Diamondrock Hospitality Co (DRH) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DiamondRock Hospitality Company's second-quarter 2015 earnings release conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Mr. Brett Stewart, Vice President Finance. Sir, you may begin.

Thank you, Ben. Good morning, everyone, and welcome to DiamondRock's second-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 second-quarter results and recent transactions, as well as provide an update on the Company's outlook for the rest of 2015. Sean will then provide greater detail on our second-quarter performance, and discuss our recent 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 this quarter, and are encouraged by the continued strength of underlying lodging fundamentals. Demand grew at 2.7% in the quarter, and continued to significantly outpace new lodging supply. With continued strength in both transient and group demand, industry RevPAR growth was primarily driven by ADR increases, as operators are able to raise rates and improve profitability. We expect these trends to continue throughout this year and next.

Turning now to our portfolio, our solid results for the second quarter were in line with our expectations. DiamondRock's second-quarter RevPAR of $184.50 set a new Company record for reported quarterly RevPAR. Our pro forma portfolio RevPAR grew 6%, and was driven by a 5.6% increase in average daily rate. Occupancy levels at our hotels were also at Company record levels, averaging nearly 84%.

Importantly, the portfolio delivered strong bottom-line results as well. Same-property hotel adjusted EBITDA margins, which exclude the newly built Hilton Garden Inn Times Square, grew 166 basis points during the quarter, leading to over 11% EBITDA growth versus last year. Including the Hilton Garden Inn Times Square, our year-over-year same-property adjusted EBITDA grew by more than 15%.

The strong results were broad-based during the quarter, with 13 hotels growing adjusted EBITDA margins by more than 200 basis points. Our asset management efforts were particularly effective in our food and beverage program, as the hotels achieved over 300 basis points of margin expansion in that department.

Although still a challenging environment, our New York City hotels met our expectations, and enjoyed exceptional occupancies of 92%, 94%, 95%, 96% and 98%. These hotels, excluding the non-comp Hilton Garden Inn Times Square, finished the quarter with positive RevPAR growth of almost 1%, which marks the second consecutive quarter that our New York City hotels have outperformed the Manhattan market by more than 300 basis points on an absolute basis.

Importantly, the Lexington achieved RevPAR growth of approximately 4% during the second quarter, and the new Hilton Garden Inn Times Square is still on track to generate a healthy 9% EBITDA yield this year. The market and our outperformance are consistent with our expectations going into the year and into the second quarter, and we expect that trend to continue for the balance of 2015.

Excluding our New York City hotels, our portfolio pro forma RevPAR growth was 7.2% for the quarter, which gives us great confidence in the continued strength of lodging fundamentals nationally. Similarly, our pro forma hotel adjusted EBITDA margins grew 227 basis points, excluding our New York City hotels.

Turning to our recent acquisitions, over the last year we have bought five hotels. The acquisitions are playing out better than originally expected, and delivering solid returns. The Inn at Key West is generating an NOI yield of over 8%. The Hilton Garden Inn Times Square is also on track to deliver an over 8% NOI yield in our first calendar year of ownership, which is a really remarkable return for a hotel in this location.

But the real homerun has been our Westin Fort Lauderdale resort. We have implemented our best practices at this hotel, and it is yielding some stunning results. We now expect to increase NOI this year by over 50%, and are forecasting to take out $3 million of operating costs. This should lead to over 1,000 basis points of profit margin expansion this year. Our NOI yield in this deal is now well over 8%, and the purchase price represents less than the 11 times 2015 EBITDA multiple.

Our fourth acquisition, completed earlier this year, expanded our West Coast footprint with the addition of the Shorebreak. The hotel is off to a good start in the second quarter, with 7.5% RevPAR growth and almost 500 basis points of margin expansion.

And last month, we announced that we acquired the Sheraton Suites Key West. The all-suites hotel has direct beach access, and has some of the largest rooms in Key West, one of our favorite markets. Our $94 million, or $511,000 per key, purchase price represents a solid 12.8 times EBITDA multiple on 2015 forecast. We are very optimistic about its growth trajectory, as its RevPAR grew a robust 14.2%, and profit margins expanded by more than 450 basis points in the quarter.

This acquisition also is a great value-creation opportunity to convert the hotel from a Sheraton brand into an independent lifestyle hotel, which would likely occur in late 2016. This conversion will allow us to eliminate more than $1.5 million in brand fees, implement a fee for parking, and re-concept the food and beverage outlets. As a result, we underwrite the hotel to generate between $9.5 million and $10 million of EBITDA upon stabilization, with potential upside.

I should note that this acquisition also marked a strategic milestone for DiamondRock, as now more than 50% of our portfolio is managed by third-party operators versus only one, 10 years ago, and only two, five years ago.

During the quarter, we also made progress on several strategic initiatives. On last quarter's call, we announced that we will convert the brand-managed Chicago Conrad hotel to an independently operated luxury hotel affiliated with Starwood's Luxury Collection. As expected, the transition this year led to underperformance in the quarter, as a result of the pending brand and management change. The official transition will occur in early September, and we expect to realize the full potential of this great hotel over the next three years.

With no other luxury hotel offerings within the Starwood system in Chicago, we believe that this is a compelling opportunity for us. To briefly quantify the upside associated with this strategic brand change, we believe that there is approximately 17 points of RevPAR market share upside, and at least $35 of rate potential from where we sit today.

Now, before I turn the call over to Sean for a more detailed update on our second-quarter results and on our capital markets activities, I would like to provide you with an update on our expansion option at the Boston Westin. When the Company acquired the 793-room Boston Westin in 2007, the deal included an option to lease land and build a 350-room expansion on a parcel adjacent to the hotel. With the option set to expire in mid-2016, we have spent considerable time carefully evaluating this opportunity. As part of our comprehensive analysis, we conducted an RFP, engaged feasibility consultants, consulted a preeminent Boston developer, and formulated the operating projections with Starwood.

After careful consideration of the pros and cons of the opportunity, we have decided not to proceed with the expansion, for a few reasons. One, the opening date in 2019 and funding for the expansion has a heightened risk of coinciding with the wrong part of the lodging cycle. And two, the risk associated with the development warranted a higher return threshold than what we view as achievable. In the end, the Company concluded that the investment capacity that would be used for this development is better allocated towards near-term acquisitions or future stock buybacks.

Sean?

Thanks, Mark.

Before discussing our second-quarter results, please note that our reported RevPAR and margin data are presented on a pro forma basis to include the Shorebreak Hotel and Sheraton Suites Key West as if they were owned for all periods presented, and exclude the Hilton Garden Inn Times Square Central since it was not open during the comparable period of 2014.

Let me start by reiterating Mark's comments that we were pleased with our second-quarter results. Our pro forma RevPAR grew 6%, exceeding industry upper upscale RevPAR growth of 5.4%. The top-line outperformance was primarily driven by our ability to drive an average rate increase of 5.6%, supplemented by a 0.4 percentage point increase in occupancy.

Our RevPAR growth also helped drive the bottom line, with over 70% profit flow-through and 166 basis points of hotel adjusted EBITDA margin expansion. For the year-to-date period ended June 30, the Company reported pro forma RevPAR growth of 6.8%, which was the result of a 5% increase in the average rate and a 1.4 percentage point increase in occupancy.

Year-to-date hotel adjusted EBITDA margins have expanded by 154 basis points. During the quarter, the Company reported adjusted EBITDA of $81.1 million and adjusted FFO per share of $0.31.

I would also note that we recorded a $9.6-million non-cash impairment charge during the second quarter, as a result of our decision to not exercise the development option at the Boston Westin. This charge was added back to our adjusted EBITDA.

Second-quarter results benefited from strength in both the business and leisure transient segments, with combined revenues from these segments growing 8.8%. Our group business also performed well this quarter, with revenue growth of 6.7%, driven by a 6.1% increase in rate and a 0.5 percentage point increase in rooms sold. Our group segment was led by Frenchman's Reef, the Chicago Marriott, and the San Diego Westin.

The recent positive trend of robust short-term group booking activity continued this quarter. Our portfolio booked $17.8 million of in-the-quarter-for-the-year revenues during the second quarter, which was an increase of approximately 24% compared to the amount booked during the second quarter of 2014. Strength in short-term bookings was most notable at the Boston Westin and Fort Lauderdale Westin. In addition, group spend on food and beverage, and AV, increased over 20% during the quarter, which we believe is a corollary to group confidence.

Finally, food and beverage results exceeded our expectations this quarter, achieving 6.1% top-line growth that, coupled with tight cost controls, resulted in over 300 basis points of margin expansion and 87% profit flow-through. Group outperformance was a primary driver in F&B, where banquet and catering revenues increased over 12%, and margins grew 190 basis points during the quarter.

Now, let me highlight several individual hotel results. The Washington, DC Westin continued to gain traction in all segments during the quarter, achieving over 25% RevPAR growth. We expect the hotel to continue gaining market share and outperforming the Washington, DC market, which has exceeded our expectations this year.

The 41 new rooms created at the Boston Hilton contributed to a 22% increase in quarterly hotel adjusted EBITDA. The 93 renovated rooms commanded over $110 rate premium from May through July, which exceeded our expectations.

The Chicago Marriott delivered 12% RevPAR growth and 288 basis points of margin expansion. These results benefited from several factors, including a strong convention calendar, several special events taking place in Chicago, including the NFL draft, outsized rate growth from their recently renovated rooms, incremental demand during the Blackhawk's run to the Stanley Cup, and their recent amendment to the management agreement. Similar to the Boston Hilton, the hotel is able to charge a rate premium from the renovated rooms, which was approximately $50 during the quarter, and ahead of our expectations.

The San Diego Westin had another outstanding quarter, achieving 12.3% RevPAR growth. The hotel continues to benefit from its recent renovation and repositioning. Year-to-date RevPAR is up 12.8%, and margins have expanded 272 basis points. We expect the hotel to continue to outperform for the balance of 2015, where we expect the hotel to generate double-digit RevPAR growth.

Finally, the Hotel Rex in San Francisco had another great quarter, with RevPAR growth of 18% and hotel adjusted EBITDA margin expansion of 330 basis points. We continue to be very bullish on the future of this hotel, which is expected to generate an attractive NOI yield over 9% during 2015.

Partially offsetting the positive trends in the quarter was the challenging operating environment in New York City. We remain confident in the positioning of our New York portfolio, which represents approximately 16% of our pro forma hotel adjusted EBITDA. Some specific data points that support our confidence include: second-quarter RevPAR growth for our New York portfolio was 0.8%, which outperformed the market RevPAR growth by approximately 300 basis points. We expect our New York portfolio to outpace the market, and generate RevPAR growth of 3.5% to 5.5% during the second half of the year.

The Lexington Hotel, which represents close to half of our New York portfolio, continues to gain traction. Over the last 12 months, the hotel has gained over 19 percentage points of market share. Finally, the Hilton Garden Inn Times Square, which represents over a quarter of our New York portfolio, is continuing to ramp up, and is currently tracking ahead of our underwriting.

In addition, the Chicago Conrad is currently transitioning from Hilton sales engines into Starwood's Luxury Collection, which is expected to be noisy through the end of the third quarter. The transition caused a 7.4% decline in the hotel's second-quarter RevPAR. Although we expect the transition to negatively impact the hotel's third quarter, we are very bullish on the prospects for the hotel after rebranding to Starwood's Luxury Collection.

Before discussing the balance sheet, we wanted to provide some color on our group outlook for the balance of the year. As a reminder, we still expect 2015 group revenue to increase 4%, almost exclusively driven by rate growth. However, we expect both industry and DiamondRock group business to be soft during the third quarter. Our guidance implies that group revenue will decline in the high-single digits during the third quarter.

The soft third-quarter group segment, which was factored into our prior guidance, is the result of holiday timing and weak city-wide activity in our large group markets including Chicago, Minneapolis, and Boston. We expect the business transient segment, which commands a $50 rate premium to group, to significantly mitigate the group softness. We expect group to reaccelerate in the fourth quarter, where group revenues are expected to increase in the mid-single digits.

In addition, please note that we raised guidance for hotel adjusted EBITDA margin expansion. Our new guidance is for 125 to 175 basis points of expansion, which is up from our previous guidance range of 100 to 150 basis points provided last quarter.

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's strategy since we founded the Company. We have over a decade long track record of consistently maintaining a straightforward and low-risk balance sheet. This discipline has allowed us to return close to $600 million in cash dividends to our shareholders since our IPO.

We have made great progress towards achieving our initiative to reduce annual interest costs by several million dollars through proactively refinancing our near-term debt maturities. We have a focused plan to efficiently reduce borrowing cost, extend and stagger our maturity schedule, and expand our pool of unencumbered hotels.

Recent financing successes include: refinancing the Renaissance Worthington with a new $85 million, 10-year mortgage bearing interest at a fixed rate of 3.66%; refinancing the JW Marriott at Cherry Creek with a new $65 million, 10-year mortgage bearing interest at a fixed rate of 4.33%; prepaying the Frenchman's Reef Marriott mortgage with excess proceeds from Worthington and Cherry Creek; and in total, we have refinanced approximately $150 million of 5.7% interest rate debt with new 10-year fixed rate debt bearing interest at approximately 3.95% resulting in annual interest rate savings of approximately $2.7 million.

We are pleased with the success of our refinancing initiatives. We will continue to execute on our action plan to refinance our remaining near-term debt maturities. Specifically, we intend to raise between $200 million to $250 million through encumbering one or more hotels during the balance of the year. These proceeds will be used to repay the $203 million loan secured by the Chicago Marriott, which is pre-payable without penalties in early 2016.

In total, we expect our 2016 interest expense to be approximately $8 million lower than this year, which represents $0.04 of incremental FFO per share. After executing on our financing strategy for the balance of the year, we expect to end 2015 with over $250 million of unrestricted cash, over half of our hotels unencumbered with an aggregate cost basis of $1.6 billion, an undrawn corporate revolver, and over $100 million of investment capacity.

I will now turn the call back over to Mark.

Thanks, Sean.

As Sean mentioned, we are encouraged by our second-quarter results and by the continued strength of underlying lodging fundamentals. Our recent acquisitions continue to exceed expectations. Our asset management initiatives, including our ROI projects, continue to drive profitability. And our refinancing activities have strengthened our already attractive leverage profile.

Today, we updated our full-year guidance, raising some components. We reaffirm our RevPAR growth expectation of 6% to 7% for the full year, we raised our adjusted corporate EBITDA guidance to $266.5 million to $276.5 million, increased $2.5 million for acquisition of the Sheraton Suites Key West. And similarly, we increased our adjusted FFO per share guidance to a range of $1 to $1.03.

We have raised our full-year hotel adjusted EBITDA margin growth guidance to be in the range of 125 to 175 basis points, with the midpoint now 50 basis points higher than when we first introduced 2015 guidance, and ahead of the increased margin guidance range provided on the first-quarter earnings call.

As Sean mentioned, for the third quarter we expect pro forma RevPAR growth to be in the range of 3% to 5%, reflecting a tough comparison to last year's third-quarter growth of 18.6%, as well as the shift in holidays and the spread of convention calendars. Importantly, we want to highlight that we expect RevPAR growth to reaccelerate in the fourth quarter, which should be a strong group quarter for us.

Our expectations for the full year remain unchanged at 6% to 7% RevPAR growth. Further, we expect our New York City assets to continue to gain momentum as we move into the back half of the year. We expect our New York City portfolio RevPAR growth to be in the range of 3.5% to 5.5% for the second half of the year.

Lastly, before I open it up for questions, let me provide a quick update on our investment pipeline. We remain sensitive to our cost of capital, which has become more expensive since January. As I noted earlier in the call, the acquisitions over the last year have generally exceeded our expectations, and enhanced the growth prospects of DiamondRock.

We will continue to actively evaluate opportunities that meet our criteria and create shareholder value, but we remain disciplined when it comes to price, size and complexity. We're fully cognizant that our cost of capital has increased. While we currently have more than $100 million of investment capacity, we've already made two great buys this year, and we consider it a successful year even if we don't do another deal.

With that, I'd like to sum up the prepared remarks by saying that we feel very good about the industry, our portfolio, our capital allocation, discipline and execution, and the momentum from our asset management initiatives. We are confident that all of these will allow us to continue to create value for our shareholders throughout the lodging cycle.

We would now be happy to answer any questions that you might have.

(Operator Instructions)

Our first question comes from the line of Jeff Donnelly of Wells Fargo. Your line is open. Please go ahead.

Good morning. Just a few questions and first, Mark, I want to compliment you on the decision process for the Boston expansion.

Thank you.

Just concerning the Conrad in Chicago, or that's being converted over to the Luxury Collection, can you just talk who you think are the most direct comps in that market for that hotel going forward?

Sure, Jeff. It's Rob Tanenbaum. Good morning.

The comps for that would be the JW Marriott in the Loop, the Park Hyatt and the W in the Loop, as well.

And I missed this, I think Mark was going through it. How you guys think that this hotel will ultimately position out versus those peers and how long do you think it will take to achieve those levels in terms of like RevPAR index for example?

Sure, Jeff, so in the prepared marks we said we think we there's about 17 points of market share opportunity versus where the hotel sits today and that would translate into about, in today's dollars, about $35 or a little more than $35 in rate. And as far as timing, we would expect to gain traction fairly quickly. But usually in the brand conversion, the full-year reap of the benefits it takes about two or three years.

Okay. And just to switch gears, I just wanted to clarify, do you anticipate any labor related issues at your Kempton property that your peers experienced up in San Francisco?

We do not. We do not have any reason to believe we would have any activity out of the norm at that hotel.

And then, at Bethesda, I know it's not a significant asset for you, but there's been some talk about Marriott relocating its corporate headquarters long into the future from now. Do you know how much of the business of that hotel stems from Marriott's headquarters proximity and how does that shape your hold sell analysis on that property?

It's a demand generator certainly for the hotel. Lockheed Martin's also in that same office park. There's about five million square feet total of office surrounding the hotel.

Marriott's lease is not up for another six or seven years, so it's still quite a ways out there. But that asset, I think based on its average RevPAR, if you cull what is non-core to what would be on our disposition target list, I think for a variety of reasons, that one is certainly on that list.

And, Jeff, this is Sean. Marriott as a demand generator is under 10% of the special corporate demand at the hotel, mostly midweek.

Okay. And just one last question, concerning the Vail asset, I recognize it's maybe a little early for this, but that hotel actually had pretty good revenue growth in the quarter. That was hit largely outside of the ski season, and I forget the rollout schedule, but I know Vail Resorts has been looking to build its summer business. I was curious if that's an early indication of that success, or do you feel that driver's still largely ahead of you for that hotel?

Sure. Jeff, it's Rob again.

The summer business has been growing, also due in part to, one, our group business at the hotel as well as due to the developments going on in Vail on Vail Mountain.

Jeff, I would just add, Vail has been one of our best buys and we're sitting here on 2015 numbers, about a 14% unlevered NOI yield on that asset. So it's enjoyed the benefit of Epic Pass, the investment that Vail has made in the summer and the continual evolution of the Lion's Head area of Vail.

Okay. Thanks.

Thank you. Our next question comes from the line of Ryan Meliker of Canaccord Genuity. Your line is open, please go ahead.

Hello.

I appreciate a lot of the color that you gave us on the Boston development and the decisions not to move forward with the option. I'm wondering, how did you factor in the possibility of somebody else taking over the planned -- a development plan that might directly compete with your Westin there?

Thanks.

Sure. Good morning, Ryan. This is Mark.

So, we obviously spent a lot of time evaluating the opportunity, the economics to us. The reason the economics and again, that we didn't think they were enough to offset the negatives of the timing and the development risk. It works really well as an expansion for our existing hotel because you can leverage all that infrastructure.

The site actually sits behind our hotel, off the main street. So it would be a less desirable site for any other hotel developer. So it would have to go out for RP, get a building permit.

Our expectation was if it does become a hotel, it's unlikely to happen this cycle. It could happen. But there's so much demand in what's evolving in the Seaport, even if it did, we don't think that it would have an impact on our -- a negative impact on our hotel.

All right. Thanks that's helpful.

And then, Rob, I guess a question for you. The new Hilton Garden Inn Times Square ran at almost 100% occupancy, I think 98.5%. Do you feel like you left some rate on the table in the quarter?

Ryan, we're continuing to work with our operators on bringing up our discounted business and we believe there's opportunity there to further drive rate.

Yes. Okay.

I just looked at that and I always tend to think when we're running that high of occupancy, we're leaving some rate on the table, but I guess the market was challenged in the quarter, too. And then, Rob, as we think about the margins, you obviously put up really good margin numbers this quarter. You've got good guidance for this year. How much juice is left in the margin expansion story beyond simply the cycle play?

We feel there's quite a bit of margin expansion available to us, Ryan. In particular, as we continue to focus in on our food and beverage margin, our rooms revenue drive as well, and just overall labor containment as we go through all of our properties.

All right. That's it for me. Thanks.

Thank you. Our next question comes from the line of Anthony Powell of Barclays. Your line is open. Please go ahead.

Hi, good morning. Going back to New York, how does the supply growth outlook look for the rest of year and also into the next year for your market and also for your submarkets?

Anthony, this is Mark. So supply this year looks like it's going to be less than what it was originally anticipated as a number of developments that got pushed off. We think it's going to be -- it's going to be marginally higher next year. Although, in our particular markets, the bulk of our investments are on Midtown East. Midtown East actually has some of the lowest supply numbers in the Manhattan market.

Additionally, they're talking about taking 1,000 keys out at the Waldorf Astoria over the next couple of years to residential conversion. That would obviously be an enormously positive impact to the Eastside and to the supply picture there. So we actually feel pretty good about where our investments are and what is happening in the city.

Got it. And just further on New York, it was good to see the Chelsea asset do a lot better in this quarter. How much more do you have there to improve the performance relative to recent trends?

Yes, if we look at the recent times, and obviously we made a manager change just in June, we continue to -- that's a revenue management game there. So we now have the right players in place. We lost about 8 points of market share that we don't think we should have lost at that property over the last year. So we would certainly anticipate gaining at least that much back.

Anthony, this is Rob. For July alone, we had a 13.3% increase in RevPAR. Our index was over 100% for July, which is the first time in 16 months so we feel very confident in our new approach at this asset.

Got it. And just one final in Boston, what's the exact process for that opportunity to go back out to bid and what's the timeline for that?

Sure. So we have our current option, it goes through early 2016, but the way the option works is we would probably -- we want to be good partners with the MCCA who owns the land there. We'd probably allowed them to -- we'd terminate the lease early. If we don't put up a deposit then this month, we would terminate the lease. And then they would have to go through a whole new process. It still needs to get a building permit and designs and there is a lot of pieces that have to fall in place for them to bring it back out to our RFT.

All right. Great. Thank you.

Thank you. Our next question comes in the line of Austin Wurschmidt of KeyBanc Capital Markets. Your line is open. Please go ahead.

Good morning. Just a question, you mentioned stock buybacks being on the table and I was just curious if you had and how large of a program you have in place? And to the extent that you would move forward with buying back some stock, would you consider or look to balance that with dispositions in order to maintain your dry powder today?

Good morning, Austin. It's Mark. That's a great question.

So we do believe that our stock's trading at well below NAV today. Frankly, we were trading over 30% higher at the beginning of the year.

On buyback programs, we currently have in place a $200 million program that is fully available to us. It's obviously a serious topic with the Board, but ultimately we're trying to balance out our capital allocation options, leverage and timing.

As far as funding it with dispositions, that would certainly be on the table. As we mentioned earlier, we do have investment capacity, but we are looking at some other opportunities and will continue to balance those out over time.

Great. Thanks. And then separately, on the third-party achieving your longer-term target in terms of exposure to third-party hotel operators, would you look to continue to drive that lower, or are you comfortable where you are today?

Yes, I'd say we're opportunistic. We currently have 15. The three deals in our pipeline that I mentioned earlier, none of which may come to fruition but all three of those are third-party operated. But I would say we are opportunistic. Clearly one of our strategic goals is to be 50/50. So I think it will depend on where we can get the best returns for our shareholders.

And then lastly, just a clarification. You in the release had mentioned the first phase at the Chicago Marriott downtown included 200 rooms. It was a revised to 140 it looked like. Did anything change there or?

No, Austin, this is Sean. It was the top five floors and it was 140 rooms, there as well as 25 suites.

Okay. Thank you.

Thank you. Our next question comes from Smedes Rose of Citi. Your line is open. Please go ahead.

Hi, thanks. I just wanted to ask you, you mentioned better results at your Chicago Marriott in part due to the amended management agreement. I was just wondering, can you quantify an annual basis how much you think that will help the EBITDA at that property?

Sure, Smedes. We think on a continuing basis, it's anywhere from $1.5 million to a little over $2 million in annual fee savings at the hotel.

Okay. Thanks.

Mark, I'd be interested to hear your perspective. Obviously this has been a very choppy second quarter for lodging companies. And there has been a wide range of same-store RevPAR and a wide range of commentary about where we are. And I'm just curious, maybe you could talk about what you are seeing for 2016 on the group side that gives you some confidence that this cycle is maybe not ending faster than might've initially been expected?

Sure, Smedes. So there's a couple things going on that make us continue to feel good about where we are in the lodging cycle. Obviously the supply picture, which we have pretty good clarity, is good. But the in the quarter for the quarter group bookings, continue to be very strong. So the -- if we look at the funnel, the funnel looks good. The realization of the opportunities in the last quarter were very good.

On special corporate transient, transient's lead this recovery, continues to be very strong. We saw obviously good strength in the second quarter. It's too early to give you good feedback on special corporate rate negotiations for 2016. But clearly, at the occupancy levels at record levels in a number of these markets, we feel like we have leverage going into those conversations.

And then the group's really a market by market story. You've seen better F&B contribution this year, better AV outside the room spend; that's increased. But we really think group on a net-net national basis is improving but it really depends what market you are in, what the citywide calendar looks like, what the availability is there.

So that one, I think you're going to see some great results in some markets and some not great results but it's really going to be specific to what's going on within those markets. So those are the trend lines we're seeing today.

Okay. And then just finally, Sean, you -- during the quarter you mentioned there was a tax, I think, at Frenchman's Reef that wasn't extended. Has that been resolved at this point or can you maybe just update us on that?

Yes, we're still going through the process down there in St. Thomas and we will be able to provide an update of that when we get it, assuming we get it. We feel confident that we should get it. But we just have to continue and go through the process and hopefully our expectation is that will happen in the third quarter.

All right. Thanks.

Thank you. Our next question comes from the line of David Loeb of Robert Baird. Your line is open. Please go ahead.

Good morning. I'd like to circle back to Boston and take Ryan's question and turn it around. Can you just talk a little bit about how you see those other opportunities? What kind of returns you see from those other uses of your capacity and what -- how that weighs relative to the potential return for basically creating new rooms at a discount to where rooms in that market are valued?

Sure, David.

Probably the best question to answer that question is to recap some of the deals we've done in the last 12 months. A number of those deals, a majority are over eight caps on first year numbers, first calendar year numbers. Those are pretty compelling.

I think particularly the efforts led by Troy Furbay have been better than we expected. But Fort Lauderdale, which we bought in December of last year, not that long ago, that will be below an 11 times multiple of EBITDA on this year's numbers. So if we can find special situations like that, that certainly is a compelling use of our allocation of our capital.

For the Boston Westin opportunity, we think it is a very interesting opportunity. It was not an easy call. But we think you need more than 200 basis points of above our baseline of our projections to do a deal like that. And that's not where the returns are penciling out right now.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Woronka of Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning. I wanted to ask you on the Key West Sheraton if they are -- you've talked about repositioning that independent. Is there a possibility that Starwood stays involved with the new soft brand if the numbers work out, or are you pretty much set on going totally independent?

Chris, this is Mark. That's a great question. I would say we're open-minded right now. We will talk to Starwood about other options for the property. I think we are committed to move away from the Sheraton brand, because we think there's ability to reposition the asset and gain higher rates. But certainly we'll be open to any approach that they have on that.

We do think the independent makes a lot of sense. It's obviously one of the highest occupancy markets in the US and this is a great product with the suites. So we will continue to keep an open mind and have a dialogue with Starwood. But our base case for buying the asset is that we will convert it to an independent at the end of next year.

Okay. Got you. And then you have a piece of debt coming due in January, property mortgage. Should we -- I think it's a property that some folks might consider non-core. Is there anything -- you would normally think about doing something on that debt pretty soon or disposing of the property. Any update there?

Chris, we are evaluating our options there. At a minimum, I think our view there is that we could take that debt and prepay it early and save interest rates just by putting that on our line of credit at a minimum. But we're also evaluating what the best long-term plan for that asset is and that could include refinancing, disposition or just unencumbering it and keeping it on in unencumbered pool.

Okay. Great. And then just to go back to Frenchman's. I think you have done pretty well operationally there over the years, but from time to time creates a little bit of noise and just friction because of the location. How do you view that longer-term in the context of does it fit, and is the amount of noise, is it always justified by the returns? Just your thoughts there? Thanks.

Sure. This is Mark. So Frenchman's Reef actually we've had a lot of success since we invested capital in it on the top line. We still think that there is opportunity at the asset. And certainly we'd like to best position it before we monetize the asset. I would say it is not on the top of our disposition list. But over time, it may be an asset that we consider disposing of.

Okay. Fair enough. Thanks.

Thank you. Our next question comes from the line of the Bill Crow of Raymond James. Your line is open. Please go ahead.

Hey, good morning. Let's start with Boston and maybe the last question on Boston. But given all the work you did, I'm sure you have a pretty good idea of what the cost per key would've been to complete the project. I think that would be a valuable number for us as we think about replacement cost.

We think, depending how you valued the land, to build a hotel there is about $500,000 a key all in. But the land's obviously a little bit of a moving target. We had the advantage of having a fixed option on the ground lease.

Right. But $500,000 would be what, representative of fair market value of land? Is that a good way to think about it?

Yes. That's fair.

Okay. Great. You talked about the --

One other data point, I would point out in Seaport. There's a soft-branded hotel that's on the market now that we understand is going to trade for $700,000 a key. A little better transient location, but that -- there will be some trades, we think, in the Seaport area that will give people better handle on where valuations are, as well.

That's helpful. You talked about the rooms at the Waldorf potentially coming up. But you also have the rooms at the InterCon that are going to come back online. What's the timing for that, and how do you think that impacts your Eastside market when that comes back?

Rob, why don't you address that.

Sure. Bill, good morning. Those rooms I expect to come back on in March of 2016 and the hotel is receiving $175 million renovation top to bottom adding two large ballrooms with it and actually increasing its room count. But we think that hotel is going to be repositioned at a much higher pay, much higher rate than where it was previously positioned, and so we have the opportunity to draft underneath that.

Okay. Two more quick questions if you don't mind. First is the -- you're converting the Conrad, obviously, to the Luxury Collection. You're also taking the Sheraton brand it looks like off the Key West asset. Obviously, you are in discussions with Starwood there, almost single-mindingly focused on unit growth at this point and trying to play catch-up and maybe doing it uneconomically, which would be to your benefit, I guess. Any change in negotiations, discussions, their stance, their aggressiveness that you've seen over the last six months or whatever?

Sure, so I think we can give you a pretty good insight on the Luxury Collection opportunity. I think it is too early to comment on the Key West opportunity since we just started engaging with them on that. On the opportunity in Chicago, for years before there was a change in their CEO, they said that opportunity would not be available for that hotel.

When Adam came in, we approached them again. They had -- we understand they have one bullet left under a territorial restriction that exists for them. And Adam was actually very aggressive in walking the property, engaging with us and using that one bullet on our property because I think we both recognized it could be a real win-win for both of us. So I would say that there was a significant change in the willingness and engagement level with Starwood on that opportunity.

Again, on the Key West opportunity, we just acquired it, we just announced it, we will have to let that one play out a little bit to give you a better gauge.

Fair enough. I appreciate it.

Finally for me, just about the third quarter, and guidance of three to five is kind of in line with what we've seen in the peers, maybe even a little better than some of the peers. We just got the STR preliminary data for July, showed RevPAR up seven to nine for the industry. Maybe you can help us think about how tough September is going to be in order to offset what was a pretty good start to the quarter?

Sure. I think it's market exposure as much as it is June to July. I think different markets are behaving very differently and so a lot of the national numbers, I think you're going to see a lot of variation between what the companies report and what these national averages are on the RevPAR growth.

So we're actually, I could tell you at our hotels and in our markets, there are wild deviations between the strength in June and July both ways. So I am not sure we can draw any particular conclusions about July strength nationally versus what we're seeing in our individual markets.

But you think September, given the calendar changes, should we expect negative RevPAR growth for the month as we think about it playing out?

Bill, this is Sean. We would not expect negative RevPAR, at least certainly not in our portfolio for September. Our third quarter is really going to be dictated by group, which we expected that to be down in the high single digits. We expect a lot of that to be offset by strength in the transient.

But group, which is about 30% of our total book of business, is going to be challenging and a lot of that is going to be citywide-driven, timing of the holiday-driven, as well as some specific market stuff, particularly within Minneapolis, where there was a couple of huge citywides that were in last year that are not going to repeat. They were one-time events. And Minneapolis is a big group hotel for us.

Listen, I appreciate the time. Thanks.

Thank you, Bill.

Thank you. Our next question comes the line of Thomas Allen of Morgan Stanley. Your line is open. Please go ahead.

Good morning. Can you give any commentary around international visitation trends on your properties? Thanks.

Sure. This is Mark.

So international is not a very big segment for us. The only market that really has any impact at all is New York, and even in New York, we are seeing the international demand relatively stable at our hotels. But again, running in most of our hotels, 8% or 10%. I don't not sure that's indicative of what's going on with international demand generally.

Okay. Helpful. Thanks.

And then just a clarification. On your 2015 RevPAR guidance, you reiterated the 6% to 7%. Did Key West influence that at all or not? Thanks.

Thomas, this is Sean.

Not really, because it's only 184 rooms. So just the weighting of it does not dramatically impact it. Although, we expect good things out of that hotel this year. The second quarter in that hotel was very strong with double-digit RevPAR. But it's not large enough to move our consolidated RevPAR numbers.

Okay. Great. Thank you.

Thank you, Thomas.

Thank you. Our next question comes from the line of Shaun Kelley of Bank of America. Your line is open. Please go ahead.

Hello. Good morning. You covered a lot of ground but I think last quarter it was probably a bigger topic talking about the Conrad rebrand. But I'm just curious, now that we can quantify the RevPAR decline you guys saw in Q2, how do you think about the ramp back up on that property rebuilding through Luxury Collection? Is it going to stay this type of GAAP for a quarter or two, or do you think it's going to ramp pretty steadily in the next couple of quarters?

Hi, Sean. Rob Tanenbaum.

We believe for the third quarter there will be some additional impact with the transition. However, the ramp up is going to be definitely a steady ramp up as we going to it.

Our results certainly were in line with expectation and in reviewing our opportunities we are extremely encouraged by the preconversion sales and marketing efforts both on the transient and group channels, and we remain very positive on the incremental strength in the hotel as it benefits from the Starwood system. The opportunity within special corporate is unbelievable and we are very excited about that, and especially now that we brought our in-house group sales office back into the property from, previously it was complexed operation. We're seeing some great strides with that.

Thanks for that, Rob.

Just to be clear, then, you say additional disruption; does that mean that you think at least the gap to the market -- and I understand it's going to vary based on what Chicago more broadly is doing. But does that mean the gap to the market is probably going to actually get wider in Q3 before it stabilizes and starts to move back the other direction?

No, Shaun, that gap will shrink.

It will start shrinking as quickly as in the third quarter?

Yes.

Okay. Great.

Maybe just a bigger picture one probably for Mark. But just broadly at this point, you outlined and talked about stock buyback potential, but if you were going to help us prioritize, if M&A were back on the table for you in terms of acquisition markets right now, you did Key West, you've done a couple of now either resort or beach type locations in your recent deals. What are you looking for right now? What markets specifically would you be most intrigued by at this point in the cycle?

Sure.

So our acquisition focus has been on adding market diversity and really been emphasizing on expanding our West Coast footprint. If I looked at our current pipeline report, there are three deals under intense evaluation. Two of them are urban CBD locations in the Pacific Northwest and one is in Southern California.

But with that said, I need to mention it, we're highly sensitive to our cost to capital, so most of these opportunities we're looking at, there's is usually some kind of value enhancement opportunity to make them pencil and be able to create value for our shareholders. But as far as markets, we're looking to expand our West Coast footprint. That would probably be the emphasis of our efforts. And the three priority deals that we have right now, all of which are relatively small, are on the West Coast.

And is that both limited service and full service, Mark?

One of the three is limited service.

Great. Thank you very much.

Thank you. Our next question comes from the line of Lukas Hartwich of Green Street Advisors. Your line is open. Please go ahead.

Thank you. Hello. Just a quick one for me. Can you talk about cap rate trends?

Sure. This is Mark, Lucas. I would say we, in the last year, we have lost 90% of the assets that we've chased because cap rates continue to stay very aggressive. And actually in a number of markets we've seen slight contraction this year.

Now obviously, rates have pulled back a lot recently and they've been a big buyer of a lot of these assets. But we've seen strategics, we've seen international money, we've seen some new entrees into the market. So it is still a very competitive environment out there, and certainly we haven't seen any pull back in where cap rates have been on high quality deals.

Great. That's it for me. Thanks.

Thank you. And our final question will be a follow-up from the line of Jeff Donnelly of Wells Fargo. Your line is open. Please go ahead.

Thanks for letting me book end. I had just one question actually. I know it's early on and maybe this one's for Rob.

But do you have a sense of what the opening of the Envoy, which I think is an Autograph Collection asset in Boston, does for the transient rates at the Westin that's nearby, as well as your Hilton? It's proximate to both and bridges those two markets. I'm just curious if you think that will maybe be helpful to you in terms of maybe setting a new high rate in the market? Or it's going to be a little bit disruptive?

Jeff, this is Rob. Yes, we do believe it'll help the market, and again opportunistics would allow us to draft similar to the Lexington in New York off of Park Place.

I know they don't have much operating data yet, but do you have a sense of how well that hotel has been fairing, just from what you can see?

No and it's only 100 rooms.

Yes, we don't have anything at this point.

Okay. Thanks.

Thank you. And that does conclude our question-and-answer period. I'd like to turn the conference back over to Mr. Mark Brugger for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.