Diamondrock Hospitality Co (DRH) 2013 Q3 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the third-quarter 2013 DiamondRock Hospitality earnings conference call. My name is Lisa and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today, Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Thanks, Lisa. Good morning, everyone and welcome to DiamondRock's third-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.

Let me start today's prepared remarks with a few general observations on industry fundamentals. The third quarter showed solid strength with the industry reporting its 14th consecutive quarter of RevPAR growth above 5%. The current lodging cycle remains strong despite an overall economic recovery that is best characterized as modest to weak.

We carefully track several major economic indicators that we believe best correlate to hotel demand. These economic indicators continue to show gradual improvement.

A benefit of the slower-than-normal recovery is that it increases the likelihood for an elongated lodging cycle. Moreover, new hotel supply remains another favorable feature of this cycle. In the third quarter supply was muted with growth of less than 1%, which is less than half the historical average, and we expect overall supply growth to continue to be restrained over the next few years.

Overall our outlook for US lodging fundamentals is for several more years of solid growth. And we have positioned DiamondRock to take advantage of that environment.

For DiamondRock there are five key takeaways from today's earnings release. One, the portfolio is performing well with approximately 6% year to date RevPAR growth excluding hotels under renovation. Two, the successful execution of our disposition strategy continued with the pending sale of the non-core Torrance Marriott at a strong EBITDA multiple.

Three, renovation disruption is now substantially behind us. Four, the Lexington renovation is done and early signs point to success. And fifth, DiamondRock is positioned for growth next year from renovation tailwinds, strong group pace, and our high-quality portfolio located in top gateway and resort markets.

Turning specifically to operating results for the DiamondRock portfolio, the portfolio continues to perform well. Year to date the portfolio delivered RevPAR growth of nearly 6%, excluding the three New York City hotels under renovation. The RevPAR increase was driven by the ability of our hotels to significantly push rate, which is up 3.7% year to date as most of our hotels exceeded prior peak occupancy levels.

EBITDA profit margins have expanded 68 basis points. We will provide a more in-depth look at operating results later in the call.

For DiamondRock, 2013 continues to be a story about setting the table for 2014 and 2015. As we explained at our Investor Day in September, the team is focused on three specific strategic initiatives to drive future growth. These strategic initiatives are, one, completing our $140 million capital investment program; two, executing our strategy to dispose of non-core hotels; and three, improving operating margins by implementing new and creative asset management initiatives.

We've already made tremendous strides, and the successful implementation of these strategic initiatives should allow DiamondRock to outperform. Let's take a few minutes to discuss each of these three strategic initiatives because they are each very important.

First, we have achieved several major milestones in our $140 million capital program. This is a big program which consists of renovating more than one-third of our portfolio, completing one major rebranding, and fundamentally repositioning three large hotels.

We recognize that renovation disruption is an unpleasant but necessary part of unlocking value and managing a portfolio for long-term performance. Today we are pleased to report that the Lexington renovation and rebranding is now complete. This is a big milestone for our renovation program.

The Lexington Hotel looks terrific and the feedback from guests and corporate accounts is exceeding our expectations. Our belief in the success of the hotel conversion has been reinforced by a number of early indicators.

Further, our strategy of rebranding to an Autograph to grow revenues by shifting from lower-rated leisure and contract business to higher-rated business transient is beginning to work. Here are some interesting data points to consider.

Since September 1, rates are up. Average daily rates have increased over $40 at the Lexington from comparable period in 2012. The Marriott brand is delivering. Approximately half of our revenues at the Lexington have been generated from the Marriott Rewards members and more than 60% of our business is coming through Marriott channels.

The target mix shift is happening. Business transient revenues now account for over 80% of total revenues at the hotel. Even better, this was driven primarily by a 5 times increase in the highest-rated transient segment. Meanwhile, we have yielded out the lower-rated segments.

We look forward to keeping you up to date on the progress at the Lexington as its exciting story continues to unfold.

The second prong of our plan focuses on our disposition program for the few non-core hotels in our portfolio. As you know, at the beginning of this cycle we aggressively pursued a capital recycling program to dispose of non-core assets and redeploy those proceeds to fund acquisitions in higher-growth markets. So far this cycle we have sold four non-core hotels at extremely strong EBITDA multiples.

The sales improved the portfolio's quality and meaningfully increase its average RevPAR. We continue executing on our program and announced today the pending sale of the Torrance Marriott at a multiple of 14 times EBITDA for the trailing four quarters.

Once again, we're focused on strategic capital recycling as we will utilize the roughly $76 million in cash proceeds from the sale to help fund the pending acquisition of the newly-built Hilton Garden Inn Times Square next year. We will continue to pursue our capital recycling program and we will look to sell one or two more non-core hotels over the next 18 months.

The third prong of our plan focuses on our new asset management initiatives. Rob Tanenbaum, our recently appointed Chief Operating Officer and head of asset management, is making great progress in identifying strategies to enhance revenues, optimize operating cost, and ultimately drive improvement in hotel operating margins. In a moment Rob will elaborate on his effort.

Before turning call over, I want to provide an update on our exciting project in Times Square. The Hilton Garden Inn Times Square enjoys a fantastic location and remains on schedule for a mid-year 2014 delivery. After the sale of the Torrance Marriott, the Company has the ability to close on the new hotel just with excess corporate cash on hand.

Now I will turn the call over to Sean Mahoney, our CFO, who will provide additional details on our operating results and the balance sheet. Afterwards, Rob Tanenbaum will discuss the tremendous progress we're making on the asset management front. Sean.

Thanks, Mark. Before discussing our third quarter results, I want to emphasize that our third quarter prior year comparisons are significantly impacted by Marriott's reporting calendar change. The Marriott Hotel third quarter includes 20 fewer days in last year, which results in approximately 10% fewer room nights this quarter.

Please note that this only impacts our quarterly comparisons that will not impact the full-year comparisons, since we have always reported annual results on a calendar year. Now let's turn to the third quarter numbers.

Overall, it was another good quarter. The Company reported hotel-adjusted EBITDA of $54.5 million; corporate-adjusted EBITDA of $51 million; and adjusted FFO per share of $0.18. While overall results were in line with our expectations, there were a number of moving pieces.

The results were negatively impacted by renovation disruption at the Lexington Hotel. In total, we now estimate full-year renovation disruption of $17 million, which is $2 million above the high end of the previous range. However, this impact was mostly offset by outperformance at the Boston Westin, LAX Marriott, and our two New York City Courtyards, which benefited from renovations completed earlier in the year.

The third quarter reflected some exceptionally strong results at many of our hotels, with five hotels reporting double-digit RevPAR growth. Excluding the Lexington Hotel, our portfolio generated strong, comparable RevPAR growth of 5%.

Our third quarter pro forma house profit margins expanded 40 basis points. However, hotel-adjusted EBITDA margins contracted 32 basis points. EBITDA margins in the third quarter were held back by total of 80 basis points from three specific drivers, mainly property tax increases at our hotels in Chicago, Denver, and San Diego; underperformance at our Washington DC hotels; and the impact of ramping union conversion costs at the Boston Hilton.

Renovation disruption, as expected, materially impacted our third quarter results. The impact was almost exclusively from the final stages of the Lexington Hotel renovation. Disruption impacted RevPAR growth by 390 basis points.

The Lexington renovation resulted in 29,000 lost room nights, representing approximately 44% of available rooms at the hotel or 2.7% of available rooms for our entire portfolio. The renovation disruption from the Lexington is now done, as the renovation was substantially complete at the end of October.

We believe that our year-to-date operating results, which are not significantly impacted by the Marriott calendar conversion, are more indicative of portfolio performance. We are pleased that the portfolio's performance so far this year.

Excluding the three renovated New York City hotels, we achieved year-to-date RevPAR growth of 5.9%. The year-to-date RevPAR growth led to house profit margin expansion of 103 basis points and hotel-adjusted EBITDA margin expansion of 68 basis points.

Similar to the third quarter, year-to-date margin expansion is negatively impacted by approximately 60 basis points due to increases in property taxes, the weak Washington, D.C. market, and the Hilton Boston union conversion costs.

Now let me spend a few minutes discussing our hotel operating results in more detail. We are encouraged by the continued recovery in Group. Quarterly Group production for the third and fourth quarters was 60% above what we booked last year, resulting in an increase in 2013 Group booking pace from 5.3% at the end of the second quarter to 7.6% now.

The production was led by the Chicago Marriott, the Boston Hilton, the Worthington Renaissance, and the Salt Lake City Marriott. Year to date, our Group revenues are 10% above last year, led by a strong Group performance at the Chicago Marriott. However, we expect flat Group revenues during the fourth quarter as a result of the lack of convention activity in Chicago, Boston, and Minneapolis.

We also had a productive quarter for 2014 bookings. Our hotels booked over $14 million in the quarter, representing an approximately 14% increase from last year. Our 2014 booking pace is up over 10%, driven by a 4% rate increase with the balance coming from incremental room nights.

Our 2014 Group segment, which represents about a third of our total business, is positively impacted by our Group concentration in Boston and a strong Group year in St. Thomas. We have booked approximately 65% of our 2014 groups, which puts us in great shape heading into 2014.

We were also pleased with another strong food and beverage quarter. F&B revenues were approximately 6% above expectations as a result of strong Group pickup during the quarter. Some notably strong performers include the Chicago Marriott's F&B revenues, which were 15%, or $1.1 million above expectations. The outperformance was driven by banquet and catering.

The Boston Westin's F&B sales grew 10.6% from 2012, which contributed to a 270 basis point margin expansion. The Renaissance Worthington F&B revenues were 23% above expectations, also driven by banquet and catering.

Let me now spend a few minutes discussing the results of a few specific hotels. The San Diego Westin continued to outperform, achieving 10% RevPAR growth. The hotel continues to pick up incremental demand from the new federal courthouse located just across the street. This hotel, which is currently under renovation, is expected to be a great growth catalyst during 2014 and beyond.

The Alpharetta Marriott was another bright spot for the Company with 23% RevPAR growth and close to 500 basis points of margin expansion. Year to date RevPAR has grown 20%. The hotel is benefited from the recent moves by General Motors and Ernst & Young into the Alpharetta sub market, which has allowed the hotel to significantly increase mid-week corporate business.

The JW Marriott Cherry Creek grew third-quarter RevPAR over 12%. The hotel benefits from its superb location within Denver's high-end Cherry Creek neighborhood, and took advantage of both midweek and weekend demand, resulting in a close to 17% increase in business transient revenue.

The LAX Marriott took advantage of strong transient demand to drive 8% RevPAR growth and 227 basis points of margin expansion during the quarter, which significantly exceeded our expectations.

The Boston Hilton grew third quarter RevPAR over 11% and picked up close to 6 percentage points of market share during the quarter, which are both great data points that reinforce our decision to bring in Davidson to create a new revenue management strategy at the hotel. We expect the hotel's margins to continue to be negatively impacted by ramping union labor and benefits costs for the balance of the year.

Finally, our resort portfolio continued to outperform, led by the Lodge at Sonoma's 10% RevPAR growth. Sonoma drove transient production from the strength of the San Francisco market and picked up additional weekday corporate groups from the Bay Area.

In addition, during September, we rolled out a resort fee in Sonoma which is expected to generate approximately $0.5 million in incremental hotel-adjusted EBITDA next year.

Lastly, I would like to touch on our balance sheet and capital allocation. We believe that DiamondRock's balance sheet is among the best of any lodging REIT. We have consistently maintained a simple and low risk balance sheet with essentially no corporate debt.

We adhere to a simple and straightforward capital structure framework as follows. We believe that maintaining low leverage is the most prudent strategy for public lodging REIT. Based on our base case, long-range projections which assume no new equity assurance, we expect net debt to EBITDA below 3 times by 2016.

Our overall capital structure acts as a defensive tool to mitigate the risk of lodging cycle volatility. We continue to believe in the value of a simple capital structure and have a bias against preferreds and converts.

We have significant borrowing capacity by maintaining approximately half our portfolio unencumbered by mortgage debt. We have no corporate debt other than our undrawn line of credit.

Our conservative balance sheet is a key element of our strategy. And we believe it enables DiamondRock to deliver superior shareholder returns across the lodging cycle with less risk.

Another benefit of our long-standing conservative balance sheet is a meaningful and sustainable dividend. We re-instituted our dividend early in this recovery and have paid a dividend for 11 consecutive quarters, returning over $160 million to our shareholders since 2011. Our current dividend yield is approximately 3% which is competitive relative to our peers and attractive in the current low-interest-rate environment.

Since our formation in 2004 we have returned more than $430 million to our shareholders through dividends. We are committed to paying a meaningful dividend and believe it is the cornerstone of our long-term shareholder return.

The Company has been thoughtful in positioning our balance sheet for upcoming capital needs, the most significant of which is the 2014 funding of our take-out commitment for the Hilton Garden Inn Times Square. After the refinancing of the Salt Lake City Marriott and disposition of the Torrance Marriott we expect to end 2013 with approximately $145 million of corporate cash, which will provide us with the option to fund the Times Square acquisition with cash on hand.

We're bullish on the outlook for lodging and DiamondRock. Today we have reaffirmed full-year guidance. For 2014 we are well positioned to benefit from several Company-specific growth catalysts including above-market growth at our renovated hotels; traction from new asset management initiatives; strong Group pace; and the acquisition of the Hilton Garden Inn Times Square.

I will now turn the call over to Rob.

Thanks, Sean, and good morning, everyone. It's been a very exciting seven months in asset management as we have been focused on implementing various initiatives in order to further unlock inherent value in the portfolio.

It may be helpful to begin my remarks today with a quick overview of asset management's critical objectives for 2013. Our first objective was to get the right teams in place at both DiamondRock and at the hotels. In particular, there was a significant emphasis on putting the right leaders in our properties.

We have been proactively working with the management companies to identify the best people to lead these efforts. And in this quarter alone, there have been five hotels with new general managers at key assets like the Chicago Marriott, the Boston Westin and Frenchman's Reef. By the end of 2013 approximately half the GMs in our portfolio will be new.

We have also replaced four directors of revenue management; two directors of finance; and one director of sales and marketing this quarter. These new players are aligned with our strategic vision for their respective hotels and were selected due to their exceptional ability to drive future hotel operating results. We believe that these new teams, with our collaboration, are positioning our hotels to deliver strong operating results.

Our second objective was to ensure that our $140 million capital initiative was executed on time and on budget. We're pleased with the tremendous progress on this initiative, and through the end of the third quarter, we've spent approximately $75 million on this program and expect to spend approximately two-thirds of the remaining capital during the fourth quarter, which will result in minimal disruption.

We completed renovation of the two New York City Courtyards earlier this summer and the Lexington Hotel rebranding and renovation is now complete. The Lexington Hotel is a multi-year story and we expect it to outperform the market during 2014 and 2015, generating adjusted EBITDA in the low $20 million range during 2014 and ramping to north of $30 million over the next few years. In addition, we have started the renovation on the four hotels acquired in 2012, with work on the Minneapolis Hilton to begin shortly.

One of the projects we are most excited about is the renovation of the Washington, D.C. Westin. This transformative renovation will reposition the hotel to attract a higher rate of transient and incremental group business. There's been pent-up demand for this hotel and the new product will allow us to gain significant market share and profitability.

The reaction from meeting planners has already been very encouraging and the 2014 booking pace is up approximately 22%. We expect this asset to be another multi-year opportunity after potential customers can see the new product. We are long-term believers in the D.C. market, and the successful implementation of our strategy at this hotel should allow us to outperform the market for several years.

The Westin San Diego renovation is also expected to reposition the hotel, allowing it to substantially close the rate gap with the Westin Gaslamp located just two blocks away. Our location proximate to the new federal courthouse is an additional driver of demand, as we have recently secured a $250,000 courthouse-related piece of business for March 2014.

Finally, our third objective was to work with each hotel to identify opportunities within the portfolio to improve both sales strategies and reduce operating costs. This has taken some time and we expect the process to be ongoing, though we're pleased with the progress to date as we head into 2014.

We are focused on developing comprehensive sales strategies and revenue management plans at each hotel. We identified a number of hotels with basic revenue enhancement opportunities, such as reclassifying standard rooms to premium view rooms as well as implementing dynamic e-commerce programs and enhanced package pricing.

An example of the impact from this approach is reflected at the San Diego Westin, where our team diligently worked with the hotel executive team and identified the opportunity to aggressively push rate by shifting the business mix towards business transients. The strategy paid off as the hotel's RevPAR growth outperformed the market by approximately 400 basis points.

Another area that we're focused on is implementing highly profitable resort fees. We added a new resort fee in the third quarter at Sonoma and we'll be adding a resort fee in Vail during the fourth quarter, as well as increasing the resort fee at Frenchman's Reef. The impact from this initiative will generate an incremental $1 million annually in profit.

Nevertheless, our operating profits are frankly not where we want expect them to be, though our dedicated approach is to work with each individual hotel in order to begin realizing the potential upside. More specifically we're analyzing various key performance indicators with our teams, including cost per occupied room, food costs, and costs per available room for support departments.

We're reducing exposure through a systematic approach to controllable expenses, as well as improving productivity and setting stretch goals for our properties.

A few successes include savings of over $375,000 at six properties in the telephone department; $185,000 at two hotels related to parking operations; and $100,000 at one property from improved productivity.

Although we've only begun to tackle the various opportunities throughout the portfolio, we're confident that our plan will result in significant margin expansion. We are extremely excited about our team, our new leaders at our hotels, and our approach to both increasing revenues and controlling expenses in order to maximize the value of all the opportunities within this portfolio.

I will now turn the call over to Mark for closing remarks.

Thank you, Rob. Looking forward we're excited about how DiamondRock is positioned for growth in 2014, 2015, and beyond. There a number of near-term catalysts.

First, our renovation program is set to begin to pay off. We're just entering into a spite of reaping the return from our $140 million capital investment program. Moreover, the renovation disruption is largely behind us and we go into next year with tailwinds from easy comparisons.

Second, 2014 should benefit from strong group performance as our group pace for next year is up over 10%. And finally, our new asset management initiatives will begin to harvest both revenue and margin expansion opportunities, starting next year.

With that, we would now like to open up the call for your questions.

(Operator Instructions) Ryan Meliker, MLV & Co.

Just a couple of quick questions here. First of all, I know you've got a few renovations that are trickling into the first quarter next year. Are you expecting any material disruption in the first quarter or are you really expecting all the disruption to be played out through the end of this year?

It is Mark. On the renovation disruption, for the full year 2014, we don't expect material renovation disruption. There's always a little in every year, but we do not anticipate significant disruption in Q1 of next year or in any quarter of next year.

Okay, that is helpful. And then Rob, I'm wondering if you might be able to help us think a little bit about where you think this portfolio's margins can get to. I know -- I'm not looking for guidance for 2014, but just as you have now been there for a few months and you have been able to digest a lot of the portfolio and where the properties are running, where do you think that the margin should be on a stabilized basis across the portfolio?

Well, I think we have great opportunity throughout the portfolio, Ryan, and we believe there is great upside throughout.

Ryan, this is Sean. I think when you think through where our portfolio has performed so far this cycle, we are a couple hundred basis points below where we think we should perform. When you look for the next couple of years, it's certainly not going to be a one-year return. But over the next two or three years we should expect to recoup that lost margin that we didn't get earlier in the cycle.

And that's really what our both revenue enhancement opportunities and asset management, as well cost containment initiatives are intended to accomplish.

So basically a couple hundred basis points above where you are today is what would make sense from a today standpoint -- (multiple speakers) margins could go up beyond that is the cycle continues to recover?

No, we would expect a couple hundred basis points above where the market margins move as we recoup those lost margins is the best way to think about it.

Okay, that's helpful. And then just real quickly, lastly, with regards to the Torrance Marriott sale, I'm not sure how much color you can give us. But can you give us an idea of who the buyer was or the type of buyer and how the appetite was for that asset?

Ryan, it is Mark again. We went to market; we engaged a national broker. We had numerous bids on the asset. The particular buyer that is under contract, we have a confidentiality agreement. I can tell you it's an offshore buyer and this was a strategic entree into the US market for them.

Okay. And were there a lot of bids for the asset or was this really negotiated with one or two guys that were pretty focused on it?

Now, there was aggressive competition for the asset. There were a lot of offers on the hotel.

Great. And do you have anything else that you guys are looking to sell as non-core over the next 12 months or so?

Yes, as we mentioned in the prepared remarks, there's two other assets we have identify to sell in the next 18 months. We're going to be disciplined about the exact timing of selling those to maximize the proceeds for our shareholders. But yes, there are other assets.

As we mentioned last call, we had about $150 million in total asset value of non-core assets to monetize. Basically Torrance at $76 million represents about half of that.

Great, that is really helpful. That's all for me. Thanks a lot, guys.

Jordan Sadler, KeyBanc Capital Markets.

It is Austin Wurschmidt here with Jordan. Just wanted to touch on the F&B growth you guys experienced. You mentioned it was better than you anticipated. And I was just curious, is this due to better group and banquet activity? Or is it something attributable that you guys are doing differently to generate additional business?

Austin, it is Rob. It is due to banquet activity from the groups.

But are you generally a seeing people plan more types of banquet activity than you were before? And when you look into 2014 with the group business that you guys have already on the books, do you expect that should continue to grow?

Yes, we do. We're seeing some really great short-term group catering contribution in the fourth quarter. So we do expect that to grow given the basis of our group booking pace for next year.

Thanks, that is helpful. And it sounded like property taxes impacted margins pretty materially at several of your properties and you have talked about the upside that you've got in margins. When you look to 2014, without providing specific guidance, do you anticipate a material impact on margins from property taxes again next year?

No, Austin, I think for 2014 when you look at where the reassessments are, there shouldn't be any big outliers in 2014. Our property taxes on 2013 were driven by both Chicago as well as Colorado's reassessment years. Chicago is a tri-annual reassessment and Colorado is biannual.

And so that -- it just so happens that as the calendar hit this year, we were comparing to prior period's that were pretty low property tax years because of where we were in the economy. So we would expect our 2014 to being normal inflationary increases to the property taxes.

The other thing on property taxes that I would note is that we are constantly appealing property taxes. About half of our portfolio today is under appeal. We do not record wins or losses on appeals until they get settled, so that's something that we are constantly working through.

Thanks, Sean, and then just one last one. With all of the group business that you guys have on the books now, which quarters next year do you expect to have the most compression from that additional group that is already on the books?

Austin, it is Rob. It is quarters 1, 3, and 4.

Thank you. That's all I've got.

Steven Kent, Goldman Sachs.

This is (inaudible) on for Steven Kent. The Marriott Suites in Bethesda is having a particularly difficult year on RevPAR and EBITDA. Apart from the weakness in D.C., are there other factors affecting performance at the property?

Yes, this is Rob. We've been working with the hotel quite diligently over the past quarter in readjusting their sales strategy. And it really just comes from a change in how the market is shifting and the property is readjusting their approach to the market.

Understood. You mentioned the government shutdown I think in your prepared remarks as the press release. Have you quantified the EBITDA or RevPAR impact of this shutdown for Q4?

Yes, it is about $600,000 in both revenue as well as EBITDA impact for the fourth quarter, primarily in our two Washington, D.C. assets.

Understand. My last question, on the Lex, you did make some very constructive remarks on the $40 rate lift and the good corporate rate. How is this tracking to your prior estimates? And I understand that it's still early days since the reopening. But can you talk about some of the corporate bookings you are seeing for 2014 at the property?

Yes, this is Mark. At the Lexington we've had about 100 corporate accounts go through. We have been added to some of the best accounts in New York City through the Marriott programs already.

We are not into RFP season, or not fully through the RFP season for next year but we are tracking ahead of schedule with the corporate accounts. We actually added more corporate accounts than we would have anticipated given the mid-year entry into the brand conversion. So we are ahead of expectations on that front.

[Thomas Allen], Morgan Stanley.

So you reaffirmed annual guidance despite higher renovation disruption. Where is the outperformance coming from? Is it all the F&B that you talked about? And I guess it's also surprising given that you -- I know you have some D.C. impact, too, even though it's small. Thanks.

Thomas, this is Sean. The outperformance -- F&B was clearly a big component of it, but that's really a subset of the outperformance in group. We've had very strong year-over-year in the year, for the year bookings for group. So, our Chicago Marriott as well as our Boston Westin were big drivers of our outperformance.

So I think the way to think about our results and our maintaining guidance is that the disruption was a couple million dollars higher than we thought. But that was essentially offset with outperformance on the group side, Boston and Chicago being the two drivers there.

Helpful, thanks. And can you just give us your updated thoughts on the current transaction environment? Thanks.

Sure, Thomas, this is Mark. As we stated on our investor day in September, we are not actually actively looking in 2013 to do acquisitions, because we're focused on the interim growth opportunities. We are, obviously, looking at every deal that comes across our desk.

The market, we can tell you from the sales effort we had, is very robust. We actually got more offers than we anticipated on the Torrance Marriott when we brought it to the market.

It seems like there is an imbalance between great opportunities and the amount of capital that is out there. So we're seeing valuations potentially going upwards from where they have been earlier this year.

Very helpful. Thank you.

Rich Hightower, ISI Group.

A quick question on the Salt Lake City refi. Can you tell us what debt to gross asset value is pre- versus post-refi really quickly?

That was a [mid-60s] LTV on the asset, Rich.

Okay. What about previously?

Our total investment in the asset is in the [low 50s]. It is $53 million or $54 million. So we've taken more than our basis out of the asset at this stage.

And I know obviously cash is fungible, but just a question on sources and uses. It does say that part of the excess proceeds from the refi could go towards the remaining funding needs for the Hilton Garden Inn. You've got an untapped revolver. I think it is priced at less than 2%. Why not fund some of that off the revolver and just pay it down over time?

I think our view generally on funding the Times Square is we wanted to make sure we maintain significant capacity for that funding, which we did through some of our earlier in the year financing, Salt Lake City as well as the upcoming sale of Torrance. We're going to end the year at about $145 million of cash.

The reason why we have a bias to keeping the line dry is generally, as an organization, have a bias against corporate debt from a risk mitigation strategy. But also as we look forward towards our refinancings in 2015 and 2016, we want to keep that line dry as an option for funding those refinancings in the future.

Okay, that is helpful. Thanks. And then really lastly, just one quick question on the guidance for 2013. I don't want to fixate too much on the fourth quarter.

But just given what you know about the portfolio today, as far as we are into the quarter, it does seem like between the high and the low there's a $10 million gap in terms of EBITDA. What uncertainty does that maybe reflect for the rest of the year if any, if I'm reading that correctly?

Rich, this is Mark. We're still sitting here getting our October results in and finalizing those. There -- in the quarter, for the quarter group business pickup exceeded our expectations last quarter.

We are comfortable with the guidance range, so we reaffirmed the guidance range. There's several million dollars of variability based on how the group plays out how the ultimate government shutdown plays out. So we wanted to keep the range the way it was.

Okay. That's all for me. Thanks, guys.

Chris Woronka, Deutsche Bank.

On the Courtyards that came out of the renovation, I know they are running really high occupancy and I think you talked about rate lift you expect to get. I don't think a lot of it came through in the third quarter. Is that just the timing function, does it take another quarter to ramp up? Or how should we look at those going forward?

Chris, it is Rob. It's a great question. I was just on the property on Wednesday for a very long meeting. And we're spending an enormous amount of time on their sales strategy and we're finding new opportunities there. So we see additional growth factors at both Q4 and well into 2014, as well.

Just to give you one example, we went out and just did a neighborhood canvas, found a new group, a new corporate account that can potentially bring us 1000 rooms on an annualized basis. I met with the meeting planner on Wednesday at the property and just said thank you for coming through.

And she just raved about the renovation, the room size of the hotel and just said she can't believe what an incredible product there is like that in New York City. So we feel very good about the future for the rate growth of this asset.

Chris, this is Sean. The other thing worth noting is our third quarter, because of the 20 less days, is really not comparable for our Marriott assets. When you think of how both those assets performed relative to our expectations at the beginning of the quarter, they both outperformed. So we are pretty -- we are pleased with the direction that they are going.

Clearly Rob is going to spend a lot of time to maximize the operations that those hotels. But the third quarter it's just very noisy on a year-over-year comp. So I would caution you against reading anything into the third quarter on a standalone basis.

Okay, that's great. And then on the sales you talked about two more planned within the next 18 months. I thought maybe it might be a number a little bit higher than that. Are those two pretty firm and then there are others that you are just looking at opportunistically? Or do you think you are not likely to sell more than two?

Chris, we really like our portfolio today. There are a couple assets that we'd consider monetizing, but we're trying to be very careful about not rushing the market when we think that there is increased value in the assets. So we're being very thoughtful.

There's two that are teed up. If we move through those two then there might be one or two behind that. But we don't want to -- generally, we love our assets. So it's not like there's a huge pool to monetize here.

Okay. And then just finally on the -- I know you talked a lot about group pickup in the quarter for the quarter. Do you think -- two-part question, do you think group behavior is changing at all in terms of waiting, which I guess intuitively wouldn't make much sense given the high occupancy levels? But also do you think that's a function of just things getting better? Or was there some catch-up there from some of the things that didn't come through earlier in the year?

Now, I think it is things are getting a bit better. I don't believe it was catch-up. It was just companies are realizing the importance of having meetings. We're just seeing the short-term side of it growing every quarter, which is very encouraging to us.

Okay, very good. Thanks, guys.

Nikhil Bhalla, FBR.

Mark, I just wanted to ask you a little bit about the flow through as you expect for about two-thirds of the EBITDA that has not been renovated this year into next year. What do you think we could get? Would it be a 1.5 time flow-through or 50% flow-through or would it be something more? Any color on that would be appreciated. Thank you.

Sure, a couple of things. Let me clear up that -- we have one-third of our portfolio that does get renovated from this $140 million capital program. A lot of our other assets have been renovated in the prior three years, so it's not like we are going in with the balance that is all in need of capital. Most of it is in fantastic shape.

As far as flow-through, we are right now in the midst of budget season and rolling up. Group, obviously it will be good and that will help flow-through next year. But I think it's too early for us to give you an evaluation of what the flow-through is going to be until we get to the budgets.

Okay. And just in terms of Washington, D.C. as it impacts your portfolio, it seems like your pace is very strong for D.C. next year. How would you characterize your portfolio to maybe do a little bit better than what the rest of the market does next year?

For Washington, D.C., yes, we do.

Okay. And you mentioned a couple of assets that are in the asset sale process right now. Any sense of what that might fetch?

Well, I will go back -- we don't have anything else that is imminent right now. Our policy is not to talk until we have something under binding contract or already sold. As we said on our last earnings call, there was about $150 million of assets we were looking to recycle. So we've done about half of that with the Torrance Marriott sale.

The other two that were identified, we're not in a rush to sell them for a price that doesn't make sense. So we're trying to be very thoughtful about when we bring them to market and what the best time is to sell those assets. But again, I think the 18-month timeframe is the right time frame.

And these additional two assets, were they contemplated in your remarks in the last quarter?

Yes.

Okay, great. Thank you.

David Loeb, Baird.

Can I just go back to the guidance for a minute? Not to beat a dead horse but pretty much everyone else has decreased fourth quarter guidance. You guys kept it the same but increased the disruption, which is at sort of a net increase.

Can you just give us a little more color about your confidence or perhaps some color on the government shutdown? Maybe that was less impactful for you guys.

Sure, David. A couple of things to consider. So our disruption went up about $2 million, but as we mentioned and as Sean just commented in the Q&A, we had outperformance, particularly on the group side in the quarter. So, some of that has already been offset in the third quarter.

For the fourth quarter we have about 8% of our portfolio with D.C. exposure, so it's not a huge part of our business. We have put in the government disruption to the best we can in our forecast, but we have a pretty good handle on how the properties are going to do and feel comfortable with our current guidance and where we are going as a Company.

So you didn't see any government-related weakness in other markets.

There was sporadic impact in some of the other markets, but generally those markets had strong enough transient demand to offset that.

Okay. And just to shift to acquisitions, what's your thought, your appetite for acquisitions and your view of the acquisition market here? You did sound pretty bullish on where we are in the cycle and on owning hotels at this point in the cycle, so are you thinking of owning more?

That's a great question, David. Well, as you know and as we mentioned on our Investor Day, 2013 has really been a focus on the capital program and internal opportunities. As we move into 2014 we will carefully evaluate our cost of capital and the opportunities in the marketplace.

But I would say that we are increasingly discerning as we move through the cycle. But of course, if we can find a great deal that adds value for our shareholders, we're going to carefully consider it.

Okay, great. Thanks.

Lukas Hartwich, Green Street.

Can you remind us of what the ADR gap was that the Lexington pre-renovation and what are you guys targeting for that?

The ADR gap from the closest competitor, the Marriott Eastside?

Either that or just the local competition.

The ADR drag from the local competition, the hotel brand around 80% of the ADR RevPAR penetration, pre-renovation, we expect the hotel to be able to make up that and be probably at parity, if not a little above parity as we get fully ramped up as an Autograph.

This is Mark. This is another benchmark. With the closest competitor a block away, and really the one that we use for underwriting analysis, there is pre-renovation about a $90 ADR gap. We were running higher occupancy but about a $90 ADR gap.

For every $1 we can close that is about $250,000 of incremental revenue. And we have underwrote to close about half of that.

Great. And then on the Hilton Garden Inn, I'm just curious if there are signage opportunities there, and if there are, what that is, what that means for DiamondRock.

Yes, so our deal, we bought this from a joint venture. And so as you may recall, this is a joint venture where they bought a distressed debt deal. There were a couple players.

One of those players controls the retail and the signage for both the Knickerbocker and this site. So they are going to retain those rights. So really it is the hotel.

That is one of the reasons our cost basis is so attractive at this fee-simple location is for a hotel at $450,000 a key at this location, we think we're getting a terrific bargain. But we do not have the signage or the retail rights.

That is helpful. Thank you.

Anthony Powell, Barclays.

I had a question on the group pace for next year. It's pretty strong. I wanted to ask how much of that group pace was related to citywide conventions in your markets, and if so, are those citywides going to be recurring in 2015 and beyond?

Hi Anthony, it is Rob Tanenbaum. A lot of the group pace is due to citywides. Boston in particular has a very, very strong year and Boston has a strong year going into 2015 as well.

Great. And just also on the supply situation in New York. There's a lot of supply coming on, including from your own hotels. How do you expect that to impact your current booking pace and your current -- your ADR outlook for New York? Thank you.

Our outlook for New York is strong. We are spending quite a bit of time with our respective teams in analyzing the supply impact and how we're marketing, and adjusting our marketing strategies with that.

But Anthony, on the group side and the pace side, we don't really own group hotels in New York. So the group and pace is not really going to be impacted by our New York portfolio. That's really our Boston, Chicago, and Minneapolis are the big drivers of our group pace.

Understood. Thank you.

Wes Golladay, RBC Capital Markets.

As we look to 2014, it looks like you guys have a lot of momentum going into the year. I'm just wondering if there's any difficult comps due to one-time events that we should be on the lookout for.

There is no specific one-time event that we think is going to be a major headwind going into next year.

Okay, and would that apply to the margin front, too, where you guys expect taxes or wages them or anything, or just plain run rate for next year?

Well, on an overall portfolio basis, we don't see anything that should be a major headwind for us. Now things [may] come up, but right now as we look forward, when we think about property taxes and support cost, wage models, most of those factors, there is nothing that is imminent that we think is going to hold us back.

Okay, and then when you look at the changing of the personnel at a lot of the hotels, as this caused any short-term pain on the performance of these hotels?

No, we're working with the brands and it has not. In fact, what we're seeing is that the change-outs have created a huge upside both from an employee satisfaction standpoint and a guest satisfaction. So we're seeing positive results quite quickly with those changes.

Okay, that's all for me. Thanks, guys.

(Operator Instructions) Jeff Donnelly, Wells Fargo.

Mark, there have been two unsolicited offers for hotel platforms in the past week. Do you think we're going to see more consolidation activity in the industry in the near term? And what role do you see if any for DiamondRock?

Okay, let me take that gently. There's two phenomena out there. There is the private to public -- sorry, the private is out there. There is a ton of money on the sidelines that, once again, lodging, because if you think about the various asset classes, lodging right now stacks up as probably as the highest-growth asset class.

And the financing markets have continued to get much, much better. And the LTVs are going up and the ability to get cheap mezz and other financings for corporate transactions is really quite phenomenal.

The deals that we have seen so far, there's usually something inherent in those deals that the market probably doesn't fully appreciate. So I think there will be a lot of active capital on the sidelines.

I don't know how many offers for public companies, all-cash offers are really going to mature and actually come to pass, but I think that people are watching. It's a very interesting asset class. I think a lot of these companies are trading below NAV and so that activity will remain.

The public to public, that is something we don't like to comment on.

And maybe just related to this, how do you think about the discount to replacement cost? You were talking about the acquisition market before, but I'm curious if you think that gap is narrowing or if that gap is in fact, closing at all just because of their property types like multifamily or whatnot are bidding up land prices and construction inputs?

What we are watching now is obviously prices have increased in hospitality. But the appetite for development sites and for alternative uses, the cost of construction, all those have increased a lot in the last 12 months. So probably the discount to replacement cost has narrowed a little bit, but it's still pretty wide when you're looking at the price of current assets in the marketplace.

Is it fair to say, I think you touched on it, but do you think there's sufficient debt capital out there that, to the extent that are private players out there looking for large portfolios, regardless of where they are held, that higher leverage options are available for them?

Yes, there's a lot of private equity on the equity side and there's a lot of debt capital that's available today. And I would say in the last 6 to 12 months the ability to get the higher leverage and lower cost mezzanine debt has increased.

And just switching gears actually, just to your hotels, how are you guys thinking about the Vail Marriott now that we are coming into season this year? And maybe as a follow-up, Vail is looking to expand its summer season offerings in 2014 and 2015. Have you guys been in talks with them about that initiative?

And just curious on your thoughts on how that can impact and just rounding out your year-round demand, and maybe how you think about the valuation there?

Jeff, it is Rob. And we saw -- this past summer we saw incredible demand during the summer season. Vail put out -- did quite a bit of work upon the top of their mountain. They got a ropes course. They've got quite a bit going on there.

So we're seeing incredible demand from just a leisure standpoint as well as a group focus as well, utilizing our Marriott system. We had very strong group during the summer months. So we see the seasonality really being smoothed out.

I had previously asked the management of this hotel for Host when I was with them back in the late 1990s, early 2000, and it's incredible to see the difference over the last 10 years of how this market has truly become a much more year-round resort.

And actually, Rob, is there any update on your thinking around converting, I think it is the Northeastern University space in Boston, back into rooms?

Yes, we have two more years on that lease.

But you haven't made any firm decisions there?

No, not at this point.

Okay, thanks guys.

There are no additional questions. I would now like to turn the presentation back over to Mr. Mark Brugger for closing remarks.

Thank you, Lisa. To everyone on the call, we appreciate your continued interest in DiamondRock and we look forward to updating you next quarter with our full-year 2013 results.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.