Diamondrock Hospitality Co (DRH) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 DiamondRock Hospitality Company earnings conference call. My name is Lisa 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, Vice President, Strategy, and Capital Markets. Please proceed, sir.

Thank you, Lisa. Good morning, everyone, and welcome to DiamondRock's first-quarter 2015 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 risk and uncertainties as described in the Company's SEC filings. In addition, 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.

With me on today's call is Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum; our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will provide a brief overview of our first-quarter results and transaction activities as well as provide an update on the Company's outlook for the rest of 2015.

Sean will then provide greater detail on our first-quarter performance and discuss our capital markets activities. Following their remarks, we will open the line for questions.

With that, I will now turn the call over to Mark.

Thanks, Brett. Let me start by saying that we are very pleased with our results in this quarter and are encouraged by the continued strength of underlying lodging fundamentals.

Demand continues to significantly outpace new lodging supply. Industry revPAR growth was primarily driven by rate increases, as operators are able to raise rates and improve profitability. We expect the trend to continue throughout this year and beyond.

Turning now to our portfolio, we had an excellent quarter and set a new Q1 record for DiamondRock, both in terms of revPAR and margins. Our portfolio revPAR grew almost 8% and was driven primarily by a 4.3% increase in average daily rate. Moreover, asset management initiatives continue to take hold and pro forma hotel adjusted EBITDA margins expanded by 140 basis points.

11 of our hotels generated double-digit revPAR growth, almost half of which were over 20%. 12 hotels also grew hotel adjusted EBITDA margins by more than 200 basis points during the quarter.

Additionally, despite a challenging first quarter in New York, our New York City assets had various unique catalysts that allowed them to outperform the Manhattan market by approximately 400 basis points, which was consistent with our expectations going into the year and a trend we expect to continue throughout 2015.

Our asset management program continued to shine this quarter, as the team found opportunities to both enhance hotel revenue management strategies and to control expenses across the portfolio. This adds a meaningful driver to our organic growth going forward.

One example of the tremendous success our team has had is at the Westin Fort Lauderdale Beach Resort, a premier beachfront asset we acquired in late 2014. Implementing our best practices, we have successfully streamlined the hotel's labor model, eliminating more than 30 managerial positions for $1.5 million in annual savings. Successfully reconcepting the hotel's main restaurant and reducing food cost collectively saved us another $0.5 million annually.

In total, through these initiatives and others, this year alone, we expect our asset management team to be able to extract approximately $3 million of cost savings at this hotel and expand profit margins by over 1,000 basis points. The hotel is tracking ahead of our initial underwriting and our purchase price now represents well over an 8% cap rate on forecasted 2015 NOI.

Another big focus for the team is on identifying high return on investment opportunities to create shareholder value at our existing assets. One of the most significant projects this year was the opportunity to create 41 incremental guest rooms at the Boston Hilton.

In the process, we were able to fully renovate approximately 90 guest rooms at the Boston Hilton, which are now substantially complete. These 90 guest rooms sell for a $30 to $50 premium as a premium room type.

Of course, because we added rooms, our gross debts are skewed. The new rooms impacted first-quarter portfolio margins by approximately 12 basis points and will impact full-year portfolio revPAR by approximately 20 basis points due to that higher room count.

Overall, this is exactly the type of low-risk minimal disruption project that we find most attractive to drive value. We are currently pursuing more ROI opportunities in the portfolio to add rooms, including adding eight incremental rooms at our New York City Courtyards and four rooms at the DC Westin.

In Chicago, we completed a rooms renovation during the seasonally slow winter of the top 5 floors, with 175 guestrooms, plus all 25 suites. We are now charging a $35 premium for these upgrade rooms. Additionally, we were able to add two new keys during the process and convert lobby space into a new Marriott prototype for a [FMB] on-demand outlet that will allow us to provide modified room service and significantly reduce annual room service costs.

We will methodically renovate the balance of the rooms over the next several years during the winters and we don't anticipate any material disruption. Also, we negotiated a structure, whereby Marriott agreed to participate in the cost of the renovation through permanent fee reductions. For 2015, we were able to reduce management fees by approximately $1.8 million. We appreciate their spirit of partnership.

Also in Chicago, we previously announced that we were reviewing the brand and management options for the Conrad Chicago. We are excited to announce that we have concluded that review and that the Conrad Chicago will be converted later this year to be part of Starwood's Luxury Collection.

This will be Starwood's only luxury brand representation in the Chicago market and we find that a pretty compelling opportunity for us. The hotel will be operated by a third-party manager, subject to a franchise agreement. We look forward to sharing more details about our plans for this hotel in the near future as we complete the theming and capital repositioning plan for the hotel.

There are numerous other smaller ROI projects that are underway or under evaluation in our portfolio. One in particular is at the Lexington Hotel, where we are evaluating three separate retail conversion/retenant opportunities to create additional value. As you can see, we really like to exploit opportunities within our existing portfolio.

Turning now to our investment activities during the quarter, we recently acquired the Shorebreak Hotel, a lifestyle hotel located beachfront in Southern California. Upon acquisition, we brought in Kimpton as the new operator. We paid $58.5 million for the hotel and the hotel is forecasting to run modestly ahead of our underwriting at a 12.4 times multiple on currently forecasted 2015 EBITDA. That's about a half a turn better than underwriting.

This acquisition is a great example of the kinds of deals that we are targeting. It's accretive, it has asset management upside through an operator change, it's located in an attractive West Coast market, and it enhances our brand and geographic diversity. The team will continue to focus on these kind of deals going forward.

Before I turn to our updated outlook for 2015, Sean will discuss our first-quarter results in more detail. Sean?

Thanks, Mark. Before discussing our first-quarter results, please note that our reported revPAR and margin data are presented on a pro forma basis to include the Shorebreak Hotel as if it was owned for all periods presented and exclude the Hilton Garden Inn Times Square Central, since it was not opened during the comparable period of 2014.

Let me start by reiterating Mark's comments that the first quarter was another outstanding quarter for DiamondRock. Our pro forma revPAR grew 7.9%, which significantly exceeded industry upper upscale revPAR growth of 6%. The top-line outperformance was driven by our ability to increase average rate 4.3%, coupled with an incremental 2.5 percentage points in occupancy.

Our portfolio also generated strong hotel adjusted EBITDA margin growth of 140 basis points during the quarter. Our margins were positively impacted by ongoing asset management initiatives, such as implementing resort fees in several markets and cost control initiatives across the portfolio.

For example, we benefited from recent cost-containment initiatives at the Fort Lauderdale Westin, where profit margins grew an impressive 627 basis points. The Company reported adjusted EBITDA of $48.5 million and adjusted FFO per share of $0.19.

Overall, our portfolio benefited from strength in both the business and leisure transient segments, as revenues for these combined segments grew 10.3% during the quarter.

Our group business also performed well during the quarter. Group revenues grew 6.6%, driven by a 3.3% increase in rate and a 3.2% increase in group room nights. Our group segment was led by the Boston Westin, the Minneapolis Hilton, and the San Diego Westin, where group revenues grew 29%, 40%, and 35%, respectively.

Recent positive trends in short-term group booking activity continued this quarter, with our portfolio benefiting from approximately 60% growth in in-the-quarter, for-the-quarter bookings compared to the prior year. Strength in short-term bookings was most notable at the Boston Westin and Fort Lauderdale Westin.

Additionally, the group segment contributed to a 7.9% increase in quarterly banquet and catering revenues, which contributed to the 119 basis points of food and beverage margin expansion.

Now let me spend a few minutes highlighting some truly exceptional individual hotel achievements. The repositioned Washington DC Westin gained traction in all segments during the quarter, achieving approximately 35% revPAR growth. We expect the hotel to continue gaining market share and outperforming the Washington DC market.

The Boston Westin benefited from both increased BCEC activity and strong in-house group. The BCEC hosted two additional events compared to last year and the hotel leveraged its new meeting space to book multiple in-house groups.

The San Diego Westin had an outstanding quarter, achieving over 13% revPAR growth and almost 500 basis points of margin expansion. The hotel group grew revenues over 35% and continues to benefit from its recent renovation and repositioning.

The Minneapolis Hilton benefited from several large groups during the quarter. The strong group production allowed the hotel to increase revPAR over 25% during the quarter.

The Orlando Airport Marriott outperformed during the quarter, with revPAR growth close to 15%. The hotel benefited from group business, with strong F&B spend during the quarter. As a result, group spend at the hotel more than doubled and F&B margins expanded over 1,000 basis points.

Finally, the Hotel Rex in San Francisco had another great quarter, with revPAR growth of 24% and hotel adjusted EBITDA margin expansion of 627 basis points. We are very bullish on the future of this hotel, which is expected to generate an attractive NOI yield of over 8.5% during 2015.

Partially offsetting the positive trends in the quarter was the challenging operating environment in New York City and expected displacement from the ROI project at the Boston Hilton. We remain confident in the positioning of our New York portfolio, which outperformed market revPAR growth by approximately 400 basis points. Excluding the Hilton Garden Inn Times Square, our New York portfolio's revPAR contraction was less than 1%, which resulted in market share gain of 5.5 percentage points, led by the 14 percentage point gain at the Lexington Hotel.

In addition, we substantially completed the project at the Boston Hilton to renovate approximately 90 rooms, including creating 41 new rooms. While the renovation disruption was not significant at DiamondRock and was in line with our expectations, it did reduce our consolidated revPAR growth by approximately 50 basis points. This is a great project for the Company and is expected to generate an IR of approximately 20% and add over $15 million to the hotel's net asset value.

Before turning the call back over to Mark, 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 strategy since we founded 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 to over $0.5 billion in cash dividends to our shareholders since our IPO, including the recent 22% increase to our 2015 dividends. Today, we continued to maintain ample liquidity and expect to end the year with over $140 million of unrestricted cash and an undrawn corporate revolver. Based on our conservative leverage targets, we still have approximately $200 million of investment capacity.

Additionally, we expect to reduce our annual interest cost by several million dollars through proactively refinancing our near-term debt maturities, which bear interest at an average rate of approximately 6%. We have a focused plan to efficiently reduce borrowing costs, extend and stagger the maturity schedule, and expand our pool of unencumbered hotels.

The current status of recent financing efforts are as follows. We recently refinanced the $52.6 million loan secured by the Renaissance Worthington, which bore interest at 5.4%, with a new $85 million 10-year mortgage, bearing interest at a fixed rate of 3.66%.

The loan proceeds exceed our total investment in the hotel. We will use the excess proceeds from the Worthington refinancing towards the repayment of the $56.3 million loan secured by the Frenchman's Reef Marriott. This transaction, which is expected to close this month, will increase our unencumbered pool of hotels to 16 with an aggregated cost basis of $1.6 billion.

We are also evaluating refinancing the JW Marriott Cherry Creek, which is expected to close near the end of the second quarter. The existing loan has an outstanding principal balance of approximately $38 million and bears interest at 6.5%, which is significantly above current market. We expect to significantly increase proceeds and decreased our borrowing costs with this refinancing.

We have made great progress in our refinancing initiatives. Our full-year 2015 guidance reflects over $5.5 million in lower interest expense compared to 2014. In addition, we have formulated an action plan to refinance our remaining debt maturities over the next 12 months. The successful execution of this action plan is expected to reduce 2016 interest expense by an additional $8 million, which represents $0.04 of incremental FFO per share.

I will now turn the call back over to Mark.

Thanks, Sean. With this strong first quarter at DiamondRock -- and we expect that trend to continue throughout the year -- there are a number of unique growth catalysts that we expect to enhance our performance.

I will just mention the four most significant drivers. One -- our recent acquisitions have outsized growth opportunities from asset management initiatives, particularly at the Westin Fort Lauderdale Beach Resort and the Shorebreak Kimpton Hotel.

Two -- upside from our intense asset management initiatives to drive profit margins and mine ROI opportunities, such as the building of a new tent and new ballroom at the Westin Waterfront and the addition of keys at hotels like the Boston Hilton.

Three -- lower interest rates on near-term refinancings, including the recently refinanced Worthington, could result in $8 million to $12 million in interest savings annually starting next year. And four -- external growth from carefully deploying our existing investment capacity could add $16 million of annualized EBITDA.

Today, we updated our full-year guidance. Our new 2015 guidance is for revPAR growth of 6% to 7%, adjusted corporate EBITDA of $264 million to $274 million, and adjusted FFO per share in the range of $1 to $1.02. The new EBITDA and FFO guidance represents an increase from our prior guidance.

I would note that the guidance for income tax expense has increased due to outperformance of our hotels and is expected to increase disproportionate to EBITDA outperformance because of the REIT structure tenant leases. Ironically, the outperformance to underwriting at the Fort Lauderdale hotel is a culprit here. However, the incremental income tax is not expected to have a cash impact, as the Company has accumulated net operating loss credits as an offset in 2015.

I would like to also provide a brief update on our outlook on the New York City market. This market remains challenging, but we continue to expect our portfolio to significantly outperform the broader market for 2015 by approximately 500 basis points.

The largest driver of outperformance will come from the Lexington Hotel, which represents over 40% of our investment in New York and continues to ramp from its renovation and rebranding. The Lexington Hotel, as Sean mentioned, gained almost 14 points of market share in the first quarter versus its competitive set and delivered 6% revPAR growth.

We also own the newly built and very successful Hilton Garden Inn Times Square, which represents another 20% of our New York investment, although it is non-comp until its first anniversary in the first quarter. Remarkably, the hotel had 63 sellout nights in the first quarter.

In fact, we sold the last few rooms available this week at a rate of $999 based on compression and finished the last couple days with average rates in excess of $400. This new hotel is tracking strong towards $11 million in EBITDA in 2015, which is a $6 million increase from last year.

The Hilton Garden Inn Chelsea did underperform in the quarter and lost 11 points of market share. Fortunately, that hotel represents less than 9% of our investment in New York.

Part of the challenge there has been getting the right approach to revenue management. And as a result, we have terminated the current manager and will bring in a new manager in June to help right the ship and regain that lost market share. This hotel represents an opportunity for us going forward.

We would also like to note that revPAR growth for our New York City portfolio accelerated the 4.8% growth in March, an encouraging sign as we move further into the year.

Before I open up for questions, let me provide a quick update on our investment pipeline. As previously outlined, we remain committed to prudently deploying our capital into acquisitions that meet our strict investment criteria and create near-term value for our shareholders.

We are actively evaluating opportunities, though we remain disciplined and it comes -- when it comes to both price and size. We have had great success in our recent acquisitions of the Shorebreak, the Westin Fort Lauderdale, and the Inn at Key West.

The team continues to work the pipeline. We remain disciplined with our remaining $200 million of dry powder. The pipeline today has several interesting opportunities located in strategic West Coast markets, Boston, and South Florida. However, there is no assurance we will get any of these assets, but we are committed to working hard and being opportunistic.

With that, I would like to sum up by saying that we feel very good about our portfolio, our capital allocation abilities, and the momentum of our asset management initiatives. We are confident that all of these will allow us to continue to create superior value for our shareholders throughout the lodging cycle.

Our team would now be happy to answer any questions that you have.

(Operator Instructions) Smedes Rose, Citi.

Hi, this is [Archna] for Smedes. I was hoping you'd be able to comment little more on New York. Maybe give us some idea of what you are seeing in terms of the impact of lower international demand versus the higher supply. And maybe if you are seeing any nontraditional lodging supply coming in that is affecting the current hotels?

Okay. So yes, the first quarter is the lowest demand quarter in New York City. So it's the most susceptible to supply. Clearly, there's an impact from supply that we are facing in the first quarter.

On international, our portfolio does less than 15% international. We are tracking it, but some of the data comes after -- it takes a couple months to see some of that data. We're not seeing a significant drop off in international demand at our hotels, but there is likely a lag effect. And we would anticipate that that would affect the summer lower end tour and travel international demand.

Also I'd note on international for us, Great Britain is our top account, which is less susceptible to the FX change. Canada would be top three, and then within our top five, you also have Brazil and some of the other countries. So it's a mixed bag. I would say we're not seeing an impact yet, but it would be reasonable to anticipate a lag effect on that.

On your question about nontraditional sources, like Airbnb, it's very difficult to get good data on that. We're not hearing a lot of anecdotal evidence that that's impacting us.

But I will say where we're seeing strengthen our portfolio particularly is the midweek business transient. We're seeing very good growth at our properties. We are actually experiencing good growth on Saturday nights, but the Fridays and Sundays have been challenging. And that may be due to that shadow inventory.

Okay, that's helpful. And you spoke a little bit about going through the Chicago Marriott renovation. If you could comment to how you are seeing the citywide -- city convention -- citywide convention calendar pan out for the next -- for this year and for the next and how the renovations are going to be planned against that, what sort of disruption are we seeing? And do you feel like we'd been losing out a little bit on the fact that the renovations may be against a strong citywide convention calendar year?

Okay. So on convention calendars, this year is a good year in Chicago. Q1 had two more groups. So this is a favorable convention year. Next year, the first quarter is more challenged. It's down in citywides, which actually provides an opportunity on the renovation to have even less disruption, although we don't -- it's a big hotel. We're moving through the rooms over several years.

We don't anticipate any material disruption from the rooms redo. The convention calendar in 2016 improves after the first quarter and actually strengthens as the year moves on.

So I think we're well positioned. The advantage of having a big hotel in a very seasonal market like Chicago is that you have the ability to do rooms renovations during seasonally slow times with minimal disruption.

Okay, that's helpful. And just one last one for me. In terms of the Conrad now joining the Luxury Collection, is there some sort of -- if the Conrad doesn't meet any -- the minimum standards, if there's a sort of true up or a guarantee that Starwood would kind of have to -- can step in for?

Not sure I understand the question. So Conrad's contract expires this year and they will be leaving the hotel. The Luxury Collection and our third-party manager will be taking over in the fourth quarter.

We are very excited to have the Luxury Collection. It's the only luxury product for Starwood. Starwood is underrepresented in the Chicago marketplace. And so we think that's a huge strategic advantage to have our hotel positioned that way.

And so we're excited about that. There is key money involved from Starwood in this transaction, but there's no guarantees from Hilton or something like that that is getting replaced as part of this transaction.

Okay, got it. Great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Hey, good morning it's Austin Wurschmidt here with Jordan. Just wanted to touch on guidance for minute. Last quarter, you guys had said that you thought 1Q would come in within the range for the full year, that 67%.

Clearly, you guys exceeded the high end of that range, so just curious on your thoughts on maintaining revPAR guidance for the full year. Anything that you are seeing that gives you guys pause, I guess, to increase that full-year number?

No, obviously we increased the EBITDA and FFO guidance for the year. On revPAR, I think it's important to note that the first quarter is a relatively small -- mathematically smaller quarter for us, so the fact that it's a little higher on revPAR isn't necessarily going to move the full year.

Fair enough. And then on in-the-quarter, for-the-quarter, are you guys seeing any continued strength into 2Q that you saw in 1Q?

Yes, Austin, it's Rob Tanenbaum. We are seeing quite a bit of continued growth in-the-quarter, for-the-quarter, as we saw in Q1 in our booking pace. We're seeing incredible short-term business, which is allowing our food and beverage contributions to grow as well here. So we feel confident in our bookings.

Just to give you an example, we are seeing growth at our Conrad Hotel. We brought our sales team in-house. We are seeing new bookings coming from that.

In the Chicago Marriott, we booked 16,000 rooms in the year for the year and that compares to 9,000 rooms same time last year. So we're really pleased to seeing how the group booking pace is improving.

Thanks for the detail. And then just back to the Conrad, I was just curious what sort of the opportunity that you see there. And how does that hotel stack up currently versus its comp set?

Yes, so we think that the hotel has underperformed to its potential. It's a terrific hotel in arguably one of the best locations in Chicago. We've never been able to capture its proper marketplace.

There is currently over $100 rate differential with the Waldorf down the street. We think that there is ability to capture not all of that, but a large portion of that. And so we think that there is significant rate upside potential from the brand conversion.

I think it's important to note Starwood has no other Luxury Collection -- luxury product at all in the Chicago market. So for them, there's a lot of Starwood customers that would look for that and don't have that alternative now. So we think it will really -- it's a really effective brand for that hotel and we think there's a tremendous amount of potential there.

Anything particular on the margin side in terms of upside that you see? And then is there really any risk, I guess, through this transition period until we get to the new operator in place to margins?

Yes, I will let Rob opine on some of that. But on the -- currently, the disruption, you are seeing that it underperformed a little bit in Q1. Clearly, it will -- we've now put the sales team and our property out of the Hilton system, so we have much more control over the property.

There shouldn't be material renovation disruption as we move into this winter with the Phase 1 of the conversion. So we don't anticipate disruption there. And we think effectively switching the brands in the fourth quarter -- while there might be some noise, we think it will be pretty smooth.

As far as the margin side, I will let Rob jump in on that.

Certainly. So from a rate perspective, with the conversion in Q4, allows us to go into the special corporate account season being marketed as a Luxury Collection hotel. It opens up new opportunities for us.

We have a team in place that is being maintained. Our general manager, director of sales, and director of finance are all relatively new to the property and they've been focused on this transition. So we don't see any impact on that from an operational standpoint, but we see efficiencies throughout our food and beverage as well as garnering new banquet opportunities to further drive our group rates.

Austin, this is Sean. On our underwriting, we underwrote comparable margins, but the real upside potential here is through capture of incremental rate, which we think will flow nicely to the bottom line.

But on a nominal margin perspective, we didn't underwrite significant margin expansion as part of the conversion. It's really capturing that high-rated customer under the Starwood system that we were hoping to capture before.

And this is something that we've been focused on over the past year is reducing our costs there. And the team has done a great job in terms of our margin expansion at the hotel.

Great. Thanks for the detail.

Anthony Powell, Barclays.

Have you thought any more about the Boston Westin land option next to the hotel? And what are your thoughts there in potentially proceeding with that option?

It's a great question. So the option expires next year, so we are currently -- as you know, that whole waterfront district has really exploded. And the ability -- you can see it in our numbers -- the ability to push rate in the transient and the group demand in that waterfront district has increased, frankly, ahead of our expectations.

So the viability of that has dramatically increased. Additionally, as you know, the convention center is going to double hopefully here in the next three years.

So we're very optimistic on the parcel, but we're spending the time now. We did an RFP; we have a developer we're working with. We're trying to make sure that we have a great handle on the cost, the way we would structure the deal, and the pro forma, which we are in the midst of now. And we would hope to update you next call with where we are on that expansion opportunity.

All right, great. And just kind of a general industry question. But as an owner of hotels with a lot of different brands, what's your view on potential brand M&A in the space? There's been a lot of chatter, obviously, about various companies exploring alternatives. And are you in favor, opposed, what is your general outlook there?

I would say we have no particular insights into brand consolidation. As an owner, it's better to have more options and more companies than less options and less companies as we move -- as we consider alternative brands. Competition is good for owners. But we have no particular insights on M&A or what might occur.

Right, okay. That's it for me. Thank you.

Rich Hightower, Evercore.

So a couple questions here. The first one is a point of clarification, Mark. I think you mentioned in the prepared remarks there was an external growth opportunity that could add $16 million of annualized EBITDA. I just want to be clear, is that within the existing portfolio or does that imply an acquisition opportunity that generates that?

By external -- so what we said in our prepared remarks is that we have $200 million or so investment capacity. So if we deployed that, we ballpark $16 million of incremental EBITDA from deploying that dry powder.

Okay. So I guess that's an 8% EBITDA yield. Are opportunities like that still prevalent at this stage?

Well, we've done three deals in the last six to nine months that are generating returns like that. It depends. It depends on what market, what the growth characteristics are, and a couple of our recent deals have exceeded our expectations. So I don't know that it will be exactly that number, but I think that's a reasonable approximation.

Okay. Thanks for the clarity there. And then actually, I thought you had an interesting comment to one of the other questions about shadow inventory in New York and seeing it on some of those shoulder nights, I guess, on Fridays and Sundays. Are you able to quantify the occupancy impact you're seeing on those nights of the week that you think is related to Airbnb?

There is no data available that we can quantify, Rich. So we are seeing where our strength is with the different customer segments. And obviously, we have the data on where the strength is and where the challenges are.

And so we are theorizing based on the data set that we have in front of us what the culprits are. So one theory is that it's probably more of an impact on Fridays and Sundays. I think Airbnb and so the shadow inventory is not competitive with our core business transient or special corporate, but it would make sense on some of the leisure that would have more of an impact. But there's no great data to look at that that could confirm that.

Okay, thanks, Mark. That's helpful. And then one last question. I know you guys have mentioned in the past you've only got maybe one or two what you would consider to be non-core assets that could be potential sale candidates.

Would the Hilton Garden Inn Chelsea potentially fall into that category? Or is that a situation where you want to bring in the new revenue manager and see what the asset can really do before potentially marketing it for sale?

Yes, I think at this point, we think that there's -- [it would be] lost market share. We think that there is a real ability to potentially turn it around, get to a higher NOI before we talk about monetizing. But that out of our New York assets, that would be the one that would be most likely to be monetized.

Okay. That's it for me. Thanks, Mark.

Shaun Kelly, Bank of America Merrill Lynch.

Thank you for taking my question. I just wanted to follow up maybe on the Conrad commentary a little bit. You guys gave some good color on the opportunity, but Mark, I think you mentioned how brand competition is good and we're seeing a lot of new announcements in these sort of soft brands or collection brands.

So I'm curious for your thoughts in terms of -- did you look at some of these new concepts out there? And how competitive are some of those and just how do you look at the different opportunities out there right now?

That's a great question. So Shaun, I would say we looked at every available brand. There's some that are conflicted, but there are a number of new brand opportunities.

What we through was so compelling about Luxury Collection at the end of the day was the underrepresentation of Starwood generally in the Chicago market, but also the fact that we could move into this luxury segment versus just a nice four-star segment.

The Starwood had no luxury product, no St. Regis, and the ability to put a luxury hotel -- a Starwood with a franchise in place in the top three MSA, it just seemed like that there was a real opportunity to drive rate and capture that high-end Starwood customer within Chicago.

And do the soft brands have -- how do some of the either ownership restrictions or geographic restrictions apply to the soft brands? Do those -- do you get -- will this preclude Starwood from doing another big luxury asset in Chicago? Just generically for a conference call, how does that work?

I would say the trade area restrictions that you get with a soft brand are the same market that you would get with a traditional brand. So if we were doing a Hilton or we were doing a Curio, we would ask for the same territory and the same length of restriction on that same brand or that same soft brand, regardless of whether it's soft brand or traditional brand.

Got it. But it does not necessarily preclude a different brand within the same -- a different brand within the same family, like W or Luxury or St. Regis wouldn't be precluded by that trade area restriction, right?

Traditionally, that's the case. Although there are some agreements out there and Starwood and Marriott Hilton have some that go over multiple brands. That is unusual.

Got it. Thank you very much for the color.

Bill Crow, Raymond James & Associates.

Following up on the Conrad, can you quantify -- are you allowed to quantify the key money that you received to make that choice?

That's a great question, but we haven't made it public yet. So we haven't disclosed it. We will in the future, but we can't at this moment.

How hard did Hilton fight to retain the Conrad flag?

That's a loaded question. I will say we had extension conversations with senior management of Hilton about what they wanted to do with their brands within that market, both Conrad and soft brand opportunities that they have within their portfolio.

And we went through that and we talked to a number of other major brand companies about alternatives. And at the end of the day, it was really economics that drove the decision to deliver the highest value to us.

Great, great. Just one strategy question, which is you now have, I think, seven resort properties, a quarter of your portfolio. How do you think about maintaining that size, that weighting toward resorts as we get later into this -- admittedly, we've got a few years left to go in the cycle.

But as you think about the cycle ultimately coming to some sort of an end, how much exposure do you want in the resort sector? Would you buy more at this point?

Yes, so I guess the way we measure traditional resorts, we are about 15%. All resorts are not created the same. So for instance, if you look at -- I'll give you two examples within our portfolio.

If you look at the Inn at Key West, which is a 100-room hotel in Key West, that is a leisure true tourist destination. It's going to appeal to that. If you look at Fort Lauderdale, that's very different. We had a tremendous meeting platform, so while it is a resort, it also has a tremendous ability to play the group recovery as well.

So I would say we never want our portfolio to be more than 20%, 25% resorts. I think we are pretty bullish on the general thesis that the traveler, over the next decade, will continue to want experience, will travel. So if they can do a meeting in a place that has a beach or has other things to do, like a Vail -- we do tremendous business in Vail in the summer with small meetings. We think that that trend is a good trend to ride and will perform well over the next several years.

Great. Thanks for the color.

Wes Golladay, RBC Capital Markets.

Looking at the group trends in the first quarter, they were quite strong. I'm wondering what your expectations are for the balance of the year, maybe group revenues as well as F&B growth -- revenue growth.

Sure. Wes, this is Rob. Q2, we are currently flat to on our pace. Q3 is going to be down a bit, but we see an increase in Q4, similar to what other companies are seeing as well.

However, we do see the F&B group contribution increasing with our spend. So it's been a continual short-term nature business. Also, the F&B spend continues to increase.

Okay. And then --.

So we continue, as we mentioned on the first -- on the year-end call, we expected mid-single-digit group revenue increases for the year. We continue to expect mid-single-digit revenue increases, primarily driven by rate.

As we sit here today, about 80% of the group business that we expect to book is already booked indefinite. So we have pretty good color on where we expect group to end up for the year. And so our expectation hasn't changed from where we started the year.

The first quarter, we knew, based on our booking activity, was going to be good. It was slightly better than we thought, because of the in-the-quarter, for-the-quarter booking activity up 60%. But we feel pretty good about group.

But as we mentioned before, our real story for 2015 is our ability to drive transient rate, which is really going to drive our portfolio. Group has taken a backseat to transient.

Okay. And then sticking with that real quick, though, on the -- when the groups do get to the hotel, are you finding out they're spending more or are they just more in line with what you expected?

They're absolutely spending more, Wes. Our group contribution went up in the quarter about 2.5%. And we are seeing quite a bit more spend -- they're typically booking at the time of contracting a lower minimum and then coming in and spending more upon arrival.

Okay. And then last one for me. You guys gave excellent detail on a lot of the hotels. The one I was looking at was Frenchman's Reef. What are your expectations this year for that hotel?

So for this year, we are expecting the hotel to hit our expectations. We had a really -- we had a good first quarter. We slightly shifted our demand base, going with to less group, and that group was down 32%, which impacted our food and beverage contribution.

However, when you look at the close to 90% occupancy, we are really pleased with how the first quarter went there. Our second quarter at Frenchman's will be very focused on group as well, so we have a strong group base for Q2. But overall, we think the overall -- our house profit there will be over $13 million.

Okay. Thanks a lot, guys.

I would now like to turn the presentation over to Mr. Mark Brugger for closing remarks.

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

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