Diamondrock Hospitality Co (DRH) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter DiamondRock Hospitality Company earnings conference call. My name is Dominique 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). As a reminder, this conference is being recorded for replay purposes.

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

Thanks, Dominique. Good morning, everyone and welcome to DiamondRock's first-quarter 2013 earnings conference call. Today, I am joined by Sean Mahoney, our Chief Financial Officer, and Rob Tanenbaum, our Chief Operating 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. We would also invite you to review our investor presentation posted on our website at www.DRHC.com.

Let me start today by welcoming our new Chief Operating Officer, Rob Tanenbaum. Rob joined the Company last month and has already implemented fundamental changes to the asset management function in order to make the most of the internal growth opportunities within the portfolio. We are fortunate to have added Rob to our team.

Turning to the first quarter, the favorable trends in lodging fundamentals continued. Demand was very solid in the quarter, with industry RevPar increasing 6.4%, mostly from rate. Despite negative headlines about the sequester and overburdened consumers, our portfolio growth has passed prior peak levels of occupancy.

Several key corollaries to lodging demand are also improving. In April, the Consumer Confidence Index increased significantly to 68% from 62% in the prior month. Last Friday we had an unexpectedly good jobs report with a net creation of 165,000 new jobs to bring the unemployment rate down to a four-year low.

It is also important to note that this increasing demand is bolstered by a terrific supply picture. New hotel supply is only expected to increase by 1% in 2013 and 1.5% in 2014. Both are well below the long-term average of 2%. Overall, we feel very good about the positive dynamics of the lodging industry and it is quite apparent that 2013 will be another good year.

Before we review our results for the quarter, I wanted to take a minute to reveal our strategy to drive shareholder value. As you know, the Company made great strides repositioning our portfolio by acquiring hotels in premier gateway markets with outsized growth potential and disposing of noncore hotels located in secondary markets with lower growth potential.

We also increased the number of hotels operated by independent managers, which now represent close to 40% of our portfolio. The successful execution of this strategy resulted in a $16 increase in portfolio RevPar and a 240 basis point increase in hotel-adjusted EBITDA margins.

In short, our portfolio quality and internal growth prospects have never been better. Our acquisitions have consisted of hotels with value-creation opportunities because of the ability to rebrand, invest incremental capital or change management, and we are excited about the opportunities these present.

To take advantage of that upside, we are in the midst of a $140 million capital expenditure program, as well as making brand and management team changes at a number of the hotels. While 2013 will be impacted by renovation disruption, and, in many ways, can be characterized as a repositioning year, it will lead to sustained future growth opportunities. Sean will go into more detail on these projects in a moment.

Importantly, our projects are progressing as planned, and as expected we have some heavy lifting to do, particularly in the second quarter.

In summary, the Company's 2013 priorities are threefold. One, focus on internal growth opportunities. Two, explore the sale of select non-core assets. And three, remain highly disciplined in allocating each dollar of capital. As we look past 2013, we expect the successful execution of our capital renovation plan to position DiamondRock well to outperform in 2014 and beyond. In other words, we are setting the table in 2013 for the future.

Now let's get into the numbers. The first-quarter results were in line with our expectations and reflect strong lodging fundamentals. We increased RevPar, adjusted EBITDA and adjusted FFO during the period despite our operating results being impacted by more than 24,000 displaced rooms at our three New York City hotels that are currently under renovation. Excluding hotels under renovation, RevPar grew 5.6% and EBITDA margins expanded 93 basis points, resulting in an impressive 16.5% hotel adjusted EBITDA growth.

For the entire portfolio, including properties under renovation, RevPar grew 2% and the Company generated adjusted EBITDA of $34.3 million. Adjusted FFO per share was $0.14. In a moment, Sean will get into more detail on the operating results and capital plans.

Before turning the call over, I would like to spend a few minutes highlighting some of our significant recent wins. First, the Lexington Hotel in New York City. We continue to be thrilled about the growth potential for this hotel. There are several floors back in the room inventory and the renovated rooms in the building already command a $35 rate premium, even before brand conversion.

Second, we are confident that we can add a lot of value to the Westin Washington, DC City Center hotel through our comprehensive repositioning plan. Meeting planners are already enthusiastic about booking post-renovation. The promise of the renovation resulted in the hotel booking $1 million of Group revenue during March alone. The hotel is positioned for growth as this work concludes, with A 2014 Group booking piece up 56%.

Third, the Westin San Diego is benefiting from our new sales strategies. First-quarter RevPar index was 125%, up almost 18 percentage points. We are also benefiting from the newly-opened $300 million federal court house, with law firm related business doubling in production.

Fourth, the Boston Hilton is beginning to gain traction from the management changes we made at the end of last year. As we noted on the last call, we replaced virtually the entire ops team. In the first quarter, the hotel gained a strong 7.5 percentage points of market share. More importantly, the Group pace for 2014 is up an amazing 60% versus the same time last year.

Lastly, we are happy to report that construction is progressing very well on the Times Square Hilton Garden Inn, which is now over 20 stories out of the ground and remains on schedule for completion in mid-2014. This 282-room hotel is at 42nd and Broadway, the heart of Times Square. Our cost of $450,000 per key is fixed and not subject to construction cost overruns. When completed, we are confident that this will be the single best located select service hotel in Manhattan, and at a price that is $100,000 to $150,000 per key below current market value.

With that, I will hand the call over to Sean, who will discuss our operating results, capital program and our outlook for 2013.

Thanks, Mark. Before discussing our first-quarter results, I want to highlight that the quarterly comparisons for our Marriott managed hotels are impacted by Marriott International's recent calendar year conversion. First-quarter results for the Marriott hotels include seven more days than the 2012 first quarter. Please note that this will only impact our quarterly comparison since, as a REIT, we have always reported annual results on a calendar year.

In order to provide investors with comparable operating data, Marriott provided restated 2012 revenues and RevPar, but did not provide data to enable us to restate the first-quarter 2012 P&Ls. Therefore, our reported first-quarter comparisons for Marriott-managed hotels will compare to the period from January 1, 2013 to March 31, 2013, to the period from January 1, 2012 to March 23, 2012. To the extent that there are meaningful differences between the comparison, both figures will be discussed. We understand that this change may create confusion.

Now let's turn to the first-quarter numbers. Our results were in line with internal expectations. Total revenues increased 8.5% or 3.2% on a comparable basis, and RevPar grew 2% or 1.8% on a comparable basis. Despite modest top-line growth, our hotels did a fantastic job of preserving the bottom line, with hotel adjusted EBITDA margins only decreasing 38 basis points. Hotel adjusted EBITDA increased 6.6% from the comparable period of 2012 to $38 million.

Adjusted EBITDA totaled $34.3 million, an increase of approximately 9% from the first quarter of 2012.

As expected, our first quarter was significantly impacted by the renovations of the Lexington Hotel, Courtyard Midtown East and the Courtyard Fifth Avenue. In a few minutes, I will provide the current status of these renovations. The renovation disruption was the result of decreased occupancy, as more than 24,000 rooms, or 20% of available inventory, were taken out of service.

The good news is that the hotels were still able to achieve mid-single-digit rate growth while under the knife. In total, renovation disruption had a 360 basis point impact on first-quarter RevPar growth and a 131 basis point impact on hotel adjusted EBITDA margin expansion. If the three hotels were excluded from our first-quarter results, our RevPar growth was 5.6% and hotel adjusted EBITDA margin expansion of 93 basis points.

We continue to expect $10 million to $12 million of full-year 2013 renovation disruption. We expect significant disruption during the second quarter, moderate disruption in the third quarter and lesser disruption in the fourth quarter.

We were pleased with our food and beverage performance during the quarter. Our healthy F&B results were driven by a 26% increase in banquet revenues. Specifically, the Chicago Marriott contributed to the strong quarter with banquet revenues increasing over 60%, and Frenchman's Reef, where banquet revenues increased 23%. Most importantly, our Group revenue per room night increased over 9%.

Now, let me spend a few minutes discussing the individual hotel results. New York City continued to surprise to the upside. As I mentioned earlier, our three hotels under renovation were able to grow rate despite being under renovation. In addition, the Hilton Garden Inn Chelsea, our only New York hotel not under renovation, delivered outstanding RevPar growth of close to 16%.

Our results continued to outperform during the quarter, led by the Lodge at Sonoma, with approximately 30% RevPar growth. Sonoma was able to drive business transient production from the strength of San Francisco. The hotel also benefited from short-term Group and transient pickup from a local competitor being under renovation.

The Vail Marriott also outperformed, with RevPar increasing over 14% during the quarter. Frenchman's Reef also achieved 14% RevPar growth, and a $3.3 million or almost 20% increase in revenues.

We were also pleased with our first-quarter in Chicago, traditionally, a seasonally slow quarter in the market. The Chicago Conrad gained market share and generated 11% RevPar growth during the quarter. Our results at the Chicago Marriott benefited from strong Group production in both rooms and F&B. First-quarter RevPar increased 16.7% or close to 8% on a comparable basis. The Chicago Marriott achieved over 50% profit flowthrough as a result of the Group production.

Another strong performer was the JW Marriott Denver Cherry Creek, with first-quarter RevPar growth of 15.9%. The hotel benefited from its superb location within the city's high-end Cherry Creek neighborhood. The hotel's revenue strategy of aggressively pushing corporate rate was a huge success during the quarter as business transient revenues increased 14%.

Another hotel worth highlighting is the San Diego West End, with 15.6% RevPar growth. The hotel continued to gain traction from recent sales and marketing initiatives and incremental demand from the newly-opened $300 million federal courthouse.

Finally, the recent renovation allowed the Alpharetta Marriott to achieve 10% RevPar growth during the first quarter.

Boston Westin's quarter was negatively impacted by a difficult prior-year comparison. Despite this headwind, the hotel did a terrific job by achieving hotel adjusted EBITDA margin expansion of 91 basis points on 2.5% RevPar growth. The Westin DC benefited from the presidential inauguration, with first-quarter RevPar growth of 8%. We expect moderate RevPar growth from the Washington, DC market during the balance of 2013, although sequester seems to be less impactful to our hotel given its prime location.

As introduced during the last earnings call, we plan to invest approximately $140 million in the portfolio in 2013. Our cost estimates have not changed from the year-end call. We expect to fund the capital projects as follows. $60 million from existing cash reserves, which are classified as restricted cash on our balance sheet; and the remaining balance from corporate cash, about half of which will come from excess hotel cash flow and the balance from excess cash flows and proceeds from recent financings. We continue to believe that the successful execution of our 2013 capital plans will be a major catalyst for earnings growth in 2014 and beyond. We are confident in our ability to deliver long-term outperformance by making the right investments to harness internal growth opportunities.

I want to highlight the current status of our most significant projects. We are currently completing the renovation of the Lexington Hotel in New York, which we believe is the single biggest opportunity for sustained growth in our portfolio. We currently expect the renovation to cost $45 million, and the conversion to a Marriott Autograph to occur late this summer. The final rooms will be completed in the third quarter. Marriott will provide over $4 million of key money that we will use to offset the cost of the renovation.

The lobby will be complete within a month, and renovation work has started on 14 of the 28 floors. We are pleased to report that approximately 140 renovated rooms are back in service and commanding a $35 rate premium. We are still in the middle of this exciting project and will provide an update during the next earnings call.

After renovation and rebranding to Marriott's Autograph collection, we expect to realize significant rate gains, with the hotel generating hotel adjusted EBITDA of $20 million during 2014 and ramping to over $30 million over the next few years. This will be a multiyear growth catalyst for DiamondRock. We expect the bulk of the disruption, brand relaunching costs another transition costs to be behind us by this fall.

The $12 million renovation of our Manhattan Courtyards will be substantially complete by the end of the second quarter, including the addition of five new guest rooms at the Courtyard Midtown East, which will cost less than $1 million. We expect these new keys will add approximately $2.5 million to the hotel's net asset value.

We are already experiencing positive customer reaction from the renovations. We were able to push rate an incremental $15 on the renovated king rooms during the week and $10 on the renovated double-doubles on the weekends.

We are finalizing the scope and timing of the $16 million renovation of the Westin Washington, DC and the $14 million renovation of the Westin San Diego. We expect the renovations to commence during the fourth quarter of 2013.

Finally, we are planning the renovations of the Hilton Boston and Hilton Burlington. The renovation scope and costs are expected to be consistent with our underwriting. The renovations are expected to start during the seasonally soft winters, which should minimize disruption.

As we look ahead, we have great conviction that our 2013 capital investments will lead to outperformance in 2014 and beyond.

We are reaffirming our full-year 2013 guidance. It is worth noting that our 2013 results will be impacted by two major items. First and most impactful, we still expect $10 million to $12 million of renovation disruption during 2013, which will reduce annual RevPar growth by three percentage points.

Second, our 2013 Group segment will be impacted by the decrease [in citywise] in Boston and Minneapolis, which are expected to have a 50 basis points impact on our RevPar growth.

For the full year 2013, we continue to expect portfolio RevPar growth of 1% to 3%, which incorporates three percentage points of renovation disruption, adjusted EBITDA of $195 million to $205 million, which reflects $10 million to $12 million of EBITDA renovation disruption and adjusted FFO per share of $0.70 to $0.74.

Lastly, I would like to touch on our balance sheet and capital allocation. We were active in the financing markets during the first quarter when we raised $102 million through two nonrecourse secured loans. These loans have 10-year terms and sub 4% interest rates. The Company has raised more than $175 million of 10-year secured debt since December, all at rates below 4%. These transactions lowered the weighted average interest rate on our mortgage debt from 5.5% to 5.2%.

We have consistently maintained a simple and low-risk balance sheet with virtually no corporate debt. We currently have $1.1 billion of mortgage debt, no outstanding borrowings on our line of credit and 13 of our 27 hotels unencumbered by debt.

To give you an idea of how much borrowing power that provides the Company, those 13 unencumbered hotels are expected to generate over $80 million of hotel adjusted EBITDA during 2013. We expect to end 2013 with net debt to EBITDA under five times. We believe conservative leverage is essential to delivering superior shareholder returns across the lodging cycle.

I'll now turn it back over to Mark for some final thoughts. Mark?

We are very excited about the future of DiamondRock. With 27 hotels concentrated in perennially strong gateway markets, as well as prime resort locations, the portfolio quality and long-term prospects have never been better. We believe our portfolio contains tremendous internal growth opportunities and that our ability to realize this potential will lead to outperformance in coming years.

Additionally, based on convention calendars, Group for our portfolio is likely to increase moderately in 2013. The Company successfully booked over $19 million of incremental 2013 Group business during the quarter, which is 10% more than was booked during the same period of 2012. It is worth noting that the incremental Group revenue was booked at a 10% higher rate. Our current 2013 Group pace is up 3.1%, with 82% of forecasted 2013 Group revenues already on the books.

Excluding the Boston Westin, which is facing a difficult year at the BCEC, our 2013 Group booking pace is up 7.1%, driven by a 2.9% increase in rate and a 4.2% increase in rooms sold. More importantly, the convention calendars are trending dramatically better in several of our main markets in 2014. Boston alone will be a big driver of growth next year. Our 2014 Group pace is up an impressive 12%.

In conclusion, our team remains committed to delivering shareholder value and believes that 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 your questions.

(Operator Instructions) Will Marx, JMP Securities.

Thank you. Good morning, everyone. I guess I wanted to first ask about just looking at general Smith Travel data, trailing 28 days and the last week, it looks like things have slowed a little bit. Any thoughts on that, and kind of also expectations this year maybe on a quarterly basis, if there are any comps that are tougher than others, second, third, fourth quarter?

Good morning, Will. This is Mark. We are obviously watching the numbers every day and every week. We are not seeing a slowing in a number of our markets. Obviously, we have a portfolio of 27 hotels, so it is not representative of the whole nation. But I would say overall, we are not seeing trends. We are seeing Group continue to book at a decent clip. We are seeing some higher-rated Group come back this year, which is a very positive trend. Transient seems to be solid and hanging in there in most of our markets. So I would say so far, we are not seeing any indications of slowing at our particular hotels.

Okay. And looking at New York in particular, I know you have got the renovation disruption and you have got what is going on with the Courtyards and obviously your bigger hotel. But do you see -- I mean, this is the market where supply concerns -- or where there are supply concerns, if anywhere -- do you see it impacting the market this year?

It is interesting, because you do have the new supply coming in, which is sizable, which we don't think will have a huge impact on occupancy, but obviously hurts the ability to push rate. The big offset so far this year has been the FEMA and the Sandy-related business. And you are talking about a $50 billion government stimulus program to the greater New Jersey, New York area.

So it is difficult to know exactly how that plays out for the full year, kind of this incremental demand from that injection of demand, as well as the counterbalance of the supply. We are also -- on the positive in New York -- we are seeing more inbound travel to New York, international inbound travel, which is increasing and may help offset the supply.

But it is difficult to know. I think everyone was surprised by the strength in New York Q1. We are seeing that continue in April in our hotels, particularly the Chelsea, which isn't being renovated, so that is really the best gauge. So fourth quarter will be, I think, very telling for us of our ability to push rate, particularly given the Sandy comparison and the supply.

Okay, thank you. Just last question. Looking at your guidance for the year and the RevPar ranges, can you just give us a sense -- or maybe you don't want to -- but second, third and fourth quarter how you expect RevPar to come out approximately?

Sure. This is Sean. We obviously have not given quarterly guidance, so I will give the implied guidance for the back half of the year is consistent with our full-year guidance, because we came in right down the middle of our expectations for the first quarter. So with respect to what the balance of the year will be impacted by, I think the renovation disruption is worth noting, because we expect the bulk of the renovation disruption to occur in the second quarter. So you should expect our second quarter to be impacted by renovation.

The third point is our calendar comparisons are going to be difficult for the entire year this year because of the shift in Marriott's calendar. So it is going to be difficult to gauge a lot from our individual quarters. Now, our full year stays the same, but the quarters are going to create a little bit of comparability issues within the models.

Okay, that makes sense -- or sort of makes sense, but I hear you. Okay, that is all for me. Thanks, Sean. Thanks, Mark.

Rich Hightower, ISI Group.

Good morning, guys. I was appreciative of the clarification on the guidance, because I was wondering about the back half of the year as well.

But my second question -- actually, if Rob is in the room, I would like him to answer; but if not, either of you guys is fine. But you highlighted some of the potential changes that might occur with the new COO in the mix. I think you highlighted brand and management changes at some of the properties. But given that the CapEx budget and the plans haven't really changed over the last few months, can you sort of give a little more clarification as to what changes you would expect in the portfolio with Rob in place?

Hi, Rich, it is Rob Tanenbaum. Nice to speak with you.

Nice to speak with you.

Thank you. I am thrilled to have joined the team at DiamondRock, and with over 15 years of asset management experience, I have developed a unique asset management approach, which has led to some remarkable improvements in hotel profitability. I have started to implement this approach at DiamondRock, and expect to achieve earnings upside in our portfolio using the same techniques that I have employed over the years.

The system is focused on three core tenets of asset management -- revenue management, cost containment and capital allocation. I'm extremely proud of the great professional relationships that I've developed over the years with many of the key players at our hotel operators.

I'm also a big believer in accountability as a key to driving operating results. In my first six weeks on the job, I've already made changes to the asset management group. For example, we have brought an in-house head of capital expenditures with over 30 years' experience, most recently as a consultant with Goldman Sachs. This individual is bringing a new level of precision and execution capability to our platform.

At the same time, it will allow the asset managers to focus their attention on maximizing hotel profitability through implementing revenue maximization strategies and cost containment plans. I'm excited about the opportunities to drive above-market growth in hotel profits over the next few years.

Okay. Thank you very much for that.

My next question concerns non-core asset sales. I am wondering if you can give an update on maybe some of the airport properties that you guys have penciled in as candidates for that.

Sure, Rich, this is Mark. Overall, we are really happy with our portfolio of hotels in the DiamondRock collection. However, as we mentioned in the call, consistent with our strategy of upgrading the portfolio, we'll continue to look at monetizing some of our lower-growth -- few lower-growth assets and redeploying that capital into better value-creation opportunities.

We are currently focused on a couple of potential sales right now, but our corporate policy is not to talk specifically about any one disposition until it is probable. At this time, we do not have any dispositions that meet that definition, but we are actively looking at monetizing a couple assets.

Okay. Thanks, Mark. Last question and I will hop out of the queue. The balance sheet is in very good shape and you did a couple of mortgage financings in the quarter. But I notice that you do have some high-cost debt on the Courtyard Midtown East. And I don't know if the renovations factor into this, but is there a refi opportunity there before it matures in 2014?

We run on a quarterly basis the defeasance costs of each one of our mortgage debts, and it is pretty cost prohibitive to do that. But we do look at all of our options. I think when you look at our capital structure, one of the core tenets that we have is to maintain as much flexibility as we can. That includes having nothing outstanding on our line to mitigate the risk of refinancing risk in a deal with -- not only the funding of the Times Square development in 2014, but also our 2015 and 2016 debt maturities.

We also have the ability to refinance one of our 13 unencumbered assets. As well as if we are successful in selling non-core assets, we have capacity from there. So we feel very good about where our balance sheet sits today. But that is a question that we wrestle with internally, whether we could take advantage of defeasance.

Okay. Thanks, Sean. I appreciate the color.

Jordan Sadler, KeyBank Capital Markets.

Hey, guys. It is Austin Wurschmidt here with Jordan. Just circling back, I know you said not too much color on the dispositions side. But what are your plans for reinvestment? What opportunities are you seeing out there? I know you have the Hilton Garden Inn Times Square deal next year. Is there anything else that you are seeing in terms of opportunities?

Good morning, Austin. This is Mark. We made the decision -- just kind of stepping back, DiamondRock made the decision to be an early mover and buy aggressively early in the lodging cycle. So we have done over $1 billion of hotel acquisitions in the last three years.

At this time really we are focused on creating the most shareholder value by mining our internal growth prospects, and that it is currently our highest priority. We have been monitoring the acquisition market. Obviously, we are looking at every deal that comes in the door. But frankly, there has been nothing compelling that has come through the door so far this year.

Thank you. That is helpful. Then turning to the disruption, the $10 million to $12 million, how much of that occurred in the first quarter? And sort of how do you expect the balance of that to play out over the next several quarters?

Austin, about $3 million impacted our first quarter. And then we expect the balance of the year to really -- the second quarter will probably be the most impactful and the most significant, although we do expect moderate disruption in the third quarter and less disruption in the fourth quarter. We have not provided specific quarterly guidance, so we won't give you a breakout of that number. But we continue to believe that the annual disruption is $10 million to $12 million. And what we can confirm is $3 million of that impacted our first quarter.

Great, that is helpful. Thank you.

Joshua Attie, Citi.

Thanks, good morning. On the quarter, looking at the Blackstone asset it seems like in Boston and in DC, RevPar was up really nicely, but EBITDA and EBITDA margins were both down. Could you just explain what happened at those hotels?

Sure. The Hilton Boston property is now a union hotel, and at the same time last year it was not. And so this is an our underwriting, but it shows the reflection Q1 over last year.

And then this is Sean. On the Westin DC, we got a reassessment on property taxes, which had a pretty big impact on margins year-over-year, which is skewing the numbers.

Will that impact the numbers for the balance of this year?

It will.

Okay. Was that factored in when you bought the hotel?

It was.

And then also you mentioned that Group bookings at Lexington and Boston seem like they were up a lot, which has positive implications for next year and the year after. Can you remind us what percentage of the overall business at those two hotels are Group?

For the Lexington?

I think -- Josh, this is Mark. We mentioned that the Boston Westin is up over 40% -- about 40% for next year. That is obviously mostly Group, a little over 50%. The Hilton Boston is also up similarly, about 50%. And then the Westin DC is up over 50%. For the Hilton and for the Westin Washington, DC, that is probably 25% to 30% of the business at those two hotels.

Okay, thank you. Just a couple more questions. On asset sales, could you just give us some sense of -- I know you don't want to talk about individual assets -- but some sense of the dollar volume that you have, either on the market or that you could complete this year?

Looking at what we are looking at monetizing now, it would be less than $150 million. But we have a lot of price discipline and I think asset prices are appreciating over the next year. So we have a lot of integrity of what prices we are willing to let these hotels go at. But that is kind of the range somewhere below that amount.

Okay, thanks. Just one more question on the balance sheet. You clearly like where rates are today; you have done some long-term asset level financing. Have you reconsidered issuing preferreds where you could obviously lock in rates forever?

Sure, Josh. Preferreds are one of the tools that we evaluate as an opportunity. We currently like the simplicity of our existing capital structure and we believe that sub-4% 10-year debt is very attractive. It is as attractive as it has been since we formed the Company in 2004. And that is the choice that we made.

Although we do evaluate preferreds on a very frequent basis. We just have never gotten excited enough about them to make that move, because they do represent a level of corporate debt. We strive to have a balance sheet that has no corporate debt, and so we prefer the secured execution.

So at this point, it is fair to say they are off the table, or are they being considered?

They are always being considered, but I would say that they are lower odds for that execution.

Okay. Thanks a lot.

Ryan Meliker, MLV & Co.

Good morning, guys. Just a quick follow-up to Josh's question with regards to the Blackstone portfolio. Can you just give us a rundown of how those properties have performed relative to your underwriting? It looks like over the past three quarters, the Boston Westin is down $1 million in adjusted EBITDA, and I think DC is down $1.7 million or so in year-over-year adjusted EBITDA. I know you bought the assets of a 14.4 times 2012 EBITDA multiple, so I'm just wondering was that -- were you underwriting this type of EBITDA decline, indicating a higher multiple in 2013 numbers?

Good morning, Ryan, this is Mark. I will take that one. So if you think about the four assets, Burlington has clearly exceeded our original underwriting. San Diego is performing very well, particularly in Q1, so that is actually at or slightly above our underwriting.

The Boston Hilton, which we -- obviously, we acquired last July, a couple major things going on there. One is we are getting the union -- it converted to union, so we are getting that impact of wage parity, which will burn off the third quarter of this year, so the year-over-year is tough. That was built into our underwriting.

The opportunity we saw at that hotel was really to get rid of existing management, replace the entire property level team and bring in new management, because we saw a lot of upside in the revenues potential of that hotel, particularly with 66 suites.

The transition in the fourth quarter was, I think, a little tougher than we originally anticipated. We lost over 20 points of market share as part of that transition. Now, that is a temporary phenomenon, and as we stated earlier in the call, we are up 7.5 points market share in Q1 alone. Although we got a long way to go to get back to parity, but that is really the upside as the new management team kicks in there. So I would say Q4, the transition was more than we originally underwrote, but we still believe the potential is there because of the lost market share shows you that that is kind of a temporary phenomenon.

DC is a little different; DC is its own special beast. Two things going on there. The upside and the value-creation opportunity is really the capital in the renovation. So our underwriting the big growth there as opposed to renovation. And as we mentioned, just telling the meeting planners about the renovation, we booked $1 million of incremental business in March alone.

So that one, I would say DC was a little softer than we anticipated. Certainly we didn't factor in the Sandy impact in the fourth quarter of DC, where RevPar was down over 30% for that week. But DC, our bet is -- and our underwriting is really based on a post-renovated product. So we feel very good about that potential still. And as we mentioned, Group booking is incredibly strong for that hotel for next year, as one indicia of the upside that is going to be realized there.

Sure. And I understand you guys aren't buying these assets for year-one returns; you are taking a longer-term view. Just wanted to get some color on that.

Then in terms of a modeling perspective, as we think about these assets, it looks like you guys are expecting all of those assets to go under renovation late this year, start of next year. Is it following that renovation that we will start to see some of the growth that you guys believe is embedded in these assets?

So again, let me just walk through. So Burlington, the renovation it won't be -- it will be good. There is not as much upside from that capital, although we are talking about building some new meeting space to take advantage of the Lake Champlain views. So that one will continue to tick along.

The Hilton Boston is going to be less about the capital. I think you will start seeing significant rate growth as our marketing strategies are implemented with the new team. The Westin DC will go under renovation probably starting in October of this year. It is really going to be post that renovation, which will wrap up during this winter, where you start seeing what we hope will be the big gains next year; somewhat market-dependent, but certainly above market growth.

And then San Diego, we will have the renovation, but you can see already with the growth in the first quarter, the sales strategy change there is making an impact. But the dramatic change in the lobby at both Westins I think will lead to significant upside.

What our underwriting has for those assets is getting to kind of mid-40s EBITDA for the portfolio over the next couple of years, which should outpace certainly the industry growth and the balance of our portfolio.

Ryan, this is Sean. I think from the shape of the curve perspective, you should expect consistent EBITDA year-over-year from 2012 to 2013, with the ramp really starting in 2014 and into 2015, getting to that mid-40s number that Mark mentioned. So this year will be relatively flat year-over-year, maybe slight growth in the portfolio, for those four assets.

Okay. That is really helpful color. And then one more kind of modeling question. I don't know if you can give me any color, Sean. But in the quarter, you guys obviously had a $6 million benefit on taxes. Your full-year tax expense guidance is unchanged. Can you give us an idea in terms of how we should look at that over the remaining three quarters? Is it going to be lopsided to one quarter or another, et cetera?

A lot of the taxes is seasonality, because of the way the leases are structured. So we generally almost always have a significant tax benefit in the first quarter, as you can see, relative to last year. And it moves more into an expense position as the year goes on. So the fourth quarter would be where it really shifts to an expense, just because of the seasonality.

So I would have it modeling where you should expect probably second quarter, I believe will have a small expense. Third quarter tends to be closer to a benefit, but all of it in the rounding. And then the fourth quarter, it tends to be an expense, which gets us to the full-year expense guidance.

Wonderful. That is what I need to know. Thanks so much. I really appreciate all the color.

Wes Golladay, RBC Capital Markets.

Good morning, guys. I am looking at the Frenchman's Hotel. Last year it was hurt by the lack of travel subsidies towards the end of the year. Is that looking like a one-off event, and this should be fine this year?

It is Rob Tanenbaum. We think there is a complete amount of upside for this property. And it reminds me of when I was involved with the Aruba Marriott and the potential that we realized there. So we do see quite a bit of upside potential in Frenchman's.

Okay, but the subsidies should be there the whole year? Anything going on at the end of the year like last year?

Yes, they are still doing marketing from the tourism board, and so we believe that we will be able to work with that number, yes.

Okay. And then looking at the Lexington Hotel, how should we model that one, I guess, for stabilization? Maybe a lower initial yield in 2014 and then a full stabilization in 2015?

Good morning, Wes. This is Mark. So the Lexington Hotel, obviously we have an enormous amount of impact this year. Next year our underwriting -- so I will give you that guidance -- would be kind of $20 million, a little over $20 million, and then ramping up to the low kind of $30 million range.

And that would be in 2015, you think, or 2016?

Probably 2015.

Okay. Thanks a lot, guys.

(Operator Instructions) Lukas Hartwich, Green Street Advisors.

Thank you. Sean, do you have an estimate of the RevPar growth if you fully adjust for the change in the reporting that Marriott had?

For the quarter?

Yes.

It is 1.8% versus 2%.

And then just one other quick one. Do you guys have any plans to change the managers at your hotels that are performing below the performance targets, in the management agreement?

Rob has been on board for all of six weeks, so we are currently evaluating several management teams at the properties, but we want to make sure that Rob has time to get up to speed to make sure we are making the appropriate changes and taking advantage of his expertise before we actually pull the trigger on those.

All righty then. That is it for me. Thanks.

Nikhil Bhalla, FBR.

Good morning, everyone. Mark, this question is for you. When you look across your portfolio and take maybe a five-year view from here on, you have renovated a substantial portion of your portfolio already. How much of these kind of disruptions should we expect over the next several years? Are you pretty much done with all the major capital expenditure plans at this point in time in your portfolio as it exists today?

That is a great question. Obviously, we put in over -- in the last five years, we have spent well over $300 million on our properties; we're embarking on $140 million right now. This is the renovation disruption and immediate needs. This $140 million program represents about one third of our portfolio by EBITDA that we are renovating currently.

So we don't anticipate significant disruption or any new -- currently any new renovations to be announced for 2014. So we expect 2014 to be a very clean year as we complete these up. I'm sure as we get to 2015 and 2016, there are always room cycles and other things that we will have to evaluate in making sure that we are keeping pace with the market. But we don't have anything on the table currently.

So when you look beyond 2014, you are not envisioning, as the portfolio stands today, maybe another $130 million or $140 million of spend, say, in 2015 or 2016 at this point?

If you think about our program that we are currently embarked, we did strategically take advantage as an early mover and buy a lot of repositioning assets. And so if you think about the majority of the capital that we are putting in right now, it is really related to the repositioning of recent acquisitions. So we are not forecasting being a large acquirer over the next couple of years, so we won't have those.

But you know, as Rob gets through these and if we see value-add opportunities, that view may change for 2015, 2016, if there is a lot of upside. But currently what we are anticipating is that we will get through 2013, we will have a good 2014 and then we will have to evaluate the properties in the future.

Great. Thank you, Mark.

Joshua Attie, Citi.

Thanks for taking the question. I just wanted to follow up on two things that you said earlier. I guess first, why did the Hilton Boston need to go union if it wasn't union previously?

Josh, this is Mark. They had signed the neutrality in the union agreement before we actually acquired it, about two months before we actually acquired it. And reason it went union is because the wages really that were set by Columbia Sussex when they owned it were substantially below market. So that was built into our underwriting. Obviously, we would have probably paid more if it was nonunion, but that occurred before our watch.

Can you give us some sense of what the incremental cost would have been on a full-year basis last year or a full-year basis this year?

Josh, the incremental cost from primarily work rules and getting up to market was about $1.2 million per year.

Okay. And then also, the same for the tax assessment on the DC property. Can you give us a sense for what the annualized impact of that is?

Bear with me a second, Josh, on that one. Why don't we take that one off-line, Josh?

Okay.

(technical difficulty)

For the full year?

For the full year.

Okay. Thanks, Sean.

Rich Hightower, ISI Group.

Thanks for taking it. One other hiring question. I think you guys had mentioned a while ago you are looking to bring on a CIO maybe towards the end of this year, and I'm wondering if you can provide an update there, please.

Sure, Rich, this is Mark. As you know, we have decided to change the structure of the Company and split the COO and CIO position. On the CIO, we plan, as we mentioned last call, to begin the process later this year. We don't see acquisitions as a top priority near term, because we see the real catalyst for our stock focusing on these internal growth opportunities. But our plan is to have a CIO in place by the end of this year.

Okay. Great. Thanks, Mark.

This concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Mark Brugger for any closing remarks.

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

Also, I would like to remind listeners that the Company has scheduled an Investor and Analyst Day on September 10 in New York City, where we will offer tours through some of our renovated hotels and showcase the upside potential. We look forward to seeing you all at that event. Thank you.

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