Diamondrock Hospitality Co (DRH) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to DiamondRock Hospitality first-quarter 2016 earnings release conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Brett Stewart, Vice President of Strategy and Capital Markets. Sir, you may begin.

Thank you, Crystal. Good morning, everyone, and welcome to DiamondRock's first-quarter 2016 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 facts. 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 measure, 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 the Company's mayor activities during the quarter, as well as the Company's outlook for the balance of the year. Sean will then discuss our first-quarter results and recent capital markets activities. Following their remarks we will open the line for questions.

With that I'm pleased to turn the call over to Mark.

Thanks, Brad. Good morning, everyone, and thank you for joining us today. As was expected, the first quarter was volatile for the lodging industry. Performance was uneven week to week and from market to market.

We continued to see mixed signals with regard to the strength of lodging demand and overall witnessed tepid demand growth in the quarter. Moreover, new hotel supply growth increased during the quarter, most notably in the major markets, creating a headwind for hotels to drive growth on the top line.

Our view of the lodging industry for 2016, however, has not materially changed since the beginning of the year. We entered the year with a cautious view of demand trends and we continue to be mindful of the choppy operating environment, which is likely to persist throughout the balance of the year in many markets.

As a result, we are focused on setting up our hotels for success, with stringent cost containment strategies and defensive revenue management plans. We are proud of how these initiatives have played out in our portfolio so far. Additionally, as this lodging cycle gets into the late stages of growth, the Company is being strategic in taking steps to fortify its balance sheet to not only weather a slowdown but to position DiamondRock to be highly opportunistic during periods of future market dislocation.

Now let me turn specifically to our operating results for the first quarter. EBITDA grew 3.7%, which exceeded consensus estimates. However, consistent with our expectations going into the quarter, and as factored into our original full-year guidance, hotel revenues were challenged during the quarter.

As you recall, we indicated on our most recent earnings call that we expected RevPAR growth be slightly negative during the first quarter. So, our first-quarter RevPAR contraction of 2.1% is in line with that guidance and our initial expectations. The primary drivers for RevPAR contraction were the impact of new hotel supply in New York City and challenging group business patterns, including reduced convention activity in several of our major markets, like Chicago.

Our team, working closely with our operators, performed at a high level in response to a tough demand environment. We are particularly proud that we grew hotel adjusted EBITDA margins 14 basis points on a RevPAR decline, a phenomenal result.

Our asset management team aggressively implemented tight cost controls, which resulted in profit flow-through of over 122%, a record for DiamondRock. We are extremely pleased with these margin results and believe that our asset management platform is among the best in the industry.

In discussing the first-quarter results I did want to touch on Chicago. Chicago was a challenging market during the first quarter, with RevPAR for the CBD hotels down 10%. The Chicago market is historically seasonally slow during the first quarter due to the difficult winter weather.

However, the first quarter of 2016 was exceptionally challenging with city-wide events down over 50%, which generated 80,000 fewer room nights of demand. DiamondRock took advantage of this low demand period to complete renovations at the Chicago Marriott and The Gwen.

While well-timed, the renovation disruption, combined with the lack of group business, resulted in double-digit RevPAR contraction at these two hotels. Collectively, the results at these hotels held back our portfolio RevPAR by approximately 240 basis points.

Let me take this opportunity to recap those two renovations. The Chicago Marriott completed the comprehensive renovation of 460 guest rooms, adding the latest Marriott prototype room elements, and converting tubs to showers in all the king bedrooms. Additionally, we invested $2 million to create a state-of-the-art fitness center that will be a major draw for group and transient guests in the future.

The reaction from meeting planners to the new product has been terrific and is showing up in our group pace, which is now up mid single-digits for the balance of the year. Looking out further, future bookings at the hotel in 2018 are currently up 46%.

Separately, as part of the Gwen Chicago's conversion to Starwood's Luxury Collection, we transformed the guest experience by creating a new lobby, new restaurant, and enhancing the rooftop bar with fire features. This public space renovation, while disruptive, is now complete and debuted to the public only five days ago. We are positioning this hotel to be among the top luxury hotels in Chicago and are building awareness, which takes time. We would expect to start gaining momentum in the back half of 2016 with very strong RevPAR gains in 2017.

Now, before turning the call over to Sean to discuss our first-quarter results in more detail, let me recap our latest strategic moves. DiamondRock is focused on creating long-term shareholder value throughout all phases of the lodging cycle. At this stage of the lodging cycle, we believe that it is prudent to build dry powder.

I'm pleased to announce today that we've taken two additional steps towards achieving that objective. First, this morning we announced that we placed two hotels under contract to be sold for approximately $200 million. Of course, these transactions are subject to customary closing conditions and thus not guaranteed to close.

While confidentiality agreements bar us from disclosing details of these transactions prior to closing, I can say that these two hotels have collected RevPAR that is more than 30% below our portfolio average. Even after these two deals, we are looking to be net sellers for the balance of 2016, with an emphasis on our New York City assets. While we will disciplined on pricing, we believe that there is a potential opportunity to take advantage of the seemingly robust appetite of foreign-based capital for New York City assets in order to right-size our market allocation in an accretive fashion.

The other major initiative we took to build investment capacity was the successful completion of a new and greatly expanded $300 million line of credit that was coupled with a new $100 million term loan. These financing transactions increased our liquidity and created significant investment capacity for us to be opportunistic in the future.

Before providing our outlook, I'll ask Sean to provide more details on our first-quarter results and our recent capital markets activities. Sean.

Thanks, Mark.

Before discussing our first-quarter results, please note that our RevPAR and margin comparisons are presented to include the Shorebreak Hotel and Sheraton Suites Key West, as if they were owned for all periods presented.

Our hotels performed in line with expectations in the first quarter. Despite the lack of group activity, particularly in Chicago, a difficult New York market, and business transient choppiness, our hotels successfully maintained market share. First-quarter RevPAR contraction of 2.1% was driven by a 3 percentage point decline in occupancy, partially offset by a 1.8% increase in average rates. It is important to note that room revenues only declined 0.7% as a result of the additional day in February and the addition of the new rooms at the Boston Hilton.

Our profit flow-through in the first quarter was excellent as our asset management initiatives drove 122% flow through. Most impressive was the success of our asset managers working with our operators to reduce quarterly operating costing by approximately 2%, which resulted in hotel adjusted EBITDA margin expansion of 14 basis points.

The first-quarter was led by the leisure and contract segments, which achieved 5.4% revenue growth driven by a 2.3% increase in demand and a 3.1% increase in rates. The leisure and contract segments were led by our resort locations, including the Vail Marriott and Fort Lauderdale Westin, as well as our Boston hotels. Recent choppy business transient trends continued during the first quarter, with revenue declining 1.4%. The decline was driven by a 1.6% decline in average rate partially offset by a slight increase in demand.

Despite the revenue decline, business transient was strong at our Boston hotels and the Hilton Garden Inn Times Square Central. However, this strength was offset by our Chicago and Washington DC hotels. We expect the difficult business transient trends to continue, reflecting two consecutive quarters of anemic GDP growth.

As expected, our group segment was challenged this quarter, largely driven by the lack of city-wide activities and Easter shifting to March. First-quarter group revenue declined 7.9% as a result of a 10.4% decline in demand, partially offset by a 2.8% increase in average rates.

City-wide activity during the quarter was light in our most significant group markets of Boston, Chicago, and Minneapolis, which experienced group revenue declines of 16%, 31%, and 16%, respectively. It is important to understand that the first-quarter group results were in line with our expectations and incorporated into prior earnings guidance. The group softness contributed to the 5.2% decline in first-quarter food and beverage revenues, which primarily impacted banquet and catering.

Despite the decline in revenues, food and beverage profitability exceeded our expectations, achieving nearly 200 basis points of margin expansion and 102% profit flow-through. In addition, group contribution increased over 8% during the quarter, which provides evidence that meeting planners are continuing to spend at their events.

In addition, there are some other positive group trends worth noting. First, group is expected to improve for the balance of 2016, where pace is up approximately 5%. Second, there was strong 2016 booking activity during the quarter, where over $18 million of in the quarter for the balance of the year group revenues were booked, representing a 5.8% increase compared to the same time last year.

And, finally, early 2017 trends are encouraging with over 40% of the expected group business already booked. Our 2017 group pace is up in the mid single-digits largely driven by increased demand and a slight increase in rates.

The most significant bright spot for DiamondRock in the quarter was the ability of our asset management team to drive positive profit margins, despite the negative RevPAR. Total expenses declined approximately 2% during the first quarter. We were most successful in the food and beverage department where we were able to reduce departmental expenses by 7.9%.

In addition, total labor and benefits decreased 1.3% as we flexed our staffing model to account for the lack of group activities. Utility expenses were down 8%, partially due to the more moderate winter. And group commissions were lower as a result of less group business.

Before turning the call back over to Mark, I would like to touch on our balance sheet. Prudent balance sheet management and conservative leverage have been cornerstones of DiamondRock's strategy for over a decade. So far this year we have completed several transactions to further strengthen our balance sheet, reduce borrowing costs, extend and stagger our maturity schedule, and provide capacity to repurchase shares when market dislocation creates attractive opportunities.

Most recently we refinanced our line of credit, which increased capacity from $200 million to $300 million, lowered the interest spread by approximately 25 basis points, added covenant flexibility and extended the maturity date. In addition, we entered into a new $100 million five-year potential term loan, which bears interest at a slightly lower rate than the line of credit. The proceeds will be used to repay most of the outstanding balance on our line of credit and repay the $48.1 million maturity of the Courtyard Fifth Avenue, which bears interest at 6.5%. The transaction will result in over $2 million of annual interest savings and increase our unencumbered hotel pool to 19 hotels.

Our balance sheet has never been better. After factoring in the two pending asset sales that Mark discussed, we expect to end the year with 19 unencumbered hotels, less than 3 times net debt to EBITDA, no near-term debt maturities, and over $450 million of balance sheet capacity, including an undrawn $300 million line of credit and over $150 million of corporate cash. Further, our weighted average interest rate will be below 4% and our average maturity will be approximately seven years.

I will now turn the call back over to Mark.

Thanks, Sean.

As we look forward to the remainder of the year, we expect the lodging industry results to modestly improve. With the first quarter behind us, we expect group business trends to turn positive as convention activity in many of our markets improves throughout the year. We also expect leisure transient demand to remain steady and a primary driver of lodging results.

Business transient is the one segment that has the most risk and we are watching it closely. Our outlook assumes that the current business transient trends continue for the balance of the year.

For DiamondRock, our results and forecast are in line with our original expectations, and we are reiterating our guidance for the full-year RevPAR growth of 2% to 4%. We expect our second-quarter RevPAR growth to be in the low single-digits. For example, our April RevPAR grew 1.2%.

We expect the third quarter to be our strongest RevPAR growth quarter because of strong group bookings. The fourth-quarter RevPAR growth is expected to moderate somewhat from the third quarter, as the group booking patterns are less robust towards the end of the year.

Accordingly we are reiterating our full-year adjusted EBITDA and adjusted FFO guidance at this time. Our guidance for the full year remains for $265 million to $278 million of adjusted EBITDA and $1.04 to $1.09 per share of adjusted FFO.

There are a few assumptions built into our guidance. First, as mentioned earlier, we expect a material improvement in the performance of our Chicago hotels as group business improves and the current year renovations are complete. Second, we expect the challenges in New York City to continue and the results for the 2016 market RevPAR in New York City to be negative. Lastly, we did not incorporate any dispositions in the guidance, including the two pending dispositions discussed earlier.

Finally, before we open it up for questions, let me briefly address our capital allocation strategy. We firmly believe that capital is increasingly precious. We have been active in building that investment capacity through the recent expansion of line of credit, our new term loan, and our disposition program.

This naturally raises the question of how we will utilize all this investment capacity. Opportunistic share repurchases are clearly at the top of that list since we are trading, in our estimation, at an NAV discount in the range of 25% to 30%.

As you may recall, our Board of Directors authorized a $150 million share repurchase program last year. As of the end of the quarter, we have not repurchased any shares but we are regularly monitoring the market opportunity with our Board. I'll sum up the prepared remarks by emphasizing that DiamondRock has two major priorities for 2016 -- one, stay focused on asset management to drive maximum profit flow-through; and, two, build capacity to remain liquid and opportunistic.

With that, we would now be happy to answer any questions that you might have.

(Operator Instructions)

And our first question comes from Ryan Meliker from Canaccord Genuity. Your line is now open.

Hey, guys, I just had a couple questions. First of all, margins were obviously better than we were anticipating on costs down, as you guys mentioned. I am wondering two things. One, were there any one-time items impacting margins? Obviously you talked about how costs in general were down across all the different lines. Just wondering if anything stood out as nonrecurring.

And then, two, should we expect to see similar cost reductions throughout the rest of the year, or are we comping much softer? Just give us some color there. That would be helpful. Thanks.

Ryan, with respect to the one-time items, there were only two unique things recorded during the quarter. The first is we had a successful property tax appeal at the San Diego Westin, which was about $400,000. Now, that was offset by increased property taxes across the portfolio. So net-net our taxes are up, but that $400,000 was a win for us during the quarter.

And then the other unique item that was booked this quarter and will also be booked for the balance of the year, was the amortization of our key money for The Gwen, which was recorded against franchise fees, which was about $600,000 recorded during the first quarter.

Ryan, your other question on margins, obviously we're implementing a lot of best practices and we had a number of successes, particularly on the labor and benefits front, flexing the model there. Our goal is to try to achieve flat margins for the year, so that's what we're targeting. That's what's essentially built into our guidance.

Okay. That's helpful. And then the second thing that I was hoping you guys might be able to give a little color on, and then again maybe not, is with the asset sales you have under contract, any idea on expected timing? And can you give us any color on cap rates or EBITDA multiples that you're selling at?

Based on the confidentiality agreements we really can't disclose too many details on the metrics of the deal or the particular deals themselves. There are a number of moving pieces that will influence timing, but we are trying to get them closed in the second quarter. But that could slip depending on, frankly, some of the debt issues around the hotels.

Okay. That's what I figured but I figured I'd ask. And then just real quickly, lastly, you mentioned in your prepared remarks that your outlook assumes that continued challenges associated with the business travel or business transient segment, we've heard from a lot of other guys that they're seeing strength in business transient coming out of April. I'm wondering if you're seeing any of that, if you're seeing it but don't have confidence in it persisting yet. In other words, is there more upside than downside to guidance numbers at this stage?

I would say our guidance numbers are our best guess based on the trends we're seeing now. If you look at the three segments, group is the one that we have the most confidence in, although that traditionally has ticked up in the first quarter. But the people that are showing up are spending well, and the advanced bookings, as Sean noted in the prepared remarks, signaled some strength there.

Leisure is the one we're actually most encouraged about, and that makes sense given where consumer sentiment is and where consumer spending is, which both look very favorable. But business transient is the one, as we mentioned, we're the most concerned about. If you look at GDP growth at 0.5% for Q1, and if you look at corporate profits, the two best corollaries, they're not terribly encouraging. If GDP picks up for the balance of the year, which is consensus view, we'd expect it to get a little better. But we aren't feeling great about business transient. And April, while maybe a little better, certainly isn't a rebound, in our mind.

All right. Thanks for the added color, Mark.

Thank you. Our next question comes from Anthony Powell from Barclays. Your line is now open.

Hi, good morning, guys. A follow-up on the asset sales. Do you expect any taxable capital gains from the sale?

Anthony, this is Sean. Any taxable gains from the sale, we don't believe we'll have to adjust our dividends. Depending on what asset, there might be slight gains or slight losses within each of those assets but it's not going to move the needle for the entire Company's distribution requirements.

Got it. Thanks. And just on the dry powder for opportunities, the capital that you're raising seems to exceed your $150 million share purchase authorization. So, outside of share repurchases what are the other opportunities you would be looking at?

Yes, this is Mark. I would say it's going to be opportunistic based on what the market does and obviously what our share price is doing. We can certainly go back and go for a bigger authorization if the opportunity ripens in the marketplace.

We're monitoring it right now. Where our cost of capital is, it would be very difficult to justify any acquisition. So, we're going to continue to build that dry powder and I think share repurchases look like the best opportunity in the near future given the disconnect between NAV and stock prices.

Got it. And maybe one more -- your April RevPAR growth of 1.4%, it's a bit below the SCR preliminary data of 4% to 6%. Is that a function of New York and Chicago, or is there anything else driving that delta?

No, New York and Chicago, we expect those markets to get a little better -- really, Chicago to get better starting in June. But it held back the April results.

All right, that's it for me. Thank you.

Thank you. Our next question comes from the Jeff Donnelly from Wells Fargo. Your line is now open.

Good morning. Mark, maybe just on the dispositions, not so much about the specific details of this transaction, but maybe you should share some color about just the depth of the buyer market and maybe who showed up. Maybe just in general terms, your valuations, your expectations. I'm curious, too, if buyers were key valuation buyers or multiple based leveraged deals, et cetera. Just maybe get some thoughts there.

I'll probably make a couple comments and then I'll turn it over to Troy for his view, as well. The two assets that we have under contract, one was a reverse inquiry, so it wasn't a marketed process. The second was a fully marketed process. And I'll let Troy expand on the number of offers.

I would say our experience in looking at the markets right now, it really depends on the kind of asset you're selling, what kind of bidders are showing up in the depth of the market. The yield play, given the dislocation of the debt markets over the last six months, has made it more difficult for those kind of players. Clearly the public lodging REITS, with a couple exceptions, are sidelined right now. But I'll turn it over to Troy to provide some more color.

Yes, Jeff, on the one that was marketed, we had about a dozen offers on the property. Frankly, we were pleased with that. And our pricing expectation versus where we ended up was inside of 5% of target, so we were pretty happy with where we ended up on value.

That's helpful. And I'm just curious, what answers are you guys seeking to make the decision to sell hotels in New York? Are you just hoping for reverse inquiries or are you looking for something to bear out to make that decision?

We mentioned we have one hotel that's we'd be on a full marketing process there. And there's a lot of unusual buyers, if you look at what's transpired in the recent transactions. There's a lot of first-time buyers in the US, and I think they're the ones that are going to pay the premium to get the value for the assets. That's the focus of the marketing activity. Troy, do you have anything to add to that?

I would just add to that, that despite marketing the hotel we are getting a large volume of inquiries about any assets in New York. So, there just seems to be quite a lot of interest in New York assets as dispositions, acquisitions, in addition to our marketing efforts.

And then, Mark, I think in your remarks you said you expect corporate transient trends to continue. What precisely do you mean by that? Just for that segment, do you see that as almost flat over the prior year? Is that declining slightly? I just want to be more specific about how you're thinking about it.

So far we're not encouraged by what happened in Q1. There is business transient but we've seen some weakness. We expect basically that trend line to persist for the balance of the year. Sean?

Jeff, the last two quarters we've been down in the mid 1s as a percent of business transient revenues for the two quarters. Interestingly enough, the fourth quarter of business transient decline was really driven by a little over 5% decline in demand, which was concerning to us as we gave full-year guidance. The first-quarter demand stabilized. We actually were slightly up in demand but weren't able to push pricing.

When we think through for the balance of the year, we're assuming that business transient revenues are down in the 1% to 2%, which there's some encouraging signs which is that there is the demand. The discouraging signs is that it's difficult to push pricing on the business transient front.

Since you spoke, Sean, I have a question for you. You guys have a good volume of renovations occurring in slower periods in 2016 and 2017. Do you guys have a dollar estimate either for revenues or EBITDA that you can share with folks on how you see disruption coming through in the next three to four quarters? I just think it will help people with modeling in 2017 and 2018 as maybe that gets comped against.

Jeff, there's really not significant disruption. Even though there's big dollar amounts going out with the $150 million, the vast majority of that was Chicago-based, and it was in the first quarter was, which was a slow quarter for us anyway. The next handful of renovations that we have, which comprise most of the $150 million, is in markets where there's seasonality such that you can do the renovations during the slow period and really not displace much business. So, I would say there really isn't renovation disruption necessary to model within folks' forecasts.

And one last question, I'm just curious how you guys are thinking about the pending Marriott Starwood combination. Sometimes when you see an individual asset -- and I know it's very different -- but when you see an individual asset change brands you can have some disruption or loss of people to the property that impact performance. I know that's not quite what's happening here, but is there any reason why you think you might see asset level performance issues as a result of that combination? Or for the most part do you think it's going to be a fairly smooth transition with no real property level impact?

Jeff, it's Mark. It's a great question. I think long term we're pretty excited about the power of the combined company, and what it's going to do for market share gains, particularly at the Westins. We're optimistic that it's long-term positive. And they're talking about reducing costs, particularly on the Starwood properties, 2,000 of those rooms, reducing the cost, so that's positive.

I think on integration there's still a lot of open questions and so we're cautiously watching it. The conversations we've had with senior management at Marriott are very encouraging. But I think we'll have to see how the integration works. And I'm sure there's going to be some bumps in the road.

I wouldn't expect it to have a material impact on the hotels in 2016. I think the thing that we are really focused on is if they merge or change the point system and change the way they're redeemed, there's going to be winners and losers among the hotels when that points system changes. And I think that's what we want to participate with them in and understand and make sure that we're maximizing the benefit of any program change there.

Okay. Thank you.

Thank you. Our next question comes from Lukas Hartwich from Green Street Advisors. Your line is now open.

Thank you. Good morning, guys. Mark, I'm just curious what time frame should we be thinking about for additional dispositions?

At the earliest, it would be Q3, unless things exceed our time line, but that's what we're assuming. There's always a number of contingencies. It depends on what asset sells, if there's a loan to be assumed. If there is, that always add several months to the closing process.

That's helpful. And then, Sean, one for you, I think this is the first time DiamondRock's issued non property level debt. I'm curious, is there a change in strategy there or is it just that the terms are more attractive at the property level? I'm curious what drove that decision.

That's actually a great question, Lukas. The term loan is part of our overall strategy to build capacity. When we evaluated the line of credit refinancing we evaluated a $400 million line of credit versus a combination of funded versus not funded. And, really, what drove our decision to have a portion of it funded with a term loan was really four things.

The first is, as you correctly state, there's a lower cost associated with the term loan. Second, our strategy was to use a portion of the proceeds of the term loan to repay the $48.1 million maturity on our Courtyard Fifth Avenue. There's some tax reasons why we would do that from a standpoint of the mortgage recordation tax in New York, you can preserve that but it needs to be funded. So, having that on the term loan versus a line of credit provides our ability to preserve that tax credit, which is about $1.3 million of value.

The third is, our macro view is that interest rates are going to rise over time. We might be wrong on that. So, having a floating rate piece of debt helps us. To have roughly 25% our debt floating is essentially a hedge for DiamondRock in case our long-term interest thesis is incorrect.

And then, finally, we don't really view the term loan that different than a line of credit in the sense that it has the identical corporate covenants as the line of credit, and it's prepayable at any time. Although it's funded the structure of the term loan relative to a line of credit doesn't vary dramatically.

Great. Very helpful. Thanks, guys.

Thank you. Our next question comes from Chris Woronka from Deutsche Bank. Your line is now open.

Hey, good morning, guys. I wanted to ask you if your operators have changed strategy through the year thus far in terms of grouping up. I know there's a certain amount on the books going in and certain amount that's left to go, but are they actively grouping up due to the weakness in transient?

Hi, Chris, it's Rob. Yes we are in various properties. We're doing it in different ways actually. We have a continued focus on pricing appropriately based on day of week. We are growing our group base, where appropriate. For example, at the Lexington we recently completed converting a Chinese restaurant on the mezzanine level into 3,000 square feet of meeting space. So, we're trying to shift our mix there.

And then we're also looking at adding airline contract business, where feasible. And that's reflected in our 35% increase in contract and other for the quarter. We're taking a view that we're looking at all different angles of driving additional demand.

Okay. Thanks.

It's Mark. I'd just add, it's a defensive revenue management plan for the year. So, we're taking those steps, grouping up, the airline contract crew in the lower demand periods, to build a base. We want to be defensive and we want to be positioned to handle a choppy environment.

Great. And, Mark, just a follow-up on the New York question, on the asset sales, potential asset sales. If you go through a process and you get an offer that you really like, do you envision yourselves announcing it when it goes hard or announcing it when it closes? We've obviously seen cases where, just if it's a foreign capital situation, there's always uncertainty on timing. So, how would you guys approach that with the market?

Our general approach, which we're deviating from a little today, is that we don't like to announce the deals until they're closed. Because we have these deals under firm contract, and we had a quarterly earnings call, we thought it was appropriate to talk about them. But, as a general rule, we think the prudent thing to do is not to announce them until they close.

I can tell you it depends on the buyers. Some buyers we have great confidence. We sold our Torrance Marriott several years ago to an Asian-based group which had never deployed any money in the US before. And I think until that wire actually hit at closing we weren't sure they were going to be there.

Right now, the two buyers that we have for the pending contracts don't fit that profile, and we have confidence they'll close, although nothing's guaranteed. But I think, given the targeted buyer list for the New York City assets, we're going to try to wait until it closes. Although if we have an earnings call in between we may have some disclosure.

Great. And just wanted to ask on the Vail Marriott, I know you still have a little bit of runway before the contract, but are you doing any work there yet in terms of thoughts on longer-term strategy there?

We still have over five years on the current franchise agreement, so it's a little premature to shift gears on that one. But the asset itself has a lot of potential. There's also the future potential to convert part of it or more of it into condominiums. So, we'd have to understand that real estate value potentially, trying to unlock that as part of any extension or change in brand.

Right. Very good. Thanks, guys.

Thank you. Our next question comes from Thomas Allen from Morgan Stanley. Your line is now open.

Thanks for the comments around the defensive revenue management strategy. Can you help us think about your distribution channels by mix, what it was in the first quarter versus a year ago and how you think that's going to trend? Thanks.

Sure, Thomas, this is Rob. Our OTA business is actually down about 30 bps to about 12%. Again, that's part of our strategy to go for additional higher-rated business. And we're focusing throughout the portfolio in getting additional special corporate demands.

For example, at The Gwen, our special corporate business is up 31% there compared to 10% at the same time last year. And at Lexington, our special corporate business is up quite a bit. In fact, we're up 400 basis points, up to 18%, while our Internet non-opaque there is down 100 basis points to 22%. So, we're really doing a strategy throughout in all of our hotels to reduce our lower-rated business and go with higher-rated demand.

And do you feel like the brand's greater push for direct bookings is having any material impact?

It's a little too early to say right now, but we are seeing -- again, as you can see in some of our numbers, our push on the OTA side, it's helping a little bit. But it's still a little too early right now.

Perfect. And then just one last thing, one of your peers specifically called out I think it's a heightened competitive environment for transient bookings. Do you feel like that's the case? And where are you seeing that? Or if not seeing.

Thomas, that's being reflected in New York City. We really take a strategic approach in how are we pricing out 30 days out, 10 days out, 4 days out and the day of. What we've seen in New York, for example, is that the pricing power has decreased as it gets closer to the day of arrival. So, we're being strategic in how we're placing business 30 days out in order to gain the largest rate opportunities.

All things there very enlightening. Thank you very much.

Thank you. Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Your line is now open.

Hi, good morning. Just on the dispositions, could you give a sense of what the net proceeds you're expecting will be? And then, separately, I know that you've discussed the stock trading and a big NAV discount, and share repurchases are an option. But given your comments on building dry powder, are you guys considering at all sitting on the cash with the thought that there could be better opportunities down the road to either buy back stock or redeploy into new investments?

Austin, this is Mark. Let me take both of those, in turn. On the dispositions, and thinking about the confidentiality agreements we have, it's probably difficult to disclose what the net proceeds are, but if you look back into what hotels they are by figuring out what that is.

On your broader question about share repurchases, it's a great question. I would note a couple of things. One is the two dispositions that we mentioned are still pending. We don't have that cash yet to deploy.

The other thing I'd point out on valuation is that just two months ago, which was during a blackout period for share repurchases, the stock was 20% lower. I think we're being patient in trying to be opportunistic about any share repurchase. And although we do think the stock is trading at a big discount to NAV, as we mentioned, probably 25% to 30%, in our estimation, we're being cautious as we watch some of our peers hit that buyback button way too early over the last six months. So, we'll continue to monitor the markets and try to make the right calls on when we deploy the capital.

Would you consider putting a program in place, so if the stock did drop more precipitously and you were in a blackout period that you'd still be able to buy back stock?

Yes, Austin. We have that option within our plan. It's called a 10b5-1 plan where you can set a set price, if you think it's so compelling that you would buy back stock, and then that can be traded during all periods of the year.

Thanks for the color. And then, just lastly, what is it you think is driving the difference between the booking trends in group as well as the F&B spend versus what you're seeing in the business transient trends?

Austin, this is Mark. That's a great question. Group looks like it's been lagging for this recovery. So, it's been a late comer to the party. I think there was a loft pent-up demand for groups that needed to meet, finally got the momentum, and now we're seeing those groups actualize. And we're seeing a lot of new groups that haven't met in a while come into our hotels. So, I think there's a little bit of a pent-up demand element to the group trends and what's going on there.

On the business transient, as I was mentioning earlier, I think a lot of that's just more realtime in how corporate America is doing. And if you look at profitability of corporate America and if you look at the correlation to GDP, it's been a little anemic over the last couple of quarters. So, if there's improve, we would expect the business transient more quickly to react to that improvement, [or change] either way.

Great, thanks for taking the questions.

Thank you. Our next question comes from Steven Kent from Goldman Sachs. Your line is now open.

Hi, good morning. How much of your occupancy is business transient? And are there any specific sub sectors or sectors of business travelers that are the most active or depressed? Any specific industries you'd call out?

Steven, from a mix perspective about 29% of our first-quarter rooms revenue was business transient, about 29% was group, and the balance was leisure contract and other. From a sequencing perspective business transient was down relative to where it was first quarter last year about 1%, group was down about 2%, and leisure contract and other went up 3%. That's a function of what we talked about in our prepared remarks, which is the leisure contract and other businesses performed strongest during the quarter at the expense of both group, which was down 7.9%, and business transient which was down 1.4%. With respect to where the demand is coming from I'll turn it over to Rob.

Business transient, we've taken an approach where we're casting a wider net with special corporate and going out. Two great successes we've had, like at the Lexington, for example, we've increased our special corporate accounts by over 25 there year over year. And certainly at The Gwen we continue to have great growth in that as we've changed brands and having a new awareness campaign. Again, growth within the special corporate comes from going out and being more aggressive as we hit the pavement and try to generate new business.

Steve, this is Mark. I would just add two comments to that. One is, we have a portfolio of only 29 hotels. We do have an allocation to business transient that seasonality plays a big role. So, think about New York, Chicago, even Boston in the first quarter, it's not necessarily indicative of what's going on for the full year in business transient. So, we don't want to read through too much to the general industry.

The other is, what we have witnessed is actually our special corporate accounts have increased, but at a number of the special corporates, just their production is down. So, while [PIVC] may still be coming, or we may have added [MacKenzie], just the level of activity that they're producing has been shy of our expectations. So, they're coming, sometimes they're paying the rate, but the production of some of our best customers is just down.

What I was asking, Mark, was, is it more business service companies, consulting companies, technology companies, healthcare companies? That's what I was trying to get a sense for. I'm not sure if you're able to know that or not, which areas.

I think especially based on Q1, and based on the segmentation we get from our operators, it'd be hard to give you precise numbers on that kind of segmentation by type of special corporate account, if you will.

Okay. Thank you.

Thank you. Our next question comes from Smedes Rose from Citi. Your line is now open.

Hi, thanks. I just wanted to ask you, as you introduce the new and renovated rooms at the Marriott Chicago, what premiums are you getting to your regular rate?

Sure, Smedes, this is Rob. Last year when we did the original 140 rooms we were able to generate a premium between $30 and $50 throughout the year, based on the seasonality. The first set of rooms, the 460 that were out, came back during the first week of March, and the last rooms came back on April 15. So, again, still a little early to tell on this year's approach. We expect premium pricing for those rooms as we go into the stronger parts of the year.

Okay. Do you think it could still be in that same range, or given that there's more available would you expect it to dissipate a little bit?

Probably a little bit less, Smedes, probably between $25 and $30.

All right. That was it. Thank you.

Thank you. Our next question comes from Bill Crow from Raymond James. Your line is now open.

Good morning, guys. A question about Key West. I don't think you addressed it earlier but both hotels showed negative RevPAR growth. What's going on with the market? Fears over Zika virus? Anything else that we should be aware of?

It's Mark. I'll start on Key West and then turn it over on the specific hotels for Rob to comment. Key West market, it's a great market because you have the moratorium there on new supply. But what we've seen is there is some volatility because people have taken -- because it's such a good market people have taken a bunch of older products, taken them out, and then they re-introduce them, which creates some volatility and pseudo-supply, if you will.

Right now we're experiencing that. There was a four-pack of hotels that Highgate had purchased that were taken offline, completely renovated, and now coming back online. So, I think there's some absorption there. We think that will happen over the next couple quarters and then we'll get back to the regular trend line.

We do own two hotels that had some particular things going on so I'll let Rob expand on that.

Good morning, Bill. At the Inn at Key West, had put in a new manager in late September. So, the management transition continues there. But we're actually making strides. We're really pleased to see that. We've been able to increase our occupancy by 220 basis points for the quarter to 96.5%.

From a rate perspective, we had to take quite a bit of OTA there because the cupboards were left bare upon the transition. So, as the new management team continues to market the hotel --and, in fact, I think it's some of the best marketing that we have out there in the keywest.com -- not to do a plug, or not -- it's fantastic how they're repositioning the hotel for the transient customer.

What we really believe, as we go forward here, and it's probably going to start in June, there will be less focus on the OTA and we're going to be driving higher-rated direct channel bookings, and feel very confident about that. As Mark said, the four pack representing the 500 rooms really has had a bit of an impact from a rate perspective to the market, but we really do believe that will be absorbed shortly.

And then, last but not least at Inn at Key West, we have a new general manager that started there who brings a wealth of experience to the team, and we feel strongly that her impact will be immediately realized. So, we feel very good about that hotel.

From the Sheraton Suites perspective, the team's done a great job remixing the mix, generating higher transient-rated business as compared to the reward redemption business. And that's allowed us to capture additional revenue in our outlets, parking and resort fees. Just as an aside, our resort fees for the quarter were up 40% as we focus here. The Sheraton Suites and Inn at Key West are two hotels that have been significant providers to that growth.

It's Sean. I would add real quick, both those hotels, the fact that the new supply was coming back was all factored into our underwriting. Both of those hotels are actually trending about 10% ahead of our underwriting on the bottom line. So, it is just a matter of how we thought through the market. This was factored into our underwriting.

All right. And then one other asset-specific question, my history with Frenchman's Reef goes back to Prime Hospitality days. And through the years it's just been a lot more disappoint than positive surprises. I know you got a lift from the renovation but RevPAR's down this quarter, strong leisure demand quarter. Is it a core holding? What's going on there?

Yes, I'll answer that. Actually, it exceeded our expectations for the quarter. If you look at the bottom line, the margin growth there, the property really did a terrific job. There were some issues in the way we layered in the group last year that created some comp issues this year, but overall we're actually pleased with how the first quarter played out at Frenchman's Reef. And actually at the second quarter I think it's starting off on a relatively strong foot.

As far as a core holding, will we own this hotel in five years? I would say it's less likely than more likely given the volatility and the seasonality of the kind of asset of a fly-to-only market. It just has some inherent issues when you're trying to get consistent earnings. It could be up baked or it could be down baked depending on the weather, which isn't necessarily ideal for a public company.

The market, as we've seen in the Caribbean, it goes hot and cold very quickly. One, we've been waiting to maximize profitability. And you've seen revenues and EBITDA grow pretty substantially in the last three years at this hotel. So, we've been waiting a little bit to get that EBITDA back up to where we think it should be.

And then we're going to come out of the markets. We regularly talk to the brokers that are experts in the Caribbean market. Based on those conversations as recently as two months ago, it doesn't feel like the ideal time to monetize that asset. We certainly don't want to sell it below what we think it's worth.

So, we're going to continue to watch it. If there's a good opportunity to monetize the asset in the Caribbean, and we think we can get decent pricing for it, we're going to do that. I think the reason you haven't seen us be more proactive on that front the last couple years was really because we saw the upside in both the revenue and the EBITDA there, and we wanted to get there. But we're now at that point and we'll just continue to watch the market.

Thanks.

Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Mark Brugger for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.