Diamondrock Hospitality Co (DRH) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 DiamondRock Hospitality Company earnings conference call. My name is Kim and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Brett Stewart, Director of Finance, DiamondRock Hospitality Company. Please proceed.

Thank you, Kim. Good morning, everyone, and welcome to DiamondRock Hospitality Company's first-quarter 2014 earnings call and webcast. I am here today with Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Executive Vice President and Chief Financial Officer; Rob Tanenbaum, our Executive Vice President and Chief Operating Officer; and Troy Furbay, our Executive Vice President and Chief Investment Officer.

Mark will provide an overview of the industry, discuss the Company's first-quarter results and activities, as well as discuss our outlook for the balance of 2014. Sean will provide additional details on our first-quarter performance as well as provide an update on our balance sheet and key asset-management initiatives. We will then open the call for Q&A.

But before we begin, I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities law and may not be historical fact. They may not be updated in the future. These statements are subject to risk and uncertainties as described in the Company's SEC filings.

Moreover, as management discusses certain non-GAAP financial measures, it may be helpful to review the reconciliations to GAAP set forth in our earnings press release. At this time I will turn the call over to Mark Brugger, our President and Chief Executive Officer.

Thanks, Brett. Let me start this call today by stating what has now become obvious: lodging fundamentals are strong. The supply/demand imbalance worked again in the industry in the first quarter. Industry demand grew 3.8% against a backdrop of restrained supply growth of less than 1%, or about half the historical average.

Building on these positive underlying trends, the industry was able to drive a 6.8% RevPAR increase, or about double the historical average. DiamondRock's first-quarter results met our internal expectations and outperformed the industry, as our portfolio delivered 8.4% RevPAR growth.

Profits were up, with hotel-adjusted EBITDA margins expanding almost 100 basis points. This strong start to the year provides positive momentum for the remainder of 2014.

The portfolio's outperformance in the quarter is attributable to Company-specific catalysts, the three most significant of which are as follows. One, outsized growth from our recently completed $140 million renovation program; two, enormous growth from the rebranding and renovation of the Lexington New York Hotel; and three, strong group performance at several of our hotels.

We really like our group exposure. Group is a segment we have been constructive on for some time now.

It may be helpful for me to touch on each of these three key points in more depth. First, as I mentioned, we will benefit from the recent investment of over $140 million into high-impact hotel renovations, the final phase of which was completed just in the last few months. This capital program involved the renovation of over one-third of our portfolio since early last year.

The list of renovated hotels is a long one and includes our two New York City Courtyards, the Lexington Hotel, the Westin San Diego, the Hilton Boston, the Hilton Burlington, the Westin Washington D.C. City Center, and the Hilton Minneapolis. We expect a significant return on much of this investment both in 2014 and 2015 as guests and meeting players experience the renovated product and we start to move market share.

Second, the renovation and rebranding of the Lexington Hotel, now part of Marriott's Autograph Collection, is ripening into a powerful growth catalyst for the Company. The Lexington stats in the first quarter were impressive, achieving 57.5% RevPAR growth and nearly 2,000 basis points of margin expansion.

Moreover, the Lexington is penetrating rival hotels, gaining over 32 percentage points of market share during the quarter. Importantly, it is winning on both occupancy and rate. Its share of ADR was up 11.5 percentage points in the quarter.

The hotel ramp is playing out as we hoped it would, with 80% of its business now coming from the highest-rated business transient segment. This success with transient is a testament to the power of Marriott's distribution system, with fully over 50% of rooms sold coming through Marriott channels.

We are on track to meet our underwriting and deliver over $20 million of hotel-adjusted EBITDA during 2014, with several more years of upside. In total, we think hotel EBITDA has the potential to increase 50% by 2016 at the Lexington.

The third and final key point that should be highlighted relates to the group segment. Our group segment, which represents 32% of first-quarter revenues, outperformed.

First-quarter group revenue increased 13%, the highest across all our customer segments. In addition our group spend, a critical barometer of the segment's strength, grew over 8% during the quarter.

Group outperformance also led to 12% growth in the important area of banquet and catering sales. This group strength was driven by our hotels in Boston, Fort Worth, St. Thomas, and Los Angeles, more than offsetting weakness in Chicago and Minneapolis.

For our entire portfolio, we project that group business at our hotels will outperform in 2014, although we expect a dip during the second quarter, due to some cyclical citywide calendars, before re-accelerating into the third quarter.

I would like to now turn our attention to acquisitions and dispositions. As you know, DiamondRock has been executing an aggressive capital recycling program during the past few years that now totals well over $1 billion in transactions.

2014 will be a continuation of that strategic effort, as we believe 2014 will be a good year to prudently both buy and sell hotels. There are positive signs (technical difficulty) the transaction market.

We are seeing owners who held on and rode out the downturn now selling. This trend is evident in the data.

Last year, transaction volume increased over 35% to $22 billion. Going forward, leading prognosticators are calling for transaction volume to climb another 10% in 2014 to over $25 billion.

With Troy, a 25-year industry veteran, leading DiamondRock's disposition and acquisition efforts, we are well positioned to execute deals that create shareholder value. Let me touch on some of our most recent activity.

On the disposition front, we improved our portfolio quality with the sale of Oak Brook Hills Hotel, located in suburban Chicago. The Oak Brook Hills Hotel was sold last month for $30 million, including $4 million of seller financing. The hotel was our lowest-quality hotel and inconsistent with our current portfolio strategy.

On acquisitions, the Hilton Garden Inn Times Square Central is nearing completion with construction proceeding on schedule. We still expect to close on this hotel and welcome our first guest near the end of the summer.

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.

On a point potentially related to acquisitions, the Company recently received an official notice from the owner of the Allerton Hotel that it intends to prepay our $58.5 million loan during the second quarter. This event will bring a happy ending to our Allerton investment and bolster the Company's dry powder for acquisitions.

So, what's next for DiamondRock? Well, we are selectively hunting for deals that fit our strategic and financial criteria. Our focus is on urban hotels, generally in top-15 markets, as well as select resort locations.

We will continue to work hard to find good deals in this market, and we will remain disciplined throughout the process. We may also look to sell one or two non-core hotels over the next 24 months.

With that, I will now turn the call over to Sean Mahoney, who will provide details on our operating results, asset-management initiatives, and balance sheet management.

Thanks, Mark. Before discussing our first-quarter results, please note that our reported pro forma RevPAR and margin data exclude the Oak Brook Hills Resort, which was sold early in the second quarter.

As Mark highlighted, our 2014 operating results are expected to benefit from several portfolio-specific catalysts, including outsized growth from the $140 million capital renovation program; enhanced performance from the Lexington Hotel joining Marriott's Autograph Collection; strong group booking pace, led by our hotels in Boston; and the opening of the Hilton Garden Inn Times Square Central.

Now, let's turn to the first-quarter numbers. Overall, it was another strong quarter and was consistent with our expectations. The Company reported adjusted EBITDA of $37.3 million and adjusted FFO of $0.15.

The first quarter reflected some exceptionally strong results at many of our hotels, with nine hotels reporting double-digit RevPAR growth. The overall portfolio's 8.4% pro forma RevPAR growth was the result of a 4.5% increase in rate and a 2.6 percentage point increase in occupancy.

Despite the first quarter being a seasonally slow quarter, we achieved pro forma hotel-adjusted EBITDA margin expansion of 95 basis points. We expect stronger hotel margin expansion during the remaining quarters of 2014.

Now, let me spend a few minutes highlighting some individual hotel achievements. As expected, the Lexington Hotel's first quarter benefited from last year's renovation and the rebranding to Marriott's Autograph Collection. The hotel achieved 57.5% RevPAR growth and approximately 1,900 basis points of margin expansion.

The LAX Marriott achieved impressive 24% RevPAR growth and 478 basis points of margin expansion. The hotel benefited from taking advantage of a strong group base to drive revenues by restricting low-rated discount and international wholesale segments.

The Boston Hilton continued its multi-quarter run of double-digit RevPAR growth. The hotel was able to drive over 20% RevPAR growth by taking advantage of both compression from citywide activity and the recent renovation. In addition, the hotel outperformed the market, gaining over 14 percentage points of market share during the quarter.

The Boston Westin also benefited from strong citywide activity, which contributed to a 16.6% increase in group room revenues and a 30% increase in F&B revenues. The hotels took advantage of strong corporate demand in Boston, achieving over 30% growth in business transient rooms sold, at an 8.5% higher rate.

Our two New York City Courtyards benefited from the 2013 renovations with a combined 18% RevPAR growth and over 700 basis points of margin expansion.

The Worthington Renaissance also had a strong quarter, achieving RevPAR growth of 14.7%, which contributed to a 680 basis point gain in market share. The hotel's F&B also outperformed, achieving revenue growth of 19%, which was led by banquets and catering.

Finally, our Denver hotels also outperformed, with the JW Marriott Cherry Creek and the Courtyard Denver achieving combined RevPAR growth of 11.7%. The RevPAR growth led to strong margin expansion of 508 basis points at the Courtyard Denver and 385 basis points at the JW Marriott Cherry Creek.

Challenges in the New York City market partially offset these performances. Upper-upscale market RevPAR was flat as the positive impact of the Super Bowl was more than offset by the impact of new supply and difficult Hurricane Sandy comparisons. Additionally, New York City was impacted by several severe winter storms and freezing cold spells during the quarter.

In addition, our Chicago hotels finished modestly behind expectations due primarily to close to a 30% decline in citywide activity and severe weather during the quarter.

Shifting back to positive trends, our group business outperformed during the first quarter, achieving over 13% revenue growth. The group segment was led by Frenchman's Reef, the Worthington Renaissance, the LAX Marriott, and the Boston Westin, with group revenue growth of 65%, 49%, 28%, and 17%, respectively.

Another encouraging trend was the 8.3% increase in group contribution during the quarter, which provides evidence of a healthy group recovery. Our group business is well positioned to outperform over the remainder of 2014, with group revenue pace up 8.2%.

Our 2014 group pace is being driven by a 5% increase in rooms and an approximately 3% increase in average rate. We currently have over 83% of the forecasted 2014 group business on the books.

Before discussing the balance sheet, let me provide an update on recent asset-management initiatives. Our team has spent significant time identifying opportunities through enhancing sales and marketing strategies, implementing new cost-containment initiatives, and maximizing opportunities within our existing portfolio.

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 a summary of recent revenue management achievements.

We have successfully increased average rates by shipping shifting into premium retail segments while yielding out lower-rated leisure business. Specific strategies included taking advantage of compression opportunities; replacing lower-rated wholesale and contract business; implementing view category rooms; and replacing nonrepeat group demand with higher-rated business transient. Our recent implementation of resort fees at The Lodge at Sonoma and the Vail Marriott resulted in $0.6 million of incremental revenues during the quarter.

We also took advantage of group strength to the increased group room nights and aggressively price during compression periods, which resulted in an impressive 8.3% growth in group spend.

We are also working to identify cost-containment opportunities across the portfolio. Recent successes include a 1.3% increase in labor-management productivity through improved scheduling and reduced overtime. A 1.3% reduction in food costs and the elimination of dinner service at one of our urban select-service hotels helped to increase and beverage margins by 300 basis points.

Our recent restructuring of parking contracts and parking-rate increases contributed to a 17% increase in first-quarter parking profit. And lastly, we implemented several energy initiatives, including installation of low-flow toilets at both the Boston Westin and Boston Hilton that are expected to have two- to three-year payback periods, and installation of LED lighting in all guest rooms at the Minneapolis Hilton and Boston Westin that are expected to reduce annual operating expenses at each hotel by approximately $50,000.

We are currently focused on continuing our cost-containment efforts through the following new initiatives. Consolidating management positions in two hotels, which is expected to reduce annual operating expenses by approximately $200,000; further restructuring telephone maintenance contracts, with expected annual savings of $800,000; and analyzing portfolio laundry operations for cost-saving opportunities, including outsourcing and contract restructuring.

Another asset-management focus has been the implementation of value-creating ROI opportunities within our existing real estate. The most significant projects include: converting unfinished space at the Boston Westin into 12,500 square feet of valuable meeting space, with an underwritten IRR close to 30%; adding over 40 new rooms to the Boston Hilton; and evaluating the opportunity to create new rooms at the Vail Marriott, JW Marriott Cherry Creek, Westin Washington D.C., our two New York City Courtyards, and the Sonoma Renaissance.

We're also in the earlier stages of evaluating other opportunities such as converting over 10,000 square feet of vacant office space at the Minneapolis Hilton into valuable new meeting space; leasing restaurants at several hotels to third-party operators; creating incremental meeting space out of existing admin offices at the Alpharetta Marriott and the Salt Lake City Marriott; and analyzing options from the maturity of a significant space lease at one of our resort hotels to either increase rent or add approximately 20 new keys to the hotel.

Finally, we are focused on creating value from our existing contracts. We recently amended one of our management agreements to reduce base fees by over $500,000 over the next three years. And we also negotiated a multiyear base fee reduction at two brand-managed hotels due to our objection to new competitive hotels within these markets, with an expected fee reduction of approximately $400,000.

Lastly, I would like to touch on our balance sheet and capital allocation. We continue to believe that DiamondRock's balance sheet is among the best of any lodging REIT, and we are committed to being prudent stewards of our investors' capital.

We have a nearly decade-long track record of consistently maintaining 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 a public lodging REIT. Based on our base case long-range projections, which assume no new equity issuance, 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 preserve 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 positions DiamondRock to deliver superior shareholder returns across all phases of the lodging cycle and also provides the ability to pay a meaningful and sustainable dividend. Since our IPO, we have paid dividends of approximately $475 million to our shareholders.

Our liquidity position has improved as a result of the proceeds from the Oak Brook Hills disposition and the upcoming repayment of the Allerton Loan. After funding the Times Square acquisition, we expect to end 2014 with over $180 million of unrestricted cash, which will allow us to remain opportunistic if we identify attractive acquisition targets.

We will continue to focus on prudent capital allocation and be thoughtful in positioning the balance sheet for upcoming capital needs. I would now turn the call back over to Mark.

Thanks, Sean. Let me turn to our outlook. Our outlook continues to reflect both positive industry dynamics as well as DiamondRock's unique growth catalysts. We are essentially reaffirming prior guidance, after adjusting for two important transactions.

First, our guidance is updated for the sale of the Oak Brook Hills Hotel. Our prior guidance included $3.5 million of adjusted EBITDA and $2.5 million of adjusted FFO for the period after our sale date; those amounts have been removed from the updated guidance range.

Second, our guidance is updated for the pending prepayment of the Allerton Loan by the new hotel owner. While we may have a one-time book gain with this transaction, we plan to adjust out that benefit from our reported earnings to provide investors with the most comparable results.

Additionally, our prior guidance included $3.5 million of adjusted EBITDA and adjusted FFO for interest income that would have been earned during the period after the prepayment date. That amount has been removed from the updated guidance range as well. Please note that while we believe the prepayment will likely happen, and it is our best guidance at this point in time, we would strongly caution you that it is not guaranteed.

So, for 2014, DiamondRock is providing the following updated guidance. RevPAR growth of 9% to 11%; adjusted EBITDA of $223 million to $233 million; and adjusted FFO per share of $0.83 to $0.87.

I do want to emphasize that no new acquisitions or dispositions have been incorporated into our updated guidance. In addition, please note that for the second quarter we expect to earn roughly 29% of full-year adjusted EBITDA.

To sum things up, we had a strong first quarter and are well positioned to deliver solid full-year results. Moreover, we firmly believe that DiamondRock's strategic focus, attractive portfolio, and strong balance sheet form a platform for multiple years of growth ahead.

We are very excited about our prospects as well as upcoming catalysts, such as the second bump from our renovation program in 2015 and the potential upside from deploying our sizable war chest. On that note, we would now like to open up the call for your questions.

(Operator Instructions) David Loeb, Baird.

Good morning, gentlemen. Mark, you hired Troy; and you said a bunch of different ways in your prepared remarks that you are looking at acquisitions. Can you talk a little bit about what the look and feel of those might be? What you think the returns could be? What impact that might have on shareholder value or NAV, and how you look at that?

Sure, David. I also and actually I will turn it over to Troy as well. As Sean mentioned, assuming the Allerton Loan gets prepaid, we will be sitting on about $180 million of cash year-end. The goal is to actively pursue deals in the marketplace that we think will further diversify the portfolio and increase our growth prospects.

As I mentioned in the prepared remarks, we are seeing more transactions; we are seeing more volume in the marketplace. And we think that there might be some exciting opportunities. But I will let Troy jump in and tell you what his perspective is.

Hey, David. How are you? As you know, we use a very meticulous and proven process. I personally have about a 20-year career buying hotels; and while I haven't always had the lowest cost of capital, that has never precluded me from being able to find good transactions to invest in.

As I said, we are very meticulous in our study. We look at about 30 different markets around the country at any given time, study a lot of data, and are constantly updating that data.

We look at asset types, mostly in the full-service space. We look very closely at the cost of replacing those assets and look at that data on a market-by-market basis.

We are also very closely looking at the management opportunities, where we can make changes to management, make changes to brands. As you know, in my career most recently I have been a considerable amount of time in the lifestyle space. So while we have a lot of the big brands in our portfolio today, we are increasingly looking into the lifestyle space and some of the brands there, where consumers are gravitating towards.

So we are looking at those types of assets, those types of brands. We are looking at where we can apply capital to upgrade the properties. And we are looking at, frankly, probably focused on the top 15 to 20 markets around the country with a particular focus towards the West Coast.

Okay. That's very helpful, Troy. Can you just talk a little bit more about, for example, whether you would look at doing deep-turn renovations, or rebrandings that might be a little bit disruptive for a couple of quarters?

And then back maybe to Sean, about where you think the value proposition is today relative to your stock price and relative multiples, things like that.

Yes, David, this is Mark. I will jump in here. As we have said on prior calls, we think it is midcycle right now, maybe a little before, somewhere around the midcycle. So we think that now isn't the time to do a multiple year turnaround-type project.

So a Lexington, where you buy it; you figure out; it takes a year to plan and get the new brand, a year to execute, and then two years to ramp up. You shouldn't expect DiamondRock to do a deal like that unless there is some really extraordinary opportunity.

The deals that we are looking for are in high-growth markets, so Miami, West Coast, like West LA, San Francisco, if the cap rate's not insane. We would like to be in those high-growth markets.

We look for value-add opportunities where there might be something where we could up-brand it without a lot of disruption. But it is probably too late to do -- unless it was a small property -- to do really a shutdown, reposition renovation that takes a long time to get there, given where we are in the lodging cycle.

David, to answer your question on the cost of capital and our capital allocation, acquisitions are clearly only one of the options we have, with the dry powder that we are going to have. Other options include deleveraging. We have the ability -- we have got debt maturities in 2015.

We do have a share repurchase program in place; that is an option as well. So if you look at the -- if you think of the deals that we are looking at, clearly being accretive is very high on our requirements.

Just because we have the capital, we are going to continue to be disciplined in how we allocate that capital.

Okay. Last follow-up, Sean, for you. It is really easy when you have cash on your balance sheet and a low cost of debt to buy stuff that is accretive to FFO. It is harder to make it accretive to NAV. So is that what you mean when you say accretive?

We mean accretive to NAV, for sure.

Okay, great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Hi, guys. It's Austin Wurschmidt here with Jordan. Just following up on the acquisition theme -- or switching to dispositions, rather, sticking with the investment theme, you had talked previously about selling three hotels for about $150 million. And since you guys have closed on two for $105 million, Mark, you mentioned the additional sales potentially of two hotels.

So does $50 million fit within that framework of two additional hotels? Or do you think you could exceed that amount?

Austin, that is a good question. We generally really like our portfolio today. There are one or two assets that I think, if we could get the right price for, we would consider recycling. So I think we are going to be very careful about bringing those assets to market at the right point in time.

I think $50 million, give or take, is probably still a good marker. It might be a little less, might be a little more, depending on which assets are selected.

But there is -- we had sold Oak Brook Hills, which was our number-one asset we wanted to sell, probably the least core asset we had in our portfolio. With the year-end balance of about $180 million in cash, we are more likely to see how the pace of acquisitions proceeds before bringing more things to market.

But we will continue to monitor the market. Because, again, I think it is a good time to buy and sell right now in 2014.

Thanks for that. Then just on the value-creation opportunities that Sean went through, you talked about not doing any big renovations at this point. Could you just give some additional detail on how you would prioritize those opportunities? And would you consider undertaking any of these initiatives in 2014, 2015?

So I understand your question, the question is: would we consider entering into any big renovations in 2014 on our existing hotels?

Yes, related to the addition of the meeting space, and additional room additions that Sean walked us through.

I think what we said, just to be clear, is that we have completed our $140 million renovation program, some of which had a lot of disruption associated with it, which you saw in our 2013 numbers. In 2014, we are going to continue to pursue all the smart value-creation opportunities, many of which we have talked about in prior calls, which may be adding three keys here, 11 keys at another hotel, splitting some suites at seasonally low winter seasons in Boston.

Those should not be very disruptive. There is always a little bit of noise in your numbers, but those -- what we consider smart value-add opportunities, we are going to continue to pursue.

What we are trying to say is we are not planning to undertake in 2014 any big renovations that are going to have the kind of material disruption that we had last year.

Then any sense on the timing on any of those?

On the room additions?

Yes.

Austin, it's Rob Tanenbaum. The room addition in the Boston Hilton would be in the end of the fourth quarter; and the Boston Westin meeting room opportunity is going to occur in the second quarter and finish up at the end of the third quarter.

This is Sean. I just want to emphasize, on the two meeting space projects that we have, both of those projects are in space that is currently unused at the hotel and will be very undisruptive. The Boston Westin, it's part of unfinished retail space that is the building next door to the hotel.

And the Minneapolis Hilton that we are evaluating is outside of the reach of really where guests spend a lot of time. So we anticipate both of those projects to be completed with no or virtually no profit disruption.

Thanks. Then just one last one. Following the completion of the renovation at the Westin Washington D.C., you had previously talked about 2015 being a big year for that hotel. Just curious, some of the success that you have had there thus far.

Sure. Austin, we have -- it has been an incredible opportunity, having guests and meeting planners come through and say: wow, I would never have imagined this hotel look this great.

In fact, Starwood awarded us the President's Award, given our renovations at both the D.C. Westin and the San Diego Westin, given the impact. It was really amazing to walk through both properties with senior management from Starwood. And one individual had actually worked at one of the hotels previously and said: I would never think that this was the same hotel that I worked in a few years ago.

So from that viewpoint, it has been fantastic. We have had companies like the World Bank now very interested in our D.C. Westin. We are finding meeting planners coming back for walk-throughs and going: this is fantastic.

It fits their needs, being strategically located in the marketplace. So what we are doing right now is relaunching the product out to the marketplace, and our initial results have been very favorable.

Great. Thanks, guys.

Thomas Allen, Morgan Stanley.

Good morning. I believe Chicago and New York are still your biggest markets. Can you update us on what you expect your exposure to each market will be in 2015, once your new Times Square property opens up?

And then what is your outlook for market growth for those two markets for 2014? Thanks.

I'll take that. Good morning, Thomas. So for New York, as you know New York -- I will talk about the market. It underperformed in the first quarter. We expect it to be a little better for the balance of the year; and full-year outlook would be low single digit RevPAR growth for the full year.

Our pro forma for -- including Hilton Garden Inn Times Square would make the New York market represent about 22%, 23% of our overall portfolio by EBITDA. Boston and Chicago would be our next-largest markets at about 15% or so of our pro forma EBITDA for the Company.

Chicago had a tough first quarter citywide. That city is very sensitive to the citywide calendar. It was down significantly in Q1.

We see it getting better for the balance of the year, especially in the back half of the year. So we feel decent about Chicago, but it was a rough start.

And then just your Garden in Chelsea. RevPAR I think was down slightly more than I thought it would be down. Anything specific driving that, supply or anything like that?

It's a great question, Thomas. We had some revenue management opportunities there. Since moving out a particular individual we've seen an increase in that. So it was just some pricing challenges that came about from -- through; and that has been addressed.

Perfect. Thank you.

Ryan Meliker, MLV & Company.

Hey, good morning, guys. Just a couple of quick ones here. First of all, with regards to the RevPAR forecast, obviously 1Q came in below your full-year guidance range. You indicated that 2Q is going to have a lighter group revenue dynamic than you saw in 1Q.

Are you expecting 2Q to also come in below that 9% to 11%? Or do we expect RevPAR really to be back-half weighted? Or is just seasonality a little choppy?

Hey, Ryan. No, we expect the RevPAR to accelerate in the second quarter and then further accelerate in the third quarter within the portfolio. For our implied guidance for the back half, for the last three quarters of the year is from anywhere to a little over 9% to about 11.5% RevPAR for the portfolio. So we expect it to accelerate.

On a related point, we expect the same trend for our margin expansion as well. We expect that to accelerate as the year progresses.

Great, that's helpful. Then another quick question I had was, David talked a little bit about the acquisition strategy and how things were unfolding. I noticed in your EBITDA guidance that you now included $200,000 of acquisition-related costs that weren't there a quarter ago.

Are you any closer to an acquisition today than you were last quarter when we last spoke?

Ryan, I wouldn't read really anything into that $200,000. We, as a general rule, don't comment about where we are relative to acquisitions; but there is nothing to be read into that $200,000.

Okay. Then lastly, you had $110 million cash on the balance sheet at the end of the quarter. You've got another $90 million or so coming through. I know you have got the acquisition, the remaining capital for the Hilton Garden Inn.

But you certainly have a lot of capital on the books. At what point, if you can't find an acquisition that pencils out, do you guys choose to, I guess, prepay some debt the you've got outstanding?

Obviously you've got a couple loans that have over 6% fixed interest rates, and I would imagine you could probably get materially below that level today. Not sure what the prepayment penalties would be; but are you guys looking at that at all?

Sure, Ryan; we are. We are -- as part of our capital allocation strategy, prepaying debt and defeasance is one of the things that is on the table. I think our preference, all things being equal, we think we could probably deploy that capital more accretively through acquisition than defeasance because, A, the cost is pretty expensive to defease.

As well as, if you look at in particular our 2015 debt maturities, our average debt yield on that, on our 2014 numbers, is high teens. So that actually would make the problem -- we would have more capital because there is significant unused -- there will be incremental proceeds from those maturities.

That is (multiple speakers) something that we are looking at.

How about with regards to the Courtyard Midtown East that is coming due in October? Is there an opportunity to prepay that maybe a few months beforehand?

Yes, we are looking at that as we speak.

Wonderful, that's helpful. That's all for me. Thanks a lot.

Anthony Powell, Barclays.

Hi, good morning, everyone. In Chicago, how does the citywide calendar look for 2015?

It's looking -- the citywide calendar for 2015 is looking up a little bit, about 3.5% compared to 2014.

Great. On the acquisitions, I think before you have mentioned a desire to potentially acquire more resort hotels. How are cap rates trending for resort hotels compared to some of the urban self-service hotels? Thank you.

Sure, this is Mark. I will lead off on that. What we said on the prior call is one of the opportunities that we see in the marketplace -- we are obviously looking in the urban core centers in the top growth markets. But we are also focused on trying to find resort opportunities where (technical difficulty) the real economic growth is in this recovery, where that transient guest is doing well. We are trying to capitalize on that, because there is less competition for those deals.

I think you saw Hersha recently did that deal in the Keys at a 7 cap or so, which compares much more favorably than obviously what we are seeing in markets like San Francisco. But we are going to continue to cast a relatively wide net within the marketplaces that we are seeing.

I think the cap rates are a little -- it depends. If it is more stabilized obviously and less growth, we are going to get a better cap rate. But we are trying to find higher growth opportunities, and so that is always the balance in the cap rate discussion. We will pay a lower cap rate for higher growth, obviously.

I will just add to that, Anthony, the resort business is getting better, particularly skewed by better-performing group business. So those resorts that have been slowest to recover are starting to look more attractive today as their cash flows start to build back to peak performance.

I think cap rates are probably still a little bit across-the-board depending on which region you are referring to. But those are becoming a bit more stable assets these days.

Really helpful. Thank you.

Nikhil Bhalla, FBR.

Yes, hi. Good morning, everyone. Mark, the first one is for you here. In terms of the EBITDA from the Hilton Garden Inn that is going to open in August, are you still expecting $5 million of EBITDA accretion from that hotel for this year, as you were when you had your Analyst Day last year?

Yes. The hotel is on schedule to open late summer. $5 million is our best guess at this point. It may vary a little, depending on the exact opening date; but that is what is implied in our guidance.

Okay. Just going on to your booking pace, I think you mentioned booking pace is right now tracking about 8%. As of your last call, I think it was up 10%.

Could you just reconcile for us, was there more outperformance in 1Q versus what you expect in the back half?

Nikhil, it is Rob Tanenbaum. The booking pace was 9% at the end of Q4, and it is now 8.2%. The real difference came from Frenchman's Reef in quarter-two bookings for this upcoming quarter. This is a large group that didn't repeat year-over-year.

Okay, okay. So fairly consistent. One last question on the Allerton prepayment. Mark, what would be the reasons why this may not close?

They have given us notice that they intend to refinance it with a major institution sometime in the second quarter. They have the ability to withdraw their notice if that financing doesn't come through.

Okay. That's all for me. Thank you.

(Operator Instructions) Wes Golladay, RBC Capital Markets.

Good morning, guys. Looking at the group spend, the ADR looks like it's going to be up 3% for the balance of the -- for the pace. Is that being driven by a mix shift, or are you guys actually raising the rates there?

Wes, it's Rob. It's a combination of both. We are seeing an opportunity to raise rates during compression and -- as well as just overall strong demand.

Okay. You guys appear much more confident now on the group; I guess increasingly more confident each quarter. Are you going to get more aggressive on the rate increase? Or is the idea just to get them in the door and then get them with the F&B spend?

Yes, I would like to say a combination of both. There is times where we will take a group -- for example, over Father's Day weekend we have a Walking Dead group; and really during that weekend it is fantastic rooms-only business with very little F&B spend. So again, it all depends upon the time of year that you want to drive the business.

Okay. For the first quarter, did you have any cancellations on the group side, especially in cities like Chicago, where the weather was pretty bad?

No. We actually had very little cancellation business year-over-year, and that was part of the impact.

Okay. Thanks a lot, guys.

Steven Kent, Goldman Sachs.

Good morning. This is Anto Savarirajan on for Steve Kent. My first question is on the Lexington. At the Investor Day last September you mentioned that the hotel had a $90 ADR gap to comparable Marriotts. Six months in, can you update where the differential stands?

Plus where do you now stand on the retail repositioning of the property?

Certainly. Our retail repositioning continues to grow each day. We have seen since -- from September through March, we have seen a positive momentum, both our BAR and preferred corporate rates.

Our BAR rates are up over 400% plus in terms of revenue during that time period. Our preferred corporate is up over 425%. So we continue to see strengthening in that market segment for us.

In terms of the rate differential between us and the competitive set, I think we are at $40 to $45 of our expected growth.

Got it. I will ask one more acquisition-related question. You mentioned some attributes like West Coast management opportunities, full-service, lifestyle, replacement value, etc.

For acquisitions, can you elaborate a little more on the value creation? Our Troy and team seeing off-market transactions that you can create value out of? Or is it dependent on Bob and team mining cost opportunities without really going down the path of extensive renovations?

Or is it more a desire to diversify geographically? What is driving the thought process?

Yes, this is Troy; I will field that first. I think it is a little bit of all of that. There is a lot of competition out there for all these assets.

And at least I personally in my career have had a pretty successful run at being able to find assets off market, working a pretty broad network of owners and operator relationships. So not everything can you source off market; and I think probably the large majority of transactions you see are going to be done on market.

But we will certainly try to get in and find those relationships where we can buy directly, principal to principal. I will let Rob comment on the value creation on the operating side and the brand side.

Yes, as we continue to focus on the value-creation side, and Sean alluded to it through the prepared remarks, we continue to feel that there is additional upside for us as our teams further partner with our operating partners at the properties. And we are seeing great collaboration.

You see it in the fact that we are able to consolidate management among two hotels of the same operator. Looking at our ways that we can increase revenues, we can improve our productivity. So this is a continual process, and we expect this to have a nice run for us as we go forward.

Thank you.

Lukas Hartwich, Green Street Advisors.

Thank you. Morning, guys. Can you comment on why you think group business has picked up?

Sure. This is Mark; I will take that one. Which is, what we are seeing at our hotels, particularly in markets like Boston, you are seeing more bookings on citywides, you are seeing a number of the groups have more attendees. On an ancillary note we are seeing groups exceed their minimum spend.

I think that the groups generally -- corporate America as well as a number of the associations -- are feeling better. They are getting their people back out into meetings, and they are focused on growing revenue.

We are seeing increases -- I don't want to overstate in a dramatic way, but we are seeing increases in things like incentive travel, where the sales group is being rewarded and getting sent to a Frenchman's Reef or a Sonoma. So we are seeing more and more of that business come back, which is what you would have anticipated in any normal recovery. It just seems to have been delayed given the more unique nature of this economic recovery.

Thanks. That's helpful. Then assuming the Allerton Loan gets repaid, do you guys have an estimate of the IRR on that investment?

Sure. It's probably mid to mid high single digits, 7, I guess, right around there. We made about 16 -- a little over $16 million on that investment.

You guys invested in that in 2012, or was it 2011?

Lukas, this is Sean. 2010.

2010? Okay. Then my last question is, given the strong top-line growth, I was surprised that EBITDA margins didn't grow much more than -- I think it was 95 basis points. And you guys obviously have kept your full-year guidance.

So I am just curious. What was interesting to note in the first quarter?

Sure, Lukas, it's Rob. We still -- we had the ramp-up costs associated with Lexington, especially with franchise fees, now being part of Marriott's Autograph Collection. We did see a very large increase in energy costs throughout their Northeast properties during Q1.

We also had sales and marketing costs associated with the relaunching of both San Diego and D.C. Westins, which are one-time effects. And we did have the renovation of five hotels, though we do expect, as Sean has spoken to and Mark, we do expect our margins to accelerate over the remainder of the year now that all that work is completed.

Yes, and Lukas, this is Sean. Just to add, our margin performance for the first quarter was right in line with what we expected when we gave original guidance. So there was no surprises to us.

Clearly, Chicago being a tough market; New York, slowness in New York City as well as hotels being under the knife during the first quarter hurt our ability to push margins. That was all factored into what we provided to the Street at the beginning of the quarter.

Great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Hi, guys. I just wanted to follow up on the opportunity in the resort, on the resort side. I think historically you guys have referenced maybe having a 10% to 15% of your assets on the resort side. Is that changing a little bit, given the opportunity set here, or how should we be thinking about it?

Jordan there is not a change. Somewhere between 10% and 20% would be our comfort level with resorts. We have had great success with Vail, Sonoma, Charleston Historic District, St. Thomas. Those have performed very well.

We are looking -- we track very closely the type of customers that are really the most robust right now. That upper-end traveler, leisure traveler is doing very well, and there is a number of resorts that are benefiting.

So if we could find an attractive one for $50 million, $100 million, that would fit in our sweet spot.

Okay. Would you say this is more cyclical in terms of the opportunity set being a little bit better on the resort side today? Or do you think it is secular in that there is more competition now for the key or gateway markets?

Well, I think it is both. When you are doing acquisitions, you are always trying to find a trend line, right? You are trying to find something that gives you greater confidence and may differentiate your strategy a little bit from your peers. So this is one area, and we can see it in again our Vail and Sonoma type resorts.

We see that customer doing very well. So that is a place that makes sense to allocate capital.

Conversely, your second theme there, in markets like San Francisco there is so much demand for those assets that they often get priced out of the good real estate deal to the too-expensive-type deal. So we're not likely to win a lot of those market deals in a market like that.

So we are trying to find places that -- where there is a good trend line and where we can find value.

We are also just not seeing any resort development practically; it's a very stagnant pipeline for resorts. So that cost of replacement far exceeds where you can buy. So we are looking at that very closely.

No; that makes sense, and I appreciate you guys being tactical. I guess along the same lines, on the disposition front, obviously you've got some non-core stuff that aren't your favorite children, so to speak.

Is there anything in the portfolio in the hotter markets that could be culled incrementally, to the extent that there is additional opportunity on the resort side? So would you sell anything in New York or Chicago or Boston opportunistically, to the extent that there would be more opportunities?

Yes, that's a great question. I think you've seen over the last couple of years where we are very active capital recyclers. We do think that is a core tenet to our strategy and to being a proactive lodging REIT.

Right now we are sitting on a fairly large cash balance, year-end cash balance, so we're likely to deploy that before we would sell our best-growing assets. We also would look, even in markets like New York or Boston, for assets where we think someone today might be willing to pay us for all the future value creation we can generate at that hotel.

Some of those opportunities may arise. The focus has generally been on selling slower, non-core, lower-quality assets; and I think you will see more of that as that is more likely than selling in these core markets.

Okay. Thank you.

This concludes our question-and-answer session. I will now turn the call back to Mr. Mark Brugger.

Thank you, operator. To everyone on this call, we appreciate your continued interest in DiamondRock and look forward to updating you next quarter.

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