Diamondrock Hospitality Co (DRH) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 DiamondRock Hospitality Co. earnings conference call hosted by DiamondRock Hospitality. My name is Bukendra; I will be your event manager today. During the presentation, your lines will remain on listen-only. (Operator Instructions) I would like to advise all parties that this conference is being recorded for replay purposes.

And now I would like to hand the call over to Mark Brugger, President and Chief Executive Officer. Please proceed, sir.

Thanks, Bukendra. Good morning, everyone, and welcome to DiamondRock's fourth-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, we are required to give the prescribed legal preamble 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 risks 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 about industry fundamentals. We are currently in the middle of a solid lodging recovery, driven by steady demand growth and limited new supply. We are always monitoring trends and focus on tracking five key corollaries to hotel demand growth. These corollaries are tracking well, with [employments] trending up, corporate profits at record levels, unemployment declining, consumer sentiment at five-year high, and GDP forecasted to accelerate in 2014.

Interestingly, current-cycle GDP growth is tracking at a CAGR of around 2.7%, which is more than 30% below a normal recovery. The silver lining of this slower than normal GDP growth is the delay of new hotel supply and, potentially, a more elongated lodging cycle.

Our own analysis gives us strong conviction in the continued strength of lodging fundamentals over the next several years and a firm belief that 2014 is a great time to invest in lodging.

Looking back at 2013, industry RevPAR grew a healthy 5.4% as the supply-demand imbalance continued to favor lodging fundamentals. Supply ran well below the historical average, remaining muted in 2013 with growth under 1%. Demand grew a solid 2% and set a new record for room nights sold.

Now, against this positive industry backdrop, let's drill down into how we position DiamondRock to maximize long-term value. I would like to emphasize three strategic accomplishments during 2013. First, we made significant capital investments during 2013 that we expect to unlock tremendous upside potential at the renovated hotels. The best example of this initiative is the Lexington hotel, which we transformed through a comprehensive renovation and rebranding that we expect to be a major growth catalyst in 2014 and 2015.

In addition to the Lexington, we renovated seven other hotels. Companywide, our $140 million capital investment program is now substantially complete and has positioned DiamondRock for growth over the next several years.

The second strategic accomplishment I would point out is enhancement of our asset management function, which began last year with the hiring of Robb Tanenbaum as our Chief Operating Officer. Sean will provide an update on our progress in asset management in a few moments.

The third and final strategic accomplishment revolves around capital recycling. We remain committed to creating value by selling non-core hotels and redeploying those proceeds into higher-quality and higher-growth hotels. Specifically, in 2013, we sold the Torrance Marriott, a non-core hotel with an average RevPAR below $100 at a 5.8% cap rate. We will redeploy those proceeds into the Hilton Garden Inn Times Square, which is expected to generate RevPAR above $250 and be almost immediately accretive with a projected EBITDA yield of 9% in 2015.

Most importantly, all of these strategic initiatives in 2013 were taken with one overarching goal: position DiamondRock for outperformance going forward.

For 2013, we were pleased with our portfolio operating results. Portfolio RevPAR grew 5.3%, excluding the three New York City hotels under renovation and the sold Torrance Marriott. The RevPAR increase was driven by the ability of our hotels to push rates, which was up 3.5% as the majority of our hotels exceeded prior peak occupancy levels.

The RevPAR growth led to hotel profit margin expansion of 45 basis points, which would have been even better but for some one-time items that Sean will cover.

Turning to specific hotel results, let me highlight several hotels that outperform during 2013. The Vail Marriott Mountain Resort was a top performer, with RevPAR growth of 15% and solid margin expansion. The hotel implemented new revenue strategies and achieved record room rates during the holiday season. We have identified new opportunities for this hotel, including adding a resort fee and potentially adding valuable new keys.

The JW Marriott Denver had another strong year, with RevPAR growth of over 10%. The hotel continues to be a market leader, with market penetration index of over 130%.

The Lodge at Sonoma resort was another top performer, with RevPAR increasing over 10%. We instituted a new resort fee at the hotel in September which will contribute over $375,000 of EBITDA annually and boost margins. In 2013, profit margins evidenced already-strong growth of over 500 basis points at this hotel.

The Hilton Boston gained momentum during 2013 with the completion of a $7 million renovation and the implementation of our new sales strategy. The hotel grew annual RevPAR by 8.7%, with growth accelerating each quarter, culminating in 22% RevPAR growth this past quarter. The hotel gained over 4 percentage points of market share for the year. Even more exciting, we have a high ROI opportunity to create over 40 incremental rooms at this hotel by splitting underutilized suites.

The Westin San Diego was another success story in 2013, with RevPAR growth of over 7%, as our new revenue strategies allowed the hotel to gain more than 11 points of market share in the year. As importantly, just this month we completed a comprehensive renovation that fundamentally repositioned the hotel. The renovation includes several ROI initiatives, including the creation of two legal war rooms to capitalize on the new $300 million federal courthouse just across the street. The hotel is really set up to succeed.

Before moving to our outlook, let me provide an update on the renovation and rebranding of the Lexington hotel, which was completed late 2013. This is one of the most exciting projects that DiamondRock has ever undertaken. Our investment thesis was straightforward: buy an underbranded and undercapitalized hotel in an A-plus location and then make capital investments to reposition and upbrand the hotel from a Radisson to Marriott's Autograph Collection. We are already seeing early signs of success with post-renovation rate growth of approximately $40 and more than 60% of the business now coming from Marriott reward members.

As significant, the mix shift to higher-paying segments is ahead of schedule, with 80% of our revenues generated from premium business-transient customers. A powerful change from the pre-conversion mix that had 80% of its revenue come from the lower-rated leisure discount segment.

Part of this early success is attributable to the great reception from premier special corporate accounts such as Accenture, J.P. Morgan, General Dynamics, and TWC. We expect the hotel to continue to ramp in 2014 and 2015.

Our outlook for DiamondRock reflects both positive industry dynamics and our unique drivers. Today, we announced a dividend increase of 21% and introduced 2014 guidance of RevPAR growth of 9% to 11%, adjusted EBITDA of $230 million to $240 million, representing an almost 20% increase from 2013 at the midpoint of the range; and adjusted FFO per share of $0.86 to $0.90.

The midpoint of our guidance range implies hotel adjusted EBITDA margin expansion of over 250 basis points, which is probably 100 to 150 basis points above industry average. Our 2014 margin expansion is expected to recover more than half of the 200-basis-point margin shortfall to our peers that occurred over the past few years.

This progress in closing the gap is a testament to the effectiveness of our new asset management initiatives led by Rob. In addition, we expect our margin expansion will likely exceed the industry average next year as well.

Our guidance reflects the fruits of our hard work in 2013. During 2014, we expect 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.

Group pace. Group pace for 2014 is up a robust 9%, which will add compression and allow our hotels to push rates across all segments in 2014. There are a number of specific Group drivers within our portfolio. Our 2 Boston hotels, the Westin Boston Waterfront and the Hilton Boston Downtown/Faneuil Hall, are collectively pacing up 20%, benefiting by Boston's record citywide, up over 40% in room nights from last year. Also, Group will exceed prior peak levels at the Frenchman's Reef and Morning Star resorts, up over 50%.

Other standouts on the Group front include the Worthington Renaissance and the JW Marriott Denver.

One final update. The Hilton Garden Inn Times Square Central, currently completing development, is progressing well, and we expect it to open later this summer. This will arguably be the best-located urban select service hotel in Manhattan. It is worth noting that we put the hotel under contract at a fixed price over three years ago; hence, we are paying 2011 prices for a 2014 hotel. At $450,000 per key, we believe this extraordinarily well-located hotel will immediately create real shareholder value. Our guidance implies roughly $5 million of EBITDA from the hotel this year.

Now, I will turn the call over to Sean Mahoney, our CFO, who will provide additional detail on our operating results and balance sheet. Sean?

Thanks Mark. Before discussing our fourth-quarter results, I want to emphasize that fourth-quarter prior-year comparisons are slightly impacted by Marriott's reporting calendar change. The Marriott hotel fourth quarter includes five more days than last year, which results in approximately 3% additional room nights this quarter. Please note that this is the last time that our quarterly comparisons will be impacted.

In addition, on another housekeeping item, the pro forma RevPAR and margin data excludes the Torrance Marriott, which was sold during the fourth quarter.

Now, let's turn to the fourth-quarter numbers. Overall, it was another solid quarter. The Company reported hotel adjusted EBITDA of $52.8 million, corporate adjusted EBITDA of $49.3 million, and adjusted FFO per share of $0.17. While overall results were in line with our expectations, the portfolio results were negatively impacted by softness in the New York City lodging market and lower than expected group and transient pickup in Chicago. Fortunately, the impact of these markets was mostly offset by a strong quarter at the Vail Marriott and outperformance at our Boston hotels, Frenchman's Reef, and the Alpharetta Marriott.

The fourth quarter reflected some exceptionally strong results at many of our hotels, with 6 hotels reporting double-digit RevPAR growth. Our portfolio generated pro forma RevPAR growth of 3.3%, which was the result of a 3.8% increase in rates, slightly offset by a small decline in occupancy primarily in our New York City hotels. Our fourth-quarter pro forma hotel adjusted EBITDA margin contracted 188 basis points. Our margins were negatively impacted by approximately [115] basis points from several one-time drivers, including transition costs incurred in conjunction with the rebranding of the Lexington hotel and manager and brand changes at the Oak Brook Hills Resort; the addition of franchise fees at the Lexington hotel as compared to the fourth quarter of 2012, when the property was independent and paid no franchise fees.

Property tax increases at our hotels in Chicago and ramping union costs at the Boston Hilton. Overall, we were pleased with the portfolio's performance during the quarter and full year. Excluding the 3 renovated New York City hotels, we achieved 2013 RevPAR growth of 5.3%. The year-to-date RevPAR growth led to house profit margin expansion of 68 basis points and hotel-adjusted EBITDA margin expansion of 45 basis points.

Similar to the fourth quarter, full-year margin expansion was held back by approximately 90 basis points due to a few specific items such as the one-time Lexington hotel re-launch costs, increases in property taxes, and the Hilton Boston Union costs.

Now let me spend a few minutes highlighting some individual hotel achievements. The Vail Marriott had a tremendous quarter, achieving nearly 30% RevPAR growth and approximately 1300 basis points of house profit margin expansion. Hotel revenues increased over 32% as a result of several factors, including a record Christmas week; a 63% increase in group revenues; and the implementation of our result phase, which generated approximately $200,000 of incremental revenues during the quarter.

The Charleston Renaissance achieved impressive RevPAR growth of 17.9% and 567 basis points of hotel-adjusted EBITDA margin expansion. The hotel benefited from the successful implementation of an aggressive strategy to drive incremental rates. The Alpharetta Marriott was another bright spot for the Company, with 13.8% RevPAR growth and impressive 946 basis points of margin expansion. The hotel has benefited from the recent moves by General Motors and Ernst and Young into Alpharetta.

Frenchman's Reef hit its stride during the fourth quarter, with RevPAR growth of 12.8% and 286 basis points of hotel-adjusted EBITDA margin expansion. The Boston Hilton grew fourth-quarter RevPAR 22% and picked up 9.5 percentage points of market share; both great data points that reinforced our decision to introduce a new revenue management strategy at the hotel.

Partially offsetting these performance was the New York market, which faced difficult Hurricane Sandy comparison. Additionally, the historically predictable special demand generators of the New York City Marathon and the Thanksgiving Day Parade were less robust than usual.

Despite the challenging market, the Lexington hotel gained 6.8 percentage points of market share during the fourth quarter as a result of the successful repositioning and rebranding of the hotel.

In addition, our Chicago hotels finished modestly behind expectations due to a challenging Chicago market, with citywide activity was down 30%. This contributed to group slippage at the Chicago Marriott and hurt our ability to push transient rates at the Conrad Chicago.

Shifting gears to our Group business, our in-the-quarter Group pickup increased 35% compared to what we picked up in the fourth quarter of 2012. Our Group business is well positioned to outperform in 2014, with Group revenue pace up 9%. Our 2014 Group pace is being driven by a 5% increase in rooms and approximately 4% increase in average daily rates. We entered the year with 71% of the forecasted group business on the books.

Before discussing the balance sheet, let me provide an update on the asset management initiatives that Rob and his team have put in place to create value in 2014 and beyond. Our asset management team has spent significant time identifying opportunities to improve sales strategies and implement cost containment initiatives. We are pleased with the progress the portfolio has achieved to date, and we see a number of additional significant opportunities.

Let's start with the summary of our revenue management achievements. First, we identified opportunities to add resort fees at Sonoma and Vail. This initiative resulted in $300,000 of incremental revenues during the fourth quarter, and we expect to earn approximately $800,000 during 2014.

Second, we identified a number of hotels with basic revenue enhancement opportunities such as reclassifying rooms to premium tiered rooms, which has enabled us to increase rates. We estimate that these initiatives resulted in approximately $100,000 of incremental revenues during the fourth quarter.

Third, we took advantage of favorable demand trends in certain markets to aggressively drive rates. Specific successes included the restricting last-room availabilities at the Charleston Renaissance, which contributed to a 13.7% rate growth.

We also took advantage of a strong Christmas week at the Vail Marriott. The hotel achieved a record average rate of over $1400, which contributed to over 18% rate growth during the fourth quarter.

Rob and our asset management team are working diligently to identify additional revenue opportunities in 2014. And we are confident in our ability to do so. We expect our renovated hotels, including the Weston Washington DC, the San Diego Weston, and the Lexington hotel to leverage their 2013 renovations and deliver double-digit rate growth in 2014.

In addition, we expect the recent implementation of a new revenue management strategy at the Conrad Chicago to take a hold in 2014 and to contribute to double-digit rate growth at the hotel.

We are also working to identify cost-containment opportunities across the portfolio. Examples include the opportunity to eliminate redundant positions at several hotels, as well as consolidate operations, with expected annual savings close to $1 million. Implementing energy conservation projects throughout the portfolio, including lighting retrofits and installing low-flow plumbing fixtures at certain hotels. In total, the average payback of these projects is two to three years. An example would be installation of low-flow toilets at the Boston Westin that resulted in an immediate 24% reduction in water consumption. We restructured telephone maintenance contracts at 17 of our hotels, resulting in over $700,000 of cost savings. Finally, we restructured the parking contracts at 5 hotels, which are expected to result in $500,000 of annual savings.

Another asset management focus has been the evaluation of value-creation ROI opportunities within our existing real estate. We have uncovered many, and most significant prospects and successes are as follows. We added 15 incremental rooms to the Lexington hotel during the 2013 renovations. We added 5 new rooms to the Courtyard Midtown East during the 2013 renovations and are evaluating adding 2 more rooms through splitting 2 existing suites. We expect to add over 40 additional rooms to the Boston Hilton through splitting existing suites. We expect to add 13 new rooms at the Vail Marriott through splitting 4 underutilized suites and reconfiguring a corridor to allow for 9 additional rooms.

We expect to add 4 new rooms at the Westin Washington, D.C. through the elimination of an outdated presidential suite and conversion of an underutilized meeting room. We expect to add 3 new rooms at the Lodge at Sonoma by moving an existing meeting room and fitness center to space that is currently vacant.

We plan to convert unfinished space at the Boston Westin into 6500 square feet of valuable meeting space, with an estimated IRR over 20%.

I also wanted to touch on steps we are taking at the Oak Brook Hills Resort, formerly the Oak Brook Hills Marriott. During the fourth quarter, we exercised our rights under the management contract to terminate Marriott as both brand and manager to enhance exit value and provide operating flexibility. The hotel is now known as the Oak Brook Hills Resort, an independent conference facility, and is operated by Destination Hotels and Resorts, a leader in that segment.

We believe we have only begun to maximize opportunities in our portfolio. As we look ahead, we remain confident that our asset management team will continue to identify more opportunities as we delve deeper into the hotels with new ideas.

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 straightforward and low-risk balance sheet that has essentially no corporate debt.

We adhere to a disciplined capital structure philosophy that rests on five principles. First, we believe that maintaining low leverage is the most prudent strategy for public lodging REITs. Based on our base-case, long-range projection, which assumes no new equity assurance, we expect net debt to EBITDA of less than 3 times by 2016.

Second, we believe that our capital structure acts as a defensive tool to mitigate the risk of lodging cycle volatility.

Third, we continue to believe in the value of a simple capital structure and have a bias against preferreds and converts.

Fourth, we preserved significant borrowing capacity by maintaining approximately half of our portfolio unencumbered by mortgage debt.

And fifth, we have a bias against corporate debt and currently have nothing drawn on our line of credit.

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

Another benefit of our long-standing conservative balance sheet is the ability to pay a meaningful and sustainable dividend. Since our IPO, we have returned approximately $450 million to our shareholders through dividends. Today, we are proud to announce a 21% increase in our 2014 dividend, which reflects our confidence in DiamondRock's ability to fire on all cylinders during 2014. The current dividend yield is very competitive at approximately 3.3%. This past year, we took several actions to position ourselves for the coming year, with the refinancing of the Salt Lake City Marriott and the disposition of the Torrance Marriott.

As a result of these actions and excess cash flow, we ended 2013 with approximately $145 million of corporate cash, which provides us with the option to fund the Times Square acquisition with existing cash on hand. We will continue to focus on prudent capital allocation and be thoughtful in positioning the balance sheet for upcoming capital needs.

I will now turn the call back over to Mark. Mark?

Thanks, Sean. To sum up, our team is energized about the momentum at DiamondRock and our ability to create shareholder value in 2014. The lodging market dynamics are positive, and the execution of our strategic plan over the past few years will start to pay off in 2014. Consider that the midpoint of our guidance, what we believe to be the most likely case, translates into double-digit RevPAR for growth, EBITDA margin growth of over 250 basis points, adjusted EBITDA growth of almost 20%, and a 21% dividend increase.

Moreover, we enter 2014 with low leverage, $145 million of cash on hand, and an already-lined-up acquisition of a brand-new hotel in a world-class location. We have worked hard to put ourselves in the positions to deliver strong shareholder returns, and we remain excited about the future of DiamondRock.

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

Ladies and gentlemen, your question and answer session will now begin. (Operator instructions).

David Loeb, Baird.

Mark, I appreciate your comment about the upcoming acquisition of the New York asset, particularly Sean's comments about using the cash on hand to fund that. I'm wondering if you could talk a little bit more about your interest in additional acquisitions. What's your appetite? What are you seeing in the market? What are your expectations in terms of your ability to find attractively priced acquisitions in this environment?

Sure, David. Good morning. On future acquisitions, we are seeing some deal flow out there, but not a tremendous volume; probably something similar to last year's pace. As you know, in 2013 we just focused on executing the value-add opportunities with the stuff we bought. Going forward, we are going to remain disciplined. I think you will see us be opportunistic but measured. As deals surface and as we track down deals in the marketplace, that may mean we do deals this year or it may not, depending on what the pricing is in the marketplace. But our expectation is to actively look, but only pursue deals if they make sense for our shareholders.

Jordan Sadler, KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. You guys have talked over the past several quarters about public hotel REITs trading at discounts to any of these. I was just wondering if you could give us your updated thoughts on public valuations today. And then sort of how you stack that up against potential dispositions going forward.

Austin, good morning. It's Mark. Our perspective is that, although the lodging stocks have moved up, they are still generally trading at some discount to NAV. Certainly we think our stock is trading at a discount to NAV. Currently, if you look at the recent transactions in the marketplace, it looks like there is even been -- in the desirable markets, there has even been some cap rate compression, I think, because there has been a demand -- supply-demand imbalance of high-quality acquisitions in the marketplace. So that does bode well for selling non-core assets, although the compression hasn't been the same in the non-core markets. But as you know, we sold the Torrance Marriott for what we thought was a very attractive price last quarter. And we will continue to look at the few non-core hotels that we have and potentially monetizing those over the next 24 months.

Are you currently marketing any hotels today?

We don't comment on our disposition efforts until we have something under a binding contract.

Okay. And then just another one is the resort segment, as you guys mentioned, outperformed pretty handily in 4Q. And just curious what your expectation was for this group of hotels in 2014. If you could sort of stack that up versus the non-New York City RevPAR growth of 5.5% to 7.5%.

Rob, do you want to comment on that?

Sure, absolutely. Good morning, Austin. This is Rob Tanenbaum. We feel -- we made strategic moves in our resort properties over the past year, and we feel we are positioning the assets appropriately. So we are looking for outsized growth in both Frenchman's Reef, Sonoma, and Vail.

Sean, it's Jordan here with Austin. Just a quick one following up on your five principles surrounding sort of the balance sheet. Curious on the aversion to preferred. Any thoughts on that?

Sure, Jordan. That's something that we have held near and dear to our hearts since we formed the Company. Our view on preferreds is that it is more of a debt type instrument than an equity instrument; that's our bias. And with that in mind, when we compare the cost of preferred relative to what we can borrow 10-year fixed at, the spread is significantly lower for the 10-year fixed, and that's -- and so we have made those decisions to go with 10-year fixed over the last number of years.

So it's more a function of cost as opposed to the structure of the investment -- excuse me, structure of the instrument.

Correct. And we view it more as a debt instrument, so when we -- if we would issue preferred, we would view that as increasing our leverage.

Anthony Powell, Barclays.

Just a quick question on your RevPAR guidance of 9% to 11%, including the New York hotels. [Lexington] (inaudible) to a strong start, and I understand that your renovations should drive some outsized RevPAR growth in 2014; but the market has been kind of weak there, both for the fourth quarter and so far this year. What gives you confidence that you will be able to generate some share gains in New York, given the kind of overall supply growth and the softness so far this year?

Good morning. It's Mark. I will take that one. Our expectation for New York -- obviously there's a lot of -- there's a number of things going on in the New York market, including tough comparisons with Sandy in the first quarter as well as new supply entering the market in 2014. Our assumption for our hotels, a lot of that is based on recovering the renovation disruption from 2013, (inaudible) rooms that were out of service during this renovation. And then the market share gains that we expect at the Lexington. So we are not expecting a robust market in New York for 2014, but we are expecting to recover the renovation disruption from last year and then to make market share gains based on the renovation and brand change at the Lexington hotel.

This is Sean. And to sort of further that point, during the fourth quarter, which was soft in New York, the Lexington gained 6.8 percentage points of market share during the quarter despite a very difficult fourth-quarter environment for New York. So we feel confident in the ability of that hotel, which is really the lion's share of our New York City portfolio, to outperform. There was 86,000 room nights that were out of service in that hotel in 2013, which is very dramatic relative to total available rooms within our New York City portfolio.

Got it. And just to follow up on the last question on -- given some of the discounts we are seeing to NAV in the lodging REIT space, have you considered share buybacks? I think some of your competitors are looking at that more closely. Thank you.

Sure. That's a great question. We actually put in a share buyback program late last year. Our stock rallied about 25% shortly thereafter. But it is something we have a constant dialogue with our Board about evaluating that option, but we certainly have that tool in our tool chest and evaluate it on a regular basis.

Thomas Allen, Morgan Stanley.

I may have missed this, but what was Group RevPAR up in 2013? I believe it was tracking up in the high single digits of the last quarter. And then, you are guiding to Group pace of 9% to 14%, versus a lot of the C corps have been discussing kind of low to mid single digit growth. How long do you think you can continue to outperform on the Group front? Thanks.

Thomas, this is Sean (inaudible). Our Group revenue was up about 2.8% during the year. And the was -- the fourth quarter was a difficult Group quarter for the portfolio; specifically our Chicago market, which really dominates our portfolio on the Group side. So that did come down from what we reported from the third quarter. We tried to telegraph that in our commentary on prior earnings calls that our Group was front-end loaded for 2013. And on 2014, we have a high degree of confidence in our Group. We're at 9% is our pace, which is roughly 5% rooms and 4% rate. Boston really dominates our 2014 Group pace, which is up about 20% for those two hotels. In addition, we had our Worthington assets -- and Frenchman's Reef both have very strong 2014 Group outlook. In addition, the Minneapolis Hilton, which actually doesn't have a great citywide activity in 2014 for Groups, has been making great strides in picking up Group business. In the fourth quarter, they picked up over $2 million of Group business at the end of the year. Positive in Group pace for 2014, where two quarters ago we were down about 15%. So they have made great strides in picking up Group business for 2014 over the last couple of quarters, and WE hope that that momentum continues into 2014.

So would your view be that the 2014 Group pace is probably a balance between one-off things like strong city-wides and then just improvement in attracting business? And so that can kind of -- you can kind of continue to outperform in 2015, 2016?

Yes, we feel very good about our pace for 2014. I think when you look at the momentum, the last -- you know, the second quarter, third quarter, and fourth quarter all had significant additional Group revenues booked at the same time in the prior year. So the momentum continues to bode well for Group into 2014. It's too early, really, to comment much on 2015 because we are a year out. But our 2014 picture is a combination of momentum as well as, clearly, our market concentration in a market like Boston, which has got tremendous citywide activity in 2014.

And to further support what Sean was saying, in Q4 for 2014 we picked up 6.4% up higher in our revenue -- Group revenues. That's $2 million more than last year. And the majority of that was in room nights, but there was also some growth in rate as well.

Helpful. Thank you.

Chris Woronka, Deutsche Bank.

Wondered if you could maybe share with us kind of the ramp-up of Lexington by month in the fourth quarter; maybe where you are in the first quarter, so we can get an idea of the trajectory.

Sure. Lexington, the fourth quarter -- the renovation was completed in October 2013. November would start out quite nicely. October was a strong month, as well. October -- November was a little bit challenging with the New York City Marathon and softness from the Macy's Day. The third week of Thanksgiving being delayed certainly impacted the market more than what was previously thought.

December, the first two weeks came in strong, and we had a nice year end as well. So we are really pleased with our growth, as Sean had stated. And market [stayed]; 60% of our business is coming from our Rewards players, and 80% of our revenue is being driven by the special corporate and business transient accounts.

In January, we had 23% growth in our RevPAR there. We feel very confident where we are moving; had a very strong Super Bowl weekend. And we like what is being received. What we are hearing back from our clients, especially from special corporate accounts, is very encouraging as we sign up new accounts, it feels like, on a daily basis, which is very much encouraging there. But the response has been very well received and especially the press we are getting, as well as really positioning this hotel to be in the forefront.

Great. And then I think you guys had mentioned that the total full-year 2013 renovation disruption was $17 million of EBITDA. Can you just break that down for us between Lex and the Courtyards? And also, how confident you are in getting the rates up at the Courtyard this year in New York?

Sure, Chris. This is Sean. The majority of the disruption was the Lex. The Lex, of the $17 million of disruption was about 15% to 15.5% of the disruption. And then the Courtyards each had caught -- in aggregate between the two, about $1 million of disruption between those two hotels.

Okay. And then just on the Group pace. You guys mentioned you're 71% booked for the year. If you get to 100% of what you are budgeting, is that kind of in the middle of your Rev -- how do you guys correlate your RevPAR growth guidance to where you are on Groups right now?

Chris, this is Mark. We are expecting to reach 100%. That won't be the sole determinant on how we come out on our guidance. But we are about 30%, 32%, 33% Group, depending how the numbers play out. The business transient is probably the bigger variable in where we come out for the full-year guidance. So we expect to have a good Group year. Certainly we have over 70% under contract or on the books today. The new periods book is very attainable. So I would expect that we are going to achieve on the Group side. I think the -- again, the bigger variable is going to be on the business transient and how the back half of the year ends up.

Okay. Very good. Thanks, guys.

Andrew Didora, Bank of America.

Mark, I think you noted in your prepared remarks that the Hilton Boston gained some momentum after the renovation; and then as well as implementing your new sales strategy. I know changing the sales strategy was one of the key points when you bought the portfolio of assets from Blackstone. Can you maybe talk about some of the changes you've made, and if all these have been rolled out to the 3 other hotels that you bought from them? Thanks.

Rob, why don't you go ahead and take that one?

Certainly. Hi, Andrew. It's Rob Tanenbaum. Yes, we have been consistent in sending out and refocusing our teams on the revenue management strategy; so that's gone out to all the hotels. We have also looked at enhancing all our food and beverage as well. So the revenue management goes beyond just rooms; but also in food and beverage. So all those strategies are being implemented on all of those 4 properties. Yes, so some of the examples that we are doing -- for example, we are looking at advanced purchasing, increasing our average length of stay, doing our standard type of room type restrictions, managing discounts, and strategically overbooking to create the perfect sell. A really great example that we had recently was at the Denver Courtyard, where we changed our room type category. So our rooms facing 16th Street would have a higher premium. And in December alone, we generated over $18,000 of incremental revenue; pretty amazing for a hotel that size. But we were also focused -- not just beyond that, but in looking at all of our assets in terms of the GDS advertising and our e-commerce as well. From a cost-containment perspective again we are looking at, as Sean had mentioned, our labor consolidation, our energy management, and our telephone maintenance and parking -- restructuring our contracts.

This is Mark. I would just add, on -- clearly the Hilton Boston, we saw a lot of upside. That was part of -- for that hotel, part of the real investment thesis there. And you saw the momentum building to 22% RevPAR in the last quarter. And the hotel continues to gain market share gains -- 4 points of market share for the full year -- and really building market share gains as it moves through the year.

The San Diego Westin, which was another large asset in that portfolio, that one really outperformed the market in 2013, gaining 11 points of market share. RevPAR was up over 7% there in a market that was relatively weak. So we stole a lot of market share, really. And now the renovations just completed the last two weeks, we would expect to gain even more. So that one is fully kicking in with the strategies that Rob is helping employ at that hotel.

DC Westin, I would say it just finished a massive renovation about seven days ago, and it was a very intrusive renovation. So that one I expect to gain traction as we move forward from the first quarter on. I feel like in 2014 and 2015, we expect to gain a lot of the market share at that hotel with not only the new revenue strategies, but we basically have a new hotel., which was really the our thesis at the DC Westin, which was taking the entire box, putting the right capital into it, and capturing a lot of pent-up demand for those premium Starwood customers that want to be in DC.

Andrew, just to add on to what Mark was saying -- the example of the impact of our renovation in DC. We just did booked $100,000 piece of business for July. And while the hotel was under renovation, our sales manager was extremely creative and took his iPad and gave a tour through FaceTime. And the client couldn't make it down because of the snowstorm, which resulted in the -- after having the tour and speaking with our sales manager, booked sight unseen, essentially. And just loved what we were doing with it in terms of renovation and the new product that was being presented.

That's helpful. One other is for Sean, is more of -- little bit more of a housekeeping question. What was the (inaudible) change in the restricted cash balance in 4Q?

The change of restricted cash is escrow as well as CapEx fund. The -- we used some of the CapEx funds during the fourth quarter for the renovation. So when you look at the renovations -- sorry, the renovations dollars -- so when we did refinancings, we had to set aside escrows; this is the year-over-year change for both San Diego as well as Washington., D.C., renovations. And then we have restricted cash also being set aside as a percentage of revenues. So primarily it's the restricted cash held for the renovations or escrow going out.

Okay, great. Thanks.

Ryan Meliker, MLV & Co.

I was hoping we could talk -- you could help me understand some of the math behind your guidance. And correct me what -- help me understand what I am missing, or if things are just relatively conservative. But if you had total hotel revenue of $800 million on a pro forma basis in 2013, and the midpoint of your guidance is 10% RevPAR growth, and you've got property margins of 25.8% in 2013, and midpoint of your guidance is 2.5 percentage points, a margin expansion of 28.3, that gets me to hotel EBITDA of around $246 million. You add in the Hilton Garden Inn Times Square, which I am assuming you are still expecting about $5 million in incremental EBITDA. And that's $250 million in property EBITDA. What am I missing here? Obviously maybe some of it is that non-room revenue isn't going to grow by that 10% level, but it seems like there's got to be something bigger than that to get back to the midpoint of $235 million in adjusted EBITDA.

Ryan, that's actually exactly it. Our -- we expect our F&V revenue to grow a little under 5% for the year, which is -- non-rooms revenue is about 35% of our total revenue. And so with that half of the growth, that's going to impact, obviously, your -- your 10% growth there is $7 million, $8 million, doing quick math in my head. So that's the primary driver.

Okay. That is the primary driver. So it's not corporate G&A or anything like that going clearly higher. It's just your other revenue that is not going to grow quite as robustly?

Correct. Embedded within our guidance is actually a slight decline in corporate G&A year-over-year. The Allerton, which is the other driver which is not in hotel adjusted EBITDA, is going to be roughly flat this year to last year; a few hundred thousand dollars of adjusted EBITDA and FFO year-over-year. But the primary driver of hotel margins and RevPAR is going to be the hotel ops.

Okay. That's helpful. And then another question I wanted to ask you guys about was between your guidance for the Lexington -- I think you guys have talked about, if I recall, a $40 RevPAR -- or ADR premium with what you had been underwriting. Is that within your guidance for 2014, or is that something that's going to play out through 2016 as you had talked about; kind of the longer timeline in terms of getting to that 22% revenue growth CAGR?

Ryan, this is Mark. So let me go back and kind of parse the [scissors]. There's two things going on. One, we are going to recover renovation disruption from last year, which will help obviously the RevPAR year over year as (inaudible) rebuilds from that comparison. The investment thesis was looking at the rate differential between our hotel and the closest competitor; the ADR gap was ADR gap was about $90 to $100. We underwrote closing about half that gap to hit our underwritings. We think we will make -- we will be there by the end of 2015. So this year -- it takes generally two years to get the juice out of a brand conversion; to get the re-identity launched, to get all the special corporate accounts, and to get the first-time trials. So we expect it to gain a lot of traction this year, but almost to have more growth in 2015 on the right side compared to the competitive hotel in 2015 as 2014.

Okay. That's helpful. Thanks a lot. That's all for me.

Ian Weissman, ISI Group.

Most of my questions have been asked and answered, but if maybe you could give a little more details on this additional $50 million of new capital investment in 2014. Are there other major projects that you are targeting for renovation this year?

Ian, this is Mark. The $50 million is generally a pretty typical run rate for a portfolio our size. That includes everything from boilers and tillers to some ROI projects that are in there, as well. There is nothing that we think will be materially disrupted in the 2014 numbers. And there aren't any enormous projects that we are going to announce. As Sean mentioned, there are a number of ROI things like some incremental keys; some of that is in there, some isn't yet; it's not approved. We do have the meeting space conversion of unused space at the Boston Westin, and there's a number of smaller initiatives sprinkled throughout the portfolio to help margin growth this year. But $50 million isn't far off from what you should think is the long-term average investment in our portfolio, annually.

Okay. And just quickly, if you -- I mean, just came off of [valice]. You talked briefly a little bit about deals and maybe being a buyer this year. Maybe if you could just comment about which markets, which property types you are seeing the best opportunities for deals over the next six months.

Sure. So what our comment was earlier on the Q&A is that we are going to actually look into 2014. We are going to be very disciplined. Obviously, pricing, given the supply-demand imbalance of high-quality deals, is difficult. We're going to look in -- we like the markets we are in; we would build exposure in a number of those markets. New York, we are probably at our limit just from a diversification standpoint. But certainly a market like Boston, Miami, Seattle, LA would be markets that we would want to add exposure to over time.

But in addition to markets, it's a matter of finding good opportunities that meet our underwriting. So some of the markets have gotten quite heated, and it's probably difficult to create shareholder value by entering those markets right now. So we will also look for other trendlines that we can catch. For instance, our resort portfolio, although 15% [over] EBITDA, has been tremendously successful. And we think some of these smaller resorts in very high barrier-to-entry markets is a good place to play. So that would be a place we'll be looking that there's probably not as much competition, and we can probably create some value there.

Okay, great. Thank you very much.

Wes Golladay, RBC Capital Markets.

Going back to be Hilton Boston Downtown, this, again, pretty impressive RevPAR growth, but the margins were only about 120 basis points in the quarter. Is there anything one time holding that back?

Yes. Wes, it's Rob Tanenbaum. What was holding back is the union -- ramping up of the unionization of the property. So union dues have impacted Q4 for us.

So just to add on that last -- when we bought the hotel, it was in the process -- they had signed a union contract; it was ramping up, which is part of our underwriting. So we expect to make our money on that hotel, both in the revenue growth and in the splitting the suites and creating 40 incremental keys. That's really going to be unlocking the value there. We get to the Lapin effect on the union contract as we move into 2014, and then we should expect kind of standard margin growth with RevPAR growth there going forward.

This is Sean. We expect approximately about $360,000 of additional ramp this year for that hotel -- for the union ramp-up just to compare it to 2013. Just as you think through the modeling, that compares to about between $1.2 million and $1.3 million this year, so the lapping effect is pretty significant in 2014.

Okay. So probably one more quarter of it, and then we will be done with it?

A quarter, a quarter and a half.

Okay. And then going back to Ryan's question about the F&B growth, what are you seeing with that for this year and maybe next year? The Group pace is up pretty strong, and it looks like, looking at your yearly results, room revenue and food and beverage revenue growth were both about the same. So were you expecting a material slowdown in the growth right there, or are you just being conservative on that point?

Wes, this is Rob again. We are expecting moderate growth on food and beverage. Again, as hotels fill in need periods -- for example, Father's Day or Labor Day or the Fourth of July -- it's typically groups that are not only rated but also don't have much F&B contribution associated with it.

Okay. Thanks a lot.

Also, Wes, just to add on that from Sean -- 2013, we had some tremendous in-the-year pickup on Group F&B; particularly the Chicago Marriott was a huge contributor of that this year for us; which our guidance does not assume that that repeats in 2014. We'd obviously be thrilled if it did, but our guidance does not assume that that history repeats itself.

Lukas Hartwich, Green Street Advisors.

Hey guys, most of my questions have been answered already. I was just looking at page 20 of the press release. And the Hotel Rex, it looks like margins were down 600 basis points last year. I'm just curious what drove that?

Lucas, it's Rob. What drove that was property taxes was a large driver of that, as well as we had some higher A&G costs with the transition.

And then the RevPAR growth of that asset was about 5% last year. And I forget off the top of my head what San Francisco as the market did. But it seems like that asset (inaudible) a little bit in the revenue level. Is there any reason for that?

Yes, Lucas, we've changed out the revenue manager for that. We just had some challenges in the way the pricing was occurring and how they were analyzing the marketplace. But we feel that we have that moving in the right direction.

Cool.

Hopefully, for 2014 that is an upside story. The revenue manager kind of missed it a little bit in 2013. So as we changed out the revenue manager and have kind of the right system in there as we move into 2014, hopefully we will be able to recover some lost market share of that hotel and really perform well this year.

Great. Thanks very much.

Bill Crow, Raymond James and Associates.

Congratulations on getting all of the hard work behind you. From the deflagging and contract management removal on the Marriott property, could you just kind of tell us what caused that decision? Whether any money changed hands? Does that change or signal any sort of relationship with Marriott going forward? Or is it more an attempt to sell the asset unencumbered, eventually?

No. You shouldn't view it as a statement of our relationship with Marriott, which remains strong. That -- as we have talked about on prior calls, that's a non-core asset for us. It's our lowest rated [pie] RevPAR. And it is an asset we would like to -- it's on our disposition list, and over the next two years we will monetize that asset; that's our intent. So we had an opportunity under the contract because of the underperformance of the hotels to unencumber it by brand and management which, in that market, increases your exit value and the number of players and bidders you can get on an asset like that. So we took advantage of that opportunity to unencumber the asset. We are repositioning it; we brought Destination in to reposition it. There are power alley assets like this. So they are actively working on that, and then we'll position it and tried to sell it as we move forward.

No compensation paid to Marriott, I take it?

We did repay them a small -- so they gave us several million dollars of key money and yield support since we bought the hotel. And so that yield support and key money amortized over a period of about 10 years. So there was a little unamortized money that we returned to them; I think it was less than $1 million.

Bill, it's Sean. It was about $700,000 that we've repaid to them under the contract.

That's it for me. Thank you.

Steven Kent, Goldman Sachs.

This is Anto Savarirajan on for Steve Kent. Looking at the last two tables of your press release, how are we to think about what you would consider non-core or non-strategic? Some of the properties have margins that are lower than what you would consider your target level of EBITDA margins. So can you help us frame what would be considered non-core or non-strategic? Also, how many assets do you have in these buckets and slated for sale over the next 24 to 36 months?

Great question. So if you look at what we have done this cycle on our disposition effort, we have sold five hotels for about $400 million. And then if you go back and look at the characteristics of those hotels, all those hotels were in the bottom quartile of our portfolio; measured by both average RevPAR and by EBITDA per key -- profit per key. So that's clearly a metric that we are looking at. One of the things we are trying to accomplish as active capital recyclers is always upgrading the quality and growth prospects of our Company. So when you look at our portfolio, if you rank what we have now by average RevPAR or by profit per key, the stuff that's in the bottom quartile is the stuff that is most likely to be considered non-core for us and active on our disposition list. We are not going to do another $400 million over the next couple of years. We have a couple smaller- to medium-sized assets that might be on that list. But generally our portfolio today is 26 hotels; 27, with Times Square. It's a portfolio that we really like. So you will see a measured disposition program over the next year or two, but we really like our portfolio as it is today.

Got it. And with regard to the Hilton Garden Inn Times Square, do you have a sense of the timing of openings of other new hotels in the same Time Square [tract] this year? Is the prospect of opening it in August in part dependent on how and when these other assets or other hotels open?

No. We are going to open as soon as we possibly can. I mean, every day that we are not open would be a day of lost opportunity. So we think in this location, obviously the demand is incredibly deep. And we want to get open and start making money there as soon as possible. Obviously we want to make sure that we finish it in a quality fashion and have a smooth opening. But I think in a market like that in Times Square, the sooner you get open, the better.

Okay. And one last one for me. With regard to the goal of having a 50-50 split on brand versus third-party managers, where do you now stand, and where do you expect to exit 2014?

With the acquisition of Times Square, which we had third-party manager -- it would be about 60/40 as a portfolio. So we are pretty close to our objective. And then as we move forward, that's a goal. But the number one goal in any acquisition is to create shareholder value, whether it's brand managed or third-party managed. That is our magnetic north on deciding to do an acquisition.

But we think, when we look at our portfolio -- especially with the bigger hotels, which make more sense to be brand managed; and then some of the smaller and medium ones, which make more sense, we think, to be third-party operated. We have generally the optimal operator on each of our kind of asset within the portfolio. So as we grow, (inaudible) our 5 or 6 most recent acquisitions, they're generally third-party managed. But, again, we are looking to create shareholder value and be opportunistic. So we are not going to not to a good deal because it's brand managed.

Thank you very much.

Thank you. We have no further questions in the queue.

Thank you. To everyone on this call, we appreciate your continued interest in DiamondRock and look forward to next updating you with our first-quarter results. Thank you again.

Thank you. Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.