- one thing I would say, what we find next year is likely to be temporary whereas some of what we found this year and last year will be more permanent.

Okay. Then I had one specific item of just housekeeping. What were the number of available room nights in the quarter? Do you have that number?

Sure. Dennis, this is Sean. The available room nights this quarter were 821,400.

821,400. Perfect. Okay. That's almost what I figured. That's the first time I've been right. Thanks a lot.

Thanks, Dennis.

We have a question from the line of Jeff Donnelly, Wells Fargo. Please proceed.

Good morning, guys. You mentioned before about looking at some distressed investment opportunities. I'm just curious. Given the poor visibility around demand right now, what metrics are you going to be using to sort of assess valuations? And I know that you're buying, right. Is it an IRR hurdle? And I guess, implicit in that, when do you kind of think things turn? Or is it just, I guess, discount to replacement cost, price per pound type that you'd look at?

Jeff, this is Mark. It's tough. I mean, we have the least visibility we've ever had on projecting future cash flows for properties, which makes underwriting difficult. Probably the more prudent course is to look backwards versus forward.

So, if we found an acquisition target and that acquisition was accretive to our average portfolio quality and it -- kind of looking backwards, if the growth rates have traditionally been higher than our portfolio or they're similar to our portfolio, that gives us at least a baseline with our existing portfolio, the baseline to measure whether we're creating value or not creating value with the acquisition. So, that's probably going to be a very important component of underwriting assets.

Price per pound at some point will be -- is interesting and more meaningful in some markets than other markets. I think that's going to play into the thought. But that gets more important in the underwriting when you're considering future supply growth and the fundamentals going forward.

I guess a two-part question is, the first half of it being -- so is there a way that you might want to look different as a company as you go into, say, 2010 or 2011, either by geography or the mix of assets that you have, i.e., more group or more leisure? I guess implicit in that is you have to have some sort of view around markets or other sort of categories changing. I mean, do you think that maybe for some segments of the hotel business we've seen a more lasting -- I don't want to say permanent, but a more lasting disruption in demand? Say, more like, for example, luxury group or a luxury resort that would cause you to want to stay away from certain segments or move towards others? Or other markets?

That's a difficult question. This is Mark. A couple of things. We generally have been balanced between the three segments, kind of a third, a third, a third, with some of it a little bit one way or the other. We like that balance going forward. That's served us well and I think it hedges your bet a little bit on what's in vogue or what's more dynamic at any one point in time

As far as future markets, I think you need to look at the demand generators and kind of see over the next 10 years in individual markets, which ones are going to have the greatest rate of growth. So, we're spending a lot of time doing market research. When you're not buying is an ideal time to kind of really dig into the facts and the individual demand drivers, the particular MSAs, and make sure that we're focused on the right ones that are going to have the best growth. There's clearly markets that we're not in that we'd like to be in, markets like San Francisco, San Diego, Washington DC. So, we're going to gravitate towards those higher growth markets as we move forward.

And Jeff, on the luxury question, I would just add that we traditionally have stayed away from the true luxury properties; not because we think there's a structural deterioration in their demand, but they're so vulnerable in a downturn because of the relative lack of ability to respond to revenue changes with cost cuts. So, we've always felt that's a little vulnerable in a downturn and difficult to grow your cash flows.

And just one last question. I'm curious, Frenchman's Reef. I guess I'm a little surprised, I guess I'd say, by the somewhat lack of deterioration there. I mean, what sort of powered that strength there during the quarter and do you think you'll -- I guess, seasonality aside, do you think you'll kind of continue to see some resilience in that hotel?

We focused -- we had a bit of a group deficit down there that we knew about going into the year so we focused pretty heavily on travel agent and more discounted business, which helped dramatically in the occupancy. The other thing that was a big help was merit/reward redemption room nights have been very, very strong there, and in Vail, for the entire year. And we opened up some of those -- some of the inventory to those room nights, in addition to Marriott changing their redemption plan where there are no black-out dates, which requires that you manage very carefully to your occupancy for the nights that you're taking the redemptions. But I would say that combination of factors helped Frenchman's Reef.

Great. Thanks.

We have a question from the line of Ryan Meliker, Morgan Stanley. Please proceed.

Good morning, guys. I just had a couple of real quick questions for you. The first one was, in the press release you mentioned that the deterioration in group room nights may have been attributable to a decline in short-term group pickup. And then, if I understood correctly during your comments earlier, you mentioned that group bookings are becoming more short-term in nature.

Can you just elaborate and give us a little more clarity in terms of what's going on with group bookings? Are you just seeing fewer in the month, for the month type group bookings but the longer-term bookings are coming in down from the typical 9 to 12 months, more to maybe 3 to 6? Any color would be appreciated.

Sure, Ryan. This is John. This is a fairly typical pattern in a downturn where meeting planners are more cautious, number one, because they don't know within their own group what they can count on in terms of attendance and, therefore, they're reluctant to book as far out as they normally do when they have better visibility.

Secondly, I think in a market like this, meeting planners tend to feel that they're better off waiting because they know availability will be there and they suspect that they'll get a better deal as they wait. So, this is a typical pattern that you see and so the salespeople react to that by pushing hard for closure. But at the same time, the logic that the meeting planners are using is pretty good logic, so it makes sense for them to make their booking decisions on a more short-term basis.

So, am I correct in believing that the in the month, for the month bookings are what's slowing and the longer-term bookings have been reduced more to a 3 to 6-month window, or any color there?

Yes. I would say if it was a six-month window, it's now a three. If it was a one year window, now maybe it's six months. So, there is that kind of -- but keep in mind, I mean, the smaller the group, the shorter the booking window anyway.

Right.

So, if a group is a 30-day booking window for a small corporate group, it could be a week. We've seen many occasions in various hotels where we get bookings literally one week in advance.

Great. Thanks. And then the other question I had was regarding some of your property level performance numbers, it certainly seems that the margin erosion is very substantially -- regardless of RevPAR performance and even rate performance. Can you clarify if there are certain properties where you think there was a little more fat that could have been trimmed? You've got some -- in the Atlanta Alpharetta, down 24% RevPAR but only down 690 bips in margin. And then the Westin Atlanta down only 300 bips more in RevPAR but down 17.5% in margin. Just looking to figure out if there -- if you think there's more fat to trim at some properties than at others and if -- get an idea in terms of where things look from a margin standpoint at the property level.

Yes. Well, each property has its own story, as you might imagine. If you look at the Westin in Atlanta, that property lost over 30% in average daily rate. So obviously, their impact was going to be greater. But we also changed managers there so there were some extraordinary costs associated with that.

But each hotel is different. If you look at the New York Courtyards, it's very difficult to maintain margin when you've got $100 rate reductions. So, those hotels that aren't heavy on cost to begin with are very difficult to trim in relation to the magnitude of the revenue loss. But we think in each of our hotels' management teams, there's an incredible focus on cost. And we're seeing what we think are very good results given the magnitude of this downturn.

Great. Thank you, guys.

We have a question from the line of Michael Salinsky, RBC Capital Markets. Please proceed.

Good morning. Real quickly, in the -- you give a taxable net income assumption for the year. What is the tax benefit or expenditure assuming in that?

This is Sean. The tax number that we gave within the guidance was our distributable tax income, which is what we have to distribute for the REIT. We have not given 2009 guidance for our consolidated pre-tax income for book purposes. So, because we haven't given guidance, we can't give a guidance on the tax benefit for book purposes.

Okay. Would you expect it to be -- maybe ask it a different way. Would you expect it to be higher or lower than last year's number? Just given where trends are right now.

Well, it should vary commensurate with the decline in operations. So, as operations are worse, you would expect the tax benefit to go up.

Okay. That's helpful. Second, the pullback of the assets from the market there as you were potentially looking for sales. Where those -- was that due to a lack of bids? Was it more of a pricing issue? I mean, what was the specific driver in pulling those back right now?

Yes, this is Mark. We got a number of bids. We probably got 10 to 12 bids on our assets. But if you think about it, at the time we went out and we were trying to get ahead of the market at the beginning of the year. As things deteriorated and every forecast dropped substantially, it was very difficult for buyers to have conviction. And so, with the lack of certainty in their ability to close and then the pricing based on our hold analysis kept changing and the final offers were probably below what the hold value were on most of our assets, so we decided not to sell any of the assets.

Okay. Looking at the decision to put it on a controlled equity release program versus another equity program, was that more of a decision just because of the Griffin Gate? As you're looking at financing options for that or what was kind of the driver behind that decision versus a straight out -- a second equity issuance?

Well, it's a three-year program. It provides the Company with another avenue of liquidity, another tool in our liquidity toolbox. And going forward, we believe access to liquidity is going to be a tremendous competitive advantage so it's nice to have other resources.

Okay. That's helpful. The final question, then. Looking at the two -- looking at your two big group hotels, the Chicago Marriott and the Boston Westin Waterfront, can you give us a sense of how bookings are looking at both of those hotels for next year?

Yes. For 2010 both hotels are down. I'll get you the exact numbers. We'll get back to you with the exact numbers, but both hotels are down, mainly in room nights. Boston less so because of the additional meeting space they're working with and -- but in both cases, the city-wide calendars are comparable to this year. But I think in terms of what we're putting on the books, we're washing the booking numbers that we're using a little more thoroughly than we did last year. And so, what's going on the books reflects a lower expectation of what's going to show up with the group.

That's helpful. Thank you.

We have a question from the line of Smedes Rose, KBW. Please proceed.

Hi. Good morning. I -- we just had a question on the group business that you did in the second quarter this year. Do you have a sense of how much of that was booked a year ago and then how much was shorter term?

We really don't have an answer for that. It was -- I'm sure, though, it follows the normal pattern where the bulk of it across the portfolio is shorter term. The long-term bookings tend to be in the big convention hotels, Chicago and Boston. And I don't have a precise breakdown on the lead time on those group bookings.

Okay. And then the second thing, you mentioned at the beginning -- and I know this is sort of a -- maybe it just needs as a reminder, your relationship with Marriott in terms of being able to source hotels for acquisitions potentially. What exactly -- could you just remind us what exactly the relationship is and how that's going to maybe be an advantage for you going forward in looking at acquisitions?

Sure, Smedes. This is Mark. The relationship with Marriott's the same as it's been since our inception. We have an underwritten agreement with them. It's to look at -- kind of a first look at opportunities that might come through their pipeline of -- internal pipeline of deals.

So, what that essentially means is we sit down with them at regular pipeline meetings with a number of their senior executives. We talk through opportunities that might be -- they might be seeing in the marketplace with some of their owners, or places where they may have conversion opportunities from other brands to Marriott. And in-between those pipeline meetings, we talk regularly on the phone if they see something else that might be a good fit for us and we look at it.

Okay. Thank you.

We have a question from the line of Cann Hoe, KeyBanc. Please proceed.

Hi. Good morning. I just wanted to follow-up on that last question. I know that your relationship with Marriott allows you to look at acquisitions. Now, does that work in reverse where, if you wanted to dispose of an asset, Marriott might go out and look at buyers for you?

Marriott, as you know, their business model at Marriott International is not to take -- their preference is not to take real estate on their balance sheet. So, they don't have an interest in buying it. And they're relatively neutral on who we sell it to, though obviously they have a preference to good owners. But we're better served wither negotiating through our contacts to find an off-market transaction or using a broker to kind of cast the widest net possible when we bring assets to market.

Okay. Great. Thanks.

We have a question from Andrew Wittmann of Baird. Please proceed.

Good morning, gentlemen. Two analysts from Baird today, I guess. I wanted to follow up on Mike's question a little bit. When you had -- you were on the road recently you talked a lot about financing hotels potentially with new equity as a way to both grow the Company and I guess delever at the same time. With the controlled equity offering deal now filed, does the controlled offering strategy take a precedent over what you laid out previously, or how should we just think about those?

I would say about more supplemental. I mean, the proceeds from this could be for general corporate purposes, which may include reducing leverage or funding hotel acquisitions. But it's a relatively measured program with less than 10% of our market cap. So, if we found -- obviously if we found a big acquisition, this wouldn't be the ideal way to finance it. You'd prefer to go out and do a big overnight kind of match fund and delever the Company at the same time.

Okay. That makes sense. And then just on operations, it looks like that leisure transients have been a positive, I guess, for the summer. Do you think that after the summer busy travel season slows down that maybe there's potential for another leg-down in top line fundamentals in terms of just demand falling off and us taking a second leg down?

Well -- this is John, Andrew. I think if we don't see a return of corporate travel, we're going to have continuing deterioration. I think on the leisure side, in our destination resorts we're seeing occupancy actually improve year-over-year in this last three-month period. And you can generate leisure demand at a destination resort with your rate structure. So, I would anticipate that same trend continuing. At convention hotels we're struggling with the booking pace and with the attrition associated with groups. But I think the key to the fourth quarter is whether or not corporate travel begins to come back.

Okay. And then just kind of a longer-term question. Just as you think about your dividend strategy, when the dividend has a little bit more visibility behind it, can you just talk about what's your thoughts on how you might pay that out? Do you think the strategy might change, instead of paying what was a fairly large portion of your CAD number to maybe a base dividend plus a special? Is that something that's at least on the table?

Yes, this is Mark. We've had -- we're having continuing conversations with our board. We had a board meeting a week ago and addressed that with them. Clearly, that's an option that's on the table. I think we're going to need to see kind of how the whole market evolves, what a competitive yield's going to be, how people restart their dividends and when. And then the concept of a base more sustainable, a quarterly dividend and a special dividend at the end of the year, given the volatility of our earnings might make sense. But I think it's still needs a little time to play out to see how that comes to be, both from our perspective as well as from the investment community what people are going to pay a premium for.

Okay. Good. That makes sense. Thanks. I'm done.

Thanks, Andy.

(Operator Instructions.) You have a question from the line of David Katz, Oppenheimer. Please proceed.

Hi. Good morning. All of mine have been asked and answered. Thanks.

And you have a follow-up question from the line of David Loeb, Baird. Please proceed.

How about three questions from two Baird analysts. I just want to follow up on the margins one more time. John, you mentioned the Noble-managed asset having a new manager. I'm just curious about Noble versus brand-managed Hilton versus Starwood versus Marriott. How are you finding their receptivity relative to each other?

I know in the past you've talked about Hilton providing some air cover, giving Marriott the space to be a little more aggressive with cost cutting, a little more owner focused. And it sounds like they're doing a really good job on that, but I wonder if you could talk a little bit about all four or your managers and what you're thinking about that. And I guess five managers, because you have Vail as well.

Okay. That's a tough one, David. You're asking me to walk -- step on a bunch of rakes here, but I'll answer it.

Sorry, John.

I think -- what we said before was that everybody is being more aggressive this time around. Because, if you think about it, the last time around they kind of evolved into a final kind of cost structure in 2002 and 2003 as the aftershocks hit. This time we really started at that point. So, we had a much more aggressive beginning to the cost cutting.

I think that the fact that Hilton is owned by a -- that the brand is owned by a real estate company, they obviously have a huge value that they place on the Hilton brand and they're not going to do anything brand destructive. But I think they look very hard at the operating level to see what they could do to reduce costs. And I think that did, in fact, give air cover to the other big brand companies.

I think the other thing to think about is that Marriott particularly was in a sort of efficiency mode before this all started. They were looking very hard at their operation to try and improve efficiencies across the system. So, they had kind of a head-start there.

I think -- when you think about Starwood, they went through a fairly substantial reorganization and new leadership team. So, they might have taken a little bit longer to get started, but they're certainly -- and certainly in our Boston property, which is our main exposure to Starwood, they're being very aggressive and cooperative with respect to the cost structure.

So, I would say all the things that we've said in the past continue to be true. And we're very, very pleased with the brand operators' approach to this downturn.

That's very helpful. Thank you.

Okay. This concludes the question and answer session of this conference call. I'd like to turn the call back to Mark Brugger for a closing statement.

Thank you for your continued interest in DiamondRock and we look forward to talking to you next quarter.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.