Diamondrock Hospitality Co (DRH) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 DiamondRock Hospitality Company earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed, sir.

Thanks, Grace Ann. Good morning, everyone, and welcome to DiamondRock's first quarter 2011 earnings conference call. Today I am joined by John Williams, our President and Chief Operating Officer; as well as Sean Mahoney, our Chief Financial Officer.

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

In reviewing current trends in lodging fundamentals in the macroeconomic outlook, we continue to believe that we are in the early stages of a strong and sustainable lodging recovery. The major indicators that correlate with lodging demand, such as employment trends, GDP growth, corporate profits and corporate capital investment continue on their positive trajectory that started in 2010. We expect this momentum to accelerate as confidence in the economy continues to grow. Additionally, the lack of meaningful new supply remains a critical storyline to this current cycle.

Consider the following two factors. First, the four-year compound annual growth rate or CAGR of supply entering this downturn was less than 1/2 of a percent, much lower than the previous two lodging cycles, which respectively experienced new supply at four-year compound annual growth rates of 3.5 and almost 4%. Second, although annual supply growth peaked above 3% during the most recent downturn, it is currently projected to be less than 1% during the next several years, dramatically lower than the historical average. Thus, we believe that normal [cyclical] demand growth combined with limited supply environment will result in a robust and long lodging recovery.

We reported first quarter pro forma RevPAR growth of 4.7% and hotel adjusted EBITDA margins expanded 48 basis points. Our RevPAR and operating margins exclude Frenchman's Reef because it's undergoing a major renovation and related partial closure this year. Our RevPAR growth was driven almost entirely by higher room rates that resulted from increasing pricing power and the positive mix shift away from the discounted leisure segments into the higher rated business transient segment.

It is important to reiterate that DiamondRock reports following the unusual Marriott fiscal quarters due to our portfolio's concentration of Marriott hotels. Consequently, our first quarter excludes March results for seven of our hotels. To provide a better comparison to first quarter results reported by our peers, if our first quarter included March results for the seven monthly hotels then first quarter RevPAR growth would have been 5.5% and profit margin growth would have been 73 basis points.

For the quarter, DiamondRock generated adjusted EBITDA of $18.9 million and adjusted FFO of $11.8 million or $0.07 per share. The first quarter results were solid despite some unique headwinds, such as unusually poor weather in several markets and short-term supply absorption in New York and Vail. It is worth noting that our first quarter is seasonally slow and represents less than 12% of our annual adjusted EBITDA.

Looking forward, March and April results were on track and our outlook for the balance of this year remains very strong. In the first quarter more than a quarter of our portfolio enjoyed double-digit RevPAR growth led by the Sonoma Renaissance, Austin Renaissance, Orlando Airport Marriott, Charleston Renaissance, and the Chicago Conrad. Although excluded from our comparable RevPAR, Frenchman's Reef expectedly underperformed the portfolio as groups were hesitant to book the hotel immediately prior to the commencement of our large renovation.

It is also worth nothing that the Boston Westin and Chicago Marriott, which are both significant drivers of our portfolio results, are seasonally slow in the first quarter. As John will discuss, both of these markets are expected to be strong in the back half of the year.

Turning to capital structure, DiamondRock continued to strengthen its already terrific balance sheet with $150 million equity offering in January and more recently $1 million non-recourse loan on a previously unencumbered Minneapolis Hilton. Today, the company enjoys very conservative leverage with projected net debt to 2011 EBITDA of approximately 3.6 times. Importantly, the company's balance sheet remains straightforward with no preferred equity, no corporate debt and 12 unencumbered hotels.

Moreover, we project to have over $300 million in excess cash this year along with an undrawn $200 million corporate revolver. All of this is potentially available as dry powder for soon hotel acquisition opportunities. With a solid pipeline we plan to be active in 2011.

Before turning the call over to John, I wanted to provide a quick update on a few matters. First, the Allerton Chicago foreclosure. As many of you know, we took advantage of this distressed debt opportunity in early 2010 by buying a note at the substantial discount and prosecuting a foreclosure of the hotel. We had a favorable hearing on the foreclosure last month and the next step is summary judgment hearing in May.

We anticipate one to two outcomes this year. Either completion of the foreclosure giving us an attractive cost basis of less than $140,000 per key, or alternatively getting to repeat the note in full at a substantial profit. It remains hard to handicap which outcome is more likely but both are positive.

Additionally, we want to provide an update on the hotel being developed for DiamondRock in Times Square. The demolition is complete on the site and construction is expected to start this summer. We continue to be very bullish on this deal. The completion is expected no later than mid-2013. And as a reminder, our price per key on this deal is only about $450,000.

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

Thanks, Mark. Given the unique headwinds in the first quarter, we were pleased with the results for our portfolio and remain confident that the balance of the year will be strong, particularly the second half. Some of those unique headwinds included severe weather in the Northeast that caused group cancellations in Boston and impacted travel in New York City. And an ice storm in Atlanta in January impacted both group and transient sales. Chicago also had an impactful snow storm.

However, the trends remain positive with period 4 RevPAR up over 7% and group pace for the balance of the year showing strength, all of which give us confidence that the recovery remains on track. Additionally, as Mark mentioned, the first quarter is the least statistically meaningful representing less than 12% of our annual EBITDA.

As I discuss portfolio first quarter operating trends for the balance of my comments, in order to make it useful I'll exclude Frenchman's Reef from all of the numbers because the extensive renovation distorts comparisons. Pro forma RevPAR increased 4.7% for the portfolio in fiscal Q1 as a result of a 4.5% increase in average daily rate and small increase in occupancy.

The increase in the portfolio RevPAR was driven by improvements in several room segments. Group revenue increased 1.8%, but business transient revenue by far the highest rated segment was up an impressive 11.4% displacing lower rated leisure and discount transient revenue, which was up only 1.2%. We expect this profitable shift in mix to continue throughout the year.

In the first quarter, corporate and premium demand was very strong. Room nights in these two categories increased 17.2% at a rate 6.7% higher than Q1 2010 resulting in a 25% increase in rooms' revenue coming from the highest transient rate categories. In addition, special corporate revenue was up over 10.5% in the quarter.

Q1 also continued the positive trend of accelerated short-term bookings. In the quarter for the quarter, group revenue booked was higher compared to Q1 2010 with most of the increase coming from higher group rates. 2011 group revenue pace continues to improve. As of the end of Q1 group revenue pace is up almost 3% versus the same time last year. This represents a two percentage point increase since last quarter and a 17.4 percentage point increase compared to Q1 2010.

2011 quarterly booking pace is up over 4% in the second half of the year. We already have 77% of the group revenue on the books needed to hit the 2011 group revenue budget. 2012 group pace is strong as well with revenue on the books of 8.4% with a particularly bright outlook for Chicago of 10% and Boston up over 20% as they will benefit from good citywide convention calendars next year.

Hotel adjusted EBITDA margin improved 47 basis points in the quarter and we remain vigilant about cost containment despite being impacted by items relatively unique to this quarter. Margins were impacted by higher bonus accruals, state unemployment charges, medical costs, lower food and beverage profits which I'll comment on later, and higher support costs due to sales and marketing charges and higher repairs and maintenance costs. Because of the seasonally low revenues in Q1, many of these items had an outsized impact on Q1 margins.

In 2010, we had some great success improving food and beverage revenues and profitability. However, total food and beverage revenue in Q1 this year was down 2.4%. F&B departmental margins were challenged in the quarter. The portfolio had 3,800 fewer group room nights in the quarter versus Q1 of 2010 significantly impacting our high margin banquet revenues. Our asset management group remains focused on F&B and is working closely with our operators to institute new action plans adjusting menus and operating hours and finding even more operating efficiencies.

Overall, labor and benefits rose 4.5% in the quarter. Wages rose 2.4% and benefits were up 8.9% as a consequence of the items I mentioned earlier. Productivity in the quarter was good. Man hours per occupied room improved by 1% and sales per occupied room improved 1.5%. Support cost per available room, including property level G&A, repairs and maintenance, utilities and sales and marketing, were collectively up 4.2% in Q1 due mainly to higher sale and marketing costs and bonus accruals related to 2010 outperformance.

In 2009, we, together with our operators, identified over $10 million of cost savings in our hotels. We preserved the bulk of those savings in 2010 and thus far in 2011. Our asset management team is diligently monitoring our hotels to ensure these costs don't creep back in until occupancy increases warrant the addition cost.

Turning to CapEx, DiamondRock expects to invest $65 million in its portfolio in 2011. Most significantly we're engaged in then exciting $45 million renovation and repositioning project for the Marriot St. Thomas Frenchman's Reef Resort. The repositioning of Marriott's Flagship Caribbean Resort will provide significant rate potential, improved operating efficiency, and dramatic energy efficiency in savings. We've already seen great customer reaction with fourth quarter group pace at Frenchman's Reef up nearly 25% in 2012 -- I'm sorry, this year and 2012 pace is up significantly as well.

After years of planning, the project construction will commence in this quarter and conclude in October. Two of the four resort buildings will be closed, approximately 300 rooms, during the seasonally slower period and will impact full-year 2011 EBITDA by approximately $5.5 million.

Before I move on from the CapEx discussion, I wanted to summarize several ROI initiatives and their results. Over the past several years we have focused, among other things, on parking and energy projects. In parking, we generated an incremental $6.5 million in profit through marketing studies, analyzing competitive pricing, and investing in new technology. The enhanced revenue cost savings and internal control improvement from these projects have generated a 67% annual profit improvement. We've also invested $3.7 million in various energy savings technology, which in most cases pays back the investment in less than two years.

Now on to acquisitions, our 2010 acquisitions continue to outperform achieving a double-digit year-to-date RevPAR increase through March. In 2011, we previously announced that we have contracted to purchase at completion a development project at 42nd and Broadway in Times Square. The hotel will be branded and we expect the hotel to contain about 285 rooms for a total investment around $128 million, although there is a small chance we may be successful in obtaining entitlements for additional rooms. Demolition has been completed and construction is scheduled to begin this summer. We remain very excited about this exceptional location.

The pipeline continues to be strong and we've been active. We are close on several deals and we'll announce them after closing, which we anticipate will be in the next 30 to 60 days. We'll continue to be active on the acquisition front while remaining disciplined in our underwriting. Our pipeline contains a number of interesting opportunities and we continue to mind attractive acquisitions in our target markets.

Overall, we feel good that the lodging market recovery is continuing as demonstrated by continuing positive tends in group and transient pace. And it should persist as increasing business investment, recovering consumer confidence and constrained industry supply provide a very health environment for sustained growth in the lodging industry.

Mark?

Thanks. As John noted, despite some headwinds in Q1, we remain bullish in lodging fundamentals as demand and improvement in supply remains limited. Quarterly, our outlook continues to be for the hotel industry to deliver RevPAR growth of 6% to 8% in 2011. We are reaffirming our guidance for DiamondRock to deliver comparable 2011 RevPAR growth in the range of 6% to 8%.

Based on our RevPAR outlook, we expect DiamondRock to generate adjusted EBITDA of $156 million to $160 million. Accordingly, adjusted FFO is expected to range from $98 million to $101 million, which assumes income tax expense of $7 million to $9 million. This translates into adjusted FFO per share of $0.59 to $0.61. The adjusted FFO guidance was revised to reflect impact of the recently announced $100 million financing on Minneapolis. Note that no additional acquisitions are assumed for purposes of providing guidance.

In concluding the prepared remarks, once again we believe DiamondRock is extremely well positioned to deliver shareholder value. Our high quality portfolio continues to reap the benefits of the lodging recovery.

Here are a few interesting data points to ponder in terms of long-term growth potential. If our portfolio EBITDA margins return only to prior peak, they would still increase 490 basis points from 2010. Similarly, if hotel EBITDA returns just to prior peak, EBITDA of DiamondRock's comparable hotels would increase more than 45% over 2010 EBITDA.

Additionally, we remain optimistic that thoughtful asset management initiatives, like the Frenchman's Reef repositioning, will enable our portfolio to outperform. In external growth, we have already announced close to half a billion dollars of acquisitions since early last year and our balance sheet and pipeline position us incredibly well to grow through additional opportunities.

With that, we would now like to open up the call for any questions you might have.

(Operator Instructions). Your first question comes from the line of Ian Weissman of ISI Group.

Good morning. A couple questions, first on the decision to potentially terminate the contract with Hilton on the Conrad. It looks like there's been considerable momentum at that property. You did report 16% RevPAR growth. So how do you think about the termination and what other flag would you consider?

This is John, Ian. Where we are with Hilton is we're in the process of evaluation what our action is going to be. Their option to cure the termination failure comes up June 1. We talked to Hilton at length, we talked to some other brands as well, and we remain kind of open to various potential actions there. You're right the first quarter at the Conrad was good. They earned occupancy by dropping the rates a little bit. The question we have to ask ourselves and analyze is, is the Conrad brand going to maximize the value of that hotel and that's really what we're in the process of trying to understand.

And just moving to acquisitions, you said you were going to be active for the balance of this year. We've seen a lot of price discovery in the gateway cities. You do have exposure outside of those cities as well. Can you maybe describe what the activity looks like or the potential pipeline looks like everywhere else in the US outside of gateway cities or are you still only seeing deals in the primary markets?

Ian, we're focused on the primary markets in our target markets. Thus far I would say in the last six months we've looked at deals in New York City, Denver, Seattle, San Francisco, Miami Beach, Los Angeles. In some cases we were reluctant to achieve the pricing that was ultimately achieved. In other cases we've been successful. So it's really a function of our staying in the target markets and our feeling that it's not the right thing to do to stretch on price too far.

Right. But if you look at sort of outside gateway cities, like New York, Boston, Chicago, and the West Coast, is there deals coming to market in markets like Atlanta? You mentioned -- I know you did the financing on Minneapolis. I'm just trying to get an understanding that are people willing to go a little bit further out on a risk curve for higher yield at this point in the cycle or is there still capital concentrated in the primary markets.

I think in general capital is concentrated in the primary markets. We've demonstrated by our acquisition of the Minneapolis property for $150 plus million that we're not stuck -- we're not coastal-centric, if you will. We see growth and opportunities in other markets like Denver, like Minneapolis, and we'll continue to do that. I thought what you meant was more kind of middle of America type markets like Kansas City, St. Louis. We have not seen (multiple speakers) there.

How would you describe the cap rate spread, let's say, between the coastal cities and a market like Atlanta or Denver or Minneapolis?

So much goes into how you look at a cap rate, what the potential improvement in a hotel is. Clearly, there is a premium paid for the coastal cities, whether it's 100, 200 basis points. In the case of San Francisco, it's even more dramatic, which some people don't understand, some people do. But the fact of the matter is the coastal cities do achieve a premium but it depends in a Minneapolis or a Denver how much potential improvement there is, what else is going for the deal.

Let me just put it -- ask it a little bit different and then I'll end the questions. But if you look at unlevered IRRs in markets like New York City or the West Coast, how would that compare to a market like Denver or Atlanta and what would that spread be? Would it be 200 basis points?

This is Mark. The IRR, there's different growth rates. Let's say you take a 10-year period so New York's going to grow faster than some of these other cities that you're mentioning. So the IRR on an unlevered basis -- and you're playing a little bit with what you think the exit cap rate might be differential, but it's probably 100 to 150 basis points on an IRR basis.

Okay, great. Thank you so much.

Your next question comes from the line of Smedes Rose of KBW.

Hi, it's Smedes. I just wanted to ask you -- well, I guess two things. On the room count for your Times Square development, I know that you had been looking into a higher room count. I'm just wondering kind of what the process was on getting the clearance for the 285 rooms. And is there a point where supply in New York starts to, I guess, concern you going forward? I know it's traditionally thought of as a high barrier market but that's kind of proving not the case right now and maybe have your overall thoughts on supply in the market going forward. It just seems like there's lots and lots of new hotel announcements.

Smedes, this is John again. On your first question, we achieved the additional 35 rooms without much in the way of variances. The big jump would come if we were able to achieve one particular variance with regard to a loading dock. So I think we're probably at 285, which didn't require a lot of changes. So that's probably where we wind up.

In terms of your question on supply in New York, you're right a lot of rooms have come in in New York City and I think they've been felt in this first quarter. Having said that, the first quarter is, from a volume standpoint, the lowest of the four quarters. And the thinking is that the depth of the demand in New York is such that the second, third and fourth quarters will remain strong. I think the jury is out. I think we have to wait and see. The phenomenon that's going on in New York that's caused this increase in supply is people have figured out the formula of taking mid-block locations, very small sites and building spikes on those small sites. And so they're able to achieve 150 to 300 room hotels where previously people really didn't pursue them.

A lot of the supply is on the west side and lower than Midtown and even now lower than Chelsea. There are a couple more coming into Chelsea but not many, so downtown. I would say that our feeling is that supply is a risk but we think that the volume in New York, the depth of demand, particularly if the dollar stays where it is or continues to weaken, will be such that the higher volume quarters will be able to absorb the supply.

Do you have a sense of what the construction costs per key are on the hotel that you're -- on this Times Square development? If you're acquiring it for 450 do you have a sense of what it's going to cost to build?

We have not been -- we agreed on a takeout price understanding there was a profit in it for the developer. In terms of overall, we're seeing 350 type per key costs in other areas. I think Times Square is going to be higher because of the land cost. But some of the other deals we've looked at in Chelsea and elsewhere probably in the 300 to 350 cost range.

Smedes, this is Mark. On the 42nd Street deal that we're doing, it was a distressed debt deal that the current owner got in 2009. So they bought it at the-- [they bought the note] at a huge discount and that's what gave them a low-cost basis in the land and we think that's why we were able to achieve what we think is a very attractive price going in because we're taking advantage of their low basis from that distressed deal.

Okay, thank you.

Your next question comes from the line of Ryan Meliker of Morgan Stanley.

Morning, guys. Just a couple quick things, first I was wondering -- it looked like you guys had some -- almost 100% of your RevPAR growth came from rate but margins were only up 48 bips. Can you give us some color on what you need to see at the property level to see margins or is it just more RevPAR growth? Is it more rate growth or was 1Q more of an anomaly? I know Marriott had said during their first quarter call that 1Q margins were a little softer because of where expectations were last year for 1Q10 so bonuses [impacted] things a little bit more in margins in 1Q11.

And the second question was regarding Marriott. I was wondering if you could give us any color on how group sales are trending, particularly with regards to SalesForce One, whether you're seeing any concerns or not. I know we've heard from a lot of owners that at least some properties aren't necessarily too pleased with SalesForce One and I wanted to get some color on what you guys think.

On the first question, I think we mentioned what we view as -- well, in some cases what we view as anomalies in the first quarter. The other thing about the first quarter is if you get a hit it's on a low volume quarter so it's an outsize impact on margin, and I'll give you an example. New Years Day holiday fell in our first quarter this year as opposed to 13th period or fourth quarter last year. That $212,000 hit was 20 basis points almost on our margin, so that tells you how a relatively small impact in having outsized impact on our margins.

I think the bonus issue will go away. I think the unemployment tax will be spread across the year, but because the other quarters are higher volume the impact will be less. I think the food and beverage this quarter was an anomaly and it had a fairly measurable impact on our overall margins. We are working hard to make sure it is an anomaly, I'll represent that.

In terms of group sales, our pace is up. SalesForce One is a relatively new program. It's been rolled out. I think the last market is being rolled out later this year. Where it has been in place for an extended time period like Washington DC, and we only had one small property here, we are seeing a fairly impressive increase in that property whereas in the early years of SalesForce One the property lost group sales. So our view is that A, it's too early to make a judgment on SalesForce One. I think a lot of what you're hearing out there is a bit of a snap reaction. I think also that SalesForce One will get better as it becomes more mature. And in general we are very confident that Marriott is going to do what they have to do to make SalesForce One a success, whether it's tweaking the sales force offices or tweaking the resources on property. We're confident they'll get it right and we're going to help them.

That makes sense and I'd have to agree with that last statement. One other quick question for you guys. In terms of the share count, looks like you're guiding for full-year share count of 166.7 million shares but I think the weighted average in the first quarter was 168.6. It's only about a million higher but is that implying share buybacks or is there something else going on that might lower that share count throughout the year?

The 168.6, are you referring to the back pages of the press release?

Yes, exactly.

That's the share count as of the end of the quarter, which on a weighted average basis was, obviously, less than that for the first quarter.

Do you have the weighted average then for the quarter?

We do.

Ryan, there is no share repurchase in our guidance or implied there.

It's 164 million for the first quarter.

Wonderful. Thanks so much. That's all for me.

Your next question comes from the line of Enrique Torres of Green Street Advisors.

Hey guys, it's Nick Nickerson on behalf of Enrique. We were wondering -- you acquired a bunch of hotels last year budged yields on '11 of 8%. We're wondering where those are coming out now and what you're looking at on these more recent acquisitions for 2011 yields. Thanks.

Nick, this is John. I think we mentioned that the acquisitions last year were averaging double-digit RevPAR increases. So in general they are over our underwriting with I think Charleston is slightly down from our underwriting, but cumulatively they're above it. And in terms of what we're seeing now, we've been fortunate we've been able to buy at basically 7, 7.5 caps. I think that number has come down and I think now we're looking at numbers in the 5 to 6.5 range. Whether we pull the trigger on those or not is another question.

Thanks. That's it for me.

(Operator Instructions). Your next question comes from the line of Shaun Kelley of Bank of America Merrill Lynch.

Good morning, guys. A quick question on, first of all the group business comments. Obviously, you have group revenue pace up 3%. Could you give us a little bit more color on maybe how you saw that trend in March and April? I think you said that there were some cancellations in some of the markets in January and February, which makes sense. But kind of wondering how much of a snapback you've seen in that business recently.

I think, as you point out, January and February had some anomalies and they had cancellations and we had snow storms and ice storms that really did impact the actualization of the groups. What we're seeing across the balance of the year is a relatively flat slightly up second quarter, and then a relatively strong second half. We want to concentrate on the second quarter because the second and fourth quarters are the biggest group quarters, fourth quarter of course being the highest volume quarter so it's encouraging that that's up over 4%. But for the back half of the year we're looking at a plus 4% and generally an acceleratingly positive trend.

Shaun, this is Mark. I'd just add for 2012 we're already seeing pace up well over [8%], and some markets like our Boston Westin the pace for 2012 is already up over 20%. So we're very encouraged about the trends and we're very encouraged about next year.

That's helpful. And then I guess to go back to the F&B issue in the quarter, any sense on how much of that is group related? I mean it makes sense of the banquet business, which is also high margin, relies a lot on that on that group business being in the hotel. Do you need to get the group mix up in order to get that business to fall back in or is there some more, I guess, property level specific things that played into that shortfall.

I think what we need to do is, obviously, group contributes to banquet but local catering is the other key. And in the first quarter local catering is traditionally slow so our pace on local catering for the balance of the year looks better. Margin is definitely driven by your level of banquet and catering sales, so that's a focus.

On the outlet side, we spent a lot of time in the last year and a half working with our operators to reduce hours, to adjust menus, to adjust staffing levels to make outlets profitable in the hotels. That was a major effort on our part and we achieved some great results. We just have to make sure that we preserve those results going forward.

I guess just one last one on the Allerton. I know the process is still working there, but just kind of wondering strategically if you guys were to take over -- first of all, do you have any more, in terms of time, about when you think that process will be resolved one way or the other? And then secondarily, if you guys take over the hotel your thoughts on I guess getting a brand in that box.

Shaun, this is Mark. On the process there's another hearing set for this Friday on our summary judgment motion. A lot of it depends on what the judge does. They could rule quickly. They could take their time in ruling. Once they rule, then you have to go through the option process of doing notice and whatnot and that probably takes another two or three months to wrap it all up. So that's the timeline so we're little bit at the whim of how the judge calendars this and his deliberation time.

As far as brand options, the thought is once we actually have ownership of the asset that's probably the appropriate time to really engage a number of different brands on what makes sense. It would be a full service hotel and it could be everything from a well known boutique operator to one of the major brands. We'll assess all our options at that time.

Great. Thanks, guys.

Your next question comes from the line of Michael Salinsky of RBC Capital Markets.

Morning, guys. I apologize I jumped on a little bit late. Just going back to the group bookings, did you give the rate for '11? As well I think you mentioned some pretty attractive bookings for '12, just curious to what you're seeing on the rate versus pace there.

Mike, this is John. The rate is the bulk of the growth. Going forward in both this year and next, although the fourth quarter has a nice room night bump as well, but we're seeing some positive trends on the rates.

You talked a little bit, I think, about Boston. Could you give us kind of a sense of what you're seeing in Chicago as well as Minneapolis in some of your larger group houses there?

In terms of citywide activity?

Yes, that would be helpful.

You didn't mention Boston, but in the case of Boston 2012 has more citywide and more BCEC events, which is important to us because we're located adjacent to the BCEC as opposed to Hines and the Back Bay. In Chicago, 2012 room nights are basically at three-quarters of pace and pace is scheduled to be above 2011 levels. So there's every possibility that they'll get up to pace and 2012 will be a good convention year.

New York City is probably down a little bit this year and is going to be probably flat next year. It doesn't impact us that much at our Courtyards and the Chelsea Hilton Garden Inn. So Host, for example, would chart that a lot more closer than we do. In Austin, we're looking at strong market wide group sales this year. Of course, in Worthington we had the Super Bowl this year, but overall I think citywides are flat to slightly up next year. And Atlanta is basically at pace for 2011 with '12 scheduled to be up.

That's helpful. Could you give the statistics on your corporate negotiated rate first quarter and what your thoughts are on that and how much you saw on the special corporate side as well?

Ours was up 10.5% in the first quarter. In general, I think high single digits would be a rough generalization, but it sort of depends on the market. Generally, a rate -- excuse me, a range of probably 7% to 12%.

Finally, in terms of the acquisition pipeline, should we -- you have generally tended to focus more so on upper upscale, but we have seen a few select service. How would you characterize the pipeline at this point? Is a little bit more select service in urban markets or are you still primarily focused on the urban upper upscale big box?

We're primarily focused on upper upscale. We do have one limited service hotel in our pipeline but that limited service hotel looks, acts and feels like a full service hotel because there's a leased restaurant connected to it and it provides room service and catering, as well as providing three meals a day of breakfast, lunch and dinner. So it acts like a full service hotel and achieved rates like a full service hotel.

Finally, Sean, not to leave you out. Can you just talk about what you're seeing in terms -- I know you guys just did a new financing there on the Hilton. I'm curious as to what you're hearing in terms of terms, rates, LTVs, things of that nature.

Sure, Mike. We're still continuing to see positive momentum in a secured market. We're seeing LTVs creep into the mid-60s. For sort of high quality assets we're seeing -- as the hotels become more accepted in securitizations we're seeing debt yields in the 10 to 12 range, which has obviously come in from where it would have been three to six months or so ago. We were very happy with the terms that we got on the Minneapolis financing, which represents a mid-60% LTV and a very attractive all-in rate for a 10-year fixed mortgage. So we think that's a strong representation of the strengthening of the secured market.

That's all for me guys. Thanks.

Thank you.

Your next question comes from the line of Darnel Bentz of KeyBank.

Good morning, guys. I just had a quick question. I wonder if you could give more specifics on the acquisition environment, specifically where you're seeing the most opportunities and what markets in particular are most attractive to you right now.

John Williams. This is John again. I think the most activity is in the gateway cities. The pricing is most aggressive there, which is obviously attractive to potential sellers. I think I mentioned that we're pursuing in our target markets cities like New York City, Denver, Seattle, San Francisco, Miami Beach, LA. There's not -- now I'm speaking only upper upscale because there's significant limited service activity in the middle of the country. But I think the bulk of the activity is on the coasts.

Okay, thank you.

Thanks, Darnel.

Your next question comes from the line of Dan Donlan of Janney Capital Markets.

Mark, first question on the guidance, the EBITDA guidance. Was decision not to move your guidance, was that just more of a function of first quarter kind of planning out how you guys thought it would or was first quarter a little bit weaker than you expected but you expect the third or second, third and fourth quarters to be a little bit more robust than you previously expected.

On our guidance, we maintained guidance. First quarter, there were some weather events and some other things so a couple properties were a little behind. But if we looked at the revised forecast for the full year and we look at our group pace, we still feel confident with our prior guidance based on how the year is going to play out.

Going back to the Allerton and if you can handicap it do you think you're going to likely windup with this hotel or do you sill think there's a strong potential for you guys to just sell the debt piece as it is?

It's hard to know. There's a very well known broker that's been engaged by the, what's now, the equity and they're trying to call for offers in the next week or so. We're obviously in the dark on how that process is going. So if they're successful and they can pay us of, so be it. If not, we'll continue along the lines of the foreclosure and try to get ownership of the hotel. We're okay either way.

Right, understood. Then from a -- Sean, from a capacity standpoint, you guys have quite a bit of cash now that you've raised this debt. Just kind of curious -- and you have your line fully available to you. Just kind of curious -- and you maintained a very low leverage, where do you think your kind of capacity is before you have to come back to -- the acquisition capacity before you have to come back to the equity markets?

Dan, I think our capacity is probably around $400 million is where we think we can comfortably deploy that capital. Obviously, tapping the equity markets is based on specific market conditions, the types of deals we're looking at, et cetera. But we think we're very comfortable at $400 million as our dry powder today.

And then just lastly on the acquisition environment, some of your peers have been fairly aggressive. Just kind of curious why haven't you guys been as aggressive? Is it more or less just pricing where you're seeing returns? Is it that some of these hotels are independently branded and you guys have historically been more associated with branded hotels? Any type of comments you can provide would be helpful.

This is Mark. Most of the deals that we've taken a look at and taken a run at, it's been pricing. Obviously, if it's an auction deal the highest bid won. But we pursued a number of them. There's a number of interesting opportunities but we're staying disciplined with our underwriting and we've priced out a number of these opportunities.

Just curious on the independently branded, would you guys potentially pursue some of these independently branded hotels that are probably coming to market in the next two to three months?

The answer is in the right markets we would pursue it. If it was a DC, New York, San Francisco type markets where we think the independent name can -- there's enough demand there that they can make their own brand. So in markets like that we would consider those opportunities.

Thank you very much.

Your next question comes from the line of Sule Laypan of Barclays Capital.

Morning. I was wondering if you could clarify the comment you made on guidance. Is your outlook for second, third and fourth quarter today up or flat from what it was three months ago?

It's up slightly.

Did I hear correctly, you said on the 42nd Street development there's not much chance it could be upsized now in the number of rooms?

That's right. I think the probabilities are that it will be 286 rooms.

Just lastly, the room renovations at the Courtyard and the Renaissance Waverly, have those started already or when will they start?

They are going to start in the back half of the year.

Thank you.

You have no questions at this time. I will now turn the call back over to Mr. Mark Brugger for closing remarks.

Thank you, Grace Ann. To everyone on this call, we would like to express our continued appreciation for the interest in DiamondRock and look forward to updating you next quarter.

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