Diamondrock Hospitality Co (DRH) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 DiamondRock Hospitality earnings conference call. My name is Latasha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Thanks, Latasha. Good morning, everyone, and welcome to DiamondRock's third-quarter 2012 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 like to remind everyone that 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 risk and uncertainties, as described in our SEC filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP set forth in our earnings press release.

Before jumping into the numbers, we would like to point out that we continue to see good strength in lodging fundamentals, and the macro trends indicate a longevity and endurance to this cycle. We take the most confidence in the constrained new-hotel supply, which is allowing incremental demand to be harnessed more fully at existing hotels. With hotels trading at significant discounts to replacement cost, and the long lead time for the development of major full service hotels, we believe that the industry is in the early stages of a multi-year run where annual supply growth is 1 or more percentage points below the long-term average.

On the demand side of things, despite some mixed macroeconomic signals, hotel demand in many of our markets has returned to prior peak. Our portfolio ran an impressive 81.7% occupancy in the third quarter, with seven of the hotels running over 90% occupancy. This is the highest third-quarter occupancy level in the history of DiamondRock. Leisure was a particularly strong segment for us in the third quarter, with stand-out results at our three resort-focused hotels in Vail, Sonoma, and St. Thomas.

Turning to the third-quarter numbers, we were pleased with our third-quarter results, which were consistent with our expectations. The Company's third-quarter RevPAR growth number of 3.4% is somewhat distorted by comparisons at Frenchman's Reef, with rooms out of service last year. The more indicative number that we would draw your attention to is rooms revenue growth, which increased 6.3% in the third quarter. Profit flow through was relatively good in the quarter, with hotel EBITDA adjusted profit margin growth of about 59 basis points. As a result, third-quarter adjusted EBITDA was $46 million, an increase of 10% from the comparable period in 2011. FFO per share was $0.18.

Several of the recently acquired assets from Blackstone were particularly strong during the third quarter. RevPAR growth at the Boston Hilton, Burlington Hilton, and San Diego Westin was 9.7%, 16.3%, and 9.8%, respectively; very strong numbers. We also saw strong growth in the quarter at a number of our other hotels. The Salt Lake City Marriott's RevPAR increased over 10%, as it continues to benefit from the recently opened City Creek project by Taubman. The Sonoma Renaissance's RevPAR was up over 10% as well, as a result of continued strength in the San Francisco market. And the Bethesda Marriott Suites benefited in the quarter from demand created by the AT&T National PGA Tournament and the unexpected major storm that knocked out power in the greater Washington, DC area for several days.

As we highlighted on our last earnings call, our large-group hotels in Chicago, Boston, and Minneapolis were negatively impacted by soft third-quarter convention calendars. Despite these headwinds, the Westin Boston and Chicago Marriott Downtown each delivered solid RevPAR growth of around 4%. Group pace for the fourth quarter is up over 9%, with each of our big-group hotels benefiting from strong fourth-quarter convention calendars. Specifically, group booking pace is up 10% at the Westin Boston, 6% at the Chicago Marriott, and up 5% at the Hilton Minneapolis. Additionally, we expect strong group performance from the LAX Marriott and the Chicago Conrad, with fourth-quarter group pace up 42% and 29%, respectively.

Our New York City hotels had varying levels of success in the third quarter. The Courtyard Fifth Avenue had RevPAR growth in excess of 12%, whereas the Lexington Hotel's RevPAR growth was only 1%, partially due to reduced European traveler demand over the summer.

The Washington, DC market, which has been one of the best long-term hotel markets in the United States, remains a growth-challenged market during 2012. Washington, DC Westin City Center hotel experienced RevPAR contraction due to the local market challenges, as well as being in need of capital investment. The Company has accelerated the timing of the comprehensive capital renovation in order to allow the hotel to regain its rightful market position. We are currently planning the scope and timing of that renovation, which will most likely take place in mid-2013. We remain confident in the upside opportunity at this well-located hotel, which is one of only two Westins in DC, and its ability, post renovation, to regain significant market share.

In St. Thomas, our Frenchman's Reef Marriott continues to gain traction following our $45 million transformational renovation last year. Total revenues increased in the quarter by $9 million over the comparable quarter, which experienced large renovation disruption last year. However, the hotel is facing some demand challenges this fall, which are partially attributable to the recent limitation of local government subsidies for US-VI flights. We will discuss this in greater detail in a moment in connection with our new outlook.

In analyzing our third-quarter results, there are a number of one-time items that should be noted. One, as I mentioned earlier, the comparable room night issue at Frenchman's Reef resulted in a 290-basis point delta between the 6.3% rooms revenue increase in the quarter and the 3.4% reported RevPAR growth. Two, disruption at Worthington caused about $2 million of profit displacement from the planned facade restoration project, and impacted profit growth by about 60 basis points in the quarter. And three, the Company expensed approximately $600,000 of fees related to the exploration of the new ballroom at the Chicago Marriott; this expense was not in our prior guidance.

Turning to the balance sheet. We expect to end 2012 with a debt-to-EBITDA ratio of approximately 4.5 times. As importantly, 15 of our 26 hotels are unencumbered by debt. To give you an idea of how much borrowing power that provides the Company, our cost basis in those 15 unencumbered hotels is about $1.5 billion.

We feel very good about the balance sheet, and fundamentally believe that conservative leverage creates superior shareholder returns. This conservative leverage strategy, along with solid operating results, allows DiamondRock to pay a well-covered and competitive dividend yield of over 3%. I would like to add that being an income company is another core tenet in our strategy to deliver superior shareholder returns.

I will now turn the call over to John to review our results in further detail, and discuss our recent portfolio recycling activity. John?

Thanks, Mark. Third-quarter results met our expectations as the continuing positive demand trends resulted in portfolio RevPAR up 3.4%, with ADR up 4.3%. Leisure transient revenue was up almost 13% in the quarter, led by our resorts and seasonally strong leisure performance at the Boston and Burlington Hiltons up 21% and 80%, respectively; the Denver Courtyard up 19%; the Minneapolis Hilton up 16%; the Salt Lake City and Torrance Marriotts up 27% and 24%, respectively; and the Worthington Renaissance up 15%. The balance of the revenue gain was the result of modest increases in group and business transient, and some well-placed contract business we put in at the Lexington Hotel in New York, and the LAX and Torrance Marriotts.

Food and beverage revenues were up 4.3% in the quarter, but margin growth was restrained because the increase was concentrated in less profitable outlet sales, as the third quarter is seasonally low for higher-profit banquet and catering revenue. Rooms margins were impacted by the cost of employee benefits and travel agent commissions, which impacted margins by 41 and 30 basis points, respectively, this quarter.

Support costs were well controlled, and were up 4.6% in the quarter. Overall, our asset management team did an excellent job in the quarter working with the hotel operators to control costs through cost-containment plans. We were pleased to achieve profit flow through for the quarter of 59 basis points of EBITDA margin expansion on 3.4% growth in RevPAR.

We did want to comment specifically on our recent portfolio acquisition from Blackstone. As you will recall, the portfolio includes the Hilton Boston, Hilton Burlington, Westin DC, and the Westin San Diego. The portfolio generally performed very well during the third quarter for our period of ownership. The Boston Hilton achieved RevPAR growth of 11%. Margins are not comparable because the food and beverage operation was leased out in March, and the property began operating under union wage and benefit scales in July. The San Diego Westin achieved RevPAR growth of 15.4% and adjusted EBITDA margin growth of 175 basis points. The Burlington Hilton grew RevPAR by 17.6% and adjusted EBITDA margins by 788 basis points.

Finally, the Washington, DC Westin was impacted by a very weak August in DC against a strong comp, and finished down 7.6% in RevPAR. However, some very effective cost-containment measures, and a property tax reduction, allowed the hotel to gain 254 basis points in adjusted EBITDA margin. This hotel will see the most upside in the portfolio from capital investment, which will occur next year.

We remain very bullish on the long-term prospects for the portfolio, and have begun the planning and design work for the capital we expect to invest in the portfolio during '13 and '14. These hotels are well located in strong markets; and once the hotels are renovated and repositioned, they should enjoy considerable upside potential. The acquisition of the $495 million portfolio from Blackstone represents a significant milestone in the execution of our strategy to redeploy capital from lower-growth secondary markets into urban core markets.

Turning to the balance of 2012, I want to add a few thoughts to Mark's comments on the fourth quarter. Overall, we expect solid growth during the fourth quarter, despite some challenges in the New York City market during September, resulting from the timing of Yom Kippur and Rosh Hashanah, and lower-than-expected turnout at the UN General Assembly. In addition, we expect meaningful growth from the group segment during the fourth quarter, as group pace for the quarter is up over 9%.

Although we are not providing 2013 guidance at this time, I'd like to provide some color on our 2013 outlook. Despite difficult comps to 2012, our 2013 group booking pace is up 3.6%, which is slightly better than as of the second quarter. The '13 booking pace is currently weighted towards the first and second quarters of 22.8% and 12.5%, respectively. While the pace for the back half of '13 is currently behind same time last year, the hotels have plenty of time to focus their sales efforts and book groups, particularly in the high-group volume fourth quarter.

On the special corporate rate, we are early in the process, but our hotels are targeting increases for next year in the mid- to high-single digits. On the business and transient and leisure segment, the bookings are too short-term to provide you with any real color. We are generally optimistic, given the low-supply backdrop and the high-occupancy levels in most of our hotels, which should allow us to manage market segmentation and drive rate.

Now, I'd like to provide color on our current significant capital projects. We expect to invest in our portfolio when we identify significant upside opportunities. We are very excited about the potential of the portfolio, and I want to highlight the major capital investments on the horizon. The rebranding of the Lexington Hotel represents a significant return on investment opportunity for DiamondRock. We are confident that our up-branding and repositioning will allow the hotel to close the $90 rate gap compared to the most comparable Marriott-branded hotel in the market. To put that in perspective, each $1 of incremental ADR translates into $250,000 of incremental room revenue every year. We have completed the planning and scope of the comprehensive $32 million to $34 million renovation of the hotel. We are currently bidding the work, and intend to begin construction in late December.

Post renovation, the hotel will join the Autograph Collection, Marriott's premium lifestyle brand. The renovation will touch every aspect of the guest experience at the hotel, including the guest rooms, guest bathrooms, and the hotel public space. This project will be completed in mid-2013. The project will be phased to minimize disruption; but since the hotel runs over 90% occupancy, disruption is inevitable. We expect the majority of the renovation disruption to impact the first half of the year.

We are also finalizing the planning and scope of the renovations of our two Manhattan Courtyards, which will take place in early 2013. We have identified an opportunity to reposition these two hotels to better compete with the full-service hotels in their respective competitive sets. Upon completion in Q2 of '13, we expect each of the hotels to command room rates that are closer to the full-service rates in the market.

Additionally, we are redesigning underutilized space at the Courtyard Midtown East (inaudible - technical difficulties) we estimate these incremental keys to be worth approximately $2.5 million in incremental asset value. We completed the first phase of the renovation of the Worthington Renaissance facade on time, on budget, and within budgeted displacement. We have decided to accelerate the second phase of the project into 2012, rather than next year as originally planned, because it will mitigate the estimated overall disruption. We are also finalizing a lease for third-party operation of the restaurant, lobby lounge, and room service of the hotel, which will reconfigure a portion of the lobby, and dramatically improve food and beverage margins, as well as guest satisfaction.

At the Minneapolis Hilton, we are designing a room-refresh project that is expected to begin in Q4 of '13 and be completed in Q1 of '14, with little disruption. The Conrad Ballroom addition, which was added in previously non-revenue-producing space, opened on budget in July as scheduled. The reaction from meeting planners has been tremendous. Group revenue pace at the Conrad is up almost 30% in the fourth quarter, and 14% in 2013. The lobby upgrade will further reposition the hotel to gain share among the higher-end hotels in Chicago. That work will begin this December and be completed early in February of 2013, and should result in very little disruption.

As Mark mentioned, the Westin Washington, DC hotel will undergo a complete repositioning during the middle of 2013. This hotel is one of only two Westins in DC, and has significant upside from the capital investment. We believe there's significant revenue lift by enhancing this product, and it should be able to close the $50 rate differential with the Westin West End.

We are currently evaluating the timing and renovation of the Westin San Diego. We expect to complete the renovation no later than early 2014. We are investigating the best timing in order to minimize renovation disruption. Since there is over $1 billion in construction projects within two blocks of our Westin San Diego, opening up between the end of this year through 2016, we want to get the renovation done as soon as practical to capture the demand from these new buildings. Finally, the Hilton Boston and Hilton Burlington are currently scheduled to be renovated during the seasonally soft winter of 2014, and renovation disruption should be very manageable.

To conclude my comments on capital, I would say that while we expect a big payoff from the investment opportunities, these types of investments inevitably come with some profit disruption during the process. We estimate disruption from capital plans to range between $7 million and $10 million in 2013, with most of it concentrated in Manhattan in the first half of the year and some in DC in the third quarter.

While [we are on] capital projects, it's worth reminding you that construction has begun on the 42nd Street Hilton Garden Inn, and is scheduled for completion in mid-2014. This 282-room hotel is at 42nd and Broadway, the heart of Times Square. Our cost is fixed on this project, and we have no construction risk. When completed, I believe that this will be the single best located select-service hotel in Manhattan.

On the acquisition and disposition front, we recently completed the sale of the Atlanta Westin hotel for a high EBITDA multiple. The hotel required $12 million to $15 million investment to comply with Westin-brand requirements, which we determined was not a good allocation of capital. We have now reduced the Company's Atlanta exposure to approximately 2%. This transaction, like the prior sale of the three assets in suburbs of Lexington, Austin and Atlanta, furthers the execution of our strategy to continuously upgrade the portfolio and reallocate capital into higher-growth markets.

On the acquisition front, we are seeing a better flow of quality assets in our target markets. We will continue to pursue acquisitions to grow the Company in a thoughtful and disciplined fashion. However, right now, our real focus is mining the extensive internal value that we see in the existing portfolio.

Thanks for your continued interest in DiamondRock, and I'll turn the call back over to Mark.

Thanks, John. To recap our results prior to discussing our revised outlook, year to date the portfolio has delivered rooms revenue growth of 7.3%, year-to-date RevPAR growth of 5.9%, and year-to-date profit-margin expansion of nearly 100 basis points. We are pleased with those results.

Now, we'd like to turn to the outlook for the balance of the year. We remain confident in the lodging recovery; however, we are adjusting our expectations for the fourth quarter, and lowering the midpoint of EBITDA guidance by approximately $9 million, excluding the impact from the sale of the Atlanta Westin. We want to make sure that we clearly articulate to our investors the rationale for this change. First, we would like to take you back to our first-quarter earnings call this year. On that call, the Company raised its original outlook for full-year EBITDA guidance by $9 million, based on the early positive trends, and our operators raised hopes of accelerating hotel fundamentals during the back half of 2012, specifically for a really exceptional fourth quarter. In simplest terms, our operators got a little ahead of themselves and have now adjusted forecasts back to their original expectations for growth in the fourth quarter. While that's not the whole story for changing our outlook, it's a big part of it.

In addition to this overall change in operator expectations, there are a few specific things that are impacting the fourth quarter. I'll try to hit each of the major items. One, we have made the business decision at the Worthington Renaissance to combine what had originally been a two-phase facade restoration project into one project, and complete the disruptive portion of the work entirely during 2012. While this decision adds about $1 million in previously unforecasted profit disruption to the fourth quarter, we believe it eliminates what would have been another $2 million in profit disruption in 2013. We are pleased that our asset management team, working with the hotel staff, figured out how to move groups around in the fourth quarter in an efficient and less disruptive way. While originally not budgeted for this fourth quarter, we are obviously happy that we have the opportunity to save $1 million in total disruption from this project.

Two, there are two previously unanticipated headwinds at Frenchman's Reef that lead us to reduce the hotel's fourth-quarter forecast by about $1.5 million. The first headwind, which I mentioned earlier, relates to increased air fare to the island of St. Thomas this fall. The local government has already spent its travel-promotion fund to subsidize airlines flying to the island. This has raised ticket prices, and impacted demand. We expect this to change as the new year brings a new travel-promotion budget, and the ability to aid the number-one demand generator to the island, tourism.

The second issue at Frenchman's relates to some previously unscheduled maintenance at the hotel that requires partial closure for a week. These type of activities are unfortunate, but necessary to maintain our hotel in first-class condition.

Three, our Westin Washington, DC City Center hotel is being impacted by both a weaker-than-anticipated DC market from the pre-election pause, as well as some group government business cancellations from the Federal Government's recent travel restrictions. We expect our DC hotel to experience RevPAR contraction of 5% to 7% in the fourth quarter. Going forward, this hotel should benefit the most from our capital investment, as groups are holding off from booking until after the renovation, and from comparisons to this year, with its short-term loss of government business.

Four, as we have discussed, our portfolio experienced some weakness in September. Most notably in New York City, which was impacted by the timing of Rosh Hashanah and Yom Kippur, as well as the lower-than-expected attendance at the UN General Assembly. This moderating of demand in September also put additional risk to our interim independent hotel strategy at the Lexington Hotel. As a reminder, the strategy for the fourth quarter was to remove Radisson, save $1 million in franchise expense and, even with some revenue displacement, net higher profits. Obviously, the success of this interim strategy is contingent on strong demand patterns in New York City for the balance of the year.

Lastly, in light of recent trends, we have built in some additional conservatism into the new guidance range. While we certainly want to put forth achievable guidance, we believe that our approach is prudent.

While I have just gone through a rather long litany, we do expect a good fourth quarter. Our outlook is for rooms revenue to increase 5% to 7% in the fourth quarter, which is consistent with recent guidance from the industry bellwethers. As with last quarter, the RevPAR number is distorted by comparisons to Frenchman's Reef. Our full-year guidance shows solid growth, as you would expect in this part of the lodging cycle. For the full-year 2012, our outlook is for rooms revenue to grow 6% to 7%, and RevPAR growth of 5% to 6%. Accordingly, we expect adjusted EBITDA of $184 million to $190 million, and adjusted FFO per share of $0.74 to $0.76.

Before concluding the prepared remarks, we want to talk about the great potential that we see in DiamondRock. To that point, we would like to leave you with four main take-aways today. The first take-away is that DiamondRock's portfolio quality and growth potential has never been better. With $3 billion in hotels, the Company has spent the last three years redeploying capital from dispositions of hotels in suburban and slow-growth markets like Atlanta, into new strategic markets such as San Diego and Washington, DC, while building DiamondRock's footprint in key markets such as Boston and New York City. We believe that our portfolio today is concentrated in some of the best long-term markets in the country.

The second take-away is that our portfolio has tremendous growth potential from operations, just from the lodging recovery and good asset management. To put it in perspective, our comparable hotels are still $70 million below prior-peak EBITDA, and 500 basis points below prior-peak margins of 32.5%. That's a lot of growth potential. If we just return to prior-peak hotel profits, and we expect to exceed that over the next few years as we have already crossed over prior-peak occupancy, that would translate into more than $4 of incremental share price at the long-term average valuation multiple.

The third take-away is that there are numerous capital and branding initiatives within the existing portfolio to create above-market growth over the next few years. The highest potential ROI project in 2013 is the conversion of the Lexington Hotel to Marriott's Autograph Collection. This is in addition to the renovation of our two New York City Courtyards, which will create five new keys. We also have upgrade opportunity through renovations of our recently acquired hotels, most notably the Hilton Boston, Westin San Diego, and the Westin Washington, DC. While we will have related profit displacement in 2013, we believe that the return from these capital investments is going to lead to some exceptional upside in the portfolio, during what is likely to be the most lucrative part of the lodging cycle.

The final take-away is that we have purposefully maintained a best-in-class balance sheet to reduce risk and preserve valuable optionality throughout the cycle. For a lodging REIT, balance sheet management is arguably the number-one driver of value to shareholders.

In conclusion, our team remains committed to delivering shareholder value, and believes that the internal growth opportunities will be the main driver of DiamondRock's strong relative performance over the next few years. With that, we would now like to open up the call for any of your questions.

Operator?

(Operator Instructions)

Shaun Kelley, Bank of America.

Just had a couple of quick questions about the guidance. Mark, you gave a lot of really good color on that, so I'm probably going to beat a dead horse here a little bit, but the thing that caught my attention the most regarding the fourth quarter was the change in underwriting, or outlook, from some of your operators. Could you give us any more color on what gave them the optimism in the first quarter? Was it, particularly, group bookings that they thought they had on the books that were cancelled? Or, what is different that gave them that confidence then, they're backing off it now?

Shaun, this is Mark.

I think that there are a couple things operating at the beginning of the year. One is, they were exceeding their forecast and budget for periods one, two, and three; so as we moved into it, they were extrapolating some of those trends, even on some light-revenue months, extrapolating that for the full year. In the year, for the group pace and ancillary pickup, I think they were expecting more of traditional recovery and I think this recovery is more a moderate and extended recovery, so the trajectory was a little different than they were anticipating. I think those are the two major drivers.

Okay. On that last point then, because the group pace actually looked very good for the fourth quarter, right? If I caught it correctly, I think you said it was up 9%? So, is it transient and some other categories that aren't coming through in some of these hotels that aren't giving you the compression that you were expecting, or how is it working?

The business transient is still relatively good; it's just not accelerating at the same clip that they forecasted. Then, on the group, it's not so much the room nights as it's ancillary spend where we're seeing the difference in the profitability go through.

Okay, that's helpful.

One last one on a couple of the acquisitions and renovation plans for next year. What I'm trying to understand is per your view for the Westin Washington, DC. Is this, in terms of accelerating some of the renovation spend or the challenges at that hotel, is that different than your underwriting when you guys acquired it? And, how -- it seemed in the language that you guys had in both the release and in your prepared remarks that maybe it was, so just trying to understand that.

Probably a similar question for the Lexington asset here in New York, given is it really Europe that's different than what you guys were targeting there? What's different at that hotel?

Okay, let me take those in turn.

In Washington, DC, when we underwrote the hotel -- we do a 10 year -- 10 years of underwriting, and we had the renovation sometime in the first 18 months. What we have seen in our short period of ownership is there is more group reluctance to book the hotel in the current physical state, needs a renovation. What we see is the quicker we can get that renovation done, the quicker we can get to our pro forma returns at the hotel. So, we are trying to book that in the least disruptive but as quickly as possible. There was a -- when we first underwrote it, it was going to happen somewhere between mid 2013 and end of the first quarter of '14. We decided to take the more aggressive position in that range because we see the returns on the upside of it.

On the Lexington in the summer, the European demand -- Radisson is tied internationally, mostly the European demand, which was softer in the summer. They don't have the same kind of distribution for countries like Korea and China and some of the other ones that were making up for some of the international in-bound traffic to New York during the summer. So, that was particularly impactful at our hotel.

Got it. That's really helpful color. Thanks, guys.

Eli Hackel, Goldman Sachs.

Two questions. First, on New York, can you talk a little bit more about your expectations for New York next year? I know you're not giving official guidance. But, given some of the supply coming on in the market and with your renovations, what RevPAR or relative RevPAR to the industry you think you could see in New York. On your relative exposure to New York, will you be happy with it after the Hilton Garden Inn opens up in '14, or do you need more -- do you think that would be a little bit too much?

Second question is on Frenchman's. I'd love your updated thoughts on the property; obviously, you had a big renovation there, some issues since then. Just wondering on your outlook for the property and its existence within your portfolio? Thank you.

Okay, that's a lot. This is Mark.

I'll take two of those questions and then turn it over to John for the outlook, generally, on New York. As far as the -- taking the last question first, Frenchman's Reef, the property looks great. The meeting planner reaction to we did there has been fantastic. I think what we are seeing in the fall is a more temporary condition; obviously, the maintenance issue is a one-time issue. Then, the increase in airfare, the way the local government manages its travel-promotion budget is always a little bit unpredictable. But, we are anticipating that that won't happen again. I think it should be great, and we like that asset a lot. It's performed very well this year for us, overall.

As far as our New York concentration, I think being 25% New York, which is where we're going to get to, is probably about where we want to be. We believe that New York, over the next 10 years, is probably the number-one demand-growth market in the country, especially with patterns that we see happening in international travel over the next decade. So, it's a place we really want to be. It's probably not prudent to have more than a quarter of your portfolio tied to any one market, so we think that's probably the optimal place for DiamondRock to be, somewhere in the mid-20%s exposure to the market.

I'll turn the call over to John to talk a little bit more about what we're seeing for the fourth quarter and a little bit into next year for New York.

Okay, Eli, what we're seeing in the fourth quarter in New York is a slightly softer demand environment than we'd anticipated when we made the decision to take the Radisson brand off on September 15. We lost some market share in the summer, as Mark explained, because of the slowdown in European wholesale business, primarily.

In the fourth quarter we're seeing -- we anticipate a continued loss of market share; that was in the underwriting. But, what we didn't underwrite was a relative softness. And, I don't want to overemphasize this, but a relative softness, particularly, in September because of the holidays and the lack of UN pickup, which has been the most reliable September demand generator for years in New York, and 45 countries just decided not to come this year.

In terms of supply, we see, probably, a continued above-national average supply in New York. Fortunately, a lot of it is outside of our direct-market environment; but there is some impact, regardless, in the entire city as you see a 4% increase next year. If that pans out, it will inevitably impact our rate potential in the city.

Having said that, once we complete this renovation of the Lexington and the two Courtyards, we're going to have dramatically better product. In the case of the Lexington, we're going to have a dramatic improvement in RevPAR index. As I said in my statement, there's a $90 spread between this hotel, the Lexington, and the most comparable Marriott-branded hotel in the market. We expect to pick up a lot of that $90 once we open the renovated hotel. We'll be able to open the renovated hotel before the completion of the renovation. As the last rooms go under construction, the balance of the hotel will be complete, and that's the point at which we will convert to Autograph. So, we have very high hopes for the Lexington, particularly, in the second half of next year.

That's great; thank you very much.

Will Marks, JMP Securities.

Just continuing on the New York, what is the supply growth that you are showing for the remainder of the year as well as next year?

Okay, this is John.

The overall estimate is about 2% for this year, that includes the entire year, not just the balance of the year. Looking at about 4% for next year and about 2.5% to 3% in '14. Hopefully, somebody can come up with a higher and better use of land than hotels in New York within that time period.

It doesn't seem like you and others are that concerned with the ability to absorb, that demand will absorb the supply?

There are a couple things that had been working in New York. First of all, there was a lot of displaced demand in Manhattan that went out to New Jersey suburbs and the boroughs. That demand has pretty much been brought back into the city. At this point, the new supply has to be directly related to the demand growth. So far, demand has outpaced supply. As long as that continues, I think you'll continue to see the absorption that you've seen.

It's not without some impact, I have to add. Depending on your location within the city and where the new supply is coming, which is West Side and Downtown, there's additional impact in those markets. We've maintained all along that if you have the right location in the city, the Midtown East; Chelsea; and, soon to be, Times Square, that's going to minimize the impact of the new supply. It won't completely mitigate it, but it will minimize it. So, that continues to be our feeling, as long as demand continues to outgrow supply, absorption will continue and the impact will be mitigated.

Okay, great.

One more question. I know you haven't given RevPAR guidance for next year. Would you say that, let's pick New York, Chicago and DC, where will those three markets at this point fall in terms of above, below your what you think next year will look like?

For -- this is Mark, Will. For DC, our anticipation is for a better DC next year. Obviously, the inauguration is worth between 1% and 1.5% increase in RevPAR all by itself, generally, in the city. We've also seen easy comparisons to what's going on with the lobbying effort, which is a big demand generator in the city, should be very active next year. Although the city-wide calendar is not strong, that's not going to affect a number of the properties, like ours, in the city. I think DC will be a much better story next year than this year. And, I think perennially, with the government here and the high occupancies that DC runs, it's a great market to be in.

Chicago, the convention calendar looks good for next year. Our group bookings look relatively good. So, we are anticipating Chicago has a decent year in 2013. We haven't gotten our preliminary budgets yet, so I'm a little hesitant to say exactly what we think that market's going to do.

Then, New York City, our hotels are transient-based hotels, so we're going by trend lines. There's not a group booking to provide you clear guidance, but the special corporate rate negotiations are beginning. The hotel operators feel like they have the leverage. They're going for high-single digit increases there.

As John mentioned, it's really going to be a different story, depending on the location of your hotel, next year in New York City. So, we feel that, even with some supply, there is a lot of demand growth that's going on in the city. There is good special corporate rate negotiation leverage on our side this year. So, we're relatively optimistic for next year.

The -- that sort of answers my question. Actually, what I was trying to find out -- that's helpful, but if you came up with a RevPAR guidance number next year for the whole portfolio, where would those three perform relative to that RevPAR number for the whole portfolio?

I think we're hesitant to give 2013 guidance, and I don't want to back into it either.

Fair enough. Thanks, guys.

David Loeb, DiamondRock.

(Laughter) congratulations, David; welcome aboard.

That would be a problem since I'm going to ask hard questions, and I value my independence. David Loeb with Baird, thank you. I knew when I was talking to the operator that was going to get screwed up, oh well.

First off, I just want to thank you, Mark and team, for your candor and openness, particularly, about the guidance. Now, I want to test your candor and openness, also, about the condition of the Westin in DC. It is rare that companies say that their assets are tired, in print; so, thank you.

This one is probably for Sean. I have two. In the release, you noted that you expect the line balance to be at about $50 million at the end of the year. That's about $17 million less than what we would have thought. Given the timing of the writedown of Oak Brook, and its book value now of a little north of $15 million, are you contemplating sale of that by the end of the year?

David, the balance of the line is really going to be paid off from proceeds from the Atlanta Westin disposition, which was roughly cash proceeds of $40 million, as well as excess cash flow generated during the fourth quarter in excess of our dividends. The Oak Brook writedown was non cash, so that does not impact our estimated line balance.

We're calculating in cash flow from the quarter, free cash flow. But, my question was really that since it's now $15 million of net book value, more or less, were you thinking of selling it? I know it's a non-cash writedown, but are you thinking of selling it? And, is that in that estimate for the $50 million.

There is no sale of Oak Brook Hills in our fourth-quarter estimate.

Okay. So, it sounds like what you're suggesting is that maybe there is a lot more free cash flow than what we are estimating?

That's right.

Okay.

Then, second, this one on Burlington. There is a perception among investors that Burlington came with the package; and it wasn't like you were going out, looking for assets in Burlington, Vermont. I have to assume that you underwrote it, and decided that it was a good investment for DiamondRock. But, particularly, in light of other assets within the portfolio that have been underperformers over the years, Atlanta perhaps being an example of one that has been a flat IRR, 0 IRR; or Oak Brook, which clearly has not been good, can you give a little bit of an explanation of where you see the returns in Burlington? And, why you think that asset makes sense for DiamondRock?

Okay, this is Mark. David, I'd be happy to take that one.

Stepping back in time, when we initially went up and negotiated with Blackstone on what a portfolio would be for DiamondRock, we went through 24 assets, I would say, combed through and tried to pick the best portfolio; we were targeting about $0.5 billion. We went through those; and somewhat, the size dictated the composition of the portfolio.

Burlington would not be a strategic market for the Company, but we are actually fairly excited about that asset. It is fee simple; it is franchise, so the exit is, we think, relatively strong with local independent operator managers. And Burlington, our allocated price at $55 million represents a 10.4 EBITDA multiple in 2012 numbers, which we think is strong; and the hotel's going to grow about 15% in RevPAR this year over last year. On an independent basis, we think that's actually a fairly compelling investment; obviously, not a core target market, but we like the hotel a lot.

On your related comment about the sale of hotels like Atlanta, or the return on Oak Brook, I think our strategy, generally, is to sell the hotels that haven't performed as well as we would have anticipated. So, I think you're going to see that more on the sales. The home-run deals in the portfolio that we've done over the last year are the ones we're probably least likely to sell. Just to give you an example, the two Courtyards in New York, our cost basis is probably about $240,000 a key in those, but I don't think you're going to see us sell those any time soon, even if we can get $0.5 million a key and make a huge gain. We think the growth potential in those hotels is too valuable to give up.

That's very helpful and quite fair. Thank you, Mark, for that. I actually agree that on balance you have made some really, really excellent investment decisions. Thanks.

Tim Wengerd, Deutsche Bank.

I wanted to talk a little bit more about your 2013 bookings. Can you talk about the rate increase that you have on the books, and then how much of your expected group revenues for 2013 are on the books? And, when you look at the booking window, how is it comparing to the booking window at the peak of the prior cycle?

Tim, this is John; I'll take that one.

The 2013 group pace is currently room-night oriented, so it's actually down a little bit in rate. That's not unusual. The early group business that you put on the books is, typically, you're going for volume. As you get into the year, and do end the quarter for the quarter, end the year for the year, then the rate becomes the driver.

In terms of how much is on the books, right now, about 60%, 61% is on the books for 2013, that's anticipated group. Again, Mark mentioned, we don't have budgets yet, so we don't have full clarity on how much group business we'll do next year. But, if we maintain about 30% of the portfolio revenue, then it represents about 60%. We expect to cross over into 2013 with about 70%, which is our historic average, of total '13 revenue on the books, January 1.

Okay. That 70% that you mentioned entering the year, what was that like at the peak, say entering 2007 or entering 2008? Do you have an idea or --?

It's not a comparable number because the portfolio has changed, but I think 70% to 75% is probably typical of a cross-over rate for typical group hotels. Some large convention hotels would have a higher percentage on the books as you cross over. Some of the more standard 30%, 35% group houses would have less. So, it's a blend of roughly 70%.

Okay, all right. That 3.6%, the group pace that you mentioned for 2013, that's based on the 61% that you mentioned?

That's right. It's compared to the same time last year.

Okay, thank you.

Nikhil Bhalla, FBR.

When you mention about your group base being a little bit stronger for the back half of next year, given most of the renovation activity is front loaded for 2013, I'm trying to reconcile what's causing the group falloff, in a way, in the back half of the year of next year. Thank you.

Okay, this is John, I'll take that.

The group pace is up 3.6% overall, but it's up dramatically in the first half, 20%-something in first quarter and 12.5% in the very heavy-volume second quarter. The balance of the year, again, it depends on the -- how far in advance the groups are booking, and a lot of our -- we have three major convention hotels where advanced booking windows are lengthening, and that's important. In the other hotels, the nature of the business is that it's much shorter-term oriented. So, corporate groups tend to be much shorter-term bookers; and therefore, we feel comfortable that the back half of the year we have plenty of time to put groups on the books. It's really not related to the renovation. The renovation work is done in primarily transient hotels in 2013, so it really doesn't have an impact on the group booking cycle.

Got it. When you look across the major convention cities in your portfolio, Chicago, Boston, if you could give us some sense of how you see these cities shaping up, in terms of convention activity, not specific to groups at your hotels, but overall market convention stuff, next year versus this year. Thank you.

Okay. In Boston, there are more city-wide conventions with significantly more room nights associated with them, over 40% in room nights. In Boston, it's important to distinguish between BCEC and Hines -- sorry, what did I do? Oh, I'm sorry, that was for '14 I gave you. For '13, pace is down at BCEC in Boston, and I believe it's flat to slightly down at Hines, but '14 is up significantly. Again, distinguishing between BCEC where even if there are fewer number of room nights, the groups are smaller, we're attached to the convention center; and therefore, we get the first 800 rooms.

Sure.

In Chicago, next year is a decent pace. It's, right now, it's roughly flat to down just slightly. But, it should be a very good year with the way the pattern of the demand is falling. And '14, right now, they're behind a little bit, but they anticipate that they'll catch up.

In -- you didn't ask about Los Angeles, but Los Angeles is down significantly in number of conventions and room nights for '13. Minneapolis, which is very important to us, is about 8% up next year in number of conventions; and again, we're attached to the convention center, so the number of room nights is not as important as the number of conventions. Salt Lake City, which is important to us, sees a falloff next year in terms of room nights, but the booking pace at the hotel is quite strong. And, San Diego has a good pace next year; it's up 10% in number of conventions and roughly flat in room nights.

Great, that's great color. Thank you so much.

One final question. I'm looking at your balance sheet, and it seems like you have about $41.8 million as assets held for sale, any color?

Sure. That is the Westin Atlanta North, which closed after the end of the quarter, but --

Okay --

(Inaudible) gets classified as assets held for sale.

Okay, I thought as much. Thank you, I appreciate it.

Ryan Meliker, MLV & Co.

Most of my questions have been answered, but I was hoping you might be able to add a little bit of color. You mentioned that there was some unexpected maintenance that occurred in the quarter at Frenchman's Reef. Wondering if you can tell us, or give us any color on what that was, and if it had any -- obviously, the property came out of renovation, is there a concern that there might be other things that might be following as a result? Thanks.

This is Mark; I'll take that one.

The maintenance at Frenchman's Reef, which was (inaudible) the main tower, which is one of four buildings, that the property be shuttered for one week, relates to replacing some sewer lines that, after so many decades, you need to do that under the floor. We went in a couple months ago. We scoped all the pipes, found ones that needed to be repaired or replaced, and that's the maintenance that we're going to undertake here. It was not related to the renovation.

Okay, and it wasn't something that could have been looked at during the renovation and could have been resolved at that point in time? Or, where hindsight's always 20/20, but --?

That would have been great. We didn't scope -- you don't normally scope pipes, every pipe in your building unless there's a problem; and here, we had some indication that there was a problem but not until about 1.5 months ago.

Okay, great. Thanks a lot.

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

Thank you. To everyone on the call, we would just like to express our continued appreciation for your interest in DiamondRock. We look forward to updating you on the next quarter. Bye-bye.

This concludes the presentation. Thank you for your participation, and you may all now disconnect. Good day.