Diamondrock Hospitality Co (DRH) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2017 DiamondRock Hospitality Company Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I'd now like to turn the call over to Sean Kensil.

Thank you, Michelle. Good morning, everyone, and welcome to DiamondRock First Quarter 2017 Earnings Call and Webcast. Before we begin, I'd like to remind participants that many of our comments today are considered forward-looking statements under Federal Securities Law and may not be historical facts. They may not be updated in the future. These statements are subject to risks and uncertainties as described in the company's SEC filings. In addition, as management discusses certain non-GAAP financial 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 first quarter results as well as discuss the company's outlook for the balance of the year. Sean will then provide greater detail on our first 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 for DiamondRock's First Quarter 2017 Earnings Call. Before beginning our discussion on the quarter, let me provide a brief review of fundamentals. The lodging cycle is in the eighth years of the recovery, and we are currently in a modest growth environment. The corollaries for demand remain mixed. Gross domestic product came in light for the quarter at only 0.7%, the slowest pace in 3 years. That being said, the first quarter is surely the weakest for GDP and other indicators remain positive. Unemployment continues to reach cycle lows as the economy approaches full employment. And in March, consumer confidence hit its highest level since 2000. Other economic indicators, such as corporate profits and nonresidential fixed investment are generally stable to positive. As we look out, future growth will likely be influenced by the success or lack of success in passing stimulative measures, such as tax reform and infrastructure spending bill.

Focusing just on lodging fundamentals, demand growth continued to outpace supply in the first quarter by around 90 basis points. Industry RevPAR growth of 3.4% was solid. However, consistent with our expectations at the beginning of the year, RevPAR growth for the top 25 markets underperformed the industry average by about 100 basis points in the first quarter. And that trend will likely continue for the entire year because of more elevated levels of new hotel supply in the prime urban markets. In particular, we would note the RevPAR contractions in the top markets of Boston, San Francisco, L.A., New York and Miami.

Turning to DiamondRock's performance. We were pleased with our first quarter results, which were modestly ahead of internal expectations. Our comparable RevPAR grew 1.9% and EBITDA profit margins increased to 5 basis points. The results are more impressive in light of the renovations in the quarter. Adjusting our results for renovations, our portfolio's RevPAR grew 4% and margins increased 81 basis points in the quarter. It is worth noting that our first quarter performance was enhanced by the inauguration as well as the calendar shift of Easter moving into the second quarter. The outperforming properties within our portfolio for the quarter included the Chicago Marriott Downtown, the Worthington Renaissance and the Salt Lake City Marriott. The asset management team and our operators were once again very effective in implementing tight cost controls. Total hotel operating cost increases were held to only 1% during the first quarter. These cost controls led to first quarter flow-through of approximately 47% and allowed us to grow hotel adjusted EBITDA profit margins with only modest revenue growth. The first quarter also marked the substantial completion of DiamondRock's 2017 renovations. As of the end of April, we now have almost all of the renovation disruption behind us for the full year. It was a very active program in the first quarter. As we completed major rooms renovations at the Charleston Historic District Renaissance; Shorebreak Kimpton Hotel; the Luxury Collection, Gwen; The Lodge at Sonoma; and The Worthington Renaissance; additionally, at the Chicago Marriott, we were ahead of schedule in completing the third phase of our 4-phase $100 million transformation. The final phase of the renovation is for the remaining 20% of the rooms as well as the 60,000 square feet of meeting space, which will be completed during the seasonally slow winter season coming up.

Turning to acquisitions. Our off-market acquisitions L'Auberge de Sedona and Orchards Inn were completed in the quarter. The purchase price of the hotels represents an 8% yield and a 12.6x multiple on the forecasted 2017 hotel adjusted EBITDA. The hotels are the best located hotels within the high barrier-to-entry Sedona market. And we remain very excited by the upside potential of the hotels from implementing our asset management best practices. In fact, we are already seeing significant traction of the properties in the short time that we have owned them. The hotels are currently tracking ahead of underwriting with combined RevPAR growth of over 25% in the first quarter. We look forward to continuing to update you on these properties.

Before providing our outlook, let me turn the call over to Sean for more details on our first quarter results and recent financing activities. Sean?

Thanks, Mark, and good morning. Before discussing our first quarter results, please note that the comparable RevPAR, hotel adjusted EBITDA margin and other portfolio statistics include the Orchards Inn and L'Auberge de Sedona and exclude the 3 hotels sold last year for all periods presented. In addition, the first quarter had 1 less day than the prior year, which will impact some of the year-over-year comparisons. Our hotels performed ahead of expectations and gained market share during the first quarter. First quarter comparable RevPAR grew 1.9% due to a 1 percentage point increase in occupancy and a 0.6% increase in average rate. RevPAR growth was the strongest in March, which benefited from the shift in the timing of Easter into April. Our asset management initiatives drove a solid 47% profit flow-through in the quarter. Food and beverage margin growth was exceptional, where we achieved 94 basis points of profit margin expansion on a modest 0.3% increase in revenue. Overall, it was the combined efforts of our asset managers and our operators in implementing tight cost controls that enabled the hotels to limit total hotel operating expense growth to 1% and grow hotel adjusted EBITDA margins by 5 basis points.

First quarter operating results were impacted by the renovations at The Gwen, Chicago; The Lodge at Sonoma; The Charleston Renaissance; and the Shorebreak Hotel. These significant renovations held back comparable RevPAR growth and margin expansion by 210 basis points and 76 basis points, respectively. Excluding these renovations, first quarter RevPAR grew 4% and hotel adjusted EBITDA margins expanded by 81 basis points. Let me spend a couple of minutes discussing the quarter's results and trends in our 3 significant segments. Our business transient segment exceeded expectations during the first quarter. Business transient revenues increased 4.1%, which was primarily driven by a 7.5% increase in demand, partially offset by a 3.2% decline in rate. The growth in transient was led by the Chicago Marriott, The Lexington Hotel, the Salt Lake City Marriott and the Bethesda Marriott Suites. Our first quarter leisure contract and other revenues decreased 1.5%, which was a little below expectations. However, the decline was largely attributable to the first quarter renovations. Excluding the hotels under renovation, first quarter leisure contract and other revenues were slightly positive. The group segment performed slightly ahead of expectations during the quarter, which is traditionally the lowest group quarter of the year. First quarter group revenue increased 1.2%, as a result of 1.5% increase in average rate, offset by a slight decrease in demand. Short-term pickup was encouraging with $4.3 million of in the quarter, for the quarter business booked, which represents a 17.5% increase from prior year. The solid group performance was led by the Chicago Marriott and Worthington Renaissance. Both of these hotels grew group revenues over 30% during the quarter. The Chicago market benefited from a much stronger convention calendar compared to an unusually weak one in 2016. The Worthington Renaissance benefited from strong citywide activity and the renovated rooms. The renovations during the quarter held back our group revenue growth by 280 basis points.

Looking ahead, our second quarter results will be constrained by the shift of Easter into April, which will primarily impact group. In addition, the renovations of The Lodge at Sonoma, Charleston Renaissance and The Gwen, Chicago, wrapped up in April. So some renovation disruption will carry into the second quarter. Despite these headwinds, our April RevPAR grew 0.4%, which was ahead of expectations. Our 2017 group pace remains encouraging with over 80% of the expected group business already booked. Our 2017 group pace is currently up 2.1%, as a result of a combination of increased demand and rates. During the first quarter, we have booked over $21 million in 2017 group business. The layout for the balance of 2017, which is influenced by the timing of city-wides in our markets, shows group revenue to be approximately flat during the second quarter and 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 quarter of the year. We will continue to monitor short-term group booking trends to assess whether we need to modify the group pickup assumptions in our guidance.

Looking forward, our 2018 group pace is encouraging, with approximately 45% of the expected group business already booked. Our 2018 group pace is currently up over 10%, led by both of our hotels in Chicago and the Frenchman's Reef Marriott.

Turning back to the first quarter. I want to make a few comments on the New York and D.C. markets. RevPAR at our 4 New York City hotels declined 0.4%, which was above expectations, as our hotels gained market share and did better than the market RevPAR contraction of 1.3%. As a reminder, our original full year earnings guidance assumed 3.5% to 4.5% RevPAR contraction at our New York hotel. We will continue to closely monitor New York City fundamentals to assess if our guidance assumption should be modified. Our 2 hotels in the Washington, D.C. market benefited from the presidential inauguration and Women's March during the first quarter. The hotels combined first quarter RevPAR growth with an impressive 17.1%. For the full year, the Washington D.C. Westin is expected to benefit from a strong D.C. convention calendar and currently shows group pace up over 18%. We continue to expect that our hotels in the Washington, D.C. market will be top performers for us this year.

Before turning the call back over to Mark, I would like to touch on our balance sheet. We continue to position our capital structure to maintain liquidity to allow the company to be opportunistic. We recently addressed our only 2017 maturity by completing a new $200 million unsecured term loan. This loan further strengthened our balance sheet, reduced borrowing costs, extended our debt maturity schedule and provided additional investment capacity. The interest rate on the term loan is approximately 80 basis points lower than the repaid loan, which will result in annual interest savings over $1 million.

In summary, our balance sheet is in great shape. The weighted average interest rate on our debt is only 3.7%. We have no near-term debt maturities with our next maturity in 2020, our average mortgage maturity is nearly 6 years, 20 of our 28 hotels are unencumbered, our 2017 net-debt-to-EBITDA is approximately 3.1x and we currently maintain $350 million of balance sheet capacity, including an undrawn $300 million line of credit and approximately $120 million of corporate cash.

I'll now turn the call back over to Mark. Mark?

Thanks, John. I will now discuss our outlook for the remainder of the year. We gave guidance in February. We noted that our guidance did not assume any re-acceleration in growth from the prospect of lower taxes, reduced government regulation or infrastructure investments. Our current outlook remains consistent with that assumption. There were some encouraging signs in the first quarter, such as modestly better transient rate growth and group pickup versus our expectations. However, it is too early to declare a trend. And the short-term nature of our business requires us to continue to take a moderate view on the year. In general, we currently see lodging fundamentals and business trends remaining stable and in line with how they have performed over the past several quarters.

Accordingly, today, we reaffirmed guidance for full year RevPAR growth of plus-1% to minus-1%. We did adjust our full year adjusted EBITDA and adjusted FFO guidance shortly after our last earnings call for acquisitions of Sedona. Our guidance for the full year is for $238.5 million to $251.5 million of adjusted EBITDA and $0.96 to $1.01 per share of adjusted FFO. As Sean mentioned, we do expect our RevPAR growth to moderate a little in the second quarter, but remain positive. We are encouraged that our preliminary April results for RevPAR up a little less than 1% despite the Easter shift impact. We have pointed out that group pace for the portfolio is the lowest in the second quarter and then gets stronger in the back half of the year. Additionally, for the balance of the year, we are optimistic about the performance of our new Sedona assets and the recently renovated hotels, such as The Luxury Collection Gwen and The Worthington Renaissance. Further, we believe that we will benefit from our portfolio having less than 1% combined exposure to the difficult markets of San Francisco, Houston and Miami. While we do have investments in New York City, that market has performed better than a very soft expectations.

Looking out beyond this year, we are evaluating some exciting repositioning opportunities within our portfolio. At hotels like the Vail Marriott and our Sheraton Key West beach resort. We will have more to report on those potential upside stories later this year.

Lastly, before we open it up for questions, let me briefly address our capital allocation strategy. We continue to be particularly mindful of how we allocate capital at this point in the cycle. Based on our analysis, we believe that the company has at least $350 million of remaining dry powder. In 2017, we are being measured in utilizing our capacity and have targeted smaller acquisitions that improve the overall growth and quality of the portfolio. The management team would consider it a very successful year on the external growth front if we are able to find a few more small value-add deals, like those we recently bought in Sedona. However, if no deals make sense, we are appropriately content to maintain excess capacity at this stage of the lodging cycle. With low leverage, over $125 million of cash on hand and untapped $300 million revolver. We believe that when the time is right, we will be able to effectively and efficiently allocate our capital to drive our performance. To wrap up, we continue to position DiamondRock for success with a high-quality portfolio, a terrific asset management platform and a robust balance sheet to foster growth and profitability.

With that, we would now be happy to answer any questions that you may have. Michelle?

(Operator Instructions) Our first question comes from Jeff Donnelly of Wells Fargo.

Mark, I guess, you just touched on capital allocation, but I'm just curious how you weigh the prospect of repurchasing shares at this point, vis-à-vis that incremental investment in the market? Do you sort of see that as a tossup at this point? Or is the fact you are kind of looking for deals so to tell us that you are leaning more heavily in favor of your transactions and raise the incremental value?

Yes, Jeff. It's a complicated question when we spend a lot of time talking with our board about. We are kind of in that little bit gray zone. We believe we are trading below NAV. So it's not -- so it still seems like a decent opportunity to buy your stock. But usually, we look for very significant discounts before we repurchase stock. We would rather allocate our capital if it is a push towards higher growth, higher quality assets, thinking about the long-term positioning of the portfolio. We bought stock back in the fourth quarter of last year, below $9 a share. We are, obviously, significantly above that level right now. We are going to continue to evaluate both options. And every time we look at an acquisition opportunity, obviously, that's an alternative use of our cash.

And just maybe to switch gears. On the expense controls, it looks like excluding the renovation in the quarter, your Q1 margins are much better than maybe you guys expected. I'm just curious how sustainable do you feel that trend is? Or do you feel much of that was just stronger-than-expected market demand and maybe some timing on expenses?

Yes, Jeff, that's a good question. I think for the full year, we're looking at expense growth in the 2% to 2.5% range. So the first quarter, the team did excellent job. Second quarter will have little less growth, so less F&B contribution from banquets which have been a really strong suite for us on the expense control and flow-through line. So I think the short answer is we had a good first quarter. We expect the full year to have good cost control, but 1% expense growth is probably not sustainable for the full year.

And one last question. I know not a long time has lapsed, but just I'm curious if you guys have a sense of what the impact of the closure of the Waldorf has been on The Lexington and maybe your other hotels on the east side? I'm just -- because I'm wondering if the closure has boosted demand there. Or maybe you have seen some loss of overflow business that's maybe negatively impacted you guys?

Yes, Jeff, I think, it's too early to tell. We'll have to wait for a couple more (inaudible). There is big city-wides that would have been at the Waldorf that come up in June. So far, it's been beneficial for us. We picked up several small groups that will stay there and some other business. So we are picking up a little so far, but I think it's too early to call it.

Our next question comes from Ryan Meliker of Canaccord Genuity.

Thanks for a lot of the really good color on group and even your April trends thus far. I had 2 questions. I guess the first one was, can you talk a little bit about how New York trended in April. We heard from -- I think it was Park yesterday that said that, New York was up 8% across their assets in April. I'm just wondering if you were experiencing some of the same benefits.

Ryan, it's Mark. I would say our New York performed well. A lot of that's due to the Easter shift. So the leisure was very good in New York for April, and we had positive growth in New York as well.

Great. That's helpful. And then the second question I had was, can we talk a little bit about the Boston Westin, and your guys thoughts surrounding the news that hit this quarter that there is going to be a new convention center hotel, basically across the street from yours, in the Omni? And what you think that might mean to your investment at The Westin?

Sure, Ryan. So there was news, about 2 weeks ago, that there is going to be a new 1,000-room convention center, Omni, built across the street from where we are located. There is pros and cons for us. Hopefully, that also portends an expansion of the ECC Convention Center. The other positive for us is that site, as you know having been there, those are just vacant parks right now, and really disconnect our hotel from the Waterfront. And so the build-out there with some retail I think really adds to connectivity in the Seaport area for our Westin, so that's a net positive. It also provides ability with over 100,000 square feet of meeting space that they're going to add with that hotel to bring bigger groups and more conventions into Boston and Seaport area. So those are positives. It's 4 years away I think there will be substantial corporate office construction within the Seaport market that will continue to help us. But I think, all in all, it's probably about a net neutral for us.

Got you. So it's not necessarily -- it's not going to trigger sincerely an investment decision at that Westin, correct?

No, we are still very excited about our hotel there and about the future of Seaport.

Okay, great. And then one last one for me. You gave some good color, so I'm just looking for a little bit more if you have anything. Talked about -- 1Q was a strong quarter for you guys, up 4% in RevPAR before the renovation disruption, 2Q is going to be softer, but you said would still be positive. So the first half of the year, it seems like it is going to be trending towards the higher end of your guidance. And then you said your group pace is stronger in the back half of the year than in 2Q. So I mean, I understand not raising your guidance this early in the year given all the uncertainty, but what's it going to take to give you guys confidence that things are going to be better than your current outlook suggests?

Yes, I mean, we still have some holes that we are trying to book for the back half of the year with some of the groups. So as these holes get filled, we will feel more confident. Obviously, the more business transient positive trends continue, that would be encouraging to make us feel better. Remember, the first quarter is only 17%, 18% of our full year EBITDA. So there is still a lot of the year left to play out, obviously, as more of the year we get this month under our belt we will feel more confident about the upside potential and the guidance.

Our next question comes from Michael Bellisario of Baird.

I just wanted to circle back on the capital allocation comments. It sounds like its acquisitions or be patient currently, is that correct? And then where do dispositions fit into the mix, given the -- what seems to be improving financing and transaction market out there today?

Michael, it's a complicated question. So I would say a couple of things. The valuations are holding up very nicely in the private market. Actually, you can feel better and better. Right now, on the disposition front, we are sitting with excess capacity, well over $100 million of cash. We think we are well positioned. If a good opportunity comes up, we could seize on it without having to sell any additional assets. So I think, probably if -- we may be opportunistic, but it's not Priority 1 to try to build more capacity through dilutive sales at this point in time. On the acquisitions, the Sedona acquisitions are really the prototype of the kind of transactions that we are looking for. So they are off-market deal with value-add opportunity, where we really think we can get outsize return, even at a discounted NAV valuation or stock probably a better use of our capital. So if we could find those opportunities, we are still inclined to do those kind of opportunities. They are hard to do. They are hard to find in this market, but that's where we are working on right now. As far as share repurchases, I think we are patient. If there is a pullback in the market, we certainly always have that arrow in the quiver. But at these levels, even though it's a discount to NAV, it's not nearly what we are -- the discount we are buying in, in the fourth quarter.

Got it. I was just referring to patience on the acquisition front, not necessarily specific to buybacks. And then just kind of one other housekeeping item relative to the pre-Sedona guidance that you gave last quarter. What do you think the positive impact on the full year for RevPAR growth and margin change will be from the inclusion of the Sedona assets?

Mike, it's relatively small because the assets are only 177 keys. And so it's in that 10 basis point to 20 basis point impact, but kept us within the range, which is why we didn't change the RevPAR range.

Our next question comes from Shaun Kelley of Bank of America.

There's been a couple of different questions about New York, but I was curious if you could just comment specifically on international inbound, and what you guys are seeing there, probably pretty good at Lex?

Sure. So -- across our portfolio, the international is relatively flat. But the mix shift, in New York, we did see a decline, particularly an in-bound travel from Great Britain, probably as a reflection of the currency shift between the dollar. So I would say we lost a significant portion of the British inbound. We were able through the strength in the market to replace that with domestic travelers, actually at a little bit higher rate. So it was fine in the first quarter. Other international travel seems relatively flat with New York City. Obviously Emirates, if you look across the country, Emirates have flown back some of their flights. We would expect some impact with some of those inbound demands from Middle East.

Perfect. And then maybe just looking at -- I know you had mentioned I think, may be it was last quarter, a possible opportunity around the kind of tweaking the brand on the Vail Marriott. Any kind of updated dots there? Or where does that fit on the kind of capital internal growth kind of idea schedule?

Yes, the 2 opportunities we talked about were the Vail Marriott, and we think there is enormous opportunity there, given the rate differential between our property and really all the surrounding properties, which are luxury hotels, the rate gap is over $200. We are in the valuation stage on that, obviously making sure that we get the capital plan that are required and figure out the branding on the backside. So that's something we will announce probably later in the year. The other opportunity we've talked about publicly is the Sheraton Key West beach resort, which may have an opportunity to go to a lifestyle independent, given the high occupancy in that market, and there might be upside by doing that. We're still in the evaluation phase on both of those projects, but we plan to announce something before the end of the year.

Great. And then last thing would just be on Frenchman's. Looks like the performance is actually fairly solid in the quarter, at least on the RevPAR line. Are we sort of post any Zika concerns or anything else in that market that would be dragging that property down? How do you feel about that market, in particular?

Well, so I'd say we've experienced very little impact from the -- in the U.S. Virgin Islands. Really Puerto Rico and Miami have been hit, but the public perception on the USVI is much more positive. So we have had virtually no group cancellations related to Zika, and our -- obviously, our inbound leisure has been very strong as well. So we didn't have any substantial impact. So we don't expect something to change or have a rebound there, if you will, because it kind of stayed consistently strong. We still feel pretty good about the U.S. Virgin Islands. The supply picture is excellent. It's one of the reasons we really like a lot of these resort markets. It's very difficult and very expensive to develop a new hotel. So I think we feel very comfortable on that. The employments look pretty good. So I think all of those are relatively favorable. We continue to evaluate our long-term hold on the asset given the seasonality and the fact that it is airplane accessible only. But so far the performance has been fairly solid.

Our next question comes from Anthony Powell of Barclays.

You mentioned that leisure was slightly positive in the quarter, excluding renovations. We've heard generally I think stronger comments around leisure from most of the companies. So was that due to the Easter shift? Or did you see anything else in your portfolio?

Anthony, this is Sean. I think for our portfolio, a lot of our leisure-centric hotels were the ones that were under the knife during the first quarter, and so we were more impacted by leisure in our portfolio for the first quarter. We still feel pretty good about where leisure trend should go for the year. I think our first quarter was a little bit of an anomaly relative to the peers on that one.

Got it. And maybe more on dispositions. Given some of the green shoes to New York maybe, why won't you sell down more in New York and acquire more of the resort assets you have been building up over the past few years?

Yes, I think there's 2 answers to that: one, is we have capacity now for good opportunities that may emerge without selling additional assets, so it is not -- they are not interconnected, if you will; and then New York, I would say, the level of interest that's increased in New York in the last really 90 days has been fairly substantial from a lot of capital sources. We are always evaluating our allocation. We are about 12% in New York now. We would like to be 10%, probably our long-term goal. But we will evaluate opportunities. I think if we were -- if we had inbound inquiry that was an attractive pricing, we would definitely consider that. But given where the balance sheet is now, I'm not sure it makes sense to be proactive given that we are long-term believers in that market. We can be patient on how we think about those assets.

Our next question comes from Smedes Rose of Citi.

I just wanted to ask you on The Lexington specifically. I think there's been some talk before that maybe you would change the brand there potentially. And also, any kind of updated thoughts on that, and maybe just going as more of an independent hotel versus part of a larger system? And then also specifically there, are you still booking contract business into that properties? You have talked about being a little more defensive there on your last call. I was wondering if you are still pursuing that now.

Smedes, so I guess I'll take the second question first. Yes, we are still being defensive at that hotel. We are putting some contract, and it's 725 keys. Obviously, it's a softer demand environment, given the supply in New York. So we are making sure that we can get some compression, make sure we hit the targets, the 95%, 96% to achieve the higher redemption rate through the brand. So we are taking the defensive strategy, but with that said, and you can see that as occupancy has increased at expensive rate in the first quarter, we do think that there will be a little bit more pricing power in New York. So we are trying to be balanced as we think about the revenue management strategy for the balance of the year to not leave too much on the table, particularly the Tuesday, Wednesday nights when there's been very strong demand within the city. On the brand side, I'm not sure we've made public comments. We've had questions about what kind of payoff of the conversion from an independent to the Marriott autograph has been. I would say we've gained -- the response has been we've gained a lot of share, but it came at the -- came with a lot of additional cost as well. So it's probably a net neutral on the analysis we're looking at right now. We're still evaluating -- we have been working with Marriott on what the best long-term positioning for this hotel would be and trying to understand the kind of cost benefits as we think through the market over the next couple of years and the best way to kind of have a win-win situation on that asset. So I'd say we are still evaluating our options. Marriott, we've had a lot of meetings. We're working in partnership to try to figure out the best path forward there.

Our next question comes from Chris Woronka of Deutsche Bank.

I want to circle back with you on the data point about corporate transient. I think you said room nights were up. I think you said rates were down. Can you just give us a little bit more color if that was a mix issue or something else?

Chris, I think a lot of it was a function of the fact that we had a significant renovation activity during the first quarter, but yes, the business transient was up 4.1%, which was more than -- all driven by demand. Frankly, when we think through maintaining guidance, in that decision the big driver that was we were not -- during the first quarter, we didn't see a lot of pricing power within the business transient segment. And so we maintained our assumptions for the full year there. That's something that we're going to continue to monitor as we look through the year and could be a catalyst for us as we think forward. It's sort of a potential upside opportunity within both our portfolio as well as the industry. But we didn't see anything in the first quarter to get excited about the business transient side, other than the fact that demand was very, very strong.

Okay, great. We heard from you guys and actually couple of other peers on some of the things you are doing from a revenue management perspective regarding these redemption levels and the rate you get reimbursed on those. Is that something going forward, I mean, are you worried all the brands kind of change the math on that? And does it negatively impact you at some point?

Chris, this is Mark. We are in discussions with the brands. I think they are evaluating going forward what is the right program, both for their system and for their owners. My guess is that there are changes coming in the next -- within the next 24 months. It's clear with Starwood and Marriott merging, that those are slightly different programs, it's also an excellent time for them as they put those systems together to think about: Is there a better way to do the redemptions than the way we've done it before? And so I would say our understanding is options are on table. We are currently expressing our opinion on what the best way forward on that is. I don't think it's going to negatively impact us. My guess is some hotels will be a little better and some will be a little worse under the program. But overall, we're optimistic given the markets that we're in. That net-net, it's probably a benefit for us.

Okay, great. And just kind of sticking with that Marriott-Starwood, you guys are pretty heavy now combined with those 2 outside of a couple Independence and Hiltons. I mean, is it going to be a conscious effort to diversify a way in any acquisitions you do?

Chris, I would say we think we are over 80% Marriott-Starwood aligned. Some of that is managed by them, a lot of it's managed by third-party operators. Now I think we are hooked up to the largest system, most powerful travel company the world, right. They have over 100 million members in their rewards program. They are in 122 countries. I think we're very happy with being aligned with something powerful. We will be opportunistic as we look in new acquisitions. I think whether it's a Westin or Hilton or Kimpton, we will try to find the right opportunities kind of regardless of the brand, but I think being hooked up with Marriott is a great thing for us.

Our next question comes from Rich Hightower of Evercore.

So I want to get back on the topic of expense for a second. So if I look at sort of the same-store lineup, across the different categories, you had about 4% same-store increase on the rooms departmental expense side. Just wondering what's driving that? Is it labor? I guess, it's predominantly labor, but I guess, more generically, are you seeing a tightening on the labor side of the business and would that flow-through to F&B and some of the other categories? Just kind of tell us what you're seeing on that front? And what we can expect going forward?

Rich, the 2 biggest drivers of the rooms department cost up 4% are wages and benefits, which were up a little over 3.5% during the quarter as well as travel rate and commissions, which were up about 8.5% for the quarter and most of that was really group related and the Chicago Marriott really drove that during the quarter because we had tremendous amount of group business in the hotel during the quarter. When you look across the board at our operating expenses, our controls were very tight there, F&B was a great story for us in operating expenses. Rooms would have been the one where we had that 4% increase, but a lot of that was, as I said, specific to wages and benefits and commissions.

Okay. And then what are you kind of expect going forward on that?

So our full year guidance assumes around -- anywhere from 2.5% to 3% wages and benefits to increase. And our total expenses for the year are expected to increase between 2% and 2.5%. Obviously, we did better than that during the first quarter. Tom and his team are working hard to replicate those results. But the assumptions embedded within our guidance assume, as I said, 2.5% to 3% on labor, benefits and total cost of 2% to 2.5%.

Our next question comes from Austin Wurschmidt of KeyBanc Capital.

First one, just on the better business transient trends that you guys talked about. I guess was this broad based or specific to certain markets? And then any specific industries that stood out as driving that better-than-expected performance?

Sure. The business transient was really driven by a handful of hotels during the quarter, the Chicago Marriott was a big driver of that because of just -- we were coming off renovation last year and there was better citywide which created compression. The Salt Lake City Marriott had a great first quarter business transient as well. Once again, that was driven by production from a handful of the local special corporates in the market including General Dynamics and the Audi (inaudible) were big drivers there as well as the Lexington with a strong business transient contributor during the quarter. And so I think a lot of that was volume-related. You also had the ability during the quarter where the group demand was not great, particularly in January and February. It was obviously stronger in March, but you were able to replace some of that group demand into business transient demand.

Great. And then you guys have been a little bit more defensive on the revenue management side. I guess, any changes into your tactics at this point? And what would you need to see to go a little bit more aggressive on the revenue management front?

Yes, I would say, we are trying to be balanced in our approach. So far we're not seeing the great re-acceleration in demand, right? It's been stable. But we're trying to make sure that we are being thoughtful, while we are defensive perhaps on a Thursday, Friday and some of the weekends. I think on the Tuesday, Wednesdays, particularly on one of these high compression markets, we are trying to push rate a little bit more. So we're trying to make sure that we balance being defensive, with not taking all the upside opportunity off the table.

Would you say that's a little bit different than what you've been previously doing?

I think we are evaluating particularly for the back half of the year and on the busiest nights of the weeks, whether we should be getting a little bit more aggressive with some of the business transient, but overall, I would say it's still a defensive tone. We are still trying to take up a little more contract, a little bit more group and then we are trying to have a little bit more pricing power with the business transient, the short-term business transient.

Great. And then just last one for me. I know you guys have been big believers in trends in the leisure business, but can you remind us what your threshold really is for exposure to resort hotels for the overall portfolio, and maybe where you are today?

Sure. I think our overall exposure probably we will be comfortable going to about 1/3. We are well below that.

We're hanging out around 1/4 of our portfolio as resort-centric today.

Yes, it depends how you cut it a little bit. So we still have room to add more, but we would never be over 50%, probably 1/3 is a good target.

Our next question comes from Lukas Hartwich of Green Street Advisors.

Not to be the dead horse here, but can you talk a bit about the business transient pace? And how that's been trending?

Business transient pace is up. It continues to do well. And obviously, as Sean mentioned earlier there, based on how much group is in house and how much internal compression you have, that's kind of when you open or close rates. What you will see is, as mentioned earlier, first quarter, we had some holes. And so there are a lot of -- the way the business travel works you, you have lower rated accounts, NRA accounts, your LRA accounts, you kind of keep those accounts open and don't close them out. So you saw some volume in Q1. In out quarters, we will be more rigid in opening up those lower-rated BP accounts to try to drive rate and remix the hotel. So all signs are positive on the BT side, but the challenge is how you handle and mix those rooms and how that overall affects your RevPAR and your total rate. So I think it's positive.

There are no further questions. I'd like to turn the call back over to CEO, Mark Brugger, for any closing remarks.

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

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