Diamondrock Hospitality Co (DRH) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 DiamondRock Hospitality Company's earnings conference call and webcast.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Brett Stewart. Sir, you may begin.

Thank you, Chelsea. Good morning, everyone, and welcome to DiamondRock's second-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 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, 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 discuss the Company's second-quarter results and strategic activities as well as provide an update on the Company's outlook for the balance of the year. Sean will then provide greater detail on our second-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, Brett. Good morning, everyone and thank you for joining us.

Let me start by highlighting that, with the completion of our recent disposition as well as the refinancings earlier this year, we have successfully executed on our strategic objective for 2016 to build over $450 million of liquidity. Dispositions [are marked] well to be opportunistic going forward. Turning to our operating results for the second quarter, we implemented defensive revenue management initiatives that drove a 1.7 percentage point market share gain for the DiamondRock portfolio. More importantly, our team, working with our operators, achieved in all-time record profit margin of nearly 36% as a result of tight cost controls. The success with our cost-containment initiative has substantially mitigated the impact from softening transient demand trends. F&B was a particularly bright spot in the quarter, with the portfolio delivering better than expected profit margin growth of 87 basis points.

As I mentioned, we are seeing mixed signals on demand with slightly softer transient demand for 2016 than anticipated on our last call. Given the latest economic indicators, this is not surprising. Second-quarter GDP growth came in less than half of consensus expectations at an anemic 1.2%, and corporate spending decreased 2.2%. The second quarter is also likely to mark the sixth consecutive quarter of declining revenues for Fortune 500 companies. The positives remain consistent -- elevated consumer sentiment and low unemployment, as confirmed by this morning's job report.

Focusing on lodging fundamentals, uncertainty and volatility remain key themes. Year-to-date RevPAR growth for the industry was 3.1% and our outlook for the back half of the year is for the industry to be at similar levels. In the second quarter, RevPAR for the industry grew 3.5% and the top 25 markets grew only 2.5%. In the quarter, top markets in the US, such as New York, Houston, Chicago, and Miami, all exhibited negative RevPAR growth.

So how is DiamondRock responding in this environment? On operations, as you can see from our second-quarter results, we put in defensive revenue strategies and put in place stringent cost containment measures. Strategically, we have positioned the Company to create value in a more challenging environment by building cash and expanding borrowing capacity. Let me spend a minute on our strategic execution. As we mentioned during the past few calls, we have been active in selling assets to build investment capacity. In the last 60 days we have successfully closed on $275 million of disposition. The sales of the Hilton Minneapolis and the Orlando Airport Marriott reduced our future CapEx needs by approximately $46 million and improved portfolio quality. In fact, these hotels ranked last and fourth to last in average RevPAR in the portfolio. Additionally, our most recent disposition of the Hilton Garden Inn Chelsea, which was sold at a 13.5 times multiple of trailing EBITDA, moved us toward our targeted portfolio allocation of 10% for New York City.

Today the balance sheet positions us to be opportunistic capital allocators in an increasingly uncertain time. DiamondRock expects to end the year with over $200 million of unrestricted cash, $300 million available on our corporate revolver and a debt to EBITDA ratio of only 2.7 times. Based on our assessment, this gives DiamondRock more than $450 million of dry powder to create shareholder value in the future. We will continue to assess the markets and be thoughtful about allocating this capital in the best possible way, which may include buying shares under our existing share repurchase program. Remember, the bulk of the disposition proceeds were received less than a month ago.

Okay, so now let's drill down a little into DiamondRock's markets and quarterly results. The performance across markets was uneven. On the positive side, we outperformed in many of our markets, with our hotels in Boston growing RevPAR at 6.5% versus the market growth at 1.5%. Our Washington, DC, hotel grew RevPAR 5.3%, bettering the market by 180 basis points; and our Florida hotels collectively grew RevPAR 8%, led by the Fort Lauderdale Hotel with 22% RevPAR increase.

On the more challenging side, New York and Chicago held back overall portfolio RevPAR growth. Excluding our hotels in those two markets, the DiamondRock portfolio grew RevPAR by 4.2%. Specifically, RevPAR declined 6% at our New York hotels, which was slightly more than the market decline because of some specific supply impact. Our Chicago hotels declined 3.2% versus the market decline of 1%, as our renovations this year, completed in May, had some impact. Our Denver hotels were mixed, but collectively underperformed the market as we held rate too high for too long at our JW Marriott -- something that's now been corrected.

Within the quarter, the portfolio demonstrated high volatility month over month. In April, our RevPAR was up slightly. But in May, RevPAR reversed direction and turned negative for the month. June, however, rebounded and turned out to be the strongest month of the quarter, with RevPAR up over 4%. Even with this volatility, there are some clear trends. Transient is moderating a little more than expected. Leisure, outside of the worst performing markets, is very solid. Group, which had been holding up, is showing some hesitancy with an uptick in cancellations and a slowdown in the short-term funnel. But group bookings for next year actually strengthened and are now pacing at 5% for 2017.

Given this backdrop, and as discussed in our last call, our team has been proactive putting in place defensive revenue strategies, which successfully allowed the portfolio to gain share in the quarter. The larger effort has been on cost containment. We have looked for every opportunity to reduce costs and increase profit flow-through. Let me give you a few examples. One example is our success in reevaluating energy contracts as well as other service contracts like parking and laundry. This year at three hotels alone, we were able to switch energy providers or renegotiate energy contracts that enabled us to save a combined $1.25 million in energy costs annually.

On a smaller scale, at the Charleston Renaissance we rebid the laundry contract to achieve annual savings of $75,000. These all add up. Another example of our cost-containment efforts has been to reduce labor costs by combining back-office departments. Where we have shared managers, we recently combined accounts payable to save $100,000 annually. And separately are combining management positions at our two Denver hotels.

A final example is our focus on controllable expenses, such as complementary toiletries. An innovative approach to toiletries has reduced this expense by $100,000 at the Gwen, and we are working to implement a similar solution at the Kimpton Shorebreak, where we think we can save another $20,000.

It is from these and many more projects like these that we were able to achieve our strong bottom-line results in the first quarter that continued into the second quarter. We are proud of the team's accomplishment in driving 11 basis points of margin expansion in the second quarter, given the modest demand environment. We are still uncovering opportunities to reduce recurring operating expenses by continuing to rethink our labor structures, examining additional third-party contracts, and streamlining food and beverage departments. While not easy, we believe that our team and our operators will continue to find opportunities to creatively restrain costs.

I will now turn the call over to Sean, who will provide additional detail on our second-quarter and year-to-date performance as well as our balance sheet.

Thank you, Mark. Before discussing our second-quarter results, please note that our comparable RevPAR, hotel-adjusted EBITDA margin, and other portfolio statistics are presented to include the Shorebreak Hotel and Sheraton Suites Key West and exclude the three sold hotels for all periods presented.

Our hotels performed in line with expectations in the second quarter. Despite the lack of group activity and a difficult New York City market, our hotels gained 170 basis points of market share during the quarter. Second-quarter RevPAR growth of 0.8% was driven by a 1.2 percentage point increase in occupancy, partially offset by a 0.6% decline in average rate. Consistent with the overall industry, second-quarter RevPAR was uneven, with 0.8% growth in April, 2.5% contraction in May, and 4.1% growth in June.

Our asset management initiatives drove a solid 57.4% profit flow-through in the quarter. Our asset managers were able to work with our operators and limit the increase in quarterly operating costs to less than 1%, which resulted in hotel-adjusted EBITDA margin expansion of 11 basis points.

Let me now spend a couple of minutes discussing our transient and group segments. Second quarter total transient revenues were flat as a result of a 2% decline in rate, offset by an approximately 2% increase in demand. However, transient was impacted by softness in both the Chicago and New York markets. Excluding these two markets, second-quarter transient revenues increased 3.5%, which was in line with our expectations.

As expected, our group segment was challenged this quarter. Second quarter group revenue declined 1.2% as a result of a 2.5% decline in demand, partially offset by a 1.3% increase in average rate. Citywide activity during the quarter was light in Chicago, which experienced a 9.8% decline in group revenue. It is important to note that Chicago group trends are expected to improve during the second half of the year, with pace up approximately 9%.

There are a couple of other group trends worth noting. First, group is expected to improve for the balance of 2016, where pace is up approximately 3.4%. Next, our second-half group pace has moderated from last quarter. Our portfolio wasn't immune to the recent trend of declines in short-term bookings. Our portfolio booked approximately 20% less in-the-quarter-for-the-quarter group revenues this quarter. This trend contributed to our cautious view on fundamentals for the balance of the year. Finally, early 2017 trends are encouraging, with over 50% of the expected group business already booked. Our 2017 group pace is up over 5%, driven by a combination of increased demand and rates. Importantly, 2017 group pace at our two largest group hotels, the Boston Westin and Chicago Marriott, is up 11.3% and 6% respectively.

As discussed last quarter, in the face of challenging fundamentals we implemented defensive revenue management strategies at several hotels. These strategies were successful during the second quarter, where contract revenues increased approximately 45%.

Now, let me spend a couple of minutes on Chicago and New York City markets. Second-quarter RevPAR contracted 3.2% at our two hotels in Chicago, which impacted our portfolio RevPAR growth by 80 basis points. Our soft Chicago quarter was driven by early quarter renovation disruption at the Marriott and Gwen, and very difficult prior-year comps in May as a result of the Microsoft Citywide leaving Chicago. It is worth noting that we were encouraged by June's results, where we achieved combined RevPAR growth of 10.3% at the Gwen and the Marriott. As previously discussed, Chicago citywide activity improved in the second half of the year, where group pace is up 9%. Despite stronger citywide activity, we expect the current transient headwinds to partially hold back our Chicago growth for the balance of the year -- which is still expected to outpace national averages.

Second-quarter RevPAR contracted 6% at our four hotels in New York, which had an 180 basis-point impact on portfolio RevPAR growth. We expect New York City RevPAR contraction to continue for the balance of the year. After the recent disposition of the Hilton Garden Inn Chelsea, our New York City concentration is down to 12% of adjusted EBITDA. As a reminder, our long-term target for New York City portfolio allocation is 10%.

Our margins benefited from successful cost-containment in the F&B department. We were pleased with our second-quarter food and beverage results that generated close to 90 basis points of margin expansion on flat revenues. The positive F&B results were driven by strong topline results at the Boston Westin, where F&B revenues increased 12%; and at the Fort Lauderdale Westin, where quarterly F&B profit increased approximately 17% on flat revenues, resulting in close to 670 basis points of margin expansion. Overall, our tight cost controls led to our portfolio generating 11 basis points of hotel-adjusted EBITDA margin expansion on 0.8% RevPAR growth.

We are very pleased that total expense growth was less than 1% during the second quarter. Moreover, our second quarter profitability was positively impacted by several other items, including productivity gains over 2% as labor management systems took hold; the successful appeal of property taxes at both of our Chicago hotels, resulting in a $1.8 million favorable true-up recorded during the second quarter; utility expenses down approximately 2.5%; and commissions being lower as a result of lower group and leisure demand.

Before turning the call back over to Mark, I would like to touch on our balance sheet. We believe that liquidity is at a premium in this environment and it is a top strategic focus for DiamondRock. 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.

During the quarter we refinanced our line of credit, which increased capacity to $300 million, lowered the interest spread by approximately 25 basis points, and extended the maturity date to 2020. In addition, we entered into a new $100 million five-year term loan, which bears interest at a slightly lower rate than the line of credit. The proceeds were used to repay the outstanding balance on our line of credit and repay the $48.1 million loan secured by the Courtyard Fifth Avenue, which bore interest at 6.5%. Finally, we sold three non-core hotels for approximately $275 million, generating approximately $185 million in net cash proceeds after the Minneapolis debt assumption. The three sales are expected to generate a REIT taxable gain of approximately $12 million, which is not expected to require a change to our current dividend to pay out. After all of this recent activity, our balance sheet has never been better.

Our weighted average interest rate is approximately 3.7% and our average mortgage maturity is nearly seven years. Further, we expect to end the year with 17 of our 26 hotels unencumbered, net debt to EBITDA at approximately 2.7 times, no near-term debt maturities and over $450 million of balance sheet capacity, including an undrawn $300 million line of credit and over $200 million of corporate cash.

I will now turn the call back over to Mark.

Thank you, Sean.

Before we open up the call for questions I would like to spend a few minutes discussing our current outlook for the remainder of 2016. As previously discussed, we are operating in an environment of continued uncertainty and increased risk with forward bookings. As a result we are more cautious about industry fundamentals at this point than we were earlier in the year. Our caution is derived from a combination of the softness in transient segment as well as supply impacts in a few markets. Although short-term group has showed some hesitancy, we do expect group business to gain momentum in the second half of the year, but not enough to fully compensate for the softer transient demand trend. As a result, we are now forecasting lower overall travel demand for the rest of year.

To reflect these current market conditions, we have reduced our topline expectations and now forecast our comparable 2016 RevPAR growth to be flat to up 1% for the full year. However, we have exceeded our original expectations on cost controls and believe that we can flow more revenue to the bottom line. The team has really stepped up. Based on the full implementation of our cost-containment initiatives, we expect to substantially offset the impact from lower revenue growth. As a result, we are maintaining our full-year 2016 adjusted EBITDA and adjusted FFO guidance, except as to reflect the impact from our recent asset sales. For the full-year 2016, we now expect $250 million to $263 million of adjusted EBITDA, and $0.99 to $1.04 per share of adjusted FFO.

To sum up, we remain cautious on industry fundamentals and are adapting the business plans at our hotels to adjust for this environment. Even so, DiamondRock has executed on its strategy to build $450 million of liquidity and is focused on creating shareholder value through opportunistic capital allocation.

With that, we will now be happy to answer any questions you may have.

(Operator Instructions)

Ryan Meliker, Canaccord Genuity.

Hello, good morning guys, thank you for taking my question. I just had a couple of things. Number one, and I probably sound like everyone on the call seems like I ask this, but I have to ask Rob -- another great quarter on margins, you guys been able to maintain full-year EBITDA and FFO guidance on lower RevPAR growth.

What are the expectations for the back half of year? Are you going to really have some substantial margin headwinds next year?

Ryan, we really, as Mark said in his prepared remarks, we remain committed to furthering our margin expansion and we have not broken the glass yet. So we still feel very confident in all of our initiatives. For example, we just added a destination fee at the Westin San Diego, that was just for the month of June was $31,000, but we believe that's going to be a $0.75 million initiative on a full year basis.

Our productivity improved by 2.8% as we continue to utilize our various labor management systems and assessing our operations, we still believe there's opportunities there. And an item like at The Gwen for example, we are looking to reduce our canned and chilled water costs by $100,000 and we're looking to do a combination with our Chicago Marriott to do a partnership with them. So we think there's opportunities throughout the portfolio that we really believe in.

Last but not least, really when we look at ROI investments, the Chicago Marriott -- we just replaced three large 1970-era boilers with 14 smaller variable ones -- we're going to save over $150,000 a year from those efficiencies. When we look throughout the portfolio, we believe there's more to happen in the future.

Okay, sounds like there's still more to come, that's exciting. Second question I have is with regards to RevPAR guidance? Your year to date RevPAR is down 0.7%, obviously was a tough first quarter, the second quarter wasn't exactly stellar, up 0.8%, but your guidance for the back half implies close to 1% to 3% growth?

Can you just walk us through what gives you confidence that you're going to see that type of acceleration in the back half of year, given all the macro color that Mark, you talked about?

Sure, Ryan. You are right on the back half -- it is roughly 1% to 2.5% RevPAR growth as implied within our guidance. I think when you look at our market concentration for the back half of the year, we do expect obviously, positive RevPAR. We think Chicago, and group specifically, get better in the back half of year and we expect those to outpace the market.

Our group pace for the back half of the year in Chicago is up 9%, up 3.5%, like a 3.4%, -- for the entire portfolio and so that level of group pace gives us comfort that we should generate positive RevPAR for the back half of the year.

Okay. That's helpful. Than just a last question had to do with share buybacks? I noticed you guys didn't buy back any more stock?

Sean, when you and I spoke about it a little earlier, the stock -- it seemed like it represented some opportunities throughout the second quarter? Did it not, in your opinion? Or did it never reach a level that you guys would have been comfortable buying back stock? Or was it that it never reached a level at a time where you felt comfortable with disposition proceeds coming in?

Ryan, this is Mark. I guess there's a lot of things going on in consideration of the share buyback. One is, we just got the disposition proceeds in, about a month ago -- so you know, until they close, you never have 100% certainty. I would say that's one factor.

We continue to watch the markets, it is obviously the number one discussion with the Board. Think we want to be flexible and opportunistic. With Brexit, there was some uncertainty and we wanted to see how that played out on the stock price.

So we're continuing to monitor, we're continuing to have discussions in the Boardroom, we're trying to be very thoughtful about deploying our investment capacity.

Got you, so its not necessarily that the stock never reached an opportunistic level for you? Its more that you might have thought it might have gotten to more opportunistic level following Brexit or that you didn't have the proceeds in from asset sales, and you weren't ready to deploy that capital until that came in, is that fair?

Yes, I would say its a continued dialogue with the Board. And all those things are factors that go into it, it is not that we don't think that it is a great value, we just want to make sure we're being very thoughtful about the movements in the marketplace.

Okay, that's helpful, that's it for me, thank you, guys.

Rich Hightower, Evercore ISI.

Hello, good morning guys. So a couple questions. First, I want a comprehensive view on group business? Maybe not just for DiamondRock's portfolio because it is concentrated in a couple of really big chunky assets, but maybe for the industry at large?

It does sound like the back half of 2016 is a little bit worse than expected, but everybody consistently says 2017 continues to look pretty strong. So my question here is -- would you say that pattern of behavior indicates that corporate clients are simply trying to make numbers, so to speak, for 2016 and then the clock resets on January 1? Or do you think there is something, given the uptick in attrition rates and so forth that you mentioned, that there is something more fundamental at play there?

Rich, this is Mark. I think it is a complicated question. I think there's a number of currents going on here.

On the national trend, of what we can see of the funnels through our conversations with some of the largest operators in the country, is that the short-term funnel, and clearly the decision is made in the quarter for the quarter, we are seeing corporate America and a lot of associations not as confident in this moment in time in booking some of that business. So we've seen a little uptick in the cancellation and attrition. We see more hesitancy there.

There seems to be some conviction, and I will speak more about our particular markets in our portfolio, that we have better citywides in 2017, so that's definitely influencing what's going on in a number of these markets. And I think people are still -- their long-range plans remain intact for the base level meetings that they have to have. The ones that are more optional tend to be the short term ones, and so those are the ones we've seen the increased hesitancy on.

That's helpful color. My second and final question here just concerns further asset sales in New York City, potentially? I think that last quarter you said the reverse inquiry was still pretty strong. Just curious if that has held up quarter over quarter?

And also if you don't mind -- give us your estimate of how many assets are on the market currently? We've heard anywhere ranging from 30 to 50, so let's say several dozen? So it would be a very competitive market to sell assets, it seems? What you are seeing, in general would be very helpful?

Sure. So on our individual -- I will give you our particular color, which is, we recently sold Hilton Garden Inn Chelsea, we had very good interest in the asset, we had a lot of foreign, unique foreign buyers, that were interested in reviewing and looking at the asset. So we were very encouraged that there was actually more capital than maybe we would have first predicted, to look at that particular asset. As far as reverse inquiries and looking at more asset sales, I think we are comfortable that we have a lot of liquidity at the moment.

I think if we -- obviously, anything is for sale for the right price; but unless we've got a really full price on assets we are not looking to build more cash than we currently have. On the Manhattan market overall, we obviously staying very close to what's on the market and what the brokers are -- have in the market. I think there's a lot of people that are testing the water in New York.

So officially there's probably somewhere between 25 and 30 hotels on the market. This probably more that are available and being whispered about. But based on what we are seeing, a lot of those are not going to trade.

People still fundamentally believe in the real estate value in New York. While there would be some competition, there is not enough liquidity to sell 50 hotels in New York at a good price. My guess is there will be some deals that clear but it is going to be a small percentage of what's on the market. And its a lot about price discovery and folks out there that will market and sell if they get very full price from a unique buyer, but otherwise they are inclined to hold their assets in New York.

David Loeb, Baird.

Good morning. Mark, I appreciate your candor in the prepared remarks about markets and your answer to Ryan's question. I just want to drill a little deeper. Conservatism is in these days, and most other hotel REITs have cut their guidance pretty significantly, both topline and EBITDA and FFO; you only adjusted the EBITDA and the FFO for the dispositions and really left the rest of those numbers intact in the face of the relatively dramatic decrease in RevPAR.

Can you talk little bit about that? Was it enough? Do you feel like you are being conservative enough or were you really more ahead of the curve? What's really behind the decision to leave the guidance alone, except for the dispositions?

Sure, David, that's a great question. I would say the first half played out similar to what we expected in delivering towards our full-year EBITDA and FFO guidance. So in those two quarters we obviously know what they are in predicting the full-year.

As we look forward it is probably a combination of two things. One, we probably risk-assessed our initial guidance maybe a little more than some other folks in this space. So that plays into it, but really it is the cost-containment efforts.

We saw much more success on a number of initiatives that we put in place earlier this year that were coming out and we have more confidence in the ability to implement and succeed on these cost-containment initiatives than we did at the start of year. So it gives us confidence that the range that we have out there is achievable.

Okay. And one specific market question, maybe this is for Rob? What's going on in Key West? We saw RevPAR drop. Looks like profits were actually up because apparently excellent cost control at the Sheraton, but what are the trends there and what are your concerns for the next year or so there?

Sure. The introduction of the four pack came on throughout the first two quarters of the year. And so as that's being reintroduced in the marketplace, that's creating some impact on -- its just being absorbed. We account for that in our underwriting for the [in] Key West. And we had down just changed out our revenue management personnel, we have a non-island person there now, and we're seeing a positive effect from that change.

Key West is a market that we still, its still one of our favorite markets. On the north end of the island there is four hotels that we're renovating, came back in. We think they are getting absorbed fairly rapidly, but has some impact on Key West.

We have a transition revenue manager there too, but we feel very good about the future of that asset. On the Sheraton Suites, we've actually exceeded our expectations on some of the cost initiatives there and the resort fee initiative at that hotel. So while the RevPAR may be a little bit more challenging than we initially anticipated, the bottom line is actually slightly ahead of our underwriting expectations.

I'm getting asked, so I feel like I need to ask -- any concerns about Zika in any of your properties in the reefs in southern Florida?

It is a great question -- obviously, there's the recent headline news about the warning in Miami. So far -- and we obviously have that on the radar screen and there are constant dialogue with our operators -- we haven't seen any material impact, or even really any anecdotal impact at our hotels in Florida or in the Virgin Islands. In fact, there is probably some submarkets that people are more concerned about in the Caribbean that benefits other islands. So no, we are not currently seeing it but we are monitoring it very closely, but as of now we are not seeing any impact.

Great. Thank you.

Chris Woronka, Deutsche Bank.

Good morning, guys. Want to ask about, going back to the guidance, and given how the second quarter ultimately unfolded with uptick in cancellations and a little bit less in the quarter, how much -- how did you haircut what you got in the books for the second half when thinking about guidance?

Sure, Chris. So what is implied within our guidance is less pickup from group than we picked up last year, so we expect the wash of what the group expects anywhere from 2% to 5% or 6% less pickup this year than was there last year. So we think we've done an appropriate job of haircutting what the end of quarter, what the quarter group pickup is going to be for group.

Okay, very good and then just to revisit the asset sale question. Some of your suburban assets are actually the top performers year to date, but we think the pricing on those isn't always as strong, or demand is not always as strong? But longer-term -- and I hear your comment about not wanting or needing any more liquidity, but how do you view still maybe the five lowest RevPAR assets in the portfolio?

Chris, great question. I think we really like all of our hotels, our 26 hotels, that we have now. We will constantly look at the bottom 10% to 20% in quality and think about monetizing those as we move forward. I don't think this is the optimal time, necessarily, to do that, given where the market is, to maximize value for our shareholders. But again, everything is for sale at the right price, but right now, sitting on $450 million of capacity, dispositions aren't our top strategic priority.

Okay, got it, very good, thank you.

Anthony Powell, Barclays Capital

Hello, good morning. Question on New York. How are your hotels preparing for the closure of the Waldorf next year?

Is the Lex booking some new group activity? Are you trying getting more corporate contracts in? How should that impact that overall market for you?

Good morning, Anthony. You know, with the Lexington, we are excited about the Waldorf closing in second quarter. One of the things we are doing right now -- is the Barclays just was reintroduced into the market in April, and so that's being absorbed, but as we look at it we've added 3,000 square feet of meeting space. We converted a Chinese restaurant into meeting space so, we are looking to further group up and we are working to further drive additional accounts in terms of airline contract as well as business transient. We believe there is more in the market that can be secured as the Waldorf comes out.

All right, great, that's it for me, thank you.

Austin Wurschmidt, KeyBanc Capital Markets.

Hello, good morning. I know you guys have talked a lot about getting some of your markets like New York City down to 10%, and you are being thoughtful about allocation today, but are there any markets over time that you would like to increase your portfolio allocation to?

Yes, that's a great question. We're big believers in a diversified portfolio. There's number of markets that we have either small exposure and we'd like to have greater exposure. I think we would like to limit our portfolio to 10% any one market, just because we believe that markets obviously move in different ways at different times. Even if they are they are top markets over extended period of time.

So we're not in Seattle right now, that would be a market we would be very interested -- the Pacific Northwest generally, a number of the west coast markets, we are pretty bullish on DC over the next several years. We really like resorts, experiential resorts, and drive-to markets, it is another area that we think is it good to expand into. So I would say, that's the short list.

Thanks for the detail. The Fort Lauderdale Westin has really been a strong hotel performer for you. As you start to lap some of the initial cost reductions and more difficult topline growth and just comps in general, what's the opportunity moving forward there? And to the extent that you do see transient business start to soften from some of the headlines, what would be the strategy for locking in future business?

Sure, opportunity at the Westin Fort Lauderdale -- we will soon embark on a restaurant renovation there and a complete repositioning of the lobby and the restaurant space. We think that we can further enhance our penetration in our food and beverage operation, and from a sales and marketing perspective, we really are focusing in on appropriately pricing our asset, which we've done well this year. We've had 10% ADR growth both in Q1 and Q2.

We've been able to move the occupancy up quite a bit. As Sean spoke about earlier, from looking from our learnings in 2015 we've been able to further penetrate the market and discuss what opportunities are out there. So we believe there's more to be had in this hotel. Our operator has done a phenomenal job and we're extremely pleased with the outcome.

Then last one for me, I don't know if you touched on it yet -- where did aware did you see a lot of the uptick in cancellations this quarter? You mentioned an uptick in your prepared remarks?

Sure, Austin, we saw it at the Boston Westin, Salt Lake City, San Diego and Worthington. So our big group hotels is where a majority of the uptick in the cancellation activity was. Which was not, frankly, a surprising trend for us, that started last quarter and continued into this quarter. But that's the hotels where it was most impactful.

And Austin, one of the items in Boston was the fact that the Boston Grand Prix that was supposed to occur over the Labor Day weekend was canceled.

Great, thank you for taking the questions.

Smedes Rose, Citi.

I just wanted to follow-up on -- you mentioned the uptick in group cancellations, is there also any particular sub sectors of the economy that you are seeing more cancellations in? Is a finance related or, et cetera? If you are able to tell?

Yes, Smedes, this is Mark. We don't have -- we have anecdotal data. We're looking obviously across the portfolios.

Financials are obviously under -- they have been under stress, continue to be under stress, but it is pretty broad-based across the industries and associations. And again, while the percentages are increasing, it is not an enormous amount of absolute dollars in these cancellations. But I would say the hesitancy is pretty much broad based among corporate America.

And Smedes, interestingly the offset to that is, even though cancellations are up, our group spend is also up within the portfolio, which seems to go counter to that a little bit. To Rob's point, I guess the Grand Prix segment -- cancellation is up but that was a unique event in Boston. There's no one segment that we are more nervous about than others.

Okay, great.

The other facts that are worth mentioning, is our 2017 group pace, as I mentioned in my prepared remarks is very strong, its up over 5%. Particularly our hotels -- the Chicago Marriott, and the Boston Westin are both up dramatically. Chicago is up 6%, Boston is up 11% and on pace for next year with over 50% of the business on the books.

So our overall group outlook is strong. And even in 2018, which I know is very forward-looking, at our Chicago Marriott our pace is up over 40%. So we feel good about group segment within our portfolio in the industry.

Okay. Thank you. I wanted to ask you specifically, a little more color just on the Time Square submarket in New York? How is the Hilton Garden Inn there holding up relative to competitors? If you have the RevPAR index? Your thoughts on that submarket in general as new supply continues to open there?

Smedes, the Times Square market trap was down 2.8% for the quarter. We were down 7.7% at Times Square. As you know, it is an overall very challenging market.

We've seen a softening in our international demand there, we're down about 100 basis points in international business. But it is really a focus on how we price on the Tuesday-Wednesday for corporate business, and then on the weekends, we've just been challenged on how we are pricing on the weekends given the amount of new supply coming in.

Great, that's it for me, thank you.

Thomas Allen, Morgan Stanley.

Good morning. How is July RevPAR tracking, and how do you think about the cadence of 3Q and 4Q? Thank you.

Sure, thanks, Tom. Our July RevPAR was slightly negative, which was not was not surprising to us and consistent with the industry. We expect, from a cadence perspective August and September to both get better, September being stronger than August but both in that low single-digit range.

So the expectation is 4Q is going to better than 3Q or are pretty even?

Pretty even, not one dramatic shift between quarters.

Okay, great. Can you give us an update on your views on the hotel brand's direct booking push and if you are seeing any shift in OTA [mix]?

Sure, Thomas, we have, its still a little too early to tell, but we have seen a shift in our TA commissions, they were down to 4%, which really equates to the fact that we're seeing a little bit less OTA in our portfolio.

Thomas, this is Mark. We are very supportive of the brand's initiative in these efforts to channel shift. We think long-term that's absolutely the right way to go.

Shaun Kelley, Bank of America.

Hello, good morning, two main questions. The first one is just big picture -- as you think about the cost control initiatives you've been very successfully able to put into place.

There's different levels of contingency based on what you guys are seeing on the top line, and I'm curious to get a sense -- and this is probably a theoretical question more than an actual hard answer you can give, but -- what inning, or what level of alert are you guys on at the hotel level to try and gain some of these -- put into play some of these margin initiatives? Are you starting to reach into the playbook that you had back from prior downturns? Or are these more things that you would consider efficiencies at this point?

Good morning, this is Mark. What DefCon level are we at? We are putting mostly in efficiencies and opportunities and trying to be innovative.

We are not -- we haven't gone to what I would call the break-the-glass scenario Rob referred to earlier, where we're holding open positions and we're trying to fundamentally shift the labor models or things that impact the guest experience. Those kind of cost initiatives, which we did implement the last downturn, we have not broached those yet. We don't think its appropriate yet, but clearly we have those plans here, we can enact them if things got softer than they currently are.

Okay, that's helpful, Mark. The other question I have is a little bit more specific -- and I appreciate that I'm probably reading too much into a single quarter of margin performance is dangerous -- but just, as we see the magnitude of margin decline at a couple of the New York City hotels, is that indicative of just how tough that market is when it comes to costs rising on the weak RevPAR? Or are these things you can probably begin to ameliorate, again through some of your initiatives as the year goes on?

I would say there are opportunities, and we working on a number of opportunities. But in New York, particularly with the union hotels, there are significant fixed costs that you need to deal with that in a weaker environment create more pressure on the profit margins.

So in New York, if you look at a fixed cost like property tax, they're relatively high as a percentage. Obviously, those can be tough to reduce in the short-term because they're viewed on a rolling average, the way they are calculated. So it is a challenging market to reduce cost, but we do see opportunity and we are working on a number of initiatives at those hotels.

Great, thank you very much.

Jeff Donnelly, Wells Fargo.

Good morning guys. I just wanted to circle back on a few items. Concerning group business, I wanted Rob's perspective about how you reconcile the strength in the group pace we're seeing for 2017 and beyond, not just with you guys, but other folks, versus that weakness that we are seeing in the shorter-term numbers for both group and transient on the corporate side. I'm just curious does your experience tell you that the short-term trends are the canary in the coal mine for perhaps a more, frankly, bleak future? Or does it tell you to take a more optimistic view that the longer-term bookings are more indicative of the environment and the shorter-term weakness is simply a response to current events, and election uncertainties, and things like that?

Sure, Jeff. I agree with you on your latter point there. As we look at 2017 bookings, the fact that they increased in the quarter for 2017 is a very good sign for us, and we believe there's more to be had. Our Boston Westin is pacing on double-digits for 2017, Chicago Marriott is in high single digits, San Diego Westin is high single digits, DC Westin is high double digits and JW Cherry Creek is high double digits as well. So we believe that there is a positive outlook on that side of it, for 2017, in just a short-term, as companies are holding back, given corporate profits.

Thank you, and for Mark, how specifically are you determining when the right moment is to use liquidity to buy assets or buy stock? Is a multiple, is a price per key? I ask this because it is my impression, a lot of hotel executives out there, they look at the last one or two cycles and people just want to avoid -- they try to aim for bottom-picking the stocks and repurchases or trying to buy at a very low price per key? I'm just curious how much those past cycles are influencing you or how you are looking at when you decide to strike?

It is a great question. Number one strategic question and conversation we are having in the Boardroom. I think it is a confluence of a lot of different factors in trying to make the decision. The stock today we believe is cheap.

It is just trying to make sure that we are being -- the liquidity too, is probably more precious than it has been in the last few years. So I think we view our liquidity as very valuable, and we just want to be very thoughtful about deploying it. Its not that we don't think the stock is inexpensive right now, because we do.

Its just trying to make sure with all the macro things going on right now, that we are being very deliberate in putting out that dry powder. There's no magic. We have not said there's a magic -- obviously we have to use them where we buy the stock, but I tell you it is flexible because things are moving so quickly in the overall environment.

So when you say you are not looking to build more cash or liquidity than you currently have, does that imply that you are also content with your leverage metrics, where they are at now as well? And if that's the case, should we conclude that excess cash flow from operations would likely go to share repurchases?

I guess there's a couple ways to look at that, Jeff. We said that we think we will end the year at about 2.7 times debt to EBITDA. That's below our target range and we think we have $450 million of capacity to still be within our targeted debt leverage range.

So we feel like we are in very good shape there, and we don't need to go lower than that to be very comfortable in any environment. So I think we're sitting there on dispositions. I'm not sure it is an ideal time to sell more unless we get special pricing and that could happen, but we are sitting on what we think is very significant capacity right now. Does that make sense?

Yes, I guess I'm thinking -- come 2017, if you have a lot of capacity within your leverage targets, I think you are ideally going to be producing some cash flow I would think, in 2017. I'm not sure if that's earmarked for more renovations or that's money, albeit somewhat small relative to the portfolio, could potentially be trickled into the stock? I'm just curious how you are thinking about that?

Jeff, when we look at our leverage targets we obviously look at it over an extended period of time, which also factors in future CapEx and future operating cash inflows. So the $450 million of capacity that we talk about on the call, really is inclusive of an assumed operating environment for the next five years. So it is kind of already baked in.

Okay. Thank you.

Bill Crow, Raymond James.

Great, thank you, I have to go deep into my list of questions here. I just found it interesting that management fees were down for the quarter but franchise fees were up 10%. It just seems like going in different directions. And maybe it is just a one quarter, and maybe its the asset sales? Anything that explains that?

Yes, Bill, this is Sean. The big driver there is our Chicago Marriott instead of management fees, were the contract was amended in conjunction with the green to do the capital expenditure project there. So that adds a pretty material impact on our overall fees for the portfolio.

There are a couple of unique items as well going into the franchise fees as well. We had a couple hundred thousand dollar credit that was booked last year at the Vail Marriott, which impacts the year-over-year comparability of those hotels. As well as the fact that we have more franchise hotels today than we would've had last year. So it is a bunch of moving pieces.

Thanks, Sean. One follow-up question on the direct booking. Your occupancy was up and rate was down, which is a little contrary to what we are seeing with the industry and other peers. Does that reflect more the direct booking business, or is that just a compilation of 26 hotels doing different things?

I don't think the direct bookings have any material impact in making conclusions. It is probably more about the markets and it is more about our defensive revenue strategies that we are initiating at a number of our hotels.

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

Thank you, Bill

Lukas Hartwich, Green Street Advisors.

Thank you. Hi, guys, can you give us an update on the environment for take-private activity?

That's a loaded question. Sure, Lukas. There are -- for the take-private, obviously the debt markets have improved.

We don't comment on marketing our own company or activities that we are exploring in the M&A space. But clearly the debt markets have improved but the activity -- there's not a lot of activity that we have heard about in the marketplace that's occurring right now.

Fair enough. Can you remind us what the renovation impact is on the second-quarter and for the full year?

There's very little renovation activity for the second quarter. We do have renovations that we do have planned for the back half of the year, which is mostly Worthington -- is the most significant one. There's enough seasonality in that market where we don't see a huge amount of impact.

Great. That's it for me, thank you.

Thank you, Lukas.

I'm showing no further questions at this time. I would now like to turn the call back to Mr. Mark Brugger record for closing remarks.

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

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