Diamondrock Hospitality Co (DRH) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DiamondRock Hospitality Company Q3 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's presentation, Mr. Brett Stewart. Sir, please begin.

Thank you, operator. Good morning, everyone, and welcome to DiamondRock's third-quarter 2016 earnings call and webcast.

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

In addition, as management discusses certain non-GAAP financial measures, it may be helpful to review the reconciliations to GAAP set forth in our earnings press release, which can be found on our recently redesigned Company website.

With me on today's call is Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will discuss the Company's third-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 third-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 on the call today. I know this is a big news day with election results, so we appreciate you tuning in.

The policy changes that will arise from the election and impact our business will take some time to emerge. With that said, it is our sincerest hope that our newly elected leaders will exercise wisdom and restraint in governing over our country.

For DiamondRock, I would like to begin by saying that we are pleased with our portfolio's results in the third quarter in light of moderating business transient demand. While the macroeconomic data remains mixed, we expect lodging fundamentals to continue to be softer in the near term, with business transient demand slowing and supply, while still low across the country, creeping up in many of the top 25 markets. In fact in the third quarter, hotel demand and supply growth hit a point of equilibrium, both at 1.6%.

Turning to DiamondRock's performance in the third quarter, our portfolio performed well given the overall operating environment. The portfolio gained 2.1 percentage points of market share in the quarter against its competitive set, demonstrating the success of our defensive revenue management strategies.

As importantly, the Company achieved record third-quarter profit margins as implementation of tight cost controls allowed us to grow EBITDA margins by 23 basis points on a less than 1% growth in RevPAR. Furthermore, the biggest testament to the success of our cost control initiatives is that year-to-date through the third quarter our portfolio's total operating expense growth was essentially zero, a terrific result.

Additionally, F&B was clearly a bright spot for us in the third quarter. F&B revenues increased over 9%, and F&B margins were up over 300 basis points.

F&B profit flow-through was healthy and exceeded 70%. These strong results were the product of our asset management initiatives to have the hotels strategically take groups with stronger banquet contribution and an intense focus on controlling food and liquor costs.

In understanding our results, it is important to understand how the different segments of demand are trending. The weakest segment was business transient, which slightly underperformed our expectations.

Business transient revenues were down 2.8%. Business transient has been challenging throughout the year, and we expect this trend to continue, given lackluster corporate spending and profits.

The leisure transient and contract business segment was up 2.1%, a solid performance. We've been implementing defensive revenue management strategies throughout the portfolio, and the increase in contract business is certainly related to that effort.

Notably, the group segment was relatively strong in the quarter, with group revenues increasing 3.7%. The drivers within the portfolio for this positive group strength came from outperformance at our two big-box hotels: the Chicago Marriott and the Boston Westin. Additionally, our Frenchman's Reef Resort and the San Diego Westin also had good group quarters. Importantly, as we look forward we've had solid group bookings into 2017, with group pace up about 4.3% for next year.

Our top performers in the third quarter were the Vail Marriott, the Frenchman's Reef Marriott, the Westin Fort Lauderdale Beach Resort, the Bethesda Marriott, and The Gwen Chicago, which all achieved double-digit RevPAR growth. In addition, despite difficult market dynamics, several of our key hotels were able to significantly outperform their competitors. This was especially true at the DC Westin and the Boston Westin.

Let me take a moment to provide some additional perspective on The Gwen Chicago. This is one of the repositioning stories within the portfolio.

The hotel continues to ramp up from its re-branding and renovation to a Luxury Collection brand. Despite challenging market dynamics in Chicago, the hotel continues to build momentum and establish its presence within the market.

We changed operators at the hotel this summer and focused our revenue management strategy, which has worked well. The third quarter showed positive signs, with double-digit RevPAR growth and over 700 basis points of EBITDA margin expansion.

The 2017 booking pace is also notably improved. This should be just the beginning of a multiyear ramp, as the major guestroom renovation will be completed this winter and put the hotel among the best in Chicago. This hotel is now tracking well, and we are excited to see how far we can take it.

There were also challenges in the third quarter. Our third-quarter performance was negatively impacted by the renovation at the Worthington Renaissance, which experienced RevPAR contraction in the quarter of over 25%. This disruption negatively impacted overall third-quarter comparable RevPAR growth by 90 basis points and hotel adjusted EBITDA margins by 25 basis points.

The Worthington's renovation will be completed in January, and we are looking forward to unveiling the renovated guestrooms. For the Worthington we are budgeting 10% RevPAR growth for next year.

As you are aware, the New York market continues to be challenging. Our New York hotels performed generally in line with the market, with RevPAR declining by 2.7%. New York held back the portfolio's RevPAR growth and adjusted EBITDA margin growth by about 100 basis points each.

I do want to remind everyone that we completed the sale of our Hilton Garden Inn Chelsea earlier this year and are closer to achieving our strategic target of a 10% allocation to New York City.

I will now turn the call over to Sean, who will provide additional details on our third-quarter results and our balance sheet.

Thanks, Mark. Before discussing our third-quarter results, please note that our comparable RevPAR, hotel-adjusted EBITDA margins, and other portfolio statistics are presented to include the Shorebreak Hotel and Sheraton Suites Key West and exclude the three hotels sold earlier this year for all periods presented.

Our hotels performed in line with expectations in the third quarter, gaining 210 basis points of market share despite challenging business transient fundamentals, a difficult New York City market, and renovation disruption at our Worthington Renaissance. Third-quarter RevPAR growth of 0.8% was driven by a 0.6 percentage point increase in occupancy and a slight increase in average rates. It is worth noting that our total revenue growth of 2.8% exceeded our RevPAR growth as a result of the 9.2% growth in food and beverage revenues and a 7.8% increase in other revenues.

Consistent with the overall industry, our third-quarter RevPAR was uneven, with 1.5% contraction in July, and 1.6% and 2.2% growth in August and September, respectively. The month of September benefited from the shift of the Jewish holidays into October.

Our asset management initiatives drove a solid 52.9% profit flow-through in the quarter. Our asset managers were able to work with our operators to limit the increase in third-quarter operating costs to approximately 1.5%, which resulted in hotel-adjusted EBITDA margin expansion of 23 basis points.

For the year-to-date period ended September 30, the Company reported comparable RevPAR decline of 0.2%, which was the result of a 0.4% increase in average rate offset by a 0.5 percentage point decline in occupancy. Despite the RevPAR contraction, margins continue to outperform expectations, with year-to-date hotel-adjusted EBITDA margins expanding by 24 basis points.

Let me spend a couple of minutes discussing current group trends. Our group segment improved this quarter, as expected, with revenue growth of 3.7%. That was achieved through a combination of a 1.6% increase in rate and a 2.1% increase in demand.

Group was led by Frenchman's Reef, the Chicago Marriott, and the San Diego Westin with revenue growth of 155%, 16%, and 32%, respectively. Frenchman's Reef benefited from a large insurance group that generated over $2 million of business for the hotel during the quarter.

There are a couple of other group trends worth noting. Our fourth-quarter group pace moderated from last quarter, with pace now down 1.8% compared to up 1.6% last quarter.

Our portfolio wasn't immune to the recent trends of declines in short-term bookings. Although our in-the-quarter for-the-quarter bookings were flat to last year, we booked approximately 16% less fourth-quarter group revenues compared to the same time last year.

Our guidance assumes that this trend continues during the fourth quarter. However, 2017 group trends remain encouraging, with over 60% of the expected group business already booked.

Our 2017 group pace is currently up 4.3%, driven by a combination of increased demand and rate. Importantly, 2017 group pace at our two largest group hotels, the Boston Westin and Chicago Marriott, is up 6.4% and 4.8%, respectively.

Now let me spend a couple of minutes on the New York and Chicago markets. Our New York portfolio outperformed the Manhattan market, although we are never satisfied with RevPAR contraction. Third-quarter RevPAR contracted 2.7% at our four hotels in New York, which was better than the overall Manhattan RevPAR contraction of 3.2%.

Our New York hotels negatively impacted portfolio RevPAR growth and margin expansion by 100 basis points each. We expect New York City RevPAR contraction to continue through at least 2017.

Third-quarter RevPAR grew 0.7% at our Chicago hotels, which slightly underperformed the market growth of 1.2%. As expected, the favorable citywide activity in Chicago led to strong group performance, where combined group revenues increased 13.8% at the Marriott and The Gwen.

However, the strong group results were offset by softness in business transient and leisure and contract. Revenues in these two segments declined 5.8% and 9.8%, respectively.

Before discussing our strong margin performance, I wanted to touch on the comprehensive room renovation of the Worthington Renaissance, which started in August and is expected to wrap up around the end of the year. We expect the renovation to better position the hotel to outperform in 2017 and beyond.

There have been some early successes as the new product is presented to meeting planners, which is evidenced by the approximately 25% increase in 2017 group bookings during the third quarter. However, the short-term disruption from the renovation reduced third-quarter RevPAR growth and margin expansion by approximately 90 and 25 basis points, respectively.

As I discussed earlier, we were very happy with our ability to maximize profitability in the current environment. Our comparable hotel-adjusted EBITDA margins have increased 23 and 24 basis points for the third quarter and year-to-date periods.

We're proud that we have been able to keep hotel operating costs flat so far this year, which is a result of our successful asset management efforts. In particular, our food and beverage margin growth has been exceptional. Year-to-date F&B costs are down 2.5%, and revenues have increased 0.7%, resulting in over 200 basis points of food and beverage margin expansion.

Before shifting to the balance sheet, I'd like to point out that third-quarter corporate expenses were $1.4 million lower than the comparable period of 2015. The decrease in corporate expenses was the result of a benefit recorded this quarter from forfeited compensation from the recent transition of DiamondRock senior management.

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 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 debt maturity schedule, and provide capacity to repurchase stock.

We began repurchasing shares late in the third quarter and through yesterday have repurchased $6.5 million of shares at an average price of $8.92 per share. The average price represents an attractive valuations of 9.6 times 2016 consensus adjusted EBITDA.

Our balance sheet is in great shape. The weighted average interest rate on our debt is approximately 3.7%, and our average mortgage maturity is nearly six years. Further, we expect to end the year with 17 of our 26 hotels unencumbered, net debt-to-EBITDA of approximately 2.7 times, no near-term debt maturities, and approximately $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.

Thanks, Sean. Before we open up the call for questions, I would now like to spend a few minutes discussing our outlook for the remainder of 2016.

The theme this year has been softer business transient demand offset by better-than-expected execution of cost controls. As we look forward, we believe that this theme will continue.

Our team is intensely focused on defensive revenue management strategies and stringent cost controls, and these strategies are working well. As a result, DiamondRock is able to maintain adjusted EBITDA and adjusted FFO guidance originally provided on February 23, despite a more modest outlook for full-year RevPAR growth that resulted from the softer business transient trends. Thus, consistent with and unchanged from our original guidance, we expect full-year adjusted EBITDA of $250 million to $263 million, and adjusted FFO per share of $0.99 to $1.04.

Finally, before we turn to questions I would like to touch on our capital allocation strategy. DiamondRock remains committed to creating shareholder value through opportunistic capital allocation.

As previously discussed, we strategically disposed of three hotels earlier this year for $275 million in gross proceeds. As Sean mentioned, we're on track to end the year with over $200 million of cash, an undrawn corporate revolver, and net debt-to-EBITDA ratio of just 2.7 times. Based on the way we calculate investment capacity, this gives us more than $450 million of dry powder to drive future value. We view our balance sheet as a key strategic advantage.

We have started deploying that capacity in a modest way. As of yesterday, we have purchased approximately $6.5 million of common stock at a weighted average price below $9 per share. There is still $143 million of remaining capacity under our current share repurchase program, and we plan to be opportunistic about it.

In closing, while we remain cautious on fundamentals, we are confident that we have the ability to continue to mine value from our portfolio. Our team is focused on key asset management initiatives to drive bottom-line results. And lastly, our balance sheet is one of the strongest in the industry, and we have significant dry powder to take advantage of market inefficiencies.

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

(Operator Instructions) Anthony Powell, Barclays.

Hi; good morning, everyone. A quick question on transactions. You mentioned that you're still slightly above your target EBITDA contribution from New York City. Are you looking to sell assets there or anywhere else in your portfolio?

Yes, good morning, Anthony; this is Mark. That's right, we set out at the beginning of the year to sell $200 million to $300 million of assets, to get our balance sheet into the position we wanted it to be, headed into softer demand trends.

We accomplished that goal. We're always opportunistic about selling assets. There is always a price certainly we would sell any asset in our portfolio.

Right now, New York is a tricky market. There still is pretty good demand for hotels, but there's a lot of hotels on the market.

We are believers in New York real estate over the extended period, so I think we would be very hesitant to sell for a price that we weren't excited about. So to answer your question directly, we don't currently have anything actively on the market, but we would certainly be opportunistic if we got a good offer on New York City assets.

Got it, thank you. Moving on to Chicago, this year was more difficult on a citywide calendar earlier in the year. How does that look next year for Chicago?

Yes, the calendar year obviously this year was very difficult, particularly the first half of it. 2017 is better, with total rooms and citywides up about 4.8%.

So 2018 is really the next great year in Chicago, with citywide rooms tracking up about 20%. Our Chicago Marriott for 2017, the group pace is up about 5% for next year.

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

Rich Hightower, Evercore ISI.

Hey, good morning, guys. Heck of a day for earnings. So on that topic really quickly, not to be too casual about it, but now that the world and corporates have achieved some modicum of certainty about the outcome of the election, do you foresee that playing a helpful role in the way business transient demand evolves over the next -- however long?

Yes, Rich; that's a great question. I'm not sure we're totally qualified to answer it. Our expectation is that the election was causing some hesitancy with corporate investment. But there's going to be some hesitancy post-election until there is some clarity around exactly what policies are going to be pursued and what the priorities are, as well as filling out some of the cabinet positions.

So there may be a period here over the next quarter or two where that becomes -- we gain clarity on that. We think it's an advantage to have the election behind us, but I think there is still some uncertainty exactly the direction we're going to go on some major policy decisions.

All right, that's helpful, Mark. Then just on the topic of buybacks, there's been an evolution in the way, I think, DiamondRock has considered buybacks relative to the other tools in the toolkit for enhancing shareholder value and how you guys think about NAV and cycle and everything. Just curious for an updated view on the Board's view on where buybacks fit in.

And also, more specifically, if you were to fully exhaust the $150 million current authorization, would that still keep you in line with your overall leverage and liquidity goals?

Right. I guess there's a couple parts to that question. The first is, the Board is obviously very focused on the share buyback. We have a lot of robust conversations about valuations, and often it's going to vary depending on how our outlook for the general economy and for fundamentals are for the next two or three years, trying to make sure that we're being thoughtful about what we're doing with leverage and what direction the stock might go, and trying to make sure we have a good risk assessment on that.

As far as the leverage, what we've said publicly is that with -- we have $450 million of investment capacity. So the short answer, if we deployed $150 million, we still would be very comfortable with our leverage. And we think that we have several hundred million dollars on top of that to deploy, whether share repurchase or something else, and still be comfortable with our leverage levels.

Great, thank you.

Jeff Donnelly, Wells Fargo.

Good morning, guys. Sean, I'm just clarifying on the repurchases, and I might've missed this. Were the share repurchases you discussed only consummated during Q3? Or does that include subsequent to quarter-end, including up to current day?

Jeff, great question. That was -- most of the share repurchases were actually done subsequent to the quarter. We did very little actually in the third quarter. The vast majority were consummated between October 1 and through market close yesterday.

Okay. I guess just on dispositions, Mark, I think it was last quarter you had said that you guys weren't likely going to be selling additional assets. Just given where your stock is today -- and I know it makes around and you can't be as nimble with sales -- but I guess I'd ask: Why wouldn't you continue to push down the path of exploring sales to extend your balance sheet capacity, but also continue to arbitrage that difference in the stock price versus where your assets are?

Jeff, I think the answer to that is we have a lot of cash now, so I think we would want to start deploying that in a fairly significant way before we built a much larger cash balance. We are active -- we always look at our assets. If we thought we could arbitrage what we think the value is, future value and what someone else might be willing to pay, we would certainly entertain that.

But we really like our portfolio. We really like our assets. So I think we're going to be careful about building more cash capacity at this moment unless we had a really opportunistic sale.

Just two other questions. One is the Bethesda Marriott Suites; just off-the-cuff, do you know how much of the business of that hotel comes from a better Marriott International?

Jeff, this is Sean. About a little over 10% of the business, the special corporate business, comes from Marriott.

Okay. Then I'm just curious, any ballot measures around the country that you guys were watching that could have a tangible impact on your portfolio? I know that in San Diego, like, Measures C and D failed. I'm just curious if there's others that you guys might've been watching.

Obviously the measures that are -- that we pay most attention to regarding the wage, minimum-wage laws in various markets. But when we actually dissect the employees at the hotels, very few are at that level or close to that level, so we don't anticipate that that would be a material impact on our margins.

Okay. Thanks, guys.

Ryan Meliker, Canaccord Genuity.

Hey, guys. I had a couple quick ones. First of all, G&A expense looked like it was a little bit lower this quarter. Anything driving that, that we expect to carry forward?

I know on the full year you guys are largely in line with where you were last year, so not sure if that was just a timing issue. But any thoughts there?

Sure, Ryan. The majority of the variance to last year was the reversal of -- or really the forfeiture of equity compensation related to the change-out of senior management from Rob.

Got you; okay, that's helpful. Then I guess the second question, I was hoping you guys -- and you talked a little bit about this, but maybe it makes sense to summarize or at least give us added color. As we look out to 2017, it seems like you guys might have some tailwinds across your portfolio.

You obviously talked a lot about Worthington; you talked a little bit about Chicago. Can you just give us how you guys are looking at some of those tailwinds and what you think the impact to some of those tailwinds might be across your portfolio in 2017?

Sure, Ryan; this is Mark. I would say overall the outlook for 2007 still remains very cloudy. But for DiamondRock specifically, we do have a number of positives going for us.

The Worthington renovation, certainly with down 25% RevPAR in a positive market, that comp and the benefit of the renovation should be very helpful next year. As we look forward, we have good group pace, on a relative basis; it's up 4.3%. We have about 60% of our group business already under contract for next year.

We have The Gwen, which I spoke about in the prepared remarks, which is still ramping up, and we expect a pretty significant ramp over the next two years on that asset. Obviously there are some offsets with some of the markets.

I would say the other benefit we should have is that in Chicago, which was very difficult in the first half, it's a better calendar in Chicago first half of next year. And we are doing about half the number of room renovations that we did in Chicago in 2017 versus 2016, so there should be a little less disruption in that number.

That's helpful. I don't know if you can, but I'm going to ask it anyway. If we just like ballpark assume that RevPAR across all your markets and your comp sets was flat next year, how much do you think those tailwinds would lead you to outperform?

Ryan, I think we're just in the -- we're just starting the budgeting process. I would hate to throw a number out there that we haven't really put a lot of thought behind.

Fair enough. I figured I'd ask. Thanks.

Thomas Allen, Morgan Stanley.

Hey, good morning. Can you just talk a little bit more about Rob leaving and the plans for the asset management team going forward? Thanks.

Sure. Good morning, Thomas. I'd be happy to address that.

First I'd say that operations are going really well with DiamondRock. The same Vice Presidents that were handling the day-to-day asset management remain as committed as ever to producing great results.

Additionally, the senior leadership team here, particularly Sean and Troy, have really stepped up and embraced the transition. They're doing a great job leading the asset management function on an interim basis.

As for the search, just to give you an update, we've previously announced we engaged Ferguson, which is a well-known recruiting firm in our field, to conduct a nationwide search. While we're still completing the process, I can say that the caliber of the candidates has surpassed my expectations, and we're very confident that we'll find an excellent professional to take that seat.

But we don't have anything specific to report today. But I do hope to give you an update in the relatively near future.

Thanks. Then just following up on that, you guys have done a very good job maintaining margins this year. As you pointed out, you haven't -- you've maintained guidance throughout the year despite the fact that you've taken down RevPAR guidance by 3.4%, on my calculation, at the midpoint. How are you thinking about that for next year? Thanks.

Thomas, I would say on margins, we've exceeded our expectations from an ability to control costs. And there's -- next year could play out a number of different ways.

I think, obviously, if the market turns and demand accelerates and corporate profits accelerate, as some people had forecasted, obviously that's the best scenario, because we'll have revenues to handle any increase in costs.

The general rule of thumb is that total expenses grow 2% to 3%, and you need 2% to 3% RevPAR growth to maintain margins. If we're in a -- if we do have, which I don't think is probably the case, is significant downturn, obviously we have a lot of tools that we learned from the last recession that we could utilize to manage margins in a way that we are not yet implementing.

The more difficult environment would be if we're just very muted growth. It's a little harder to control expenses in that environment. Sean, do you have anything to add?

No, Mark; I think you hit it. I think the key takeaway on the cost is that they've outperformed our expectations this year. We've maintained costs flat on a year-to-date basis.

Food and beverage has been a big driver of our cost-out performance this year, where our costs were down about 2.5% in F&B. We would like that to continue into 2017; but that's certainly not our base case.

Helpful, thank you.

David Loeb, Baird.

Good morning, gentlemen. You've talked about capital allocation from a couple of different perspectives. You got a question about buybacks and a question about dispositions.

So let me turn that around and ask: What would get you to look seriously at acquisitions?

Yes, David, obviously, our cost of capital is relatively expensive right now. But I'll give you an example of a deal that would still make sense.

If you look at the Westin Fort Lauderdale beachfront resort, our preliminary budget for next year has that at almost a 12% unlevered yield on our investment. That is still -- those kind of deals would still be attractive in this environment; but they are very, very hard to find.

Okay. Further on the buyback, how do you decide at what price you are willing to execute that buyback?

That is the magic question. We have a lot of debate in the Board room. Every time we get together with the Board members we have an updated forecast both for where we think the fundamentals are going and probability scenarios, as well as where we think the markets are going. But I can tell you it's a very fluid conversation.

Everyone believes -- there's consensus that it's a tremendous value at the current levels that we've been purchasing the stock. As Sean mentioned, the 9.6 times; it's actually almost a 9.5% NOI yield at the levels we've repurchased the stock. So everyone knows it's a value.

We're just trying to make sure that we're thoughtful with our liquidity as we reinvest it here. But everyone is confident in this value. But it is a fluid conversation, and I think the outlook will change quarter to quarter.

Okay. On a different topic -- again for you, Mark -- you talked at the very beginning of the prepared remarks about the strength at a number of the resorts. What's driving that? Is it leisure? Is it group?

And is that coming from your particular outreach sales efforts? Or is it just really good demand for those locations?

The answer is yes. I would say across the resorts, the resorts generally outperformed. One of the reasons we bought resorts is that we really like the trend line.

Obviously, leisure is more tied to consumer sentiment, which has remained elevated. We like the trend of people who embrace experiential travel. We think that that generally will outperform the market averages over the next five or even 10 years, because we think that's a very powerful trend.

But in the quarter particularly there was very good group in Frenchman's Reef which helped that particular hotel. So we are seeing good group at the resorts as well as decent leisure transient.

David, one quick look at that. The Vail Marriott was also a significant outperformer for the quarter, which really was across all segments. That hotel really benefited this quarter; one of its closest competitors was shut, which was right across the street, for the entire third quarter. So we picked up a tremendous amount of market share this quarter at Vail.

So Vail and Frenchman's were the two resorts within our portfolio that really outperformed and ultimately drove our resort results.

Okay, great. That is absolutely it for me. Thank you.

Shaun Kelley, Bank of America.

Hey, good morning, guys. Thanks for taking my question. Just wanted to revisit the margin commentary quickly.

Marriott I think on their call yesterday gave a little bit of view on house profit margins across their portfolio, and made a somewhat cryptic comment about possibly having pulled forward some expense controls at some of their hotels.

So my question for you guys is obviously you have a decent amount of exposure to Marriott, now the combined company.

Is there anything you know of that was either pulled forward in the expense run rate or anything that might be a headwind as we moved into next year? Or is it more like we've just done a great job this year and we'll just have to restart and find new things next year?

No, Shaun, there's nothing I can think of in particular that was a pull-forward. Obviously, everyone has been very conscientious about expense growth this year, and I would commend Marriott that they've done a tremendous job at our properties at controlling costs.

But frankly we haven't done the things that we did in the 2009 downturn which are not repeatable. Right now we're doing things like labor management systems, controlling F&B cost, redoing the menus, still continue the energy programs, rebidding parking contracts. There were a lot of small projects that all added up to help us contain cost.

But I can't think of anything across the portfolio where we pulled forward and wouldn't be able to continue to make headway in 2017.

Okay, great; appreciate that. Then the follow-up question, similar vein, was a few -- a number of years ago at this point, you guys were very clear on some of the integration challenges that happened around Marriott and their Sales Force One program. We're facing a fairly new but significant integration challenge now, and you guys are seeing both sides.

So my question is, any views so far on just either the communication across the Marriott-Starwood merger and specifically any view on the group salesforce and how that integration may be pacing?

I would say it's early days on the merger. They have done a great job in communicating with owners. Particularly they've done a great job with DiamondRock; we are in regular dialog.

We are happy with what we've seen so far about the approach to consolidating the sales and the approach they are going to take in 2017. But, frankly, there's a lot of details that still need to be worked out.

I'm certain there will be some disruption as they put things together. But net-net as we look forward over the next couple years we think it's going to be a real powerful driver for our portfolio.

Great. Thank you very much.

Bill Crow, Raymond James.

Hey, good morning, guys. Mark, when you were discussing some of the tailwinds for next year, you didn't mention anything about taking 1,400 rooms out of the market up in New York in the Lex. Is it possible that maybe contrary to popular thinking that closing the Waldorf might have a negative overall impact on hotels in that market, given the loss of meeting space -- and maybe even a more permanent impairment?

It's an interesting question. We've spent time with our operators and we've spent time looking through the segmentation and where the demand is coming. We don't think so.

Based on the analysis we've done, the Waldorf was in some ways taking blocks of rooms unassociated with its meeting space that were holding down the Lexington Hotel corridor rates; so we do think it's a net benefit. I would remind people that the Barclay, which is a relatively big hotel, about 500 rooms, came back on; so that's somewhat an offset as the Waldorf leaves the market.

We think it's net-net beneficial. We don't think that it's going to lead to enormous amounts of RevPAR change on the East Side. But we do think it is incrementally better having the Waldorf out of the system than having it there, even with its meeting space.

So you take all those large meetings and you shift them over to the Hilton, or to the Marquis, or to a different city, right? How much overflow did you get at the Lex from Waldorf, bigger meetings?

Yes, based on the assets we've seen -- we're not in the Hilton system; we're in the Marriott system there, so we're a different brand. There was obviously some compression, but we think we lost more on the low-rated transient that were -- at least on the East Side.

Remember, the East Side is sitting there with millions and millions of square feet of office. And that's really our primary bread-and-butter driving the Tuesday, Wednesday, Thursday business at that hotel. So we think that we can make up for the rates there for anything that we might've lost from a little bit of compression at the Waldorf.

Okay. That was it for me. Thanks.

Anthony Powell, Barclays.

Hi, good morning. Just one obligatory question on some policy stuff. I think over the past few years there's been a lot of focus on streamlining visa applications and processes from Brazil and China and other countries. Do you foresee any change in that type of trajectory with the new administration?

Boy, that's a tough question. Obviously, particularly China, the more we can get the inbound travel the better it is, particularly for our New York City hotels. So from a demand perspective, we obviously want that visa process to be as short and efficient as possible for Chinese inbound, particularly over the next decade.

I don't know what the changes are going to be, and I don't know how it's going to impact us. Obviously, a more liberal policy is better for us; but it's hard to know.

Currency changes may be more impactful, frankly, than the visa policy. So that's the one we've been most focused on.

Any hotel exposed to travel from Mexico on the inbound side?

No. Based on when we look at our top 10 international inbound countries, Mexico frankly isn't on there. The only hotel where we have a reasonable amount of inbound from Mexico is, frankly, our Vail resort in prime season. But those families have been coming to Vail for 20-some years, and I anticipate that they will continue that trend over the next couple years.

All right, got it. Thanks.

Thank you. I'm showing no additional audio questions at this time. I'd like to turn the conference back over to management for any closing remarks.

Thank you, operator. To everyone on the call, we appreciate your continued interest in DiamondRock and we look forward to updating you with our full-year results early next year.

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