Diamondrock Hospitality Co (DRH) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 DiamondRock Hospitality Company earnings conference call. My name is Tony and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Mark Brugger, CEO. Please proceed.

Thanks, Tony. Good morning, everyone, and welcome to DiamondRock's third-quarter 2011 earnings conference calls. Today I'm 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. They may not be updated in the future. These statements are subject to risks and uncertainties described in our securities 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.

Let me start the call today by saying that we are pleased with the third-quarter operating performance of our portfolio and remain optimistic about the continued strength of lodging fundamentals. In particular, demand at our hotels is pretty good. In fact, even preliminary indications for 2012 are strong.

With the recent volatility in the capital market, slow employment growth, and the ongoing concern about the European debt situation, we understand why investor sentiment has grown more cautious. However, even with a more temperate world view, the 2012 outlook for our portfolio is very positive for a number of reasons, some macro and some unique to DiamondRock. I will highlight just five for you.

First, our portfolio 2012 group booking pace is up 10% in revenue as a result of favorable convention calendars for our two most important group markets, Chicago and Boston, as well as strong forward group bookings at Frenchman's Reef. Our Marriott hotels are leading the way, up over 12%, and we expect to outperform the industry on the group side next year.

Second, our portfolio will benefit from the re-opening of the fully renovated Marriott Frenchman's Reef Resort in St. Thomas.

Third, our portfolio quality will be even better after consummating the pending sale of the three non-core hotels to Inland American.

Fourth, new hotel supply continues to grow at a rate significantly below historical averages. For example during 2011, hotel supply grew at 7/10 of 1%. In 2012, supply growth is forecasted to fall to only 1/2 of 1% which will provide our hotels with pricing power even with moderate demand growth.

And fifth, government per diems are up nationally 3% to 7% in 2012, which will be a tail wind for the industry next year versus a headwind this year.

Overall, for the third-quarter 2011, DiamondRock's portfolio of hotels generated an impressive RevPAR growth of 7.2%. Hotel-adjusted EBITDA margins expanded 44 basis points. Our third-quarter margins were held back by high property taxes implemented upon the recent expiration of the PILOT tax program at the Boston Westin and a difficult comp as a result of a successful tax appeal recorded during the third quarter of 2010. Excluding these two items, our margins would have grown 185 basis points.

This RevPAR margin data is pro forma for our own hotels as of the end of the quarter, but of course excludes the Frenchman's Reef resort.

Our third-quarter results were led by double-digit RevPAR growth at half of our portfolio with particularly robust results achieved at our hotels in Boston, Atlanta, Los Angeles, and Minneapolis. We had outstanding results from a number of other hotels, including an 11% increase in RevPAR at the Sonoma Renaissance and a 19% increase in RevPAR at the Worthington Renaissance in Dallas-Ft. Worth.

Results were more challenging at the Griffin Gate Marriott due to tough comps and the Vail Marriott, due to new supplies.

Our single hotel in the DC market, the Marriott Bethesda Suites, underperformed in that soft market. However, based on overall strong revenue growth, DiamondRock generated third-quarter adjusted EBITDA of $41.7 million and adjusted FFO of $0.16 per share. It is worth noting that the renovation disruption at Frenchman's Reef displaced approximately $7 million of revenues and $1.5 million of EBITDA during the third quarter alone.

Turning to acquisitions, the Company has been very active during 2011. We have committed more than $0.5 billion in forward transactions, over $450 million committed in New York City and approximately $120 million in Denver. We believe that both of these markets have great long-term potential. In fact, our hotel acquisitions over the past 18 months are actually ahead of our underwriting.

On the disposition front, we stated on our last call that the Company was evaluating the disposition of certain non-core hotels over the next year to create additional dry powder to invest in higher growth opportunities. I am pleased to announce the pending sale of three non-core hotels to Inland American for a purchase price of $262 million. The portfolio consists of the Griffin Gate Marriott located in Lexington, Kentucky; the Renaissance Waverly located in the northwest submarket of Atlanta; and the Austin Renaissance located in the Arboreum submarket of Austin.

The disposition will provide the Company with several key benefits, including enhancing our portfolio quality and providing significant dry powder for future acquisitions. We expect the transaction to close at the end of the year contingent upon the lenders approving Inland American's assumption of the related property debt.

Now let's turn to our capital structure and balance sheet. Since the Company's inception, DiamondRock has remained committed to low leverage and a straightforward capital structure. It is during times of economic uncertainty that a balance sheet such as ours is most potent. We are protected if macro factors are worse than anticipated and positioned to take advantage of opportunities if industry fundamentals remain strong.

Our projected 2011 net debt to EBITDA ratio is 5.6 times. Looking at it another way, if the sale of the three hotels that occurred at the beginning of 2011, this ratio would be only 4.8 times. The solid debt ratio will only improve during 2012 as hotel cash flows increase and we regain the displaced renovation business at Frenchman's Reef.

Additionally, our debt is very well-structured and flexible. 12 of our hotels are unencumbered by debt and have a cost base that's well north of $1 billion. That is a lot of potential borrowing power. Although we plan to stay conservative, it is nice to have the flexibility.

Moreover, providing income to our shareholders is important to us. Since our inception, DiamondRock has provided our investors with over $0.25 billion in cash dividends. Our current dividend yield of 4% is well-covered and substantially higher than many of our peers. Our ability to pay a strong dividend is indicative of the health of our balance sheet and our belief in the positive operating trends.

Before turning the call over to John, I wanted to provide a quick update on a few other matters. First, the Chicago Conrad. The Conrad has achieved outstanding operating results during 2011. Year-to-date RevPAR [grew] at 16% and market share improved an impressive 5 percentage points.

Earlier this week we signed a new agreement with Hilton Worldwide for them to continue to operate the hotel as a Conrad. We are excited about the results.

Under our new agreement, Hilton provided an annual operating performance guarantee which will last through 2015. The new agreement also gives us the right to sell the hotel unencumbered by brand or management, thereby maximizing our flexibility and exit value. Moreover, we have identified great ROI opportunities at the Chicago Conrad to add over 4,100 square feet of high demand meeting space in place of non-revenue-producing executive offices as well as re-concept a restaurant, outside terrace and lobby. The Chicago Conrad has a bright future.

Second, although John will go into more detail, we are pleased that our Frenchman's Reef Resort has reopened. It looks great and is tracking at a $45 million capital budget, due to the extraordinary efforts of our asset management team.

Third, Allerton, Chicago. As many of you know, we took advantage of this distress debt opportunity last year by buying a note at a roughly $10 million discount. Our basis in the note equates to an attractive $140,000 per key. In a move to hold us off from completing foreclosure, the owner filed for bankruptcy last May. Although the filing slowed things down, it triggered a recourse guaranty that allowed us to file suit to collect legal fees, etc., from the guarantor that was put up by the owner.

Concurrently as a secured creditor, we are taking action to maximize value for our shareholders in the bankruptcy proceedings. We have engaged best-in-class legal representation and will incur the concomitant legal fees. Although we may recover the legal fees from the guarantor, GAAP requires that we expense them now as incurred. We anticipate the bankruptcy process to be resolved around the middle of next year.

Fourth, earlier this month we reached a settlement to resolve litigation related to our LAX Marriott. Our contribution to the settlement is approximately $1.7 million which we accrued in the third quarter. We are pleased to put this matter behind us and this one-time expense is added back to our adjusted EBITDA and adjusted FFO.

Lastly, we want to update you on the Hilton Garden Inn Hotel being developed for DiamondRock in Times Square. The demolition is complete on the site and construction is expected to start after the New Year's Day holiday with delivery in mid-2013. Our price per key on this deal is fixed at only about $450,000. We remain very bullish on this project as we believe that the A plus location and strong brand will enable the hotel to achieve high rates while maintaining great flow-through from its limited-service cost structure.

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

Thanks, Mark. Before getting into details, let me say that this was a very strong quarter. We saw solid demand and the team did an excellent job managing hotel costs. The outlook for 2012 looks good and we continue to see exciting investment opportunities at our hotels.

In the third quarter, room revenue for the DiamondRock portfolio increased 7.2% and was driven almost equally by increases in rate and occupancy. Food and beverage revenue was up 2.6% and house profit margins were up 136 basis points compared to Q3 of 2010. All the comparisons I'll give in prepared remarks unless I indicate otherwise will exclude the Marriott Frenchman's Reef Resort, which was substantially closed during the third quarter. I'll say more about Frenchman's Reef in a minute.

Our portfolio benefited from strong demand in all segments. Group room revenue in the quarter was up 4.2%, business transient was up 4.4%, leisure and other discount revenue was up 12.6%, and contract and other revenue was up 16.9%. As you know, the third quarter is a strong leisure quarter.

The room segmentation for the portfolio by revenue in Q3 was 34% group, 32% business transient, and 34% leisure and other, reflecting our strategy to have a balanced revenue mix in our portfolio.

Our asset managers and operators have worked cooperatively to increase productivity at the hotels in order to enhance profitability. Our team remains focused on controlling expenses. Overall productivity for the portfolio was very good with man-hours per occupied room down almost 4% and sales per man hour up 6%. Salaries and wages were contained in the quarter increasing only 3.2% with benefits up 5.1%.

We continue to battle higher travel agent commissions and credit card fees which continue to trend higher at approximately 8% and 12%, respectively, over Q3 last year. Food and beverage sales were up 2.2% as I mentioned, but margins were down slightly because of the mix of leisure in the quarter led to a less profitable mix, weighted towards low-margin outlet sales.

Higher profit banquet sales were up a modest 1% with group catering up about 2% but local catering was off 2.5%. As a result of menu planning initiatives and volume purchasing programs, food and beverage product costs were actually both slightly lower in the quarter. Support costs in the quarter increased 3%.

Support costs were impacted by sales and marketing and repairs and maintenance costs, which were up 6.3% and 5.2% respectively. This impact was mitigated by moderate increases in hotel G&A, up just 2.3%, and lower utility costs down almost 3%. The utility cost savings were in part a result of the energy-saving initiative we have invested in over the past three years.

Overall, a very good quarter for the Company with revenue, cost controls and both group and transient pace continuing to trend well.

We continue to aggressively work with our operators to maximize results in our properties. We work closely with Marriott to improve the performance of the new sales organization as it relates to DiamondRock's portfolio. Resources have been added or reorganized to concentrate sales efforts on important feeder markets and effectively convert tentative leads into definite group room nights.

Marriott has developed tools to measure lead response time and sales effectiveness and both measures have trended positively all year. These efforts, together with the positive impact of the reopening of Frenchman's Reef, have undoubtedly contributed to our Marriott-managed portfolio 2012 group revenue pace being up over 12.4%.

Our consolidated portfolio 2012 group revenue pace including all brands and managers is also up an impressive 10% compared to 2011.

No one is declaring victory yet in this complicated sales reorganization, but the dramatic increase in account coverage, seven times the number of accounts covered by the sales organization representing 110,000 accounts, the improved lead response time and effective lead conversion rates, and the improvements in pace and group RevPAR index are all signs of progress.

Our internal investment program has been extensive and we found excellent opportunities to invest in our hotels and deliver attractive returns.

Let me start with our largest initiative, the repositioning of Frenchman's Reef in St. Thomas. I'm happy to report that the repositioning and energy project at the Frenchman's Reef Resort is substantially complete. The project is expected to be completed on budget and the resort reopened on schedule earlier this month.

The planning for this $45.3 million project began in 2008. Construction commenced in May of this year and the resort has been transformed. All of the rooms have been renovated and the facade upgraded. We have created a brand-new state-of-the-art spa and fitness facility, which had been the primary objection for meeting planners.

We have rebuilt the pool into three world-class pools including a spa and plunge pool, a family pool with the latest spray showers, and an adult resort pool with a swim up bar and a breathtaking infinity edge overlooking the Caribbean Sea. The new resort pool area includes a wedding gazebo in a secluded setting which will be an effective sales tool for the already popular wedding venue. We added a newly constructed lounge, attached to the main restaurant that provides guests with panoramic views of historic Charlotte Amalie Bay.

The energy program in the hotel is equally as exciting. We have reengineered the HVAC at the resort to a central system, providing condition dry cooling to the guest rooms and public areas to dramatically enhance guest experience. We converted the hotel to self-generation and will no longer rely on the island energy provider. The new system will have a compelling return on investment as it is projected to reduce our cost per kilowatt hour by 25% and our energy consumption by an estimated 30%.

Guest and meeting planner reaction to the revitalized hotel has been exceptional. We expect the renovated resort will commence significantly higher rates in both the leisure and group segments and recapture group business that had stopped meeting at the hotel, and the energy savings will be substantial.

Next, the Lexington Hotel in midtown Manhattan is in the final planning stages for an exciting redesign and renovation. We believe the hotel has significant rate potential with smart capital investment and potential rebranding.

Our underwriting during our acquisition of the hotel included a $25 million investment for repositioning the hotel in order to maximize our returns. The repositioning will renovate and re-concept the 712 guest rooms and the public space to emphasize the hotel's history and create a unique guest experience. When complete, the hotel will be positioned at a 4 1/2 star level and, depending on our final analysis, will be either branded or compete as a very upscale independent similar to other well-known hotels along the famed Lexington Hotel corridor.

We are planning renovations to minimize disruptions at this high-occupancy hotel which means that some work occurring in the first quarter next year and the bulk of the capital being completed in early 2013.

Turning to the Conrad Hotel that Mark talked about, we are also in the final planning stages of a re-concepting and significant meeting place addition at the Conrad in Chicago. The plan will include activation at the lobby and food and beverage outlets, including taking the already popular outdoor terrace to the next level. We will add over 4,000 square feet of highly valuable meeting space.

We will also create an additional deluxe suite by splitting the Presidential Suite into two deluxe suites with high-demand outdoor terraces. We expect to invest $3.5 million in the hotel that projections show will generate a very attractive return. The work should be completed at low demand periods to minimize disruption and we plan to complete the work by mid-2013.

As Mark mentioned, we have restructured our financial relationship with Hilton to significantly enhance our returns from this hotel. We have been very impressed with Hilton, and we look forward to expanding that relationship.

I did want to touch on acquisitions and dispositions. We have bought some great hotels over the last year. Forecast 2011 EBITDA for the six hotels we acquired over the past 18 months exceeds our acquisition pro forma EBITDA as Mark mentioned.

With that said, dispositions also remain a key part of our capital allocation strategy to create value for our shareholders. The disposition of the non-core hotels Mark mentioned will improve our portfolio growth, increase portfolio quality, and increase our portfolio concentration in high-growth urban locations.

For example, the average rate of our portfolio will increase almost $5.00 after the disposition of the three hotels. The hotels are identified as non-core for the Company, based on a number of considerations, and we targeted their dispositions at our strategy session early this year. The proceeds from the sales will allow DiamondRock to reduce leverage and, more importantly, substantially increase our investment capacity in what I think may be a very interesting time to buy next year.

The fundamentals of our portfolio are trending well into 2012. However as we entered the 2012 budget season, our instructions to our managers are the same as last year. Don't add cost in anticipation of revenue improvement, only in response to increased volume and then only if absolutely necessary.

With that said, we are seeing strength in both group and transient pace. Our two most important group markets of Boston and Chicago have strong citywide conventions next year. The renovated and reopened Frenchman's Reef Resort will obviously have outsize growth. The Salt Lake City Marriott will benefit from the opening of the two City Block City Creek mixed-use projects after four years of impact from this massive construction project. And all of this against a backdrop of historically low new supply in the US.

We believe that these facts paint a very positive picture for DiamondRock in the 2012 fiscal year. Mark?

Thanks. As John noted, we remain positive on lodging fundamentals and expected the fourth quarter to continue demonstrating favorable demand trends with solid RevPAR growth.

The [good group] on the books for the fourth quarter gives us great confidence in the quarter. However, we are revising our guidance to take into account a number of things notably that our RevPAR growth, while expected to be strong, have previously included the hotel operators' overly aggressive fourth-quarter rate assumptions for both transient and group. We have taken a more prudent view of the forecast for both rate as well as for group F&B contribution.

Additionally, support costs are above trend lines, particularly sales and marketing impacting the fourth quarter by about $1 million mostly due to certain programs true-ups. Lastly, as we discussed, we have accounted for additional legal fees.

Thus we now expect to file and results for the full year 2011. Pro forma RevPAR growth of 6% to 7%, adjusted EBITDA of $166 million to$170 million. Note that this includes the disruption from Frenchman's as well as $2 million in incremental legal fees related to the LAX settlement and Allerton legal fees. Accordingly, we expect full-year adjusted FFO per share to be $0.63 to $0.65.

In concluding the prepared remarks, we would point out several key reasons that we believe DiamondRock is well-positioned to deliver shareholder value.

One, our portfolio and has tremendous upside from the cyclical recovery. For example, if this recovery achieves prior peak DiamondRock's comparable hotel EBITDA will increase 45% over 2010. Stated differently, we are currently trading at a historically inexpensive cap rate of almost 10% on prior peak hotel NOI for our portfolio.

Two, our portfolio has above cycle upside from attractive ROI opportunities. Good examples of those opportunities include the Frenchman's Reef reinvention, the Lexington Hotel potential rebranding, and the Conrad Chicago additional meeting space.

Three, the DiamondRock external growth story is strong. Our recent acquisitions are high quality with high growth potential.

Moreover, the pending sale of three hotels to Inland American along with our already great balance sheet positions DiamondRock to pursue acquisitions as others are sidelined by the turmoil in the capital markets.

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

(Operator Instructions). Eli Hackel of Goldman Sachs.

Good morning. Two questions, one just relates to the sale of portfolio and how you look at the proceeds going forward. You mentioned 2012 may be an attractive year for buying assets.

Where would you look to take leverage to? I mean, if you are going to be at 4.8 times this year, would you bring it above 5, again to purchase hotels and then what are you seeing in that market?

And second question, just on the sale of the portfolio, how active was the bidding for these hotels? And maybe some color on who the bidders were or was this a special situation in terms of where you found the buyer of the portfolio? Thank you.

I'll take your second question first and then turn it over to Sean. As far as the market process for the assets we originally went to market with the Griffin Gate Marriott Hotel and from that -- and there was a number of interested parties. From that we build a relationship with Inland American and grew to a larger portfolio deal. So it was partially marketed and partially off market for the sale of the portfolio.

Related to your question on leverage and where we would go in leverage, I'll turn it over to Sean.

With respect to the leverage, I think as Mark correctly stated, this will take our leverage down to 4.8 on the net debt to a banal basis. I think from a long-term perspective, we will continue to strive to have low leverage on our capital structure. We are going to evaluate our long-term leverage again as part of our strategy session this fall. I think what you would expect from DiamondRock in the future is what we have done to date which is to have one of the lowest levered balance sheets within our space. I wouldn't expect that to change as we look forward.

And then just one more actually, just a clarification point. On the group bookings you gave a number that -- sorry if I missed it, but did -- could you just -- were group bookings a number that you gave for next year? Did that include Frenchman's or was that exclusive of Frenchman's?

The 10% I gave you included Frenchman's, Eli. This is John.

: Do you have that number excluding Frenchman's?

It is 8.7%.

Thank you.

Ian Weissman, ISI Group.

Ian Weissman Just one follow-up question on the acquisition or the disposition, I should say, of the non-core assets. I assume that the transaction wasn't consummated in the last 30 or 60 days and it seems as though it is all the rage for institutional capital to be walking away from deals, given the uncertainty. What if any out does Inland have at this

The contract, obviously, is covered by confidentiality agreement, but we have a market deposit and it is contingent on the lenders approving the assumption of the secured debt. So that is really the big contingency that remains in the contract to consummate the deal.

And remind us again the closing date is when?

The closing date is going to be determined by the timing of the under consent and we are anticipating it by the end of the year.

And just any color that you might be able to provide on pricing. Cap rate or such.

Yes, as you know we are covered by confidentiality agreement so I won't give any projections. But our -- we publicly disclosed the trailing 12 in our press releases. It is roughly a little over a 7 cap on trailing numbers.

Great, thank you so much.

Smedes Rose of KBW.

Thanks. I wanted to ask you on your cost as you look out into next year, I think you noted that your benefits are running up 5% and labor is up 3%. Do you think that is a reasonable rate? Would you expect to see that into next year? And then what percent is benefits of your total labor cost?

We would expect, depending on volume, of course, we would expect the 3% to be sustainable. As you know, we have very few union hotels and where we do have them, 3% should accommodate the increase. In terms of the benefits as a percentage of total wages and benefits, I will get that for you in just a minute.

And then just -- what was the -- you said you made a settlement as to the LAX hotel there. What was the issue? Or what was it that needed to be settled?

The LAX involved the hotels in what is called the LAX corridor. There was an ordinance passed a number of years ago related to wages and the way that the banquet tips are distributed. So that was the -- [first of all] a crucial issue in the litigation.

And then, I just wanted to ask you one thing. I think on your last call you had given some statistics around the pace of group bookings just for Chicago specifically and for Boston. And I was just wondering if you could give us an updated number on those?

Sure, the pace for Chicago is about 10.8%. The pace for Boston is about 16.6%. That's as of period 10.

So it looks like for Chicago it slowed a little bit from your last update, but picked up a little bit for Boston.

Yes, but very slightly in the case of Chicago.

Okay, all right, thank you.

In answer to your question on wages -- on benefits as a percentage of total labor, it runs in the mid-40s.

Okay. Thank you.

David Katz of Jefferies.

Good morning. I wanted to ask about profit and profit flow-through and I may be just overly focusing on two numbers, but you gave some RevPAR growth and margin expansion excluding the three hotel portfolio, right, and I think on a year-to-date basis, RevPAR growth would have been [6.3%] with 108 basis points and then in the quarter without those three hotels, it was 7.3% and 170 basis points. Those flow-throughs are different and I wanted to just get a sense for what is in there, what may be in there other than just rate differential. And to that end, I wanted to just talk about where you see breakeven and margin, relative to RevPAR as we look at next year, and how that should roll. I think we are trying to just calibrate that.

To answer the first part of your question, related to the three hotels that are pending sale and the way they impact the portfolio, there are a number of things going on with those three hotels. They are good solid hotels, but the Waverly is impacted by a property tax appeal in the comparable period where we won and it all flowed through third quarter of 2010. So that impacts the margins there and, therefore, the comparisons to the portfolio.

Griffin Gate is also working against a difficult comp, due to the fact that they had the equine world games there last year. And so you'll see that comparison impacting the margin for that hotel as that comp remains there for both the third quarter and the balance of the year.

As far as 2012 and what the breakeven is for RevPAR, it is really a much more complicated formula than that. What we have seen is that almost the as important of a driver of the profit flowthrough given our group mix is about a third of our portfolio is the F&B contribution that is coming from these groups, particularly the high profit banquet. So we could have a relatively modest RevPAR growth and still have great margins. If that group F&B contribution picks up next year and the group starts spending a lot more on banquets, week could have terrific profit flowthrough even with kind of moderate revenue growth.

So it is going to depend on the mix and the ancillary contributions in large part.

Right, so if we look at that third-quarter relationship between 7.3% RevPAR growth and about 170, it I think gets to about a 2 to 1, right, flowthrough of profit growth to RevPAR growth? And does that mix change next year? In other words will the mix have more groups on it that might improve that or (technical difficulties)?

I think there's enough moving pieces. It's hard to say because while we expect next year to be a very strong group and our group to increase next year, the business transient and also the group spend is going to be difficult to forecast these [next] flowthrough. Kind of the 1 to 2 is the rule of thumb that I've heard other people use, but our experience is that every quarter is different and the mix really plays a significant role in the ultimate flowthrough.

Perfect, thank you very much.

Thank you.

Sule Sauvigne of Barclays Capital.

I was wondering -- you mentioned your group revenues were up 10% next year, but can you give us an indication on where rates are coming in for next year?

Sure. That breakdown works out to about 7 per -- it is about a 70/30 split rooms to rate.

But it roughly a little north of 2% rate growth next year. [2.8]%.

Okay and is there a meaningful difference between the rate you're getting on the Marriott properties that have -- that are doing the new sales program versus the rest of your properties?

I didn't hear the question. Are part of what?

(multiple speakers)

Oh. I think it is a mix. We have had a number of hotels that have just come into the [salesforce one in some of that] in a couple of years. So it has been different at the different properties and I think a number of them are too early to tell what the rate differential is as they are ramping up their integration into salesforce one. So I don't think we have a definitive answer to that question.

Okay. And on the group bookings piece, has that changed significantly since last quarter? I know you said is excellent for next year, but just wondering if you have seen a change?

It has improved.

And then just lastly, you mentioned the Vail Marriott underperformed in the quarter because of new supply. I was just wondering if you adjust for that new supply. Did you see any changes in demand otherwise and what are the forward booking trends for that property?

Yes. In the last quarter of call, we talked about the Sebastian and the Four Seasons adding to the supply and significantly impacting the market. We also commented that some of the East Coast and other out-of-market business which is the highest rate of business didn't come in to the extent that the property had anticipated.

For the first quarter of next year which is really the key quarter, that obviously some of that supply it will have been absorbed, but we are still seeing on the group side, that the Four Seasons in particular is being uncharacteristically aggressive in their quotes. But the Vail Marriott in general is -- for the first quarter next year is down year over year versus the same time last year. Second quarter is good. Fourth quarter is good. Third quarter is also down slightly.

Thank you.

Ryan Meliker of Morgan Stanley.

Good morning. Just a couple quick questions here. First I wanted to talk about the guidance a little bit. I guess the implied guidance for 4Q RevPAR is plus 6% to 9%. I think last quarter, Sean, you had mentioned that your back half guidance was plus 6.3% to just under nine -- or just under 10%. So largely in line with what you are seeing here, so was there a material change link you mentioned in your prepared remarks that you cut back your expectations for RevPAR, based on property level managers indicating stronger growth than you are necessarily expecting?

As you correctly said, we are -- we are adjusting our full-year 2011 guidance and it just takes sort of -- to be helpful to everybody we prepared a bridge to our prior guidance. The first is the hotel operators, in our opinion, did incorporate overly aggressive fourth-quarter transient and group rate growth assumptions. While we believe that mid- to high single digit RevPAR is achievable, we believe that if we split between both rate and occupancy. With that RevPAR mix, we think it was prudent to model our rate growth assumption to be more consistent with both year to date and prior quarter trends. This conservative rate assumption impacted our guidance by about $1.5 million.

Second, our F&B profit growth is still expected to be in the high single digits for the fourth quarter. Our prior guidance also included the hotel operators' projection that groups would significantly increase the amount of groups spend on banquet from the prior quarter's trend. This adjustment also impacted our guidance by about $1.5 million.

The third item is our support costs are rising above inflation and particularly the sale of the marketing costs are up about $1 million from prior expectations. And this is mostly due to program true-ups.

And then, finally, the legal expenses are up a couple million dollars to reflect both the LAX settlement of legal fees as well as the outcome proceedings. So that all of those in aggregate are about the $6 million adjustment to our guidance.

Great. That's helpful. So am I correct in assuming that your guidance does incorporate the performance of the three hotels that are being hold for sale?

It does. It assumes an end of the year sale for those assets.

So they won't be -- are you expecting to put them into discontinued operations in the fourth quarter or is that undetermined yet?

We are.

You are? And then the last question or two questions I had was with regards to the Conrad in Chicago, you mentioned the $1 million reversal of the accrual. Was that incorporated in the adjusted EBITDA margins of that property?

It's factored into the management fees. So that is added back to our margin.

So it is added back to your margins. And then the last question I had was just looking at the Radisson in New York or at the Lexington Hotel in New York, I guess, it looks like you had pretty strong or decent RevPAR growth at 6.6% fueled almost entirely by rate, yet margins were down over 400 bps.

I'm wondering if you guys could talk a little bit about what happened with that property in the quarter and if those challenges from a margin standpoint were expected when you made the acquisition last year or earlier this year?

Yes. A significant part of that is pretty tax and it's -- obviously we are looking into potential appeals of the property tax, but that number is --. That is driving a lot of the margin difference.

And was that expected when you made the acquisition? Did you think property taxes were going to go up to that level or maybe not?

I think it is as much the property tax increase, but it is the way we have spread it throughout the quarter. So the way the assessment came in and the way we booked it, it disproportionately affected the third quarter and will disproportionately affect the fourth quarter as well. The house profit flow-through is actually pretty good at the hotel. But obviously that is something as we get to a full year comp next year, it will spread more evenly.

But to answer your question the property taxes were assumed within our acquisition on the writing.

Thanks a lot, gentlemen.

Will Marks of JMP Securities.

Good morning. I just had a couple questions. One on the -- you mentioned referencing peak EBITDA. Can you give us what that would be ex the three hotels you are selling?

We would have to get back to you separating that out with what our 2007 EBITDA. Because I would have to go back into pro forma and rethink. I don't have that in front of me.

Does that percentage you were referring to does include the three though, right?

It does.

Okay. It would be great to know what it is without this. And then just the only other thing I wanted to ask, maybe given where you are located but without much presence, what do you -- in terms of DC, what do you -- how do you look at that market next year in terms of growth? I guess there is some impact to your asset, but any views on DC market would be helpful.

Well, I think there are better people to ask that question of frankly because we have the small hotel out in the suburbs and we are not impacted by citywide conventions basically at all at this point. I think in general, the city is looking forward to the opening of the new convention hotel. So I think bookings, group bookings next year are down. I think the hope is that with the new convention center hotel that that will dramatically improve the capture rate at the convention center.

And then just in terms of how the calendar or actually the legislative calendar impacts that you -- is next year expected to be a dramatically down year in terms of transient travel?

Not that I --. I don't think so.

All right. That's all for me. Thank you.

Michael Salinsky of RBC Capital Markets.

First question in terms of the three assets sold, how much -- how many more non-core assets are in the portfolio? And are you marketing anything additionally currently?

I'll take that one. I think everyone always has a bottom 20% of their portfolio by definition. We do not currently have anything on the market, but we generally don't talk about acquisitions or dispositions until we have something definitive.

Mike, I would like to be clear on something too. This is John.

The quality level of these assets is not really what is driving the sale. They are high-quality assets. They are just simply not markets that we've targeted as strategic markets as we've talked to you and other investors. And so we targeted these markets as markets that we were not going to stay in.

In terms of the quality of the assets though, I mean Austin is a high-quality asset and a high-quality submarket. The Atlanta Waverly property is a high-quality property that does a great group business and in fact after the -- at the end of the third quarter, their group pace for next year was up almost 24%.

And Griffin Gate is suffering from very tough comps this year because of the horse World Cup last year. But it is in general it is a very good asset and good location. So for our portfolio it doesn't prove average rate, but as a public company we are driving at a certain quality level and market level that others aren't.

And there is no shift in strategy with those as well if you look at the three they seem to be more -- they seem to have bigger group functions there.

Right, all three of them are significant group houses.

Do you have the breakout of the portfolio in terms of group versus transient ex those three assets?

No, we would have to get that for you.

Okay, if you could provide that, that would be great. Second of all in terms of you went through a number of projects on the dockets for the next couple quarters here. Can you give us a sense of what you are thinking in terms of CapEx spend for 2012? Should -- it should be -- we would expect it to be a little bit lower, correct, because of the absent Frenchman's Reef?

Well, yes. I think absent extraordinary projects it will be similar to last year, but keep in mind that we are going to begin spending money on the Lexington and on the Conrad. But we have not finalized our CapEx with the operators yet or with the brands I should say. And so we still have work to do on that, but I anticipate that it will be similar to last year, excluding extraordinary projects.

That's helpful. Also too in terms of corporate negotiation, I know it is a little bit early, but can you give us a sense of what your thoughts are? You talked about per diem rates and you also talked about group pace. Just curious as to what you guys are thinking in terms of corporate negotiated rates.

I think with where occupancies are at this point if you think about being 80% in the third quarter, I think that there's some strength in the negotiating position of the brands. You know, it sort of depends on the market, but I think the anticipation is still that it will be in the mid- to high single digits. Certainly the ask will be higher than that. The bid will be lower. The customers are reading the newspapers and watching TV and so their position is not weak.

So I think it is a yet to be decided number, but certainly the anticipation is that it is roughly similar to last year; and our target is certainly to be in the high single digits.

Then finally, do you have an active buyback plan in place just given that you will have a nice cash inflow there from the sale of those three assets? Is that something you would look at as well?

To answer to your question we do not currently have one in place and we would look at one. As you know we have done share repurchases in the past and our Board has considered them periodically over the years. And while we consider our share price compelling as it is trading -- where it is trading today in a [big play] -- discount through replacement costs, we want to remain prudent with our balance sheet.

But our Board is going to reevaluate the issue at our December Board meeting which should be around hopefully approximate to the closing of the Inland portfolio and decide, given all of our alternative uses of our capital what the best use will be going forward.

That is all for me. Thanks.

Josh Attie of Citi.

Can you talk about the portfolio strategy and maybe how it has changed over the last few years? Looking at the three hotels you sold, Griffin Gate was a pre-IPO hotel, but the other two were acquisitions that you made a few years ago. I guess, what has changed in those markets and how has your thinking changed in the last few years in terms of the markets that you want to be in and don't want to be in?

I think our portfolio strategy continues to get refined. We want to take the portfolio in a direction of higher growth markets over the next five to 10 years, higher RevPAR markets over the next five to 10 years. We keep the -- we are trying to keep the three legs of the lodging stool between group and business transient as well as discount leisure relatively balanced, so we have that diversity. We are trying to stay diversified geographically as well.

But what we are doing on each individual asset as well as when we analyze potential markets that we want to be in is we continue to reevaluate what we think the potential is over the next decade in each of those markets. And as time progresses, we modified some of those positions. They may have a great couple of year run and then we may have a different view on how the next three, five, to 10 years are going to play out there.

So it's really a relative game in some ways in looking at these assets versus some alternative uses of capital. But the overall strategy of the company is to stay in top 25 markets, to stay with some destination resorts in the portfolio, and try to figure out a strategy that will allow our Company to outperform over the next five years.

And your quarter began on September 9th or 10th. Can you tell us what the RevPAR growth has been to date?

Mid single digits.

So you are projected to get better than that in the next three months to hit the midpoint of the guidance?

Yes. Our period 10 was impacted by some of the Jewish holiday calendar.

Yes, we have very -- this is Mark. We have very strong period '11, '12, and '13 group on the books which we think is going to have a material impact on our ability to drive rates for the balance.

And just one more question. I don't know if you addressed this in the prepared remarks, but have you made a decision on the Radisson, what brand it is going to be ultimately? If it is going to have a brand.

Right, we are currently in discussions with a number of parties related to that and we hope to have an that announcement on our next earnings call.

Thank you.

Thanks, Josh.

Andrew Didora. Bank of America, Merrill Lynch.

Good morning. Just two quick questions here. First, John, you had mentioned the solid pace next year in Chicago and Boston. But just curious maybe you could run down maybe some other markets that you are most bullish on for RevPAR growth next year, whether it be because of what you have on the books right now or just from a supply perspective.

And then, two, just with your hotels in New York and maybe more specifically the Lexington Avenue hotel, have you seen any sort of slowdown from international visitors over the past two months or so, I guess specifically from Europe?

Okay. On the first one, Salt Lake City I guess I would identify as a strong booking pace hotel. It is up about 23.5%. That is a significant group hotel for us. The Atlanta Westin is up 43%, which is a less significant group hotel. Sonoma is up 32%. Torrance is up 15%. So -- and the Denver market has a strong first half and citywide calendar and a less robust second half, but they still have time to fill that in.

With respect to the -- the second question was what again, Andrew?

Just in terms of your New York hotels or maybe just specifically at your Lexington since I know a high percentage of the demand comes from international there. Just curious if you have seen any change from your European customer, just given what has been going on in the macro over the last two months or so?

We haven't really seen any trend to speak of. I think New York remains a fairly volatile transient market. With the new supply there a softness in transient demand impacts the market a little bit more than it used to. So there is a little more volatility, but I wouldn't attribute it to European travel.

That's helpful, thank you.

Enrique Torres.

Can you give me some color on what percentage of expected group room nights are already in the books for 2012?

It is in the mid-60s percent.

Thanks and then my other questions have been answered so thank you.

Dennis Forst of KeyBanc.

Good morning. I just wanted to hone in a little bit on Frenchman's Reef. As -- am I right at the beginning of this month we are back to all the rooms being open and for sale?

Substantially all the rooms, yes. There are 20 or so that are still being turned over.

And for the third quarter, about how many room nights did you have available?

For the portfolio or for Frenchman's?

No, just Frenchman's.

I would have to get to that number.

It is about 200 rooms per night.

A night. Okay. Yes, I think you may have mentioned that on a previous call. And then, have you been selling group business right along with the expectations that property would be renovated by October 1?

Yes. We had our first big group check-in October -- tomorrow, October 20.

So there really is no ramp up the end of business. It's like fully blown ready to go, and --.

The meeting planners are very excited about it and they were excited as we were going through the process. I will say a number of people want to see it before they book it. So they want to go down after the renovation before they put their groups in.

So, there is a hesitancy to book the week after the hotel is supposed to reopen or even a month. A lot of players want to go down and make sure that you deliver what you promise. They want to see the brand-new spa. They want to see (technical difficulties) , they want to see the new fantasy pools. So we are experiencing that and we are seeing that for 2012 in the bookings, but it is not like you turn it on October 20 and the groups are fully

Okay. So there will be a ramp up in 2012 and hopefully a normal year in 2013?

Or hopefully more ramp.

Yes, I think '12 should be a pretty strong year in and of itself.

Okay. Even with the groups kind of holding off as of now?

I think the groups kind of taking the wait and see attitude would affect the fourth quarter although the fourth quarter, even with the first several weeks of the quarter the hotel was out of service, we are still up in the fourth quarter year over year compared to last year. And next year, the booking pace next year is up 44%.

So we don't anticipate that there is going to be a long build next year. We expect it to more or less hit the ground running.

Okay. Terrific. Thanks a lot.

Daniel Donlan, of Janney Capital Markets.

Just wondering if you could talk about the scale of the Lexington redevelopment, so to speak, and you definitely are going to keep that a full-service hotel and then maybe the timing behind that as well or is that -- most of this still up in the air?

No. It is definitely going to be -- we are going to take it to a higher level than it currently is. We are shooting at a 4 to 4 1/2 star level. The question of branding is still up in the air.

In terms of the scope of the renovation, it is primarily rooms and public space and primarily softness and case goods, limited construction and limited infrastructure because when we underwrote the hotel, the infrastructure had been virtually redone in the late '80s, early '90s. So a lot of it is FF&E and very impactful renovation from a guest perspective.

I would just add basically everything the guest will see and touch with the exception of some bathroom work will be a new and fresh experience. The lobby will be completely reinvented so that will feel very different, including the restaurant, the hotel restaurant; the corridors that you walk down that will have new ceilings, new lighting, new vinyl, new carpet will be a much brighter and fresher experience. The guest rooms, we are going to a very cutting edge design and it will feel much different and much fresher.

So it -- for the guest experience, it is going to be dramatically different when we are done with this renovation.

And then I think you also asked about timing. We are in the process of planning that out, but we are shooting for low demand period. So first quarter of 2012 and first quarter of 2013 as well as some periods in the third quarter of '12.

So would you anticipate a little bit of disruption from those renovations or do you think you can get around that by just taking one floor out or something to that degree?

We will minimize it. I don't think we -- I'm certain that the occupancy level the hotel runs, there will be some disruption, we just have landed on the number yet.

Sure, okay. And then now that that you own two assets in Denver and I guess this is probably less of an issue for the JW, but what impact did you guys model or do you see from the Gaylord development that could potentially go out by the airport?

I think the whole city and particularly the downtown hotels and convention hotels are very concerned about that, particular given the level of subsidy that has been requested. It is almost 34% as I recall. So there is a substantial concern.

I think, from our perspective the Courtyard wouldn't be impacted to the extent citywide demand is impacted in downtown Denver as with the JW to some extent but the JW is a little bit different in that it is in the Cherry Creek area. So I think our concern is certainly there, but I think there are other hotel owners in Denver that are very, very concerned about particularly the level of subsidy that the Gaylord is requesting.

And then as we -- looking at your New York hotels, it seemed RevPAR was a little bit lower then maybe I would have anticipated. Does that have something to do with kind of the Marriott's being on a different time period?

And then secondly as it relates to New York, I think there is a new development going up, a Radisson in another brand. How do you think that is going to impact your business and would you potentially go to monetize some of these assets given the prices that have been paid for limited select service hotels in New York City recently?

I will start at the beginning. I think that calendar had some impact on -- I assume you are not talking about nominal RevPAR but you are talking about RevPAR growth.

Yes, yes, sorry.

And that was impacted to some extent by calendar, but it is also impacted to some extent by supply. And I think that -- are you referring to the Radisson Blue in Chicago that is opening?

No I'm talking about there is like a Residence Inn, I think going up somewhere in New York, and then I think there's another brand going up as well alongside of it.

Right, there is a combination Radisson -- I mean excuse me, Residence Courtyard going or in planning. There are several hotels under construction in New York and we are concerned about it. We've said in the past that we know the first quarter is impacted in New York by the supply.

We think that the higher volume corridors will be certainly less impacted by the supply. But you can't add this many hotel rooms in any market and not feel the impact.

Okay.

Just to answer your final question about would we identify these as opportunistic sales, I guess everything in the portfolio is for sale for a price, but we remain very bullish on New York, particularly where our hotels are located compared to where the supply is coming in in the city. We think we have a little bit of insulation given that in our little areas whether that's Midtown East, or given where the where our Chelsea Hotel is, some supply is coming in, but we think we are not going to be as impacted as some other parts.

And we feel very bullish about the future of New York and about the demand trends over the next couple of years in New York.

Thanks very much.

Bill Crow of Raymond James.

Good morning. Just a few quick questions for you. You indicated that group pace was up 10% revenues. Is that room revenues or total revenues?

No, that is room revenues.

And then what would total revenues with F&B be?

We don't really have that number because the groups have to be qualified as they get closer to actualization. And by contract we don't keep track of the food and beverage per contract per hotel.

What is your expectation next year for group room revenues, relative to total revenues?

I think they will be in the same 35% to 36% range that they are currently forecasted to be.

So you have got 60% of 35% at up 10. Is that the right way to think about it?

Yes, 60% to 65% (multiple speakers).

Somewhere in that range, okay. And then how many -- you talk about reshaping your portfolio or continuing to refine the portfolio. How many hotels within your portfolio today could we consider as non-core or potentially a source of funds?

There are probably three other hotels that would be on the disposition list over the next 24 to 36 months.

And then finally, for me, in the prepared remarks, you talked about what prospectively could be a very attractive acquisition environment in 2012. It seems like lately the bid ask spreads have widened. Maybe your deal didn't get impacted by that, but that seems to be the feel out there.

Is your view on the attractive acquisition environment predicated on those spreads narrowing? Or do you see distress out there that will force some sales? What is your view for next year?

I think the reason we think it could be an attractive acquisition environment is because of the potential distress of debt coming due. The inevitable narrowing of the bid ask spread that you talk about and I think those factors lead us to believe that it could be an attractive acquisition environment next year.

Very good, thank you.

Tim Wengerd of Deutsche Bank.

Good morning. In your prepared remarks you commented on the increase in per diem rates. After the sale about how much of the annual revenue is at the per diem rate?

Government makes up about 4% of our total revenue.

It's probably a little bit more of an impact, given that some of the other -- some other customers that attract the government rate. But it is not a huge percentage of our overall portfolio, but it is I think for next year it will be a headwind versus a tail wind that we have seen in 2000 --. (multiple speakers). That one.

Right, got it. As you look forward are there any significant changes to property tax assessments that you expect? Or are there any municipalities where you think tax assessments could be a concern going forward?

We are constantly in discussions with the various jurisdictions. We currently have anywhere between 35% and 40% of our portfolio is under appeal right now. I think what you are seeing, property taxes tend to lag, so what you have seen is as things were on the downturn, assessments went down; but I'm not sure they have caught up quite yet. And so there might be some upside, but we don't -- from a modeling perspective we don't model any property tax wins until we actually win the case. So we assume status quo in our projections.

Great, thanks.

I would now like to turn the call over to Mr. Mark Brugger for closing remarks.

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

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.