Diamondrock Hospitality Co (DRH) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-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. Please proceed.

Thank you, Kim. Good morning, everyone, and welcome to DiamondRock's second-quarter 2014 earnings call and webcast. Before we begin I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities laws and may not be historical fact. They also may not be updated in the future. These statements are subject to risks and uncertainties, as described in the Company's SEC filings.

As management discusses certain non-GAAP financial measures, it may be helpful to write review the reconciliation 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. He is joined by DiamondRock's senior leadership team of Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. Mark?

Thanks, Brett. Let me begin the call by stating the obvious: This is a great time to be in the travel business, especially lodging. We continue to benefit from the favorable combination of low supply and increasing demand.

Overall, US supply growth was 0.8% in the second quarter, which is less than half the historical average. Against this attractive macro background, our core customers are doing well and pushed industry hotel occupancy up 3.6% and rate up 4.4%.

Moreover, the economic data looks very encouraging. There are several key economic metrics that we closely monitor because they correlate to lodging demand. These corollaries show strength and momentum on the demand side.

First, the overall economy grew at a robust 4% annual rate in the quarter. Second, employment trends are positive, with monthly job growth exceeding 200,000 for 6 straight months, the longest stretch since 1997.

Third, consumer confidence recently hit a 7-year high. Lastly, enplanements were up a healthy 3.4% and are even higher at key airports like LAX, up almost 7%.

These are all encouraging signs for the industry, and DiamondRock is well positioned to benefit. Our strong quarterly performance and our increased guidance are a testament to our confidence in our business.

Trends in international travel also support the positive outlook for the lodging industry. In 2013, 69.8 million international visitors traveled to the US. The Commerce Department projects that figure to grow 3.5% again this year and by more than 20% by 2018.

Additionally, the JOLT Act, which is the travel act pending in Congress, would add nine additional countries to the visa waiver program. Brazil would be the most impactful. These changes could bring another 1 million visitors to the US annually.

However, while we have a bullish outlook on lodging fundamentals and growth, we recognize that this is 5 years into the recovery and firmly believe that we at DiamondRock need to remain committed to a strategy that is aligned with the middle innings of the cycle. Early on in this cycle we transformed our portfolio through strategic acquisitions and dispositions, as well as significant repositionings and renovations at hotels across our portfolio. To enhance our results, we also embarked on a much more intense asset management program.

Our second-quarter results, which I will discuss later, provide evidence that we are well positioned to reap the benefits of our enhanced portfolio and asset management initiative in what should be some of the best years of the lodging cycle. The Company's future results are also likely to be bolstered by our fortress balance sheet and financial flexibility.

We are projecting to end 2014, even after funding the Times Square deal, with more than $185 million of corporate cash. That said, DiamondRock will remain disciplined in our capital allocation, and we'll carefully evaluate the most attractive areas to deploy capital, which may include: funding hotel acquisitions; returning capital to shareholders through dividends; repaying current debt at maturity; or maintaining dry powder for opportunistic share repurchases in the future.

In evaluating the best use of our capital, it is worth noting that we have tightened our acquisition strategy and have strict investment criteria that I would like to highlight here. We continue to target opportunities in urban and resort locations, with an emphasis on markets where we are currently underexposed. We are targeting several prime markets on the West Coast and South Florida, as well as select destination resort areas.

Further, despite our conviction that there are several more years of industry growth ahead, we believe that it is prudent to avoid opportunities that require significant capital investment or deep and lengthy turnarounds. Moreover, in any opportunities we choose to pursue, we are primarily targeting smaller deals in the $50 million to $150 million range. Finally, we are very sensitive to our cost of capital and will only pursue acquisitions that create near-term value.

Now I would like to briefly touch on our strong second-quarter results, which exceeded our internal expectations, outperformed the industry, and showed increased traction from our recent execution. Our portfolio delivered 11.9% RevPAR growth. Profits were up, with hotel adjusted EBITDA margins expanding 243 basis points.

Impressively, the portfolio gained over 5 points of market share during the quarter. This strong and accelerating performance year-to-date provides positive momentum for the remainder of 2014. As a matter of fact, our portfolio RevPAR growth was up over 15% in July.

Our West Coast, New York City and Boston hotels led the way for portfolio in the quarter. The Lodge at Sonoma was the strongest performer of our West Coast hotels with 12.7% RevPAR growth. Both of our hotels in Boston benefited from compression in that market, and they averaged 16.3% RevPAR growth.

Our three renovated hotels in New York City experienced substantial growth in the quarter. And our investment in the Lexington to convert it to Marriott's Autograph Collection is playing out as we had hoped. The customer feedback on the Lexington renovation continues to be extremely positive.

While we are on New York, I would like to provide you with an update on the Hilton Garden Inn Times Square Central. As many of you know, DiamondRock placed this newbuild hotel under contract over 3 years ago at only $450,000 per key, for a total purchase price of $127 million. The hotel is finishing construction as we speak and, based on hitting the current construction schedule, the hotel will open in about a month.

The hotel is still expected to generate nearly $5 million of hotel adjusted EBITDA during 2014. The advance bookings on the hotel have been amazing. We remain confident that this will be a great financial deal for our shareholders and generate a stabilized EBITDA yield on our investment in excess of 9%.

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 second-quarter results, please note that our reported pro forma RevPAR margin data excludes the Oak Brook Hills Resort, which was sold early in the second quarter.

We expect our 2014 operating results to continue to benefit from several portfolio-specific catalysts, including: outsized growth from our $140 million capital renovation program; enhanced performance from the Lexington Hotel, driven by the rebranding to 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 second-quarter numbers. Overall, it was another strong quarter, with results slightly above our expectations.

The Company reported adjusted EBITDA of $70.9 million and adjusted FFO per share of $0.26. The strength of our second-quarter results gives us confidence to increase our 2014 guidance as well as validate last year's $140 million capital program and our asset management initiatives. We expect our momentum to continue through the balance of 2014 and into 2015.

Our pro forma RevPAR growth of 11.9% was the result of a 6.3% increase in the average rate and a 4.2 percentage point increase in occupancy. The RevPAR growth was led by a 25% increase in business transient revenues. This contributed to pro forma hotel adjusted EBITDA margin expansion of 243 basis points.

For the year-to-date period ended June 30, the Company reported pro forma RevPAR growth of 10.3%, which was the result of a 5.5% increase in the average rate and a 3.4 percentage point increase in occupancy. Our year-to-date portfolio hotel adjusted EBITDA margins have expanded 175 basis points, which is in line with our expectations.

Our margin growth is expected to accelerate during the last two quarters of 2014, with the strongest margin expansion achieved during the third quarter. The midpoint of updated guidance results in over 265 basis points of hotel adjusted EBITDA margin expansion, which is slightly higher than prior guidance.

This past quarter's results were impacted by anticipated group softness as a result of the Easter shift, which was accounted for in our prior guidance. The soft group quarter resulted in a 2.3% decline in group room revenues and a 1.3% decrease in food and beverage revenues, primarily in banquet and catering. However, despite the decline in F&B revenues, our asset management initiatives enabled us to maintain flat F&B margins during the quarter.

Looking ahead, our group segment remains well positioned to outperform, with our group booking pace for the balance of the year up 13.4%. We currently have over 92% of the forecasted 2014 group business on the books, and we expect group to be particularly strong in the third quarter, as pace is up almost 25%.

Our pace will moderate in the fourth quarter, with group revenues expected to be flat versus the prior year. Overall, our 2014 group pace is up 8%, driven by a 5% increase in rooms and an approximately 3% increase in average rate.

The second quarter reflected some exceptionally strong results at many of our hotels, with nine hotels reporting double-digit RevPAR growth. Now let me spend a few minutes highlighting some individual hotel achievements.

As expected, the Lexington Hotel's second quarter continued to ramp up from last year's renovation and rebranding to Marriott's Autograph Collection. The hotel achieved 123.5% RevPAR growth and over 4,000 basis points of margin expansion.

In the quarter, Marriott channels delivered over 60% of the room revenue for the hotel. We have high expectations as the hotel further gains awareness with both transient and special corporate customers. We are pleased with the direction the hotel is going and expect to hit our underwriting for 2014.

Our two New York City Courtyards continue to benefit from our capital investment, with a combined 28% RevPAR growth and close to 1,000 basis points of margin expansion.

The Boston Hilton extended its multi-quarter run of double-digit RevPAR growth, delivering over 28% growth by taking advantage of both citywide compression and strong special corporate demand. This allowed us to focus on minimizing lower-rated segments, such as government, in favor of the higher rated BAR and rack segments. The hotel continues to outperform the market, gaining 15 percentage points of market share so far in 2014.

The Boston Westin also took advantage of citywide compression, with a 10.5% RevPAR growth. The hotel had great wins in the business transient segment, with close to 50% growth in rooms sold at an 11% higher average rate. Impressively, these results were achieved during a slow group quarter.

Despite a close to 5% decline in banquet and catering revenues, our asset management initiatives contributed a 239 basis points of banquet and catering margin expansion. Group is expected to improve during the third quarter, where the hotel booking page is up over 40%.

The Charleston Renaissance second quarter was the best in the hotel's history. The hotel achieved an impressive 14.6% RevPAR growth with over 70% flow-through. Finally, the Sonoma Renaissance also outperformed, with RevPAR growth of 12.7% and margin expansion of 439 basis points.

Challenges in the Chicago and Washington, DC, markets partially offset these performances. The Chicago market experienced an 8% decline in citywide room nights during the second quarter, which contributed to a 4% decline in group room revenues at the Chicago Marriott, impacting our robust second-quarter portfolio RevPAR growth by 3.4 percentage points. We expect group revenues to increase approximately 3% during the back half of the year in Chicago.

Washington, DC, finished modestly below expectations due primarily to a 70% decline in citywide activity during the quarter. However, group business in Washington is expected to be strong during the third quarter, where our pace is up over 100%.

I am also happy to report that we are gaining momentum at our DC Westin. The hotel gained double-digit market share in July and is expected to grow RevPAR by over 20% during the remainder of 2014.

Next I would like to provide a brief update on recent asset management initiatives. We are pleased with the progress we have made with the portfolio to date.

In particular, our asset management initiatives are beginning to show up in the numbers, 2ith portfolio hotel adjusted EBITDA margin expansion of 243 basis points. The margin expansion is even more remarkable during a slow group quarter.

We expect our margin expansion to accelerate during the third quarter as we expect to benefit from robust group contribution. Our fourth-quarter margin expansion is expected to be slightly behind the third quarter, due to the lapping of our 2013 renovation disruption, but still exceed the 175 basis point year-to-date margin expansion.

Touching on a few of our initiatives this quarter, we are finalizing our plans to add 41 rooms at the Boston Hilton. The total project is expected to cost approximately $9.5 million and take place during the seasonally slow period this winter.

This project is expected to generate an IRR of approximately 20% and add over $15 million to the hotel's net asset value. We don't expect any disruption from this project.

We are making great progress on our plans to convert unfinished space at the Boston Westin into 12,500 square feet of valuable meeting space. This project is expected to be completed later in the fall, achieve an IRR close to 30%, and not cause any disruption.

We are also re-concepting vacant restaurant space at the Lexington Hotel. This flexible space will be an elite lounge serving breakfast in the morning, be sold for group meetings during the day, and provide additional capacity for the high-demand lobby bar in the evening. This project, which will be completed by the end of the year, is expected to cost approximately $1 million and achieve an IRR of over 30%.

Finally, we are continuing with our plan to add new rooms at the Vail Marriott, JW Marriott Cherry Creek, Westin Washington, DC, our two New York City Courtyards, and the Sonoma Renaissance. We will provide updates as the scope and cost of these projects are finalized.

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 REITs, and 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. Our conservative balance sheet is a key element of our strategy and positions DiamondRock to deliver superior shareholder returns across all phases of the lodging cycle, while also preserving our ability to pay a meaningful and sustainable dividend. Since our IPO, we have paid dividends of approximately $500 million to our shareholders.

We continue to maintain ample liquidity, which was improved as a result of the excess proceeds from the Courtyard Midtown East refinancing and the settlement of the Boston litigation. After funding the Times Square acquisition, we expect to end 2014 with approximately $185 million of unrestricted cash.

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.

Thanks, Sean. Let me turn to our outlook. We raised our full-year guidance this morning, which reflects our conviction in the strength of the lodging demand within our markets as well as our second-quarter outperformance.

Our updated 2014 guidance is for RevPAR growth of 9.5% to 11.5%, an increase of 50 basis points. Based on that growth, we project adjusted EBITDA of $225.5 million to $235.5 million, an increase of $2.5 million at both the bottom and top ends of the range.

Consequently, we expect adjusted FFO per share to be in a range of $0.84 to $0.88. Importantly, our strong guidance is supported by excellent group demand for the back half of 2014. Our group pace for the second half of the year is up over 13%, with the bulk of that strength in the third quarter.

To sum things up, we had a strong second 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 attractive growth and shareholder value creation.

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

(Operator Instructions) Jordan Sadler, KeyBanc Capital Markets.

Hey, guys. It's Austin Wurschmidt here with Jordan. Thanks for the additional detail you gave on the acquisition criteria.

I was just curious. Given the favorable operating environment and the strong competition for deals today, particularly on the West Coast, have you found it difficult identifying potential opportunities on the acquisition side?

Yes, Austin; this is Mark. We will let Troy handle that. I know we have been very active in looking at deals, and Troy can give the most color on that.

Yes, hey, Austin. We are always looking at a broad variety of deals on the West Coast and on the East Coast. So our pipeline is very active in terms of evaluating these deals.

We are both evaluating things that are on the market that are being brokered as well as quite a number of opportunities that are off-market, that based on our relationships we are having direct conversations with owners.

Those marketed deals we may participate in, but rarely will we win those. A lot of times, we look closely at those just to gauge pricing trends and give us better flavor on where things are underwriting from other companies.

It is very competitive out there, and a lot of folks are also looking on the West Coast. But we are in those markets regularly. We think that we don't miss any deal that is available out there, and we are just actively engaged with all the constituents in these markets.

So, I like our chances at least of seeing things. But we will be prudent with our investment decisions.

Thanks for the color there. Then just quickly on the Hilton Garden Inn, it looked like you guys pushed back that, from the timing on that, from early August, so about a month, but kept the contribution in the second half of the year unchanged. Is that just a function of you guys had a little bit of wiggle room in there? Or are things trending better than you previously anticipated?

Yes, Austin; this is Mark. Yes, it is about a month later than we originally anticipated, mostly due to last-minute permit delays. And we are actively trying to finish up that project as quickly as we can. As you can imagine, the final days are always the busiest there.

We are taking more comfort in the advanced bookings that we are seeing through the Hilton booking channels. What we are seeing on the books for late September, October, and November exceeded our original expectations. So we still feel very good about the $5 million.

Austin, this is Sean. Some other things positive for that. Rob has had some great wins in combining some costs at the overhead level, combining GMs, Director of Engineering, HR, and some other things, which has taken some cost out of the operating model that we would have thought needed to be in there. So great wins by Rob and the asset management team.

Thanks for the detail there. Then just switching over to Chicago, it sounds like you expect things to pick up in the second half of the year. But could you just give some color on the outlook for the group side, particularly in Chicago in 2015?

Absolutely, Austin. We think for Chicago for 2015, we are balancing -- we're flat right now in our promotions there. And we think that the team -- we know where the team is headed. We have allocated additional resources, so we feel confident in what the Chicago Marriott team is going to be able to produce for 2015.

Hey, it's Jordan. I just want a quick one on the Hilton Burlington. Any thoughts on ownership there, holding that longer-term, given the potential change in the economic outlook or framework, given the potential sale of the IBM facility?

Yes, we just -- there is actually a number of good things happening in the Burlington market. We just finished the renovation a few months ago, which turned out really terrific. We are constantly evaluating all our assets, so we will continue to monitor that one.

Okay, thank you.

Anthony Powell, Barclays.

Hi, good morning, everyone. Good results today.

Thank you, Anthony.

Clearly, Lexington result is pretty strong. How far along are you in closing that $90 ADR gap you have discussed in the past?

Yes, Anthony, this is Rob. We are about midway through closing that gap. Where we are really encouraged is when you look at our special corporate demand. We had over $2.2 million of special corporate business in Q2; that compares to about $83,000 in the year, same time last year.

So we see we are progressing well in further moving that needle.

Yes, Anthony; this is Mark. I would just add, as we have said all along, it takes about 3 years after a brand conversion to wring all the juice out of that move. So we are obviously less than a year into it right now, and it is proceeding as we expected.

So we are gaining a lot of traction with the special corporate. We are obviously reintroducing it to a number of transient travelers that have been there before. And we are getting a whole lot of new travelers coming through the Marriott channels now.

So as people try it, the reactions from the guest has been extremely positive. So it will continue to build momentum over the next 2 years.

Great. One more follow-up. Thanks for the updated investment criteria. It seems like the deal environment is getting a bit more challenging.

Given that, are you looking more at accelerated share repurchases, prepaying debt? Or is it more likely that you would be exploring those two other options versus doing more deals? Thank you.

Yes, Anthony; this is Mark. Everything is on the table, so we constantly evaluate those. Obviously we have a good handle what our cost of capital is.

We are obviously looking at the market, understanding pricing, and considering that versus alternative uses of capital. Right now we are optimistic that we might find one or two deals that would create more value; but we know the numbers. So everything is on the table is what I would say.

Great, thank you.

Andrew Didora, Bank of America.

Hi, good morning, guys. I guess I wanted to focus a little bit on cash as well; and Mark, certainly appreciate the commentary in your prepared remarks in terms of your priorities there.

But I wanted to maybe ask a little bit more about cash flow over the next few years, combined with the cash balances you have right now. Obviously your heavy CapEx work is behind you. Low leverage should be generating significant free cash flow.

I think your dividend payout ratio right now is a bit above 50%. With this cash do you think you can push that higher, as you get later on in the cycle?

Andrew; this is Mark. Generally our dividends have tracked our cash flow growth. So I think that would be a fair baseline.

It is obviously a Board decision how we increase our dividends. But as our cash flow increased, we have generally matched that with an increase in the dividends.

For the cash balance, obviously as we discussed in the prepared remarks, we have a lot of options available to us. So as the quarters progress and we see what the acquisition market is, see what price our stock is trading at -- and also we have some debt maturities which we could potentially lower our leverage and be poised to be opportunistic in the future -- all those alternatives are on the table.

So I think it will depend a little bit what pricing is in the market and how our stock performs.

Okay, thanks.

Ryan Meliker, MLV & Company.

Hey, good morning, guys. I just had a quick question. I just wanted to really get some clarity from you. So it looked like in the quarter you recognized a $1.8 million benefit associated with corporate expenses related to the litigation settlement. Well $1.8 million was obviously expenses you had in G&A prior to 1Q, and it was a benefit of $1.8 million in 2Q. Is that correct?

Ryan, that's right. Those expenses were recorded over the last couple years. As part of the settlement we got reimbursement of those expenses; so they were not added back to our adjusted EBITDA and adjusted FFO in prior years. So we thought it was appropriate to not take them out this year.

So, were you expecting that type of benefit this year? Was that embedded in your guidance prior?

Yes, it was.

It was embedded in the guidance? Okay.

It was.

That is what I was trying to figure out, because I was like -- RevPAR is going up, margins are going up, but EBITDA is only going up slightly more than that benefit. But if it was built in, that makes sense.

That's all for me. Thanks a lot. Nice quarter.

Thank you, Ryan.

Chris Woronka, Deutsche Bank.

Hey, morning, guys. Noticed a little bit of underperformance at a couple of what I think are non-core hotels. You obviously already sold Oak Brook.

But should we read into that that those hotels are being marketed? Or were those maybe just more market-specific issues?

Hey, Chris. I think it is a variety of stories. Obviously, we don't measure hotels -- one underperforming quarter doesn't mean we sell a hotel. We manage our money for the long-term.

On the disposition front, I would say if you look at what we have done over the last several years, we have generally monetized the lower-RevPAR lower-growth-profile hotels. So when you think about the hotels that we are likely to monetize this cycle, it is going to continue to have those criteria generally.

Okay. Yes, I was just wondering if there was a correlation between the underperformance and whether you were actively marketing them, and that was why they maybe underperformed. Again, it is just a couple instances.

Yes, I would say it is one quarter. So we look forward, not necessarily at the one quarter. But there is no direct relation between a marketing effort and the quarterly results that we are looking at here.

Okay. Got you. Then sounds like you guys are very bullish on the international inbound story, which I agree with. Can you remind us what percentage of your business is international in New York, and maybe for the portfolio as a whole?

Yes, Chris, it's hard to measure. Obviously, we're the beneficiary in New York of the compression for all the international travel, despite having more or less at our particular hotel. New York and Miami and LA, probably the top three markets that will benefit from the increased inbound international.

So we not only look at the impact on our current hotels, but as we are allocating capital and looking at our acquisition efforts, we are trying to get ahead of those trends to understand who is going to benefit the most. So, for instance with the JOLT Act, if it does go through with the Visa waiver program, Brazil would have, we think, a big influx.

So where are they going? How do we get ahead of that trend before others do? Those are the kind of things that we are trying to monitor, be really smart about how we allocate our capital going forward.

This is Sean. This is also -- the international visitation, as we eclipse prior peak occupancy in the industry, allows us -- it just gives us confidence in an elongated cycle, which is obviously our macro view, that we believe this is a cycle that is going to last longer than the last two. So that increased international visitation, coupled with we are already at saturation from an occupancy perspective on the industry, gives us great confidence that we will be able to have pricing power for the next several years.

Okay. Got you. That is good color.

Then just going back to Chicago for a second, is the problem entirely group, or is it something else? I think one of your peers recently might have been the first one to say: Yes, it actually -- the whole picture just doesn't look quite as good for this year.

Is that -- you guys seeing any weakness on transient? Is it supply or something else?

We are seeing still good short-term demand in Chicago, which is encouraging. We are also seeing our group spend going up there.

We had five groups in June and July that increased their spend 166%, from $81 per occupied room to $221. We were really pleased with that.

It is a very short-term market, continues to be, and it is a variety of factors. The convention calendar has changed as has -- there has also been new supply addition. So it just makes for opportunities to creatively market your asset.

Okay, very good. Thanks, guys.

Rich Hightower, ISI Group.

Good morning, guys. A couple questions. One, to follow up on the acquisition question from before, just curious. To the extent that you are missing out on deals, where exactly do you think you are missing?

Is it just in terms of the going-in cap rate? Is it the leverage you are willing to take down? Is it your view on the cycle, whether you're willing to underwrite a recession several years out, versus your competitors? Just where do you think you might be missing at this stage?

This is Troy. I'm not sure we're missing. We have been competitive in a number of bids recently.

We price where we think they make sense, and we're not always going to win those bids. There is a lot of capital out there, admittedly, and the availability of debt financing. And I think some of these private equity groups take bigger risks than we do.

So we are in a lot of these, and we make our marks where we are comfortable with them. So I don't -- I am not sure we are missing. I think we are making -- when we do miss, we miss and we are comfortable with our position.

Rich, I think the key takeaway on the acquisitions is that we are going to continue to be disciplined. And the fact that we haven't done any yet is a function of -- listen, Troy is spending a lot of time looking at acquisitions, and we are underwriting deals. But the fact of the matter is that we are going to continue to be disciplined.

We don't feel compelled that we need to buy today. We think that we will likely be able to achieve strong returns if we do; but we are not going to buy for buying's sake.

Okay. Thanks, Sean. I think the investment community would agree with that philosophy.

Second question is on New York. Clearly you are assets are a very different story than the market, given the renovation tailwinds, which have obviously been very successful to date.

But it seems like among the REITs that reported in the second quarter, there was a bit of a dichotomy between maybe the transient, smaller-box focused companies and the bigger-box group focused REITs, in that I think that the smaller-box guys did a little bit better and benefited from the fact that demand outpaced supply in the quarter. I am wondering if you have any general thoughts on that topic specifically.

Are there different segments of the market that are benefiting from that demand growth right now? Just any general ideas on your part. Thanks.

We are seeing demand just very strong of late. I will give you an example. Two nights ago at the Lexington, we were selling suites for over $1,000; we had two suites at $1,000, one at $1,750. Quite a bit of compression demand going on in the market.

And I think it is a combination. There is quite a bit of both group and transient demand out there. There is room-only group that is available for New York City. So we are not seeing a whole slew of challenges on that side of it.

Yes, Rich; this is Mark. I would just add, obviously we don't have any group houses in New York. I think there was some concern about the supply coming in, obviously, this year.

Some of the group houses may have grouped up as a defensive measure, which is -- and I think New York actually in the quarter, and we are seeing it this summer, is a little stronger than people expected. And obviously the smaller, more transient-oriented boxes have the ability to capture more of that short-term value, where some of the group had locked in defensive position, which is probably making it harder to push it right now.

Transient demand is very strong across the industry. In our portfolio, Rich, our revenue for transient was up 25%, which was primarily driven -- almost exclusively driven -- by incremental room nights. We also had strong demand out of our leisure transient during the quarter as well, which is up 16%. That compares to group which was down slightly, a little over 2%.

So we feel good about the transient strength during the quarter. And we expect transient to continue to be strong throughout the year.

Okay, great. Thanks for the color, guys.

Wes Golladay, RBC Capital Markets.

Good morning, guys. Looking at the acquisitions, it appears you guys would have a bit of a competitive advantage where a property would need operational changes; and you guys are also more willing to go after resorts. So are you seeing any resorts where you can switch the mix of the -- on the operations? Anything like that in the pipeline?

Well, we are seeing resorts out there and we are compelled with the group demand that has been picking up a lot. So the cash flows on these resorts are looking a lot more better from our perspective.

So we are active in the resort search, and generally we think that is a market that probably has more upside than it has in the past couple years, given the resurgence of the group demand.

Anything in there where Rob and team can make some changes and flip the needle for the next year and you can put in your underwriting? Is that how you guys will win acquisitions rather than buy core assets?

Wes, generally yes. So we are obviously looking core markets, through all of these resort markets. As we said in the prepared remarks, we don't think that this is the time in the cycle to take deep turnarounds. A Lexington, for instance, where you buy it, plan it, take a year to renovate it and a couple years to realize the benefits.

So a likely scenario is where we find a hotel that has been under-managed, owned by the same family, an owner for 25 years, and there is the ability to go in there and shake it up by either changing the manager or just getting very aggressive on both the revenue and the cost side with our asset management expertise. So that is a likely scenario for us.

We also believe that the resort trends, because you asked that question specifically, are very strong for these, say, four-star resorts. That customer is doing extremely well in this recovery that we are having now.

We have looked at a couple, and frankly we think they are underpriced and underappreciating that trend line. So we see an opportunity there; we are just trying to make sure we find a deal that works on all the points that we are underwriting.

Okay. One last question. Looking at the Hotel Rex, it has been an underperformer. But when I look at TripAdvisor it looks like a really strong hotel, very well appreciated.

Is there anything holding that back, such as legacy business on the books? Or is there anything you can do there?

That is a great question, Wes. You're right. There is some legacy business that we are pushing out of that hotel. And we see that starting in Q3 and beyond we won't have that lapping issue going forward.

We are very focused on the revenue management side on the hotel. We also have a new GM there, so we are very excited for what he is going to bring to the asset.

Okay. Thanks a lot for the color, and good quarter, guys.

Thank you.

(Operator Instructions) Nikhil Bhalla, FBR Capital Markets.

Hi, this is Weston Bloomer asking on behalf of Nikhil. Most of my questions have already been answered, but I have one more on group pace specifically for 2015. It was pretty helpful when you guys provided group pace for Chicago.

I know it is pretty early, with not a lot on the books; but could you guys provide an outlook on group pace for 2015 over 2014 levels? I think at this point group pace in 2Q 2013 was tracking between 9% and 10% for 2014. Just trying to get a comparison there. Thank you.

No problem; this is Sean. I will start by just telling you that group pace for 2015 -- it is a little early to do anything meaningful on 2015. As we sit here today, a little over 50% of our 2015 business is on the books; so it probably won't be as meaningful now as it would be next quarter -- is when we really want to start talking about 2015 pace.

But that being said, our pace year-over-year is down a little bit for our portfolio. We actually feel pretty good and feel strong about the first half of the year. There is holes in the back half of the year, but we obviously have a lot of time to fill that.

I think on specific markets, our three big group hotels -- Rob has already talked about Chicago. But Boston is up close to 8% in pace, and that is coming off a record year in 2013 -- pardon, 2014. Then Minneapolis, which has roughly flat citywide activity, is actually up a little bit on 2015.

So we think it is really too early to draw any conclusions on the 2015 booking pace. And we will provide more color on that after the third quarter.

Yes, Wes, I would just add two points. One is, the holes that we have are in the back half of the year, so there is plenty of time to fill those, and we are getting good momentum. The second is a number of the properties -- not the big group houses, but the smaller houses, we have taken a more aggressive approach. And actually in some of those, we have decided to lower our group exposure because the transient is good.

So DC Westin is one where we think there is more upside on the transient, so we are actually holding back some of the group at those hotels, because we think we will get a higher RevPAR and more profitability by employing that strategy. And Rob has really taken a property-by-property approach, looked at the market, the citywides, and changing the mix at some of these hotels to maximize profitability in 2015.

Okay, got you. That is very helpful. Thank you.

Lukas Hartwich, Green Street Advisors.

Thank you. Morning, guys. What was the deal with that litigation settlement? I don't recall hearing about that before.

Sure, Lukas. It is at our Westin Boston. There were some construction defects with the waterproofing in the garage, where it needs to go back and be resealed.

So there was a suit brought against the contractor, and we prevailed. So they settled it with us and we received a gross amount of about $14 million.

So you guys probably repaired that a couple years ago and they just now reimbursed you for it, essentially?

No, we will repair it over the next couple years during the downtime, to try to minimize disruption (multiple speakers).

Okay. Then you guys have any updates on your thoughts of what you may do with the land option at the Boston Westin?

Yes, Lukas; this is Troy speaking. That is one of my top priorities this year, is to evaluate and make a decision here on our expansion plans there. Obviously, the seaport is a particularly strong area, a lot of new construction there. So we are spending a lot of time evaluating that decision.

Okay, great. Thanks.

Anthony Powell, Barclays.

Hi, just a follow-up on the transaction environment. As it becomes harder for REITs to buy single assets, how are you viewing M&A as a possible alternative within the REIT space? Thanks.

Yes, I guess there's two questions really in there. There is the public-to-public and then there is the public pursuing private portfolios, which theoretically you may be able to get at a better price.

I think the outlook by most of the companies -- and I am going to guess most of the board of directors of the public companies is similar to ours -- which is: this is a great time; there are a lot of opportunities to grow through organic cash flow growth, because it will be most likely an elongated cycle.

There is, obviously, value to being bigger with a number of these companies to try to lower your cost of capital, particularly your cost of debt, and increase your liquidity. But I think for certainly 2014, I think it is a less likely scenario.

As we mature through the cycle, the odds start going up. I think that is the set-up.

Okay, ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back to Mark Brugger for closing remarks.

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

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