Diamondrock Hospitality Co (DRH) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DiamondRock Hospitality Company Q4 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Sean Kensil. Please go ahead.

Thank you, Charlotte. Good morning, everyone, and welcome to DiamondRock's fourth-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, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; Tom Healy, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer.

This morning, Mark will provide a brief overview of our fourth-quarter results as well as discuss the Company's outlook for 2017. Sean will then provide greater detail on our fourth-quarter performance and discuss our 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.

Good morning, everyone, and thank you for joining us today. DiamondRock had another successful year in 2016, as we navigated an environment of decelerating growth in lodging demand and tightened volatility in the capital markets. The stock generated a total return of 25.8%. Looking forward, we believe that the Company is well-positioned and we will provide our detailed 2017 outlook later on the call.

We'll start this morning by taking a look at the current operating environment. Macro fundamentals have been mixed, but the overall assessment is for continued growth, albeit at a modest rate in 2017. The most important demand corollary, GDP growth, in 2016 was the slowest in five years at 1.6%; but importantly, it was stronger in the second half with 3.5% growth in the third quarter and 1.9% growth in the fourth quarter.

More encouraging, unemployment rates remain at historic lows, employments are up, consumer spending is rising, and consumer confidence recently hit a 15-year high. Additionally, while not built into our guidance, postelection economic optimism is benefiting from proposed stimulative policy action on tax reform, deregulation and infrastructure spending.

We are also watchful of other items that may not favor travel, such as a stronger dollar and restrictive visa policies. It is worth noting that supply ticked up in 2016 to 1.6% and will be around 2% this year. But compared to -- excuse me -- but the four-year compounded average supply growth is only around 1%, and still looks good compared to the long-term average of 2%. Overall, despite some uncertainty, the current picture for 2017 lodging fundamentals points to modest growth.

Turning to the fourth quarter, lodging fundamentals were positive with industry RevPAR up 3.2%, as demand outpaced supply by 60 basis points. The top 25 markets continued to lag the broader US with 1.6% growth, and were weighed down by negative RevPAR in four markets: Houston, Miami, Boston and San Francisco.

Shifting to DiamondRock. Despite some anticipated renovation disruption, fourth-quarter portfolio RevPAR growth and hotel adjusted EBITDA margin expansion were modestly above internal expectations. Portfolio RevPAR was essentially flat, contracting 30 basis points, and was negatively impacted by approximately 90 basis points by the renovation disruption at the Worthington Renaissance.

In addition, disruption from Hurricane Matthew negatively impacted our Charleston and Fort Lauderdale hotels and reduced portfolio RevPAR growth by another 50 basis points.

Despite tepid topline growth, our asset management team once again shined in controlling operating expenses. Tight cost controls led to fourth-quarter profit flow-through of over 49% and held hotel adjusted EBITDA margin contraction to only 16 basis points. Remarkably, total hotel operating expenses actually declined 1.6% during the fourth quarter.

For the full year, RevPAR was again essentially flat, down 2/10 of 1%, which is in line with the guidance we provided on our last earnings call. Also, we are obviously pleased that our final full-year 2016 adjusted EBITDA and FFO results came well within our original guidance provided at the beginning of the year. This is a testament to our asset management team's ability to control costs in a more challenging than anticipated demand environment.

Without topline growth, we take pride in the fact that we were able to increase full-year hotel adjusted EBITDA margins by 15 basis points and achieve profit flow-through of approximately 125%.

Moreover, the recent hiring of Tom Healy, a proven industry veteran, to lead DiamondRock's asset management initiatives should enable us to find even more new asset management opportunities going forward and to build on the significant progress we have made in our operations in recent years.

Tom has over 25 years of relevant experience and a long track record of repositioning hotels, driving revenues and implementing cost-savings initiatives. We look forward to introducing Tom to analysts and investors over the coming year.

Turning now to the important topic of capital allocation. We remain focused on being effective capital allocators. In 2016, our disposition efforts yielded $275 million in gross proceeds. These sales accomplished a few strategic goals. They improved our quality as two of the hotels were among the bottom of the portfolio in terms of quality as measured by average RevPAR, and the third hotel sale helped to reduce and rightsize our New York City allocation.

Additionally, the three sales were pivotal in DiamondRock's effort to build more than $450 million of investment capacity to be opportunistic headed into 2017.

I should mention that we are currently looking at several acquisition targets that could enhance our portfolio and effectively utilize some of that capacity. We will remain disciplined. Ideally, we would like to add more resort and West Coast exposure and find unique opportunities to create value like we did with the Westin Fort Lauderdale acquisition. We are also particularly focused on off-market deals and are evaluating a few of those right now.

Continuing on the capital allocation front. Last year we repurchased approximately $6.5 million of our stock at a weighted average price of $8.92 per share, a greater than 20% discount to our year-end share price and an even larger discount to the portfolio's underlying net asset value. While we had expected to be in a position to repurchase more shares in 2016, the postelection rally made executing our programs more challenging.

In 2017, we are prepared to continue to be opportunistic in buying back shares, should the stock pull back.

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

Thanks, Mark. Before discussing our fourth-quarter results, please note that 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 hotels sold earlier this year for all periods presented.

Our hotels performed slightly ahead of expectations in the fourth quarter. RevPAR was uneven during the quarter with 3.2% contraction in October, 3.7% growth in November, and 0.6% contraction in December.

As expected, October was impacted by the shift in the timing of the Jewish holiday.

Fourth-quarter RevPAR declined 0.3% due to a 1.1 percentage point decrease in occupancy, partially offset by a 1% increase in average rate.

Our asset management initiative drove a solid 49% profit flow-through in the quarter. Our asset managers worked with our operators to implement tight cost controls that led to a remarkable 1.6% reduction in total hotel expenses, and held hotel adjusted EBITDA margin contraction to only 16 basis points.

For the full year, the Company reported a comparable RevPAR decline of 0.2%, which was the result of a 0.6% increase in the average rate offset by a 0.6 percentage point decline in occupancy. Despite the RevPAR contraction, margins continued to outperform expectations with full-year hotel adjusted EBITDA margin expanding 15 basis points. The margin expansion was made possible by our asset management initiative, resulting in a slight reduction of 2016 operating costs.

For January 2017, our RevPAR grew approximately 1%, which was in line with expectations. Our first-quarter results will be positively impacted by the Chicago Marriott which will benefit from last year's renovation and the Washington, DC Westin, which will benefit from the presidential inauguration and the women's march.

These tailwinds will be partially offset by the first quarter renovation of the Sonoma Renaissance, Charleston Renaissance, and The Gwen Chicago. All three of these renovations are expected to be completed early in the second quarter.

Let me spend a couple of minutes discussing the results and trends in our three significant segments. Our business transient segment exceeded our expectations during the fourth quarter. Business transient revenues increased 2.2%, which was primarily driven by increased demand. The growth was led by the Chicago Marriott which benefited from compression from the World Series, and the Boston Westin which experienced increased transient production from the relocation of General Electric to its new headquarters located close to our hotel.

As expected, our group segment was challenged this quarter. Fourth-quarter group revenue declined 4.5% as a result of a 5.4% decline in demand, partially offset by a 0.9% increase in average rate. The Boston Westin group revenues dropped more than 15% as the hotel faced difficult comps due to several non-repeat group events in 2015, including the Winter Classic hockey game.

Partially offsetting this was the Chicago Marriott with 13% growth in group revenue. The hotel benefited from a large major league baseball group that generated over $1 million of business during the quarter, as well as a strong convention calendar.

Looking forward, our overall 2017 group pace is encouraging, with more than 70% of the expected group business already booked. Our 2017 group pace is currently up 2.8% as a result of a combination of increased demand and rates. During the fourth quarter, we booked over $20 million in 2017 group business.

Additionally, we continue to be encouraged by the 2017 group pace at our two largest group hotels, the Boston Westin and the Chicago Marriott, with pace up 4.3% and 8.8%, respectively. However, we have built in softer expectations for group pick-up into our 2017 guidance based on recent booking trends.

We expect group revenues to be roughly flat during the first half of 2017, improving to low to mid single-digit growth during the back half of the year. We expect the third quarter to be the strongest group market -- group quarter of 2017.

Finally, our fourth-quarter leisure contract and other revenue increased 0.8%. The improvement was driven by increased contract revenues which were largely attributable to the defensive revenue management strategies we initiated early in the fourth quarter.

I will now address a few of our key markets. In Chicago, both of our hotels performed well, with combined fourth-quarter RevPAR growth of 6.1% which outpaced the market growth of 3.3%. Importantly, our hotels grew margins by 475 basis points.

The Gwen is gaining traction post brand conversion. During the fourth quarter, The Gwen booked over 90% more in 2017 group business, driving its 2017 group pace to up over 19%. The Chicago Marriott successfully took advantage of a stronger convention calendar and the Cubs historic World Series run in October.

In New York City, our hotels collectively grew fourth-quarter RevPAR by 1.5%, which outpaced the market growth of 0.9%. The New York market, while still facing significant supply headwinds, exceeded expectations in November and December. So far in 2017, New York City RevPAR has been positive, which we see as a constructive start to the year.

Although it is too early to tell, we are closely monitoring New York City fundamentals to assess if the market is starting to stabilize.

In Washington, DC, our Westin City Center hotel generated a solid RevPAR growth of 3.8% and 6.3% for the fourth-quarter and full-year 2016, respectively. The hotel had a very strong group year with total group revenues up 56%.

Looking ahead to 2017, the hotel's group pace is up over 30%, with a strong DC convention calendar. 2017 started off well with RevPAR growth of 68% at the Westin. We expect the Washington, DC market to be a top performer for us this year.

Before discussing margins, I am pleased to report that the renovation the Worthington Renaissance is now complete. The renovation created short-term disruption in 2016 that held back the Company's overall fourth-quarter RevPAR growth and margin expansion by approximately 90 and 14 basis points, respectively. However, this transformational renovation has positioned the Worthington to outperform in 2017 and beyond.

We are pleased with the hotel's January results, as RevPAR increased 12.5%. We are projecting double-digit RevPAR growth at the Worthington for 2017.

A bright spot for the fourth quarter was the success of our asset management and manager initiatives that reduced fourth-quarter operating expenses. The asset management team was able to increase hotel profitability despite a 1% decline in fourth-quarter revenues. This success allowed us to hold the fourth-quarter hotel adjusted EBITDA margin contraction to only 16 basis points.

For the full year, hotel operating costs declined slightly and our portfolio achieved hotel adjusted EBITDA margin expansion, which is a testament to the outstanding work by both our asset management team and operators.

Further, our 2016 food and beverage margin growth was exceptional, where we achieved profit margin expansion of 185 basis points on a modest 0.2% increase in revenues. For the fourth quarter, F&B margins were up 51 basis points on a revenue decline. We expect F&B to continue to be a bright spot for our portfolio.

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. We completed several transactions during 2016 to further strengthen our balance sheet, reduce borrowing costs, extend and stagger our debt maturity schedule, and provide investment capacity.

In addition, we used our balance sheet capacity to repurchase approximately $6.5 million of shares at an average price of $8.92 per share, which represents more than a 20% discount to the current stock price. We remain committed to opportunistically take advantage of market dislocation with regard to our stock price.

In 2017, we have one debt maturity of a $170 million property specific loan. While we have ample cash on hand and $300 million of line capacity, our current preference is to refinance with a new, unsecured term loan later this year.

Current market rates are approximately 80 basis points lower than the current loan. If we refinance the loan with a term loan, the annual interest savings is approximately $1.4 million.

In summary, our balance sheet is in great shape. The weighted average interest rate on our debt is only 3.8%. Our average mortgage maturity is nearly 6 years. 17 of our 26 hotels are unencumbered by debt. Our 2017 net debt to EBITDA is approximately 2.9 times, and we currently maintain $450 million of balance sheet capacity, including an undrawn line of credit and over $240 million of corporate cash.

I will now turn the call back over to Mark. Mark?

Thanks, Sean. Now I'll transition the call over to a more detailed overview of our 2017 outlook. As previously noted, lodging demand came in under original expectations for the industry during 2016, on more modest GDP growth and some likely hesitancy by corporate America pre-election.

Post-election, the outlook for US lodging fundamentals improved as earlier concerns related to economic and political uncertainty were replaced with optimism from the prospect of lower taxes, reduced government regulation and infrastructure spending. These measures, if enacted, would likely lead to better GDP growth in late 2017 and for 2018. Despite this optimism, we believe that it is premature to factor this upside scenario into our 2017 outlook as we have not seen any material change in demand over the past few months. We are hearing that some of our corporate customers are moving forward on projects previously put on hold, but they're not fundamentally changing travel practices just yet.

If demand actually benefits from the enactment of positive policy changes, that could lead to better results than reflected in our current guidance. Supply expectations are built into our guidance and will continue to have an impact on overall RevPAR growth numbers in the US. Many of the most desirable markets in the US have seen new development starts.

The top 25 markets, in particular, will see supply impact its growth and consequently, we expect the top 25 markets to continue to trail the RevPAR growth of the broader US industry by 100 to 150 basis points in 2017. Since our portfolio has investments in many of these top markets, this will have some impact on our portfolio's performance. That being said, we feel that our portfolio is well-positioned compared to many of our peers with our relatively stronger geographic footprint for 2017.

In the top 25, there are four markets that will likely underperform, Houston, Miami, New York and San Francisco. Fortunately, we only have 13% of our portfolio collectively allocated to those markets. While we do own some hotels in New York, we less than 1% exposure to San Francisco, which is experiencing major disruptions due to the renovation of The Moscone Center, as well as no exposure to Houston or Miami.

Our 2017 results should also benefit from our group pace which is up in the low single digits for 2017. The second half of the year is particularly strong up mid-single digits in group pace. The solid group pace is bolstered by strong convention calendars in Boston, Washington, DC, and Chicago. Based on our full-year 2017 RevPAR growth expectations for the portfolio of minus 1% to plus 1%, our EBITDA and FFO guidance is as follows.

Full-year adjusted corporate EBITDA is expected to range from $231 million to $244 million and full-year adjusted FFO per share is expected to range from $0.92 $0.97. In considering our guidance, it should be noted that the three hotels we sold last year generated approximately $26 million of EBITDA on a trailing 12 month basis and we have yet to redeploy that capacity.

Additionally, our guidance assumes that there is a similar amount of renovation disruption as last year. However, most of the 2017 disruption is frontloaded in the first half of the year. It is worth spending a minute on our hotel capital investment program. We are making significant investments into our hotels to position them to outperform in the coming years.

In total, we plan to invest between $110 million and $120 million into our hotels in 2017. This capital falls into three buckets, lifecycle renovations, system enhancements, and ROI projects and repositionings. We're very excited about the prospects from our repositionings and renovations, which include The Gwen Luxury Collection's final phase of its rebranding renovation, which will be completed in the second quarter of 2017. The renovation is on schedule and on budget. There will be some disruption in the first two quarters but the hotel should outperform throughout the remainder of the year. The Gwen continues to gain traction with 2017 group booking pace up nearly 20%. And perhaps even more encouraging, 2018 group booking pace up over 50%.

For the full year, despite renovation disruption, we expect RevPAR to increase in the mid-single digits at The Gwen as the hotel continues to gain fans. The Chicago Marriott Downtown is underway with the third of the four phases of its transformational renovation. This phase will be completed in the second quarter after which 940 of the guest rooms will be new and modern. Meeting planners, in particular, are reacting very positively to the improved room product, new state-of-the-art fitness facility, and F&B enhancements. Not only our meeting planner saying that they like the renovation, they are putting their clients in our hotel. Group paces up 8.8% for 2017 and up over 30% for 2018 at the Chicago Marriott.

The Worthington Renaissance completed the renovation of its 504 guestrooms in January. The newly renovated product positions the hotel to be a clear leader in the market. As a consequence, we expect the Worthington to deliver double-digit RevPAR gains in 2017 from a combination of stronger demand and easy renovation comparisons.

The Sonoma Renaissance and Charleston historic district Renaissance are currently under renovations. These hotels have been great performing investments for us and are generating about 15% and 10% unlevered NOI yields, respectively. The two hotels are located in markets we believe will continue to outperform in coming years. The renovations will keep the hotels fresh and relevant.

While not starting in 2017, we are evaluating a few other projects that we think could lead to outsized returns in the future. At the Vail Marriott, which is been a homerun for us, and last year generated a nearly 17% unlevered NOI yield, there remains tremendous untapped potential. There exists $180 rate gap between our hotel and the luxury comp sets. We believe that this rate potential may present a compelling opportunity to reposition the resort as a location of our hotel, adjacent to the Ritz-Carlton has really transformed into a luxury location in recent years. This transformation is due in large part to the massive investment in the area by Vail resorts. This year DiamondRock will finalize its analysis and planning to renovate and reposition our Vail hotel; stay tuned on this one.

Another opportunity within the portfolio is the Sheraton Key West. This 2015 acquisition has the beachfront location and large room layout that lends itself to be converted into a great independent lifestyle resort with much greater profitability. Like Vail, we intend to complete our analysis and planning later this year. Note that both of these projects would likely start in 2018 and be completed during their respective slow seasons.

As we look forward, we continue to position DiamondRock for success with a high-quality portfolio, best-in-class asset management platform and a robust balance sheet to foster growth. While the Company will need to remain nimble in what is likely to be a volatile 2017, we will stay focused on the short-term priorities to get the most from the owned portfolio, while making sound capital allocation decisions regarding growth through acquisitions or opportunistic stock buybacks.

Let me wrap up the prepared remarks by saying that the entire DiamondRock team remains dedicated to working hard for our shareholders and we appreciate the trust you have placed in us. With that, we would now be happy to answer any questions you may have.

(Operator Instructions) Smedes Rose, Citi.

Hi, good morning. I wanted to just ask you a little bit more about the cadence of your group business where you said you were looking for it to be kind of flat over the first half of 2017 and picking up in the back half. Does that really just reflect the convention calendars in the markets where you are more exposed to group business? Or is that something -- is that more reflecting some of the renovation disruption that you are looking for in the first half? Or -- maybe just a little more color around that.

Yes, Smedes; this is Mark. I think it's a combination of all that. Obviously, the convention calendars are better in Chicago and Washington, DC, where we have two significant hotels. Boston had some tough comparisons with the fourth quarter so it's a little better in the back half given that tough comparison we had this year in 2016. So it's a combination. Obviously, we are benefiting from stronger convention calendars in our markets.

Okay, thanks. And then, Sean, you mentioned -- sorry, I just tuned out for a second, but you mentioned an uptick in contract business that you guys signed during the quarter. Is that correct? Would you talk about that a little more?

Sure, as part of our defensive revenue management strategies that we put in place at the beginning of fourth quarter, we increased contract business at a couple of our hotels. The largest impact was at The Lexington as well as The Gwen where we signed pretty significant Aer Lingus contracts at both of those hotels, which had a strong impact on our contract business in the fourth quarter.

So that weigh on results at those properties over the course of 2017 or is that shorter-term business, or --?

It should not; we expect that to continue within the hotel. The feedback we've gotten from both of those crews have been very positive on both hotels.

All right, thank you.

Rich Hightower, Evercore.

Hey, morning, guys. I want to dig into the RevPAR guidance range a little bit here. So it sounds like with the range of negative 1 to plus 1, I think you guys made it pretty clear you are not baking in any postelection optimism into those figures. Would you say, then, that the range currently reflects the pre-election pessimism or is there any sort of nod nod toward the better macro environment and 2017? It just doesn't -- it sounds like you guys are being very conservative despite the fact that you might believe that things will get better; you're not seeing in the business yet. I'm just trying to dig into that a little bit to figure it out.

Sure, Rich; this is Mark. So we based our guidance on the trends that we were seeing in the current trends, things -- people don't change their travel habits overnight but we're not seeing increased -- right, January was up a little bit, but we're not seeing fundamental change in travel behavior. So we don't think it's appropriate to build that into guidance now. We're trying to explain to investors that our guidance we think will be consistent with what the top 25 will do in 2017 based on our expectations. We did say if we -- the positive policy is enacted then it should lead to better results than what's in our current guidance.

Okay. And then I think you guys had made reference also in the recent past to -- when you talk about potential stabilization in New York, part of that is the reduction in Airbnb inventory. Is any of that factored into the full year guidance as well?

It's a tricky question. So I think we saw better trends in November, December and frankly in January in New York than we had previously anticipated. So we are seeing some encouraging signs. Whether you can directly attribute that to changes to the policies against illegal hotels, it's hard to draw that direct correlation. But I think New York as shown some green shoots lately and we're encouraged by that.

Okay. Thanks, Mark.

Anthony Powell, Barclays.

Hi, good morning, guys. It's a question on, I guess, leisure travel. One of the large brands said that in the fourth quarter what they call their retail training was up 5%. It seems like your leisure was a bit below that. Could you comment on current leisure trends and if your results are impacted by the markets you're in?

Sure, this is Mark. So I think -- look, stepping back, we think leisure is strong and a good trend that will continue through 2017. Obviously, it is going to correlate with consumer sentiment which is very high and consumer spending, which is also elevated right now. So we're encouraged by those trends. I wouldn't extrapolate too much from what our small portfolio is doing in any one quarter. Sometimes Q4 is not necessarily our strongest leisure quarter, but we are encouraged by leisure overall. We do think leisure will hold up in 2017.

Yes, and Anthony, to add to that -- this is Sean -- during our fourth quarter, the impact of Hurricane Matthew, which impacted two of our leisure markets in Charleston and Fort Lauderdale, did have an impact on our overall leisure performance for the quarter, which would cause a deviation from national trends.

Got it. Thanks. And just on margins, obviously they were a big part of the 2016 story. Could you describe in 2017 where you're seeing incremental cost pressure on labor, property taxes and if you've already gotten a lot of the low hanging fruit out of the -- in terms of margin expansion and so making it harder to increase margins in 2017.

Sure, within our 2017 guidance, the math would indicate at midpoint margin contraction of approximately 100 basis points, and -- which compares, obviously, to positive margins for 2016. Within our 2017, the assumptions that are built into that guidance is a labor and benefits to be up between 2.5% and 3% across our portfolio, as well as we have some property tax headwinds within our portfolio.

We have about $5 million of incremental year-over-year property tax growth which compares to roughly flat in 2016. The real big drivers of that change, $3.5 million of the $5 million increase relates to wins in 2016 which we have reversing in 2017. The balance is really Boston and New York increases and so when you look at what we've guided to for property taxes, we assume that we don't win any property tax appeals. And obviously, we're fighting a lot of property taxes, and hopefully we will, but that's not baked into guidance. And that $5 million alone is between 50 and 60 basis points on our total margins for the portfolio. And so that's the material color within what we expect to go on within our portfolio in 2017.

All right. Thanks a lot.

Michael Bellisario, Baird.

Good morning, guys. Just wanted to circle back on your comments regarding acquisitions, first just kind of a higher level question. Just what gives you the confidence that 2017 is an appropriate time in the cycle to be deploying capital toward additional acquisitions?

Yes, Michael; this is Mark. That's a great question. I think we're trying to be very selective in the type of acquisitions we're looking at. It is a little later in the cycle so we're underwriting very modest growth. If we can get things to pencil and we find some exciting opportunities, the deal we referenced as kind of a benchmark deal was the Westin Fort Lauderdale deal where we were able to buy it and take $5 million of cost out within the first year.

Those kind of opportunities and other opportunities where we find unique value creation, I think regardless of where we are in the cycle, assuming that our stock repurchases isn't a much better option we should be looking at those opportunities. We're obviously sitting on a lot of investment capacity that we built last year through asset sales, so puts us in a position to be active if we can find the right deals.

Got it. And then kind of building off your comments there, how do you reconcile your current portfolio expectations? I know it's a little bit more skewed toward top 25 markets, flat RevPAR growth, contracting margins. How are you underwriting deals and how are you getting to your return hurdles or even exceeding those return hurdles in today's slow growth environment? I guess what levers do you have to pull once you acquire a property to get to those 9%, 10%, 11% unlevered returns that you might be targeting?

Sure, that's a great question. So if you looked at our pipeline today, there are several off-market deals, so one piece is buying the right initially. We're looking for deals where there is the ability to substantially move operations so where we think that the cost or revenue management has a lot of potential. Those are the kind of opportunities -- it would be very difficult where our cost of capital is to buy a good hotel in a good market without some kind of special sauce to create incremental value at that property.

That's helpful. Thanks.

Austin Wurschmidt, KeyBanc Capital Markets.

Yes, hi. Good morning. Sticking along the lines of acquisitions, was just curious how much of the dry powder you guys would be willing to deploy today and if you would consider selling any additional assets in order to maintain your existing dry powder? I think you said $450 million was the number.

Sure, Austin; this is Mark. Listen, as we said in the prepared remarks, we think that 2017 has the potential to be a volatile year. We are generally targeting assets -- acquisitions between $50 million and $100 million. So I think throughout the year if we find one or two deals we obviously won't use all of the $450 million, but I think we would take it one quarter at a time and continue to reevaluate the environment that we're in. So we're comfortable deploying several hundred million dollars of acquisitions if we find the right deals, but I think we're going to focus on smaller deals again in the $50 million to $100 million range. And we'll have the ability to continue to reassess every quarter on the right capital allocation strategy for 2017.

As far as your question on dispositions, we're really happy with the portfolio that we have today, our 26 hotels. So there's nothing obvious that we would want to sell in this environment. where everything, obviously, is for sale at any time for the right price, but we're not actively engaged in selling anything at the moment.

Thanks. That's very helpful. As far as New York City, you mentioned that you are starting to look into a potential stabilization in fundamentals and I'm just curious what is it you would look for first I guess as an indication that things perhaps have started to stabilize. And do you think there is any potential that fundamentals could accelerate at all into 2018?

So, Austin, I don't want to -- let me be clear on our comments. So we've seen a couple months that were a little better than expected in New York City. We are still budgeting and what's built-in our forecast is low single-digit RevPAR, negative RevPAR in New York City for 2017. So we're not building a bullish case into our guidance for New York City. What we would look for is increased demand, little bit of pricing power and, frankly, it's just going to be several months of continued growth within the city as it absorbs supply.

When you look out, it is getting more difficult to get construction financing. We do see supply tapering off after 2018, but we'll have to get through the supply increases this year and next year in New York City.

Thanks, Mark. And then last one for me, just on the Vail Marriott; been a strong contributor the last several quarters and I think you mentioned last quarter that there was a hotel that was shut down nearby which has benefited. So one, I was just curious is there an expectation that that reopens at some point in 2017 and when? And then what are you thinking about in terms of the timing of a potential renovation at the Vail Marriott?

Yes, I'll take -- so there is one competitive hotel in the marketplace that's been closed that we referenced on the last called The Cascades. We anticipate that hotel will be closed for the ski season this year, which is obviously the most profitable time of the year for us. We do expect it will reopen as a new product post ski season and we will have to compete with it going forward.

As far as anything on the --.

The time?

Yes.

Yes, as we said in the prepared remarks, we're evaluating it right now. We anticipate that we will put capital into it and reposition the hotel starting in 2018.

Great.

The nice thing about Vail and renovations is we have two very slow seasons every year to get renovation done with very little impact on profits.

Great. Appreciate the details, Mark.

Bill Crow, Raymond James.

Hey, good morning, guys. Two quick questions for you. First of all, you talked about your ability to maintain wage and benefit growth at 2.5% or 3%. Is there enough labor out there to allow you to really get away with that?

Sure, Bill; this is Sean. We feel comfortable within our market that that's a very achievable result. We did better than that, frankly, during 2016 and so we're assuming some wage pressure within our in 2017 budget, but we're very comfortable with those assumptions.

You haven't really experienced any labor shortages or inability to hire labor at this point? (multiple speakers)

Well, it's not so much an FTE issue as much as it is we're continuing to implement our asset management initiatives, labor-management studies, etc., which is getting more out of the folks that are on property today. And so staffing has not been an issue for us, it's just getting as much productivity as we can.

Bill, I would add to that, just on scarcity factor, our hotels, they are good jobs, right? We're talking about run by the best-in-class managers in the business, the Marriotts of the world. People want to work at these kind of hotels, so we have not had a problem getting people generally to want to work at our properties. We're not anticipating that in 2017.

Okay, great. It wasn't as much a DiamondRock question as just an industry question, and that was helpful. Any other bright spots from a supply perspective as you look across your markets? You mentioned New York, in 2017 and 2018, and then we're on the downhill side. Anything else that you can point to that says the end or the peak of supply deliveries is near?

That's kind of a loaded question. Look, there's been some supply -- obviously, Chicago had some supply; it's tapering down a little bit but still -- it's still swelling with some increased supply. I think the more anecdotal evidence is from the construction matters that we communicate with and they have certainly tightened their belts on their appetite to finance new hotel construction in many of the markets. Now that will play out more in 2018 and 2019 than it will in 2017, since those deals are already financed. But we're not calling the end. I think the likely peak is over the next 18, 24 months, and then it should subside based on the construction lending trends.

Yes, Bill; this is Sean. Our base case assumptions for supply are -- it's going to be above, particularly for top 25 markets, will be above historical averages for both 2017 and 2018 and for both of those years the supply is pretty well baked and pretty well understood at this point. To Mark's point, as you look further out, that's where some of those positive trends should be able to help supply.

Great. Thank you, guys. Appreciate it.

Lukas Hartwich, Green Street Advisors.

Thank you. Hey, good morning, guys. As you think about acquisitions, how is leverage factoring into that equation?

So, how is leverage factoring into that equation? So our underwriting -- the way we underwrite deals is through an unleveraged hurdle rate. So we're looking, obviously, at accretion dilution over the couple of years but then we are targeting a 5 and 10 year IRR model that is unlevered when we think about acquisitions. And then we think about leverage more on a corporate basis.

Currently, it's fairly easy to think about because we're sitting on so much excess capacity. We think we're under levered. We're obviously sitting on over $200 million of cash and $300 million undrawn on our revolver. So I would say we feel very liquid today. We feel like we're a little underlevered and it does not impact the deals that we do or don't do because we're really looking at those on an unlevered basis to decide whether they create value or not for our shareholders.

And, look, it's a quick -- sorry, this is Sean. A quick follow-up on the leverage. When we look at the investment capacity calculation that we have today, we look at that more on a long-term basis and what that does to our capital structure, not just for the short-term but for the long and medium-term. And so from a leverage perspective, where we get the $450 million of capacity is looking at what our leverage is at the next trough and we assume comparable downturns to what the last two downturns are, which we believe is relatively conservative.

And even at those conservative levels, our net debt to EBITDA maxes out at between 5 and 5.5 times and so with that level we're very comfortable deploying that $450 million because we believe that's a very reasonable amount of level at the trough, relative to historical averages and our business model.

So you're saying if you use the $450 million of capacity, even if we have another downturn like the last two, you'd get to 5.5 times debt to EBITDA at the trough. Is that what -- did I understand that?

Exactly.

Okay. And then in terms of Fort Lauderdale, with the airport shooting there in the first quarter, is that impacting the market at all?

No, the larger impact on Fort Lauderdale for the market was -- there were two things. The first is Hurricane Matthew impacting October was about $0.5 million at the hotel and then the other issue, the market itself was down about 10%. We actually gained a little bit of share during the fourth quarter, but it was primarily a market issue. What we saw was Miami actually did a little better in the fourth quarter as they -- as some of the demand was enticed by discounting in the Miami market and so we saw a little bit of occupancy slip during the fourth quarter.

Okay, and then in the first quarter, there has been no impact from the shooting there?

No, our folks on the ground are looking at employments. We haven't seen any material impact from the shooting.

Great. Thank you.

Chris Woronka, Deutsche Bank.

Hey, good morning, guys. Wanted to revisit capital allocation but from the share repurchase standpoint. I think that what you did buy in 2016 was about $9.00 and your stock is quite higher than that now and given your comments about going after acquisitions, is it -- do you feel like it's some kind of either or you have to buy hotels or you have to repurchase the stock, you just don't want to sit on a bunch of cash. And if that's true, at what point, where does stock become more attractive to you?

Chris, this is Mark. So, I'll take that. It's not an either or. I guess if you are buying hotels, you're probably not buying stock; if you are buying stock, you're probably not buying hotels depending where cost of capital is at any moment in time. I think what we're trying to convey to investors is we're prepared to do either depending on how the markets shake out over 2017.

As we mentioned, we're probably going to buy smaller assets so it's not like we're going to use up all our capacity on one or two deals. So we would have the ability, let's say we bought a deal in the first quarter and then things -- there is volatility in the second quarter, we would certainly be prepared to defend the stock, take advantage of any market dislocation. So our thought is to be very nimble in 2017 and prepared to execute on both ends of the capital allocation strategy.

Okay, that's helpful. And then just on the commentary about the fundamentals maybe not really inflicting yet on the demand side, maybe some green shoots in certain markets, but is there anything more broadly you look at in terms of booking windows lengthening or in the quarter pick up in the quarter for the quarter group business? Is any of that coming to fruition or is it still kind of tentative?

Yes, we're looking at a number of data points every day and every week, rate transient demand trends, we're looking at in the quarter for the quarter group, we're looking at leisure pick up. But what we said on the prepared remarks is that we're just sitting here just getting in 2017. We haven't seen things where things are fundamentally different than the trends we saw as the year ended in 2016.

Okay. Very good. Thanks, Mark.

Ryan Meliker, Canaccord Genuity.

Hey, good morning, guys. I just had a couple quick questions. First of all, I guess, on the RevPAR guide, I think you guys gave some really good detailed color, so thank you; I think that's helpful. But I wanted to know -- I was wondering if you might be able to dig into a little bit -- you talked about the top 25 markets with higher supply relative -- expected to underperform the broader industry and I think that makes sense. Can you give us some color? Where do you think you're going to stack up relative to the broader top 25 markets? I know you've got some tailwinds in Chicago from renovations and got convention calendars that look strong in DC and Boston. You don't have the exposure to Miami and San Francisco and Houston that you highlighted. Do you expect to generally outperform those top 25 markets or are there other things going on across your portfolio that are going to offset some of those advantages?

Sure, thanks, Ryan; it's Sean. I think, broadly speaking, when we guided this year, our guidance was based on -- as we articulated on the call -- assumptions of where we're seeing today. And so relative to the top 25 markets, we believe that 0 to 2 feels right for the overall industry and, as Mark mentioned, we think that it's 100 to 150 basis points below that for top 25 markets and so that would imply anywhere from 1.5 down to slightly positive.

When you look at our portfolio, you're correct, we feel good about Worthington. We feel strong about the Chicago market, we feel pretty good about Boston. We have some renovation tailwinds, particularly -- sorry, headwinds, particularly in the first half of the year at Sonoma and Charleston, at The Gwen; that should pick up in the back half of the year. But generally speaking, we think we should be in line to slightly above the national averages for top 25 markets. There are a handful of incremental headwinds within our portfolio. Denver is a market that we don't spend a lot of time talking about. We have about 400 rooms there. We think that Denver will likely underperform in 2017.

Key West as another market where we have two hotels. We expect our hotels to continue to absorb the supply. There was four hotels added to the Key West market early last year. We expect that to be about a two-year absorption period. We're in the second year of that, so we expect our Key West hotels to underperform national averages. But all things being equal, we still feel pretty good about our relative positioning as we've articulated to the Street.

Great, no, that's helpful and that's what I wanted to make sure I understood, nothing had changed on that front. And then the second question I had was just on margins. You guys again did a phenomenal job controlling costs in the fourth quarter. Tom, welcome; seems like you've got pretty big shoes to fill as margins have been so strong. Is there much juice left where you guys are able to really drive operating cost controls or is more of the margin growth and asset management opportunity going to come from things like ROI CapEx like what you discussed with Vail?

I think it's a combination of all three. I do still think there is some meat left on the bone from a labor standpoint, productivity, in certain assets, right? The bigger ones I think there is more moving parts and there is some opportunity. I do think there is opportunity on the food costs, beverage cost side, some of the things that we did at strategic we're looking to implement here, but that will prove to have some positive impact.

There is a host of different programs. All the different levers from all the operating costs to kind of take a look at. So I think there is opportunity there. Another piece of it certainly is on the pricing side, the revenue management side. You look at markets like New York that are running over 90%. There is clearly headwinds but the markets are still active and then it's looking at pricing, it's looking at rate indexes, it's looking at leadtime by room type by segment and identifying opportunities to ratchet up just a dollar here a dollar there.

When you look at the portfolio, we have 3.7 million room opportunities to sell a room; we sold 2.9 million units last year. If you get one dollar in rate across the portfolio, it represents a significant amount of profit to the -- obviously the shareholders. And then looking at all the different models and factors, if you're rate index is 105 penetration to this set then everything really else in your building should be at 105, so facility fees, looking at pricing of parking, across-the-board, you have to evaluate all the pricing -- price points and opportunity.

So I think we will look at RevPAR, we will look at costs. I think there is still opportunity to drive costs as you drive up more revenue. Your margins obviously -- cost margins go down as a percentage and then the master plan -- I think there is certainly opportunity to redeploy capital in an appropriate way. We will look at it in a very structured format. We will look at it by -- not in a macro sense but at the property level by pieces and we will break down all the different projects that we think add value.

It will all be tied to marketing and how to drive the messaging and how to add value and make the hotel more relevant and that will, hopefully, drive that dollar in rate that drives the profit. So I think it's not just one effect; it's a multitude of all of them together that make the difference. And from an historical standpoint, a lot of the things we did at strategic will start to implement here and I think my expectation is that it will have a positive impact.

All right. Well that was very detailed and helpful. Glad to hear that there is still some meat left on the bone. I'll yield the floor. Thanks, guys. Appreciate all the added insights.

Thomas Allen, Morgan Stanley.

Hey, just a quick numbers clarification. I think in the prepared remarks you said that the three assets that you sold did an annualized EBITDA of about $26 million. How should we think about comparing the actual results in 2016 versus the guidance? How much will actually be lost given the timing of the sales?

Sure, Tom; this is Sean. There is two bridge items, if you will, year-over-year from 2016 to 2017. The sold hotels is about $11.5 million of EBITDA that was -- is in our 2016 numbers that will obviously not repeat. And then there's about 1.5 man dollars of incremental G&A as a result of some forfeiture credits if you will through our G&A that were booked during 2016 as well as we didn't have a Chief Operating Officer for the last several months of 2016. Those are the two big items that impacts year-over-year comparability.

Okay, helpful. Thanks and then just a big picture question on RevPAR -- and I know you've been asked this like 100 different ways, but I feel like your business transient business outperformed in the fourth quarter and that was the first time in a very long time. I -- this is Thomas Allen not Ryan Meliker -- I mean I guess why not more optimism given that dynamic?

Yes, Tom, it's one of the drivers or the primary driver of our fourth quarter outperformance of business transient, it was all demand, and so the relationship between our BT performance and our group performance is real and so when you look at how the portfolio performed in the fourth quarter, our group was down 4.5%. And that was over 5% from a reduction of demand and so what we did is we were able to replace a lot of that demand with business transient rate. And so I wouldn't read too much into the outperformance. Obviously, we're happy that we did it. We were -- we benefited -- our two big group hotels had very strong business transient fourth quarters. At the Marriott we were up double digits; I think was 13% on the BT, and that was, frankly, because of the -- because of the World Series run.

And then at the Boston Westin we were up, once again, in the midteens on the business transient. a Lot of that is just a change in a local marketplace with GE moving right around the quarter from the hotel, and incremental demand picked up there. But it was all demand.

And then the January -- I thank you guys had RevPAR at 1%. Was that relatively in line with your expectation?

It was. It was right in line.

Great. Thank you.

Shaun Kelley, Bank of America.

Hi, guys. Good morning. Just two specific ones for me. First one is as we're going through the market color, just wanted to be very clear on Boston and Chicago. Do you guys just directionally, given what you see with demand and supply, do you expect Boston and Chicago to be outperformers relative to the top 25 or underperformers? Could you just specifically speak to those two?

Sure, Shaun; this is Mark. So for both Boston and Chicago, we kind of expect them to be market perform. Certainly the citywides in Chicago are a little better in 2017 than they were in 2016; they look really good for 2018. Boston, while the convention calendar is up, it's still a little bit more hind focused than it is BCEC, but we expect Boston to be a decent market in 2017.

Perfect. Thanks, Mark. And then my other question is sort of a high level one, but just, obviously you guys have a ton of exposure to sort of the combined Marriott Starwood complex, so as an owner could you just give us your high-level view on the merger integration and how that's going from an owner standpoint so far?

Sure, so I'd say the over arching comment is we think it's great in that the combined the system will be the largest -- essentially the largest system in the world. When you think about the power of the brand, it's the size of the reservation system and the power of the points system, the rewards system and no one will be able to match what the new Marriott can provide on those two very important fronts.

As far as what we're seeing so far, it's still in process. So it's still a matter of combining sales operations and clusters and that's all underway in 2017. We expect the more material changes to occur in 2018 when at our Starwood properties or formally Starwood properties we would expect some reduction on shared service costs which will help on the margin side. But the bigger impact will be when they put the two systems together into one reservation system and combine the point system at which time you'll really hopefully see the power of that larger system impact our hotels. And we would hope particularly benefit our former Starwood Hotels to be able to gain share.

Great. And just sent you called out the Vail Marriott and the Sheraton Key West, does -- I guess being part of the Marriott family give you brand flexibility within those brands? Is that the way you are thinking about those two properties or is that too much reach and you're really just like well, relative to market we can change the indexing of those not necessarily within the Marriott family?

Good question. So I think Marriott as an over arching position doesn't really want to move things laterally among brands without a compelling reason. If there is an ability to reposition and up brand a property, they probably receptive to that kind of proposal because it makes sense for them and makes sense for us. That's -- at Vail, that's a more likely scenario. At Sheraton Key West, we're really evaluating whether it makes sense to stay within the system or given the high occupancy levels in that market, whether we couldn't have a higher level of profitability without a brand and that's really the analysis we need to complete this year.

Perfect. Thank you very much, guys.

Thank you. At this time I'm not showing any further questions. I would like to turn the call back over to Mark Brugger for any closing remarks.

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

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