Diamondrock Hospitality Co (DRH) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2014 DiamondRock Hospitality Company earnings conference call. My name is Denise and I'll be the operator for today.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I will now turn the conference over to Mr. Brett Stewart, Director of Finance. Please proceed, sir.

Thank you, Denise. Good morning, everyone, and welcome to DiamondRock's fourth-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 law and may not be historical fact. They may not be updated in the future. These statements are subject to risks 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 Chief Executive Officer. Joining Mark on today's call are Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. Mark?

Thanks, Brett. This is one of those earnings calls that you really look forward to because all the pieces seem to have fallen into place.

The fourth quarter finished strong and closed out a record year for DiamondRock. During 2014 our portfolio generated pro forma RevPAR growth of 11.6% and 275 basis points of profit margin growth, both which are among the highest, if not the highest, in the peer group.

The overall execution of the Company was excellent on a number of fronts in 2014. Our asset management, our initiatives to maximize hotel operating results were equally effective on both the top and bottom lines. Our asset management teams motto is -- gentle pressure applied relentlessly.

Acting as a strong guiding hand and proactive with the teams at our properties, we work to diligently implement new, often aggressive, revenue management strategies across our portfolio. The payoff in 2014 was evident, as almost half of our hotels generated double-digit RevPAR growth.

The cost containment and profit flow through efforts also yielded great results, with 15 of 27 hotels, growing hotel adjusted EBITDA margins by more than 200 basis points. I'm very proud of our asset management team, and our COO Rob Tanenbaum in particular, for these successes.

Equally important, our investment program had a number of wins in 2014. As we started the year, the strategic goal was to continue recycling capital from slower growth non-core assets, into higher-quality hotels located in great long-term markets. Frankly, we exceeded our original expectations, as we found unique buyers and uncovered several high-quality accretive acquisitions, despite a very competitive environment.

In 2014 we successfully sold two non-core hotels. The Oak Brook Hills Resort in suburban Chicago was sold for 30 times the trailing 12-month EBITDA. And the Los Angeles Airport Marriott was sold for a 6% cap rate including deferred capital to a Chinese entity.

To put it into perspective in terms of quality, the combined 2014 RevPAR for those sold hotels was only $108, which is 33% lower than our portfolio average. This really is a case of addition by subtraction for DiamondRock.

We are even more pleased to talk about our acquisitions in 2014. Last year we invested approximately $325 million to acquire three hotels, and each one is turning out to be a compelling story on its own.

The Hilton Garden Inn Times Square Central finished the year with an average RevPAR of $262, and is on track to generate an impressive 9% EBITDA yield in 2015. As you may, know we booked a $24 million gain on this acquisition last year.

The second acquisition was the Inn at Key West, which has high average RevPAR of $184, exceeded our underwriting, and our purchase price now represents an 8.2% cap rate on 2014 NOI.

The final acquisition in 2014 was the Western Beach Resort in Fort Lauderdale. We replaced the hotel manager upon acquisition, and we are implementing our asset management initiatives. In the first year, we underwrote the pull out over $2 million of costs, and expand profit margins by 1,000 basis points.

I'm pleased to report today that the hotel is currently forecasted to beat our underwriting by almost $1 million this year. As you can imagine we are really thrilled with this investment.

Additionally, this morning we announced the acquisition of the 157-room Shorebreak Hotel, which is located beachfront in Southern California. We brought in Kimpton to take over management of this lifestyle hotel. Our purchase price represents a 12.8 times multiple of 2015 forecasted EBITDA.

The Shorebreak deal met all of our investment criteria. It's located in a target West Coast market with great growth prospects, it's immediately accretive, and it has ample opportunities for us to implement new asset management initiatives to enhance performance. Moreover, the acquisition of the Shorebreak was match-funded with proceeds generated in the fourth quarter from our at-the-market equity program.

The decision to match fund the acquisition with equity was primarily driven by two considerations. First, we were able to opportunistically lock in value creation through spread investing as we issued stock at a gross price of $15.13 per share, or an implied 14.5 times EBITDA multiple on the mid point of our guidance. We redeployed that capital at more than 1.5 times better multiple.

Secondly, the equity issuance allowed us to make approximately $20 million of investment capacity which sets us up nicely for 2015. Of course we will remain disciplined in evaluating capital allocation opportunities, and are confident that our team will be able to identify acquisitions that meet all of our investment criteria.

The team is particularly focused on adding West Coast exposure and finding unique opportunities to create value, primarily through asset management initiatives. We are generally shying away from larger bets, as well as deals that might require significant capital investment and lengthy turnarounds.

We are primarily targeting medium-sized acquisitions in the $50 million to $150 million range. Our last four deals, as I described above, and the Hotel Rex, San Francisco before that, really represent the kinds of deals that we are looking to do.

Before I turn the call over to Sean, I want to take a moment to discuss the New York City market. We remain bullish on the long-term fundamentals and real estate values for New York City, although supply clearly remains a short-term issue.

However, the city recently set a monthly occupancy record and finished last year at over 85% occupied. The city also set another record in 2014 with more than 56 million inbound visitors, and expects to break this new record again in 2015.

As important as the long-term demand trends, which have been double the national average over the last 25 years, real estate values in New York City continue to rise. New York remains, by a wide margin, the most liquid and globally sought after market for real estate investment in the United States.

NAVs have made solid gains over the last year as average prices exceeded prior peak, with select service trades hitting $650,000 per key, and full-service hotel trades recently hitting $1.4 million, and then $2 million per key. New York City hotel transaction volumes for the last two years was $5.5 billion, double that of the next most active market. New York City also commanded the largest amount of international investment dollars, with offshore investors accounting for 55% of total Manhattan hotel transaction volume.

Now, we do expect the first quarter to be difficult for the market as supply will impact the first quarter the most because it's the seasonally slowest demand period of the year, and there is a difficult Super Bowl comp. However, to put it into perspective, the first quarter only represents about 6% of full-year EBITDA at our hotels. As we move through the year, we do expect RevPAR to strengthen and demand to outstrip supply for the balance of the year.

I want to emphasize on this call that DiamondRock has a differentiated New York portfolio. Our New York City hotels grew RevPAR approximately 9% in the fourth quarter, which outperformed the market by 800 basis points. We expect this trend of significant outperformance to continue into 2015 for three reasons.

First, the Lexington Hotel, which accounts for more than 40% of our New York City exposure, is still ramping up from its $47 million renovation and branding conversion. For 2015 we expect the Lexington to outperform the market with RevPAR in the high single digits.

Second, our newly opened Hilton Garden Inn Times Square is also ramping up and is expected to have a terrific 2015. Lastly, in total, approximately 70% of our hotel exposure is located in the Midtown East submarket, which expects less than 2% cumulative supply growth during 2015 and 2016.

As evidence of why we believe that submarkets do matter, RevPAR growth for hotels located in Midtown East, exceeded the broader New York City MSA by 260 basis points during 2014. Performance could be enhanced even more if pending hotel to residential conversions occur in Midtown East over the next few years.

With that, I'll turn the call over to Sean to discuss our fourth-quarter and full-year operations in more detail. Sean?

Thanks, Mark. Before discussing our fourth-quarter results, please note that our reported RevPAR and margin data are presented on a pro forma basis to include the Inn at Key West and Westin Fort Lauderdale as if they were owned for all periods presented, and exclude the Hilton Garden Inn Times Square Central, the LAX Marriott, and Oakbook Hills Resort.

Let me start by reiterating Mark's comments that the fourth quarter was another outstanding quarter for DiamondRock. Our portfolio RevPAR group 8.3%, which significantly exceeded industry upper upscale RevPAR growth of 6.7%. Just as important, our portfolio generated strong hotel-adjusted EBITDA margin growth of 196 basis points during the quarter.

Now let's jump into the fourth quarter numbers. Overall it was a great quarter for both the industry and DiamondRock. Our fourth-quarter outperformance was led by both our hotels in Boston, the Lexington Hotel, the Washington DC Westin, and our two hotels in Denver.

The Company reported adjusted EBITDA of $60.8 million and adjusted FFO per share of $0.21. It is worth noting that fourth-quarter adjusted FFO was negatively impacted by approximately $4 million, or $0.02 per share, from a non-cash income tax expense recorded on the gain from the sale of the LAX Marriott. This non-cash expense was not factored into our prior guidance.

Our fourth-quarter RevPAR growth of 8.3% was driven by our ability to push rate, which increased 4.5%, and an incremental 2.7 percentage points in occupancy. Our top-line growth, combined with good cost controls, allowed our hotels to achieve hotel-adjusted EBITDA margin expansion of 196 basis points.

Additionally, 15 of our 27 hotels generated double-digit RevPAR growth, and 12 hotels grew margins by more than 200 basis points. Overall our portfolio benefited from strength in the business and leisure transient segments, which increased revenue 9.3% during the quarter.

Our group business also performed well during the quarter, achieving 4.7% revenue growth, which was primarily driven by increased rates. Recent positive trends in the short-term group booking activity continued this quarter, with a 15% growth in the quarter, for the quarter bookings, compared to the prior year.

Our group segment was led by the Chicago Marriott, the Boston Hilton, and the Lexington Hotel, which achieved group revenue growth of 13%, 30%, and 50%, respectively. Additionally, the group segment contributed to a 6.2% increase in quarterly banquet and catering revenues, which contributed to the 87 basis points of F&B margin expansion. In addition group spend on F&B and AV increased 6.5% during the quarter, which we believe is a corollary to group confidence.

Now let me spend a few minutes highlighting some truly outstanding individual hotel achievements. The Lexington Hotel continued to ramp up from the 2013 renovation and rebranding to Marriott's Autograph Collection. The fourth quarter was the first quarter that did not benefit from renovation disruption during the prior year, and the hotel generated approximately 15% RevPAR growth.

We continue to be happy with the direction of the hotel which finished approximately $1 million ahead of our 2014 underwriting. We expect the ramp up continue for several more years and to achieve approximately 50% growth in hotel-adjusted EBITDA during this period.

The repositioned Washington DC Westin gained traction in all segments during the quarter, and achieved over 27% RevPAR growth. The Boston Hilton extended its sixth quarter run of double-digit RevPAR growth, delivering over 20% RevPAR growth through a coordinated effort of driving both group and special corporate demand. The hotel continues to outperform the market, having gained 11.5 percentage points of market share during 2014.

The San Diego Westin continues to draw incremental business from its recent renovation and repositioning, achieving over 15% RevPAR growth, and over 1,000 basis points of margin expansion during the quarter. Our hotels in Denver also outperformed during the quarter, achieving combined RevPAR growth of over 12%, and combined hotel-adjusted EBITDA margin expansion of over 200 basis points.

Finally, the Hotel Rex in San Francisco had another great quarter, with RevPAR growth of 25% and hotel adjusted EBITDA margin expansion of 862 basis points. This hotel really hit its stride during 2014, and we are very bullish on its future. The hotel is expected to generate an attractive NOI yield over 8% during 2015.

Partially offsetting the positive trends in the quarter was a change to the Marriott rewards redemption program, which negatively impacted fourth-quarter room revenue at the Vail Marriott by $1 million. This led to the fourth-quarter RevPAR contraction at that hotel. This policy change negatively impacted our consolidated fourth-quarter RevPAR growth by 70 basis points, and margin expansion by approximately 50 basis points.

For the full year, the Company reported pro forma RevPAR growth of 11.6%, and hotel-adjusted EBITDA margin expansion of 275 basis points, which was slightly head of our expectations. For the full year, transient revenue was up 12.3%, driven by a 7.9% increase in ADR. Group revenue for the full year increased 8.9%, which was the result of a 4.8% increase in rooms sold and a 3.9% increase in average rate.

While Mark will discuss our 2015 outlook in more detail, I would like to point out that we expect group business to take a backseat to business transient as our primary growth driver this year. During 2015, group will shrink 100 basis points to 30% of room revenues, with business transient increasing 200 basis points to 35% of room revenues.

We're coming off two good years of strong group performance, which was achieved through a combination of capturing incremental group demand and increasing group ADR. We are happy with our existing group base, and expect group revenue to increase 4% during 2015, which is expected to be driven by rate growth. Our 2015 portfolio growth will be driven by the business transient segment, which commands a $50 rate premium to group, and is expected to achieve double-digit revenue growth.

Next, I would like to provide a brief update on our asset management initiatives. The asset management team is firing on all cylinders. The success of recent asset management initiatives, including revenue enhancement strategy, cost containment measures, and ROI projects, is beginning to show up in the numbers.

Our portfolio achieved hotel-adjusted EBITDA margin expansion of 196 basis points during the fourth quarter and 275 basis points for the year. These growth rates are the highest among our peers. We expect our asset management initiatives to contribute to healthy margin expansion again in 2015.

Let me spend a couple of minutes providing an update on a few of our significant initiatives. We are in the middle of our project to add 41 rooms at the Boston Hilton. This project is still expected to cost approximately $9.5 million. We expect this project to generate an IRR of approximately 20%, and add over $15 million to the hotel's net asset value.

At the Boston Westin, we completed the project to convert unfinished space into new meeting and pre-function space during the fourth quarter. This project is expected to achieve an IRR close to 30% and did not cause material disruption.

At the Fort Lauderdale Westin, we are currently implementing several initiatives identified during our acquisition process, which included replacing Starwood with HEI, being opportunistic in our revenue management, rightsizing hotel staffing levels, terminating the restaurant franchise agreement, closing an additional food and beverage outlet, and introducing a resort fee. Our initiatives contributed to December's impressive 25% RevPAR growth. We are very bullish on this acquisition and the hotels potential for outsized growth during 2015, which is already tracking ahead of our underwriting.

Initiating premium new categories at several hotels has also been very successful, generating $400,000 of incremental revenue during the quarter. We will continue to selectively roll out this initiative as well as introducing resort fees, where appropriate, in 2015.

We're also focused on creating value by uncovering opportunities to add limited new guest rooms at existing hotels, including the JW Marriott Cherry Creek, Westin Washington DC, our two New York City Courtyards, and the Sonoma Renaissance. Finally, we have recently executed on a restaurant lease in Charleston, which is expected to result in $400,000 of incremental NOI.

Lastly, I would like to touch on our balance sheet which we believe is among the best in the industry. Being prudent stewards of our investors' capital has been a cornerstone of DiamondRock since we founded the Company. We have over a decade-long track record of consistently maintaining a straightforward and low-risk balance sheet that has essentially no corporate debt.

This discipline has allowed us to return over $0.5 billion in cash dividends to our shareholders since our IPO. Today we continue to maintain ample liquidity and ended the year with over $140 million of unrestricted cash and an undrawn corporate revolver. We also opportunistically issued approximately $71 million of equity under our ATM program, which matched-funded the accretive Shorebreak acquisition without decreasing investment capacity.

Finally, we have the opportunity to create value through a refinancing of our 2015 and 2016 debt maturities. The average interest rate of the maturing debt is approximately 5.8%, which is above current market. We will opportunistically refinance these loans at market interest rates, which we expect will result in annual interest savings of $8 million to $12 million, or $0.04 to $0.06 per share. These refinancings are expected to reduce our weighted average borrowing costs by 75 basis points to approximately 4.25%.

I would now turn the call back over to Mark.

Thanks, Sean. Let me turn to our outlook for 2015. We spent a lot of time looking at data to understand the market overall and our markets specifically.

As you are aware in 2014 the industry generated RevPAR growth of 8.3%. Importantly, this was a reacceleration of growth. Going into 2015, the data portends another strong year of performance as new hotel supply nationally remains muted, and most of the significant corollaries to demand growth appear to be flashing green. Employment growth, GDP growth, and consumer sentiment are all favorable.

I would note that the strengthening dollar will likely have some impact on demand in major international cities, but does not represent a large segment of demand for DiamondRock. In fact, even in New York our international guests represent less than 15% of our business, and that is weighted towards UK guests that obviously have a more favorable currency.

The data also suggests that the future for rate growth is bright for the next few years. Last year was the sixth year of the recovery, and yet 40% of the RevPAR gains still came from occupancy growth. Historically that suggests that there is significant rate growth potential remaining in the cycle. We are very encouraged by that data.

For DiamondRock, we enter 2015 with a number of unique growth catalysts that we expect to enhance our performance. I will just mention four of the big drivers for us. One, outsized growth from recent acquisitions, particularly at the Westin Beach Resort in Fort Lauderdale and the Shorebreak.

Two, upside from our intense asset management initiatives and payoff from the recent portfolio renovations, including meaningful market outperformance at the Lexington Hotel, and from ROI projects, such as the building of a new ballroom at the Boston Westin, and adding new keys at the Boston Hilton. Three, lower interest rates on near-term refinancings are expected to save us several million dollars a year in interest expense. And, lastly, extra growth from our existing investment capacity.

It is also worth noting two other longer-term growth catalysts the Company is evaluating -- the value from our expansion options at the Westin Boston Waterfront, and changing the brand at the Chicago Conrad. We will provide additional details on those opportunities later in the year.

As you can see, we are extremely excited about the growth ahead at DiamondRock, and we believe that our guidance today reflects that. Our guidance for 2015 is RevPAR growth of 6% to 7%, adjusted corporate EBITDA of $262 million to $272 million, and adjusted FFO per share in the range of $1 to $1.03

For the full year we expect our portfolio hotel-adjusted EBITDA margins to expand by approximately 100 basis points. Our confidence in our guidance is enhanced by our strong results so far this year, with January pro forma RevPAR growth of 8.8% for our entire portfolio.

To wrap up the prepared remarks, we will conclude by saying that DiamondRock is well-positioned for growth in 2015, and should continue to benefit from strong execution on the asset management and capital investment fronts. As always, we are grateful for your interest in our Company.

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

(Operator Instructions)

Anthony Powell, Barclays.

Good morning, everyone. A question on New York, and particularly international visitors. I know at the Lexington Hotel you do get a lot of European visitors on discount packages on the weekends. What are you doing to maybe price that business out? And how is that business trending, do you think, at that hotel so far this year?

Anthony, this is Rob Tanenbaum, good morning. 15% of our business at the Lexington is international business. And we've adjusted our pricing by removing some wholesale business that we had last year that we feel was not appropriate business for the asset. And we continue to utilize our Marriott channels to further drive revenue sources available to us.

Great. And on the acquisition this quarter, very good pricing and a very good use of proceeds from the equity sale. How much competition are you seeing for these types of deals across your target markets? And how much runway do you think you have in adding more deals in that type of price range? Thank you.

Anthony, this is Mark. When we look at our pipeline as we sit here today, and the environment, it's obviously very competitive. There's about eight deals in our current pipeline and about half of those are off market. I think we will continue to face a very competitive environment.

Last year it was competitive, as well, and we were able to find number of deals that we were very excited to be able to execute on. So, we're optimistic that this year, given the similar constraints and the competitive environment, that we will find a number of good deals.

That's all for me, thank you.

David Loeb, Robert W. Baird.

Clearly New York is an extremely liquid market. Have you thought about using the strength of that market to recycle capital, basically to take advantage of the liquidity and sell one or more New York assets?

David, this is Mark. Obviously, our recycling focus has been focused on selling slower-growth, non-core assets. Everything is for sale at the proper price.

I think on the New York City assets, we have received a number of inbound inquiries, so it'll depend on the pricing if we decide to do something with that. But we generally, as a policy, don't comment on dispositions or acquisitions until there's something under contract or it's closed.

Then let me go to one that actually is closed. The Shorebreak, can you just give us a little rundown on whether that is fee simple versus condo versus leased?

David, it's Troy. That is fee simple. The project was developed as a mixed-use project by CIM and it had a distinct retail component to it, and then the hotel set essentially above the retail. Those were all held together and then were bifurcated on this sale. So, we have a fee simple interest in the hotel.

I believe, just as a clarification, there is a 5% piece that the city owns that was part of the original deal that we have a right to buy out in a short period of time.

Okay. But you're saying it's a condo interest but the condo association owns the land?

It's a complicated explanation but that's essentially correct.

Okay. And how about the parking there, do you own that, as well?

It's owned by the city.

Okay. So you're basically leasing the parking?

We have an operating agreement with the city.

Okay. And what else is going on at Huntington Beaches? Is there any supply that's coming on in that market?

There's a hotel down the beach that's under construction. It's about a 200-room hotel, luxury hotel. It's been in the works for five or six years. It's got a big retail component there also. And that's the only addition to supply on the market.

In the release, Troy, you guys talked about barriers to entry. Clearly stuff does get built there. This one got built a few years ago, the other one is on the way. Are there others contemplated or in the pipeline are in the approval process?

There aren't. It actually took CIM about -- they started this project in the late 1990s and it took them seven, eight years to develop it. Building on the California coastline, heavily restricted, very difficult to get entitled. The project down the beach was similar. So, we don't see anything beyond that in the foreseeable future.

That's very helpful. If I can keep going -- what are your thoughts -- I guess this is to whoever -- about the Boston Westin expansion? I'm talking about the rooms tower not the ballroom.

This is Mark. David, as you know, we paid for an option when we acquired the hotel a number of years ago. We're currently evaluating that. Obviously, we are waiting for the decision to expand the convention center before we moved forward with that. We're in the, I would say, intensive investigation stage on that. But we'd we have more to talk about later this year on whether we'd do something there or not.

Okay. And as you evaluate that, what's your thought about other potential supply in that market? Do you think that there's a chance that you actually pre-empt some of that or is it just going to come anyway?

There's obviously sensitive conversations going on with the Convention Center Bureau and some of the local entities there. Certainly if we did the expansion, there is a chance that, that may have a chilling effect on the new convention center hotel. But that's yet to be determined.

Okay. And, Sean, one for you, probably an easy one. When you talked about the margin expansion expectations, what impact are property taxes and IMF increases having on your assumptions for those margins?

Sure, David. The property taxes for 2015 are going to have about a 50 basis point impact on margin expansion. As you recall from 2014, we essentially had flat property taxes year over year because of a couple of successful wins, the biggest ones being in Vail and the DC Westin. So, that's about a 50 basis point impact on 2015 taxes.

On the IMF, we actually expect IMF to be relatively flat year over year. So, actually there will be no impact on margins because of IMF year over year. We had 10 hotels in IMF in 2014, we expect to have 9 hotels in IMF in 2015.

Great. Thank you very much.

Jordan Sadler, KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. I just wanted to follow up on one of the acquisition questions. Just curious what markets you guys are looking at today given you filled some of the holes you'd talked about last year in the South Florida market and along the West Coast?

Good morning, this is Mark. If we look at our priority list, of the eight hotels, I would say, are the ones that we're most focused on now, they're all West Coast. They go really from Portland down to San Diego, and a number of markets in between.

We're trying to find places where there may be some strategic advantage in the location -- Huntington Beach, for instance, where we're not facing as intense competition but there are excellence dynamics for growth and high barriers to entry. We're looking to find a way to create value for our shareholders that isn't following the pack, if you will.

Thanks, that's helpful. And then, separately, on the margin expansion, you guys have talked about 360 basis points of upside versus the prior peak. If I recall correctly, a big portion of that's at the Lexington. It seems like you guys are expecting good growth there. I would have expected a little bit of greater upside than 100 basis points assumed in guidance. Is there anything else besides the property taxes that's holding that back? Or do you expect it to be drawn out?

Austin, this is Sean. There's a couple of other things that are impacting the margin expansion. The change to the uniform system of accounts where effectively we have to gross out revenue on banquet sales impacts margin expansion by about 15 basis points year over year. In addition, there was a couple contract increases in both management and franchise fees across our portfolio, which impacted margin expansion in 2015 by about 10 basis points.

Are you still comfortable with achieving that 360 basis points of upside? I think you said it's about $4 million to $8 million of EBITDA.

We are. As of year-end 2014, because we outperformed, our expectations were about 325 basis points behind prior peak as of year end. And, so, we remain confident that's a bogey that we expect to achieve over the next two to three years.

Great, thanks. That's all I've got.

Thomas Allen, Morgan Stanley.

Good morning, everyone. I'm just trying to understand your RevPAR guidance a bit better. You guided to 6% to 7% RevPAR growth for 2015, but January is trending up 8.8% despite weaker New York trends. So, what's driving the deceleration? And then, also, what are you factoring in for overall US industry RevPAR growth for 2015? Thanks

Thomas, this is Mark. The 8.8%, obviously January is one of our lowest in terms of nominal dollars. It's a small month. The fact that's outperforming doesn't necessarily carry the weight. We expect the first quarter to be roughly in line with our full-year guidance. What was your follow-up question to that?

When I look at STR and PKF and PwC forecasts for the year, it's anywhere from 6.4% to 7.6 %. Which one of those are you factoring in to get to your guidance?

When we look across the industry, it's about 5% to 7%. But obviously, we look more market to market to determine what our guidance is. We take a market up look, if you will, versus just the national average. But, if I had look at a national average, probably 5% to 7% is the right baseline.

Okay. And then two questions on the Shorebreak. I didn't hear you guys say what the margins are on the property today, so was just wondering where those are. And maybe discuss a little bit the decision to bring in Kimpton -- how long is the management contract, the decision around it, everything. Thank you.

I'll start with Kimpton. Obviously, we try to marry the right manager for each individual asset. Kimpton has a very strong presence in Southern California, all of California. But this was a great strategic location given where their other hotels are located.

We also thought they could do some things on the revenue side with their marketing capabilities that weren't currently being done at the hotel. We also some a number of other opportunities that they were willing to do, such as adding a resort fee to enhance our performance at the hotel. So, those are significant on the top line.

On the bottom line there's a number of efficiencies given their distribution that we want to utilize. Those were really the big drivers to bringing in Kimpton. We really think they're the right manager for this particular asset.

On margins --

Tom, this is Rob. Good morning. The EBITDA margin is a little bit south of 28% for 2014 and we expect that to go a little over 30% as we go forward.

All right, thank you. I actually just got a last-minute email from Kimpton with Shorebreak on it, so showing their marketing expertise already. Thank you.

That's great. I'm glad they're excited about it.

Ryan Meliker, MLV & Co.

Good morning, guys. Most of my questions have been answered. I just had a couple of follow-ups. First of all, with regard to the Hilton Garden Inn Times Square, any changes to the $11 million EBITDA expectation for 2015 that you had guided to prior? And if not, any more or stronger or weaker conviction in that number now?

No, Ryan. This is Mark. The hotel finished up very strong in the fourth quarter. We feel very good about our forecast for 2015 at the hotel. It's really done terrific right out of the gates. And, so, we expect, given the demand that exists at that location, we feel very good about that forecast.

Better than you did three months ago or four months ago before it opened? Or about the same?

I'd say we feel that it's the right number and our confidence level is even higher today than it was a couple of months ago.

Great, that's helpful. And then the second question I was hoping you guys could just give us some color on was, you mentioned that you are grouping down for 2015, which probably makes sense given where occupancy levels are and the focus on pushing rate. I'm hoping you can provide some color on where your group pace is today versus last year, and how much of that is driven by rate.

Ryan, good morning, it's Rob again. Our group pace is down 1.9% and it's driven by -- rate is up 1.7% with room nights down 3.5%

Ryan, I would just add, strategically what we're trying to do, there's a couple big drivers at individual hotels where we're trying to take out the lower-rated group and put in the difference between a lot of the business transient rate, or the leisure transient, depending on which hotel. There seems to be real opportunity. And given where occupancy levels are in the marketplace we have strategically taken some mix risk, if you will, because we think the upside is there.

And, Ryan, one follow-up -- this is Sean. For the full year we expect group to go about 4% for the entire year, that's mid point of our guidance, and essentially all of that is going to be through rate gains on a flat number of rooms for the full year.

That's helpful. It makes sense and I understand the concept of trading up the transients, as well as the mix shift. Those are all the questions for me. Also, just as a comment, I really appreciated all the color on New York. I think that's really helpful.

(Operator Instructions)

Ian Weissman, Credit Suisse.

This is Chris for Ian. It looks like your guidance is $85 million in capital improvements in 2015. And I appreciate the color on the Boston Downtown Hilton. But just wondering if you could talk about the total displacement for the portfolio of projects under renovation, maybe how that displacement will be distributed through the year. And what kind of return do you think you can get on that total CapEx spend.

Chris, this is Mark. $85 million is our guidance for capital spend. That's obviously a big portfolio, so spreading that across, there isn't any project that's going on that we expect to have a material impact on our operations in 2015.

The Hilton in Boston, we are adding 41 keys, but that's getting done during the seasonally slow winter. And whatever impact we have there we expect to gain a little bit later in the year, but it shouldn't materially alter any of the numbers.

As far as the return we really put it into different buckets. As Sean mentioned earlier, we expect significant return on the $9 million we're invested in the Hilton Boston. Various other projects it depends on whether it's an ROI project, whether it's a rooms refresh, or what the strategic repositioning of the hotel is. There's not one particular number that we have for the whole $85 million.

Okay, great. Thanks. That's very helpful. Going back to your 2015 acquisition pipeline, what are your thoughts on how you are likely to fund those acquisitions given where all the prices are at today, whether that be dispositions, property debt, or maybe more ATM offerings?

As we sit here today, as we mentioned in the prepared remarks, we have over $200 million of investment capacity with the balance sheet that we have. So, that obviously is the primary driver. We have cash and we will have a combination from a number of property level refinancings that are going to occur during 2015. So, we think we're very well-positioned for that amount of acquisitions.

That's great. Thanks a lot, guys.

Patrick Scholes, SunTrust.

Just a quick question here on your guidance. You have an EBITDA guidance income tax expense of $8 million to $12.5 million. Just remind me again what that is and when do you expect that to hit the income statement?

Sure, Patrick. That is income tax expense on our taxable REIT subsidiary. And we expect that to be more back-end loaded. During the first quarter of the year we tend to record an income tax benefit because of the seasonality of our portfolio. And then as the quarters go on, you'd expect higher income tax expense. If you look at where our portfolio income taxes expense has been for 2014, directionally that's a fair proxy for where you would expect it to be for 2015.

Great, thanks. That's it.

Chris Woronka, Deutsche Bank.

Good morning, guys. I jumped on late, I apologize if you already covered it. But on the acquisition outlook, Fort Lauderdale was a new market for you guys. It's somewhere -- we haven't seen any of the other REITs yet. Given where prices are generally, do you think it's more likely that you'll look into some of these other markets? I'm not saying they are better or worse than the big 5 or 10 markets. But do you think there's more opportunities in some of these markets where we haven't seen you guys or some of your peers on before?

Chris, this is Mark. Ft. Lauderdale, we really like the economics and what's going on with the demand trends there. We thought we could buy much smarter than we could buy in Miami, with similar characteristics in growth over extended period of time. So, we thought that was a better way to allocate our capital for our investors. On that deal, as we mentioned in our prepared remarks, we're about $1 million ahead of our original underwriting, and that's probably 11.5 times EBITDA multiple on our acquisition there, which is, I think, a terrific result in this competitive environment.

As we look towards our pipeline it's really West Coast oriented. We are looking -- it is Portland, it is San Francisco, it is West LA. We will look within the submarkets to try to find if there are strategic places we could be that are a little different than where everyone else is booking. I think Huntington Beach is a good example of West Coast exposure that's a little different from what other people are chasing, and we think has just excellent characteristics and growth potential.

Okay, great. Thanks, Mark. Just a quick one for Sean. How much variability do you think property taxes might have on 2015 relative to guidance? Or where are you guys on appeals versus what you've realized? Just trying to get a sense for the model, how to think about that.

Sure, Chris. There's always variability, as you know, in property taxes in the sense that we don't record any appeal wins until we actually win them. We have about one-third of our property taxes under appeal for 2015. We're optimistic and hopeful that we will be successful there but we won't bake that into any of the numbers until we get resolution.

Property taxes year over year are up, excluding Times Square, which is an obvious non-comp, about 13% year over year. And that's coming off a very favorable 2014 where we had a handful of property tax wins where our taxes were flat year over year. And so, some of that is just catch up. But we expect the big drivers there are Chicago has a reassessment, and so we expect property taxes to be up in Chicago, as well as our Denver assets are big drivers of our 2015 increase.

Okay, very good. Thanks, Sean

Nikhil Bhalla, FBR.

Good morning, Mark and Sean. A question on Chelsea Hilton Garden Inn -- why were the margins down 950 basis points? I'm sorry if you touched on this before.

No problem. The hotel converted to union earlier this year so that's impacted the increased union cost. It's obviously a small hotel and the numbers were material on a relatively small basis.

Okay. And if you could address Vail Marriott, as well, and the Minneapolis Hilton.

Sure, I will take the Vail, then I'll turn it over to Rob for Minneapolis. The Vail was impacted by a change in the Marriott rewards redemption policy which lowered rooms revenue about $1 million, which without that, RevPAR would have been flat to maybe slightly positive year over year. But that was unique to a change in policy. Rob?

Certainly, Nikhil. On Minneapolis, we had a late group cancellation worth over $0.5 million in the fourth quarter that obviously impacted the margins as well as our food and beverage contribution.

Okay. And just on the reward points, that was very specific to the Vail Marriott, right? That's not something that impacting system-wide across Marriott-branded properties?

To be more specific, they changed the rules in August of this year effective immediately. As I understand it, there were four hotels significantly impacted by that rule change. That's obviously a small portion of their whole system.

Okay. Just diving a little bit deeper on that, Mark, does that mean that it's become harder for people to redeem their points now -- the threshold's been raised?

No. The way the rule was changed is that they only allow you to take up to -- the rate of 50% of the rooms have to be at market and not redemption rules. So it's really formulaic on the owner's part. It doesn't affect the people that are redeeming the points.

Okay, got it. Another question on what you're assuming from the Shorebreak hotel in terms of EBITDA for full-year 2015 in your outlook.

We're expecting it to be a 12.8 multiple on 2015 which is EBITDA of a little over $4 million -- I'm sorry, $4.6 million.

$4.6 million. Okay, that was my math, too. And final question on G&A, it looks like at the high end the G&A went up by about 8% year over year. What may be some of the drivers of that?

The primary driver of the G&A increase is we had a credit to legal expenses in 2014 in conjunction with our settlement of the Boston Westin litigation, which positively impacted 2014 by about $1.5 million, and that really drives the year-over-year change. In addition, there was incremental personnel changes, but that was much less impactful than the credit recorded in 2014.

Got it. Thank you very much.

We have no further questions. I will now turn the call back over to Mr. Mark Brugger for any closing remarks. Please proceed, sir.

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

This concludes today's conference. You may now disconnect. Have a great day everyone.