Diamondrock Hospitality Co (DRH) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DiamondRock Hospitality Company third-quarter 2015 earnings release conference call. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host of today's call, Mr. Brett Stewart. You may begin.

Thank you, Tonya. Good morning, everyone, and welcome to DiamondRock's third-quarter 2015 earnings call and webcast.

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

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 third-quarter results, as well as provide an update on the Company's outlook for the rest of 2015. Sean will then provide greater detail on our third-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 to call over to Mark.

Thanks, Brett. Good morning, everyone.

Let me start by saying that we remain constructive on the lodging cycle, despite an increasingly uneven operating environment. For the industry, third-quarter industry RevPAR growth was a strong 5.9%, despite a difficult comp relative to third-quarter 2014 growth of 9.2%.

The macro supply picture remains accommodating, with new hotel supply only exceeding the historic average in two of the last 14 years. The demand corollaries we watch are mixed. GDP growth of 1.5% was subpar and corporate profits are being weighed down by the energy sector, but consumer sentiment remains elevated and employments are trending well.

For DiamondRock, the portfolio faces difficult comparison to our record quarter last year, in which the portfolio delivered an outstanding 18.6% RevPAR increase. Moreover, we knew this third quarter would be challenging with weak citywide calendars in our markets. The quarter was also impacted by the late Labor Day holiday and the change in Jewish holidays.

For the third quarter, DiamondRock's pro-forma RevPAR increased 2.2%. Excluding the impact from the brand transition at The Gwen, our pro forma RevPAR grew 3%, which was in line with the lower end of our guidance.

We actually saw excellent demand growth in our transient segment, with transient revenues up 7.6%. Business transient demand was especially strong with revenue growth of 9.5%, while leisure demand was also solid with revenues growing 7.7% for this segment. The group segment, however, weighed down the portfolio as group revenue declined 7.2%.

Importantly, though, our asset management best practices were a bright spot. As a result of the team's hard work, we were effective in driving most of each incremental dollar of revenue to the bottom line, as we achieved house profit flow-through of 74% and house profit margin growth of 94 basis points during the quarter. Because of this strong flow-through, DiamondRock was able to increase pro forma corporate adjusted EBITDA by approximately 6%, despite a difficult demand period.

There are two items negatively impacting the quarter results that are worth noting. First, results were significantly impacted by greater-than-expected disruption from the conversion of the Conrad Chicago to The Gwen. This disruption reduced third-quarter RevPAR by almost one percentage point and held back EBITDA margin expansion by 53 basis points. Excluding this impact, our pro forma RevPAR growth would've been 3% and pro forma adjusted EBITDA margins would have been 92 basis points.

While transitions are often difficult during initial ramp-up, we have a great plan in place for the hotel and expect double-digit RevPAR growth next year.

Second, we were hit with a larger-than-expected property tax increase at the Chicago Marriott. The newest estimate reduced EBITDA in the quarter by $1.1 million and held back EBITDA margin expansion by 47 basis points. We are appealing this assessment.

Now, let me provide you a brief update on our New York City assets, which have continued to outperform the market. Navigating successfully through a challenging environment, our New York City hotels, excluding the Hilton Garden Inn Times Square for the period it was not open last year, finished the quarter with RevPAR growth of 2.3%. Our New York City hotels have outperformed the Manhattan market every quarter this year. Importantly, the new Hilton Garden Inn, Times Square, is still on track to generate a healthy 9% EBITDA yield this year on our investment. The market and our outperformance were consistent with our expectations and underscore our confidence in our New York City portfolio.

Now let me turn to call over to Sean to discuss our third-quarter results and our capital markets activities in more detail.

Thanks, Mark.

Before discussing our third-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 only include the Hilton Garden Inn Times Square Central for September, since it opened September 1, 2014.

Our hotels operated in a challenging environment during the third quarter as a result of the holiday shift and lack of group base, which contributed to our portfolio generating modest 2.2% RevPAR growth. The RevPAR growth was driven by an average rate increase of 3.2%, which was partially offset by a 0.8% reduction in occupancy. It's worth noting that the total revenue growth of 3% exceeded our RevPAR growth as a result of the additional revenues generated from the new rooms at the Boston Hilton and the 4.2% growth in food and beverage and other revenues.

Our aggressive asset management initiatives led to excellent third-quarter flow-through of 74% and hotel adjusted EBITDA margin expansion of 39 basis points. The margin expansion was held back by higher-than-expected transition disruption at The Gwen and the unforecasted increase in the Chicago Marriott property tax assessment. Excluding these two items, the hotel adjusted EBITDA margin would have expanded close to 140 basis points.

For the year-to-date period ended September 30th, the Company reported pro forma RevPAR growth of 5.2%, which was the result of a 4.3% increase in the average rate and a 0.7% increase in occupancy. Year-to-date hotel adjusted EBITDA margins have expanded by [114] basis points.

The third quarter benefited from 9.5% revenue growth from the business transient segment, which represents the highest quarterly growth so far this year and an acceleration from the 5.5% second-quarter growth. Business transient was led by the Boston Westin, the Chicago Marriott, and the Lexington Hotel, with business transient revenue growth of 34%, 26%, and 15%, respectively.

As expected, our group segment was challenged this quarter with revenue declining 7.2%. Although we are never satisfied with revenue declines, the group segment was above expectations as group pace was down 13% at the beginning of the quarter. The outperformance was the result of picking up $6.4 million of in-the-quarter/for-the-quarter group revenues, which was 50% above the pickup from the same time last year. The stronger pickup was led by the Minneapolis Hilton, Lexington Hotel, and Worthington Renaissance.

Finally, the 5.7% growth in leisure transient revenues was modestly below expectation, which assumed a continuation of robust leisure transient revenue growth, which grew 14% during the first half of the year. This segment was negatively impacted by the third quarter's challenged holiday pattern, which was most impactful to August and early September.

Additionally, food and beverage results exceeded our expectations this quarter, achieving 4.2% topline growth. That, coupled with tight cost control, resulted in over 360 basis points of margin expansion and a 119% profit flow-through. Despite group challenges in the quarter, banquet and catering outperformance was the primary driver in F&B, where banquet and catering revenues increased more than 10% and margins grew over 460 basis points. In addition, group spend on F&B and audiovisual increased over 26% during the quarter, which we believe is a sign of group confidence.

Moreover, our portfolio continued to benefit from recent ROI projects. The new rooms at the Boston Hilton generated a $121 rate premium in the quarter, which continued to exceed our expectations. At the Chicago Marriott, the first phase of renovated rooms commanded a $50 rate premium, which also exceeded expectations.

In addition to the transition disruption at The Gwen that Mark discussed, our third-quarter results were impacted by two additional items. First, property taxes at the Chicago Marriott were impacted by a 33% increase in the assessed value, which was significantly above guidance expectations. We recorded a third-quarter adjustment of $1.1 million to true-up the year-to-date 2015 property tax expense, which negatively impacted third-quarter hotel-adjusted EBITDA margin expansion by 47 basis points. As Mark mentioned, we have already started the appeal process.

Second, early in the fourth quarter we received a 15-year extension of the Frenchman's Reef income tax agreement, which is retroactive to February. Under GAAP, the retroactive impact of the extension cannot be recorded until the fourth quarter. While the timing of the benefit does not impact the full-year income taxes, it did impact the third quarter, which resulted in our third-quarter tax revision being $1.1 million higher than guidance.

Turning to New York, the operating environment in the city continues to be challenging, but we remain confident in the positioning of our New York portfolio. Third-quarter revenue growth for our New York portfolio was 2.3%, which outperformed the Manhattan market RevPAR growth by over 200 basis points. The Lexington Hotel, which represents close to half of our New York portfolio, outperformed the market with third-quarter RevPAR growth of 2.7%.

Our manager change at the Hilton Garden Inn Chelsea began to take hold as the hotel significantly outperformed the market during the quarter, achieving 12.2% RevPAR growth and gaining close to 8 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 underwriting.

Before turning the call back over to Mark, I would like to touch on our balance sheet. After the recent financing activity, we are very close to completing our initiative to reduce borrowing costs, extend and stagger our maturity schedule, and expand our pool of unencumbered hotels. Recent financing successes include financing the Boston Westin with a new $205 million 10-year mortgage, bearing interest at a fixed rate of 4.36%. We intend to use the proceeds from the Boston Westin loan to prepay the $203 million Chicago Marriott mortgage loan, which is pre-payable without penalty in January 2016.

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%, and have or will increase our unencumbered hotel pool by prepaying the Frenchman's Reef Marriott, Orlando Airport Marriott, and Chicago Marriott mortgages.

We are extremely pleased with the success of our refinancing initiatives. During 2015, we have refinanced over $350 million of 5.8% interest-rate debt with new 10-year fixed-rate debt bearing interest at approximately 4.2%, resulting in annual interest-rate savings of approximately $5.8 million.

I will now turn the call back over to Mark.

Thanks, Sean.

Now I'll turn to our outlook for the remainder of the year. We have updated our full-year guidance to incorporate third-quarter results, including the impact of The Gwen transition and property taxes at the Chicago Marriott.

We now expect full-year RevPAR growth to range from 4.25% to 5%. We expect full-year adjusted corporate EBITDA to range from $264 million to $269 million. And we expect full-year adjusted FFO per share to range from $1.00 to $1.02.

In October, I will note that our portfolio RevPAR came in just under 4%, including continued impact from The Gwen ramp-up and the impact from the 1,000-year storm on the Charleston hotel. Our full-year hotel-adjusted EBITDA margins are projected to increase by more than 100 basis points, which is in line with our expectations at the beginning of the year, as asset management continues to be laser focused on profit flow-through.

Lastly before I open it up for questions, let me note that yesterday we announced that our Board of Directors has authorized a $150 million share repurchase program. We will take an opportunistic approach and believe this can be an important value-creation tool.

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

(Operator Instructions). Jeff Donnelly, Wells Fargo.

Good morning, guys. I think a lot of our questions were answered, actually, last evening, so I just had a few follow-ups. Mark, I guess the first question I have is on resorts. What's the outlook you guys are seeing in Q4 and Q1 for your resort properties in St. Thomas and Vail?

St. Thomas was impacted in the third quarter by two storms, so obviously that's why we had the negative 5% RevPAR in the quarter. Rob, I'll let you kind of talk a little bit more about the trends we are seeing in the Virgin Islands, as well as in Vail.

Sure. Jeff, in St. Thomas, we are seeing a bit of softening associated with the property, though Vail is holding steady, and we believe our first quarter looks strong, especially from a group perspective, for those two hotels.

And just when you say softening in St. Thomas, do you think that's because it's the lingering effects of the storm or do you think it's something that's being seen across all of the Virgin Islands as we look into 2016?

A little bit [of it] is airfare and opportunity for getting into the island.

And maybe just a follow-up question for you, Rob, is on booking channels. I'm just curious if you have good visibility into what the trend has been on the component of your bookings that are coming now from third-party online channels, such as like a TripAdvisor, versus the traditional channels you guys have used in the past? Are you seeing a rapid or significant change there?

Jeff, not at this point.

Thanks, guys.

Anthony Powell, Barclays.

Hi, good morning, guys. Just on the share repurchase program, a number of your peers are becoming more aggressive in their share buyback activity. What's your view on maybe doing buybacks a bit more quickly than you have in the recent past?

Good morning, Anthony. This is Mark. Our perspective on share repurchase is it's a valuable tool.

I think we are going to be very thoughtful. I'm not sure if this is the right time in this cycle to significantly increase leverage at the Company. Obviously, if there are dispositions, that frees up capacity to do repurchases without changing the leverage of the Company. And then, we are going to continue to monitor -- obviously, there's a lot of volatility in these stock prices and we think we are trading well below NAV, but we are going to continue to monitor that.

Got it. Thanks. And on your group pace, did you mention how you are tracking for next year and in terms of group rooms booked, and also the number of rooms booked in revenues?

So for the -- obviously, the third quarter was very challenging; in the fourth quarter, we are seeing a pickup in group. We are up about 6%.

Next year, it's a little bit all over the board. We're just getting the budgets now. We are looking at pace, so it's roughly flat, but we hope that more of that comes together over the next couple months.

Got it. I guess a follow-up on that is I guess Chicago's will probably be down next year in terms of group, but if you can look at kind of a city-by-city group outlook for next year, that would be great.

Sure. Rob?

Good morning. So for DC, we have -- it's a strong convention calendar there for both 2016 and 2017. I felt that 19% each year [for] those two years, we feel very good about DC. Boston is going to have similar room nights to 2015 with six more citywides, though down in the first quarter by 20%. And then, a very strong calendar in 2017. It's about up 24% in room nights.

Chicago, as you mentioned, has a soft citywide calendar, especially during the first half of the year, which is down by 10%, and Minneapolis is also down 4% in 2016, though there's no citywides in Q1, as compared to Q (technical difficulty) this time last year, but there is a very strong Q3 -- the team looks extremely strong, which is up 29%.

Denver is down 8% in 2016. Salt Lake City is also going to have a down year as well, and then San Diego is going to be up 46% next year, which we're very encouraged by.

All right. That's it for me. Thank you.

Chris Woronka, Deutsche Bank.

Hi, guys. I guess congratulations on some of the F&B initiatives you got, definitely really impressive margin performance. And I want to ask you, how do you feel about the sustainability of that? Were there new things that went into effect this quarter that can last you through next year? Or were there some maybe exogenous items this quarter?

Chris, this is Rob. This is a continuation of our program, which we are thrilled about. We really look at how we are menu engineering throughout our hotels and combining our banquet revenues -- sorry, banquet menus with our food and beverage outlet menus.

In Chicago, in particular, we opened up a grab-and-go pantry, which has been very, very successful and essentially we've minimized our room service program. Revenues for the quarter -- our capture rate in Chicago, for example, for the quarter was up $1.77 per occupied room. It generated an incremental $142,000 of revenue, but our profit was up over $300,000.

So it's programs like that and how we are looking at everything. At our Shorebreak Hotel, we've really seen an opportunity to reduce our food costs by looking at how we purchase and have been very, very successful. And then, our beverage program has been very successful throughout the portfolio. We've had over 360 bips of reduction in our beverage costs for the quarter. So we see that continuing as we move forward.

And Chris, one more coattail to add to that, to Rob, is Fort Lauderdale where we've totally re-concepted the food and beverage operations down there. A data point there is in the third quarter, our revenues were down by $100,000 in F&B for that hotel for the quarter, but profit was up $300,000, and that's all a result of our efforts to eliminate the Shula's franchise that was there in the past and to re-concept that in-house, and that's been very successful for us and we continue that -- to continue.

Great. And then, I guess a question for Sean. Chicago has certainly made some headlines this quarter in the earnings releases with property taxes, but as you guys look out to next year -- and I know it's kind of tough, but is this going to be more of a theme more broadly? Do you think that the assessments are going to keep going up and up in more cities and you will have to kind of go in through the appeals?

Chris, I think property taxes generally move with the cycle and what we've seen over the last three years is pretty steady increases across a lot of our jurisdictions in property tax [issues].

Chicago is unique in the sense that there is a triannual assessment, and the Chicago Marriott, which had renovation activity, triggered a pretty significant increase in the assessment of the 33%, but we believe that 2015 essentially bakes in what we expect the run rate to be. Hopefully, we are going to be successful in the appeal that we've started. We've had success there in the past, but we think Chicago is fully baked in, and then other cities, to a great extent we've seen property taxes reset over the last couple years, so as we look forward we wouldn't anticipate really significant increases year over year.

Okay. Great. Just finally for me, as you look over the portfolio, you've obviously made the change in Chicago with The Gwen. Are there any other franchise or management company changes you see on the horizon going forward?

Chris, this is Mark. The only one we are evaluating now is in Key West. We bought the Sheraton Suites and so we are looking at in the next two years -- not changing the manager, but potentially converting that potentially to a Tribute or to an independent, so that's one that we are still evaluating.

Okay. Very good. Thanks, guys.

Lukas Hartwich, Green Street Advisors.

Thank you. Good morning, guys. Some of your peers have noted an increase in cancellation activity over the last couple months. I'm just curious if you guys are seeing that as well.

Lukas, this is Mark. So cancellations in the third quarter were up a little bit. We did about $900,000 third quarter of last year; we did about $1.1 million this third quarter, so it's up incrementally.

We'll continue to keep an eye on it. I wouldn't say that we are particularly worried about it right now, but certainly it's one of the things we are going to stay focused on and watch very carefully.

That's helpful. And then given the discount to NAV, I'm just curious. Are you guys contemplating asset sales at all?

As a policy, we don't comment on asset sales until they are consummated, but there seems to be a [bit] of a disconnect between NAV and the public stock prices, so clearly that's on our radar screen.

And then, the buyback plan. If you were to use it, should we expect that you would fund it through the sale of assets or would you be looking at using other sources?

Lukas, it's obviously dependent on where the stock price goes over the next several months, so that's a prime driver, but we're less likely to take up leverage significantly this part of the cycle than to fund it with asset sales.

Great. That's it for me. Thank you.

Austin Wurschmidt, KeyBanc Capital Markets.

Hi, good morning. I was just curious, Sean, if you could talk a little bit -- you guys previously had mentioned targeting leverage kind of three times by 2016. Is that still a target that you are shooting for?

Yes, we are on track for that for next year.

Okay. Thanks. And then, just a clarification, what was the $1 million of lease preparation cost that's now in the guidance reconciliation?

So that's cost that we are going to incur in the fourth quarter, primarily related to the basement space of our Lexington Hotel in New York. We need to make that whitespace in order to prepare that to lease to a new third party, and because there's no lease, under cap we have to expense those costs.

Fair enough. And then, would you expect any disruption, I guess, from that or -- because it's not space currently being used?

No, there won't be disruption because it's space that's separate from the hotel operations and its subterranean, and so we don't anticipate any impact on the hotel ops.

Okay, thanks. And then, just last one for me, in the release you guys mentioned $8 million of interest expense savings. I think on the call today you mentioned $5.8 million, if I heard you correctly. And then earlier this year, you had mentioned potentially $8 million to $12 million from refinancing. I was just curious if you could reconcile those numbers and talk about if there's any other opportunity that could get you to be high end of that $8 million to $12 million range.

Sure. Austin, the $5.8 million was the direct impact of the financing activity we did in 2015. The $8 million to $12 million was the result of the financing activity that we've done this cycle, and so after we prepay Chicago, our weighted average cost of debt is going to be about 4% -- slightly over 4% and we're going to have roughly $1 billion of debt compared to our weighted average cost, which was around 5.3% or 5.4% at the beginning of this cycle also with a similar level of debt, about $1 billion.

So the cumulative interest rate savings, which is where the $8 million to $12 million comes in, is really the change in our weighted average interest rate where we started the cycle, where we are versus where we are going to be after we prepay Chicago, on a comparable-debt level.

Okay. Thank you.

Smedes Rose, Citi.

Hi, thanks. I wanted to ask you maybe if you could just talk a little bit about what you see on the supply side for next year. We know in Chicago there's at least several new hotels coming on. It seems like cities like Charleston have a huge spike in new supply. Maybe you can just kind of touch on some of the markets you are in.

Troy, why don't you take that question?

Hi, Smedes, this is Troy. As you quoted, Chicago has obviously seen an uptick in supply, about 2% to 4%, depending on whether you are talking about CBD or MSA. Similarly, Boston has about 3% to 4% of supply increases.

New York City is obviously getting the high profile, anywhere from 5% to 7% supply increases. But New York City, you have to sort of look at submarkets. We are predominantly in the Times Square and the upper -- and the East Midtown area. East Midtown is getting very little supply. Times Square is getting a little bit more.

You know, I think if you look at the rest of our portfolio, the Boston, Chicago, New York, San Diego is getting the high profile, but markets like Fort Worth, Vail, Key West, Salt Lake City, Orlando, San Francisco, those are all sub-1% supply growth, so we are happy about that. But we've got a lot of attention on New York, Chicago, and Boston at the moment, what that's doing to the supply dynamic.

Okay. Thanks. And then, some of your room service initiatives at the Chicago Marriott, which seem to be helping you drive revenues and reduce costs, is that something that you can roll out across more hotels over time?

Smedes, we are looking at that opportunity with our operating partners, and not just in large hotels, but also in the smaller properties as well. For example, in our DC Westin, we've recently instituted a similar program in terms and it's been relatively successful the first few weeks since starting. So, we're starting to gain traction on that.

Okay. Thank you.

Ryan Meliker, Canaccord.

Good morning, guys. First of all, nice job on the margins in the quarter. I thought they were great. Rob, I'm wondering. Do you feel like most of the low-hanging fruit that you came in with where you saw some quick, easy opportunities to boost margins is now played out or do you think there's still some more of that type of margin growth opportunity?

Ryan, we believe that there is additional margin growth opportunity. Our team is heavily involved with our operating partners, working with them on a daily basis and out in the field with them. So yes, you are right. There's not as much low-hanging fruit, but we think in partnership with our teams we find additional opportunities each and every time we meet with them and speak to them on the phone.

Okay. That's good color, thanks.

And then, I wanted to talk a little bit about, I guess, your investment capacity and how you plan to use that. It seems like with your target leverage of three times for 2016, you do have a considerable amount of investment capacity remaining. Are you currently in the market looking at deals? Is there anything that you think is close? And how do you marry acquisitions versus that $150 million stock buyback that you just put in place?

Ryan, this is Mark. That's a great question.

So I would say we are always talking about our cost of capital and always looking at our cost of capital. In fact, we were close on two deals in the Pacific Northwest recently, but the [use] of our cost to capital changed, walked away from those deals, and there's about $300,000 of dead deal costs in our numbers this year.

We are always evaluating opportunities in the marketplace. Just the cost of capital of where the stock is versus where we think the NAV of our Company is makes it very difficult to execute that right now.

Okay. So then, I guess, you'd probably sit tight? Unless the stock moves higher, you are more likely to sit tight on your investing capacity for the time being, and if it moves higher, you might be more acquisitive; if it moves lower, you might be more acquisitive in stock repurchases? Is that a fair way to think about it?

Yes, I think we are going to be opportunistic on both sides. Now it's possible we could find a deal that is such a screaming home run that it would be interesting to do, but I don't -- those are very, very hard to find. NAV accretion is easier to accomplish right now buying stock than it is to buy assets in the marketplace.

That makes sense. Okay. And then the last thing I wanted to, I guess, clarify just a little bit. In your prepared remarks, you guys talked about really strong business transient trends in the third quarter. We know in October things fell off a little bit from that perspective. Your 4Q guidance, it sounds like, indicates a bit of a persistence of that October trend, rather than what you've seen year to date and in 3Q. Is that correct?

Ryan, I think that's the right takeaway is we are extrapolating October. We don't -- we want to give our investors our current thinking, and so we think the prudent thing to do right now is just kind of assume that what we've seen in October -- and there's some noise in there -- but basically that those trends persist for the balance of the year, and that's kind of how we've built our forecast and our perspective.

Got you. So then if business transient trends revert back to what we saw through the first few months of the year, as opposed to October, similar to what we just saw in the unemployment numbers that just came out, then there's upside. Is that correct?

Yes. If business transient turns out to be better than we are anticipating, there would be upside in our guidance.

Great. That's all for me. Thanks.

Bill Crow, Raymond James.

Good morning. One housekeeping question first, and then a bigger-picture question. Troy, what is your supply outlook for DC? I don't think you mentioned that one.

For DC, we are looking at the CBD of about 1% to 2% and for the greater MSA, closer to 2% to 4%.

Great. A bigger question, guys, you are not the first ones that have had deals teed up over the summer that you walked away from. REITs have gone from being the predominant buyers; now, it seems like everybody has identified non-core assets for sale to fund buybacks and other things. And I guess we've had the Asian buyers pull back a little bit in August, maybe into September, and it looks like the Fed is getting ready to hike.

So my question is, what are you seeing, hearing from brokers on cap rates? Because it's -- we are all looking at NAV and certainly you are from a buyback perspective, but you start moving cap rates 25 or 50 basis points, it makes a difference. So, where have we transitioned to? What's the trend look like? Thanks.

Bill, this is Troy. There's not hard data on cap rate change; it's more anecdotal and what you hear from broker speak.

But I would tell you that brokers are sending messages of softness in pricing a bit and that a couple things that have been retraded recently have come off price by maybe 5%, but it's hard to sort of quantify that. And then, there were some high-profile deals that just didn't close and you expect they will come out at a lower price. So we are seeing a little bit of directional comments from brokers to come back at lower pricing, but it's hard to -- it's really hard to quantify that at this point.

Would your best guess be 25 bips? 50 bips? Somewhere in that range?

There's too little data points to sort of formulate a trend line yet.

Okay. That's it for me. Thanks.

Ian Weissman, Credit Suisse.

Hi, guys. It's Christopher for Ian. Just going back to funding the potential share purchases, I know you don't talk much about acquisitions, but if you were to -- I mean dispositions, if you were to do any dispositions, would that be more to kind of lower your exposure to New York or would it be able to like take advantage of the strong bid for the suburban maybe lower RevPAR assets?

Chris, this is Mark. That's a great question. So I think we look at it both ways. So obviously, we are always trying to look at our growth prospects, but we are also trying to take advantage of where there may be discrepancies in what we think are the long-term growth potential and asset values versus what a potential buyer may see, and we are trying to play that difference or that vig, if you will.

So for some of the non-core assets, obviously that would raise our average RevPAR and it may increase our growth prospect and be more the Company wanting more NAV accretion over the next three to five years. On the flipside, New York, we love where we are located in New York. Those are great assets in great locations. We think NAV, there's still a strong bid in that market and we think over the next 10 years that will certainly be a good place to have capital allocated. It is challenging in the next year or two.

So we are having this discussion now, so it could be either. I would say we are in continual dialogue on that.

Got you. And then, secondly, lowering the RevPAR guidance maybe almost 200 basis points, on a full-year basis maybe The Gwen accounts for, what, about 50 basis points. I'm guessing there's some storm stuff in there and then a little bit weaker transient. Can you kind of break us down in terms of how do you get to that $187.5 million lower RevPAR growth guidance? And then, how do we also think about pre-announcements? How do you guys think about them when -- kind of on a go-forward basis?

So I'll take the preannouncement one first, then maybe Sean can jump in on some of the math in how we get to be change in guidance.

So pre-announcements are -- we are always trying to give our investors our best perspective as soon as we can on what's going on in the marketplace. What we saw in the third quarter was actually -- it started off relatively strong. August was disappointing and then we actually saw September starting relatively strong. The Gwen transitioned on September 1, so obviously that kind of happened during the month of September and into October.

If you looked at where we are absent The Gwen, we were within our range of 3% to 5% RevPAR growth for the quarter. And so, our opinion was we wanted to have the best data and a complete set on how the fourth quarter was shaping up, too, including our October results, before we kind of came out with a comprehensive view on what was going on for the balance of the year. So based on our judgment, it made sense to wait until that October data came out and to do it on this call.

Sean, do you want to walk through the math on some of the changes?

Sure. So our -- it was roughly 190 basis points of RevPAR change. About 60 basis points of that related to The Gwen.

Our October transient trends, which we extrapolated out for the balance of the year, was about 100 basis points of the change and then the balance was from things like the Charleston storm impact, some of the incremental storm impact at Frenchman's Reef, etc. But that's the general math.

So the majority of the RevPAR change related to the fourth quarter and the short-term transient trends in October being extrapolated out to November and December.

That's great. And then lastly on The Gwen, when do you think that's going to be fully stabilized?

Our experience on conversions, brand conversions, is it generally takes about three years to bring the true value of a brand conversion.

That's certainly our experience at the Lexington, especially when you are going from a known commodity and you are reintroducing and branding a softer or luxury brand. It would be different if we converted and it was a Ritz-Carlton day one. When you introduce something new, you need to get the trial and the ramp-up. So it's probably about three years to get the full value of the brand conversion.

Thank you very much.

Anto Savarirajan, Goldman Sachs.

Good morning. Last quarter, you were talking about your expectations for the New York City portfolio and how you expected it to outperform the overall market. I believe you called out a 3.5% to 5.5% RevPAR for the back half of the year. Does it still hold?

And I understand you still expect to outperformance compared to the broader market. Just curious as to have your thoughts for the back half of the year have changed for the New York City assets, and any leading thoughts into 2016 as well would be greatly appreciated.

Sure. This is Mark. I would be happy to answer that question. So, say New York was under our expectations in August and then September, while we did have some good compression and certainly some good results at the Lexington, we would have expected a little bit more supercompression from the Pope visit and from the UNG in September, so I would say it's modestly below our expectations for the back half of the year for the market.

And then within our portfolio, while the Lexington was relatively good and certainly Chelsea with our brand manager change has been exceptional, the two Courtyards that we have in the city, there's some transition in the way the revenue management is being done by Marriott that probably caused those hotels to lose a bit of market share. So I would say those are falling a little behind our expectations because of that shift in the way that Marriott is doing the revenue management within the city.

Got it. The past couple of quarters, you've spoken about F&B as an opportunity and some of the margins have tracked well -- as well on that front. What is the long-term goalpost here? How should we think about the opportunity on a long term in terms of how margins can be in that business? And if we were to look back at history, are we close to achieving what might have been a peak level or is there further room to grow? Essentially, how do we think about the opportunity that is still left?

That's a tough question because each hotel presents its own business case. So I'd say the portfolio is still about a couple hundred basis points behind prior peak, but there's a lot of things that are changing within the portfolio.

While there may be more F&B, some of the hotels may have ramping up [franchisees] or something else that will make it. Some will be above, some will be below. We don't look -- obviously on a macro basis, we are trying to close that couple hundred points of deficit to prior peak, but it's different with each hotel.

I'd say F&B certainly is one of our focus areas. We don't have a particular goal for F&B. Every month in every program and every best practice is something that we continue to try to roll out to the portfolio. Certainly, Rob has expressed a lot of optimism in the ability to take some of these successes, like Chicago Marriott, and roll them out through a number of hotels in our portfolio, and we'll continue to work hard every day in finding those opportunities and fighting for every dollar.

Thank you. One last question, if I may. For the past couple of quarters, you've given a little bit of a tidbit on how you've seen international travel and how it's been either impactful or not impactful to your portfolio. Can you give us a read-through for 3Q as well?

Sure. Let me start by saying the data sets are very poor. So it's hard -- and the number of hotels to track, who is truly international and who is not international. What we saw -- and across our portfolio, a lot of our Marriott properties in particular don't do a tremendous amount of international business.

But in New York City, what we experienced is actually pretty good international demand; it was just much more rate sensitive. So, actually, our international is up a little bit in New York City, but the rate was down for those travelers.

Thank you.

Austin Wurschmidt, KeyBanc Capital Market.

Thank you. Just one quick follow-up. As you've gone through the refinancing activity this year, I was just curious if there's been any changes in the appetite from lenders or if you've seen any changes in sort of underwriting standards spreads, leverage, etc.?

Austin, what we've seen is the spreads have widened out throughout the year. Now the 10-years have also moved, but what we've seen is for larger deals -- Boston Westin being the most recent loan that we closed -- the number of lenders that could bid on that versus where it would have been probably nine months ago was less. It was still a robust bidding process where we had a double-digit number of term sheets from lenders, but the size certainly was more impactful to some lenders, including not the [bowlish] bracket.

I think the overall cost of lending over the last nine months has gone up. If you just look at what we've closed, Worthington was closed at 3.66% versus 4.36% at the Boston Westin at comparable leverage levels. And so, what we've seen is the leverage levels have not altered dramatically, but the cost has gone up because of just the movement in rates.

Great. Thank you.

And I'm showing no further questions at this time. I'd now like to turn the call back to management for closing remarks.

Thank you. To everyone on this call, we appreciate your continued interest in DiamondRock and look forward to seeing many of you at the NAREIT convention in a few weeks. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.