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Edited Transcript of DRH earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 DiamondRock Hospitality Co Earnings Call

BETHESDA Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of DiamondRock Hospitality Co earnings conference call or presentation Friday, November 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Briony R. Quinn

DiamondRock Hospitality Company - Senior VP & Treasurer

* Jeffrey John Donnelly

DiamondRock Hospitality Company - Executive VP & CFO

* Mark W. Brugger

DiamondRock Hospitality Company - President, CEO & Director

* Thomas G. Healy

DiamondRock Hospitality Company - Executive VP of Asset Management & COO

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Conference Call Participants

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* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Dori Lynn Kesten

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst

* Richard Allen Hightower

Evercore ISI Institutional Equities, Research Division - MD & Research Analyst

* Smedes Rose

Citigroup Inc, Research Division - Director & Senior Analyst

* Thomas Glassbrooke Allen

Morgan Stanley, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the DiamondRock Hospitality Company Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Briony Quinn, Senior Vice President and Treasurer.

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Briony R. Quinn, DiamondRock Hospitality Company - Senior VP & Treasurer [2]

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Thank you, Howard, and good morning, everyone. Welcome to DiamondRock's third quarter 2019 earnings call.

Before we begin, I'd like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.

In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.

With that, I am pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [3]

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Good morning, and thank you for your continued interest in DiamondRock. We are pleased to report solid operating and financial results for the third quarter.

Before I get into the results, I'd like to first provide an overview of the economic and industry backdrop, after which I'll turn the call over to our new Chief Financial Officer, Jeff Donnelly, who will provide additional color on the portfolio performance as well as a balance sheet review. I'll then conclude the prepared remarks with commentary on guidance and our outlook for the future.

The current economic expansion continues to set records for duration, but the cloud of uncertainty around the political landscape and trade environment is creating a pause on business fixed investment and has tempered the near-term outlook for growth. Encouragingly, corporate profits continue to see steady gains, and employment rates remain exceptionally strong. And this is fueling outsized disposable income and personal consumption growth. We believe these factors should continue to benefit our destination resort hotels and help support our portfolio results until the clouds of uncertainty clear and business consumption can hopefully reaccelerate.

Lodging industry fundamentals were muted in the recent quarter. According to STR, RevPAR growth in the U.S. overall for the third quarter was up 0.7%. This growth was uneven, with the top 25 markets declining 0.4% and all other markets registering 1.3% growth. Importantly, demand continues to be healthy in the major markets, increasing 2.3% versus 1.6% growth in all other markets.

While demand was superior in the top 25 markets, underperformance of RevPAR growth in the top markets was primarily attributable to new hotel supply as these markets are the most desirable for investors, developers and lenders. Rooms available in the top 25 markets increased by 2.6%, which is nearly 100 basis points higher than the supply growth in all other markets. We expect that these supply pressures will persist into next year for many urban markets, but many destination resort markets will have very low or no supply.

DiamondRock's third quarter profits were modestly ahead of prior guidance. This positive result was made possible by the hard work of our asset managers and operators who delivered very solid performance in the face of a challenging operating environment. The portfolio's relative performance was very good. We gained share at over 2/3 of our hotels, and the portfolio reported a 1.6% increase in comparable RevPAR. This RevPAR growth exceeded our aggregate competitive set by over 400 basis points. Even more impressively, comparable total RevPAR increased a robust 3.1%, thanks to excellent growth in outside-the-room spend by groups as well as the success with other revenue sources.

Third quarter adjusted FFO was $55.3 million. Adjusted FFO per share was $0.27 and in line with our expectation. Third quarter adjusted EBITDA was $67.5 million, towards the high end of our guidance range. Comparable hotel adjusted EBITDA margins contracted 58 basis points in the quarter. But it is important to note that margins contracted only 15 basis points if we exclude the disruption from Hurricane Dorian and the onetime benefit from business interruption insurance proceeds recognized for Sonoma in the comparable quarter last year. This is a testament to the tight cost controls being implemented at our hotels. We are proud of this result.

In looking to help demand, segments performed during the third quarter. We saw solid increases in group and business transient. Group and business transient demand increased 2% and a healthy 3.5%, respectively, driving similar increases in segment revenues. Short-term pickup in the group was less than the first half of the year, but that was primarily because we had lots of groups already on the books as a result of strong group calendars in our markets, which left only the least desirable gaps to fill.

We are happy to have sold more group room nights in the quarter than the comparable period. Nevertheless, we are watching our fourth quarter pace closely as there are less citywide events in our markets in that quarter. Looking ahead, our booking pace for 2020 remains very strong and is currently up over 17%.

We want to recognize the talented sales teams at our 2 most important group hotels, the Chicago Marriott and Boston Westin, where our pace for next year is collectively up 30%. As expected, there was a small deceleration in our overall booking pace for 2020 from the end of the second quarter. The change primarily related to shift at smaller hotels, where frankly, group is less important to their overall performance.

Our resort portfolio shined in the quarter. According to STR, destination resorts and spa hotels were the strongest-performing segments in the third quarter, with RevPAR up over 2% as compared to a 0.6% decline at urban hotels. For DiamondRock, our destination resorts outperformed even this positive trend in the quarter. Collectively, our resort portfolio generated 2.2% RevPAR growth and outpaced their markets by 290 basis points.

There are numerous success stories in our resort portfolio at hotels like the Vail Mountain Marriott, The Landing Lake Tahoe and the Fort Lauderdale Beach Resort, among others. But we want to highlight just 2 on this call: L'Auberge de Sedona and Havana Cabana in Key West.

L'Auberge saw a 5.2% RevPAR increase in the quarter, outpacing its competitive set by over 200 basis points. Hotel EBITDA increased 9% in the quarter, and the property's 2019 revenues and EBITDA are on track to beat our original underwriting at the time of acquisition in 2017 by over 10%.

Havana Cabana. Havana Cabana continues to win awards and was named #3 on the list of the top 10 best hotels in all of Florida by Travel & Leisure last quarter. The financial results were also excellent with 18% RevPAR growth. We expect both Havana Cabana and L'Auberge to outperform next year as well.

Overall, we have strong conviction that our resort portfolio is a competitive advantage. And over time, we will increase our portfolio allocation to destination resorts in order to capitalize upon what we see as a secular trend towards experiential travel. We believe that these type of properties will outperform the national average for the lodging sector for years to come.

I'll now turn the call over to Jeff for additional detail on our financial results and market commentary. Jeff?

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [4]

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Thank you, Mark, and let me start by thanking you for placing your trust in me and thanking the entire DiamondRock family for welcoming me to Bethesda. I feel fortunate to be a part of this team of warm, passionate, hardworking people. So let me take this opportunity to express my gratitude to everyone at DiamondRock for their patience with my questions and receptivity to new ideas.

Before I walk through our third quarter income statement, I want to remind everyone that comparable RevPAR, hotel adjusted EBITDA margins and other portfolio metrics are pro forma to include our 2018 acquisitions for all periods. Comparable results exclude Frenchman's Reef and Hotel Emblem for the month of September due to its renovation closure last year.

Third quarter financial results were modestly ahead of our internal expectations, owing to stronger total revenue growth. On a comparable basis, RevPAR increased 1.6% in the third quarter, driven by a 1% increase in average daily rate and a 0.4% increase in occupancy. Hurricane Dorian negatively impacted RevPAR by 40 basis points, with most of the disruption experienced in Charleston and Fort Lauderdale and, to a lesser extent, Key West.

Third quarter room revenue was $174.1 million or $1 million behind expectations largely due to Hurricane Dorian. Non-room revenue, however, was $1.6 million ahead of expectations, even despite an estimated $400,000 headwind from Dorian because of strong growth in our F&B outlets at hotels in Boston, Chicago, Fort Lauderdale and Northern California, partially offset by the Westin San Diego, owing to softness in group at that hotel during the quarter.

According to STR, over 60% of our submarkets reported positive RevPAR growth during the quarter, and over 2/3 of our hotels outperformed their submarket and competitive set. The largest outperformers were Vail, Fort Lauderdale and Phoenix, and the underperformers were Burlington and San Diego.

For the outperformers, the Vail Marriott generated over 30% RevPAR growth compared to the prior year and outpaced its competitive set by a comparable amount. Group and transient revenues were very strong, owing to improved group sales initiatives and increased weekend leisure business that was limited by renovations in the prior year. Vail Mountain is set to open November 15. We are encouraged by recent trends but remain vigilant whether recent modifications to redemption policies and Marriott's Bonvoy program could impact financial results in the fourth quarter.

The Westin Fort Lauderdale saw a 4.8% increase in RevPAR in the third quarter compared to a 10% decline for its competitive set. As we mentioned previously, financial performance was negatively impacted by Hurricane Dorian, but it nevertheless outperformed because it remained open when many of its peers closed in anticipation of the storm.

The Hotel Palomar in Phoenix saw RevPAR increase 0.7% as compared to a 9.6% decline in the competitive set. A sharp decline in the volume and quality of events at Talking Stick Arena negatively impacted all transient channels in the quarter, but the well-located Palomar was able to offset this impact with nearly 35% growth in group revenue and 20% growth in F&B sales.

As for the 2 underperformers, RevPAR at the Hilton Burlington increased 2.6% in the quarter versus an 8.9% increase in the competitive set. The softness was the result of an inability to replace onetime group business in the third quarter 2018 and the loss of an airline crew to a lower-cost select service hotel nearby.

The Westin San Diego saw RevPAR dip 4.8% as compared to a 0.6% rise in the competitive set. This was the result of an inability to replace a series of in-house group events and the associated food and beverage revenue in the third quarter 2018.

Our group pace for 2020 is up 6 points since the end of the second quarter, and we are exploring options to enhance the awareness and appeal of the F&B outlets to attract the daytime population.

From a segmentation standpoint, group revenues increased 1.2% in the quarter based upon a 2% increase in rooms and a 0.8% decline in ADR partially due to weakness at the Westin San Diego. Transient revenues increased 1.6% on a 0.1% increase in rooms and a 1.5% increase in ADR. Drilling deeper, it was the business transient segment that was the real source of strength, generating 3.3% revenue growth on a 3.5% increase in rooms. Total expenses grew 3.7% as a result of programs to reduce food cost, which improved margins by 30 basis points, and initiatives that increased labor efficiency by 50 basis points.

Comparable hotel adjusted EBITDA was $73.4 million. In total, this met our internal expectations but came as a result of slightly lower-than-expected rooms departmental profit that was offset by better-than-expected food and beverage profit as well as favorable variances in incentive management fees and property taxes.

Comparable hotel adjusted EBITDA margin declined 58 basis points from 2018, but the result is really better than the headline number because it was negatively impacted by 2 items: first, 27 basis points from the recognition of business interruption insurance proceeds in the third quarter of 2018 for a fire-related closure in Sonoma in 2017; second, 16 basis points from Hurricane Dorian disruption in the quarter. Adjusting for these 2 factors, comparable hotel adjusted EBITDA would have declined 15 basis points.

Corporate EBITDA was $67.5 million, slightly better than internal expectations. And adjusted FFO was $55.3 million, also ahead of internal expectations as a result of lower-than-expected interest rates. Adjusted FFO per share was $0.27, in line with our prior expectations.

The balance sheet remains in great shape. At September 30, DiamondRock had $26.7 million of unrestricted cash on hand and $1.1 billion of total debt outstanding at a weighted average interest rate of 3.9% and a weighted average maturity of 4.6 years. Net debt-to-EBITDA is forecast to be 4.1x at year-end, assuming the midpoint of our new adjusted EBITDA guidance for 2019. It is important to point out we received no consideration for Frenchman's Reef in this calculation.

We have plenty of capacity with $325 million available on our $400 million senior unsecured credit facility. We also received a $40 million commitment for additional insurance proceeds in November from our insurers at Frenchman's Reef. A portion of those funds we expect to use to pay down the $75 million balance on the facility.

We also continued our share repurchase activity in the third quarter. We repurchased 300,000 shares of common stock at an average price of $9.96 per share for a total purchase price of $2.8 million. We have repurchased 7.8 million shares at an average price of $9.58 since we commenced our repurchase program in December 2018. We have $175.2 million of remaining authorized capacity under our $250 million repurchase program. We intend to be opportunistic about future share repurchases.

Finally, DiamondRock announced a dividend of $0.125 per share that was paid on October 11 to shareholders of record as of September 30.

I will now turn the floor back over to you, Mark.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [5]

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Thanks, Jeff. Turning to guidance. We are making the following revisions to our full year 2019 guidance. RevPAR growth is now expected to be flat to up 75 basis points from prior guidance of flat to up 1.5%. Total RevPAR growth is raised to 1% to 2.5% from flat to up 2.5%. Adjusted EBITDA is now expected to be in the range of $256 million to $260 million from the prior range of $256 million to $265 million. And adjusted FFO per share is being raised to a new range of $1.03 to $1.05, a $0.01 per share increase at the midpoint from the prior guidance range of $1.01 to $1.05.

The primary reason that is driving our more conservative outlook for the top end of RevPAR growth is that while moderating trends are playing out as we expected at the time of the prior earnings call, the more optimistic scenario for the high end of prior guidance is now less likely given the lack of acceleration in business transient demand generally. Accordingly, we are maintaining the bottom end of prior RevPAR guidance while adjusting down the top end.

Adjusted EBITDA was revised to take into account the new RevPAR range as well as the approximately $1 million of impact from Hurricane Dorian and about another $1 million of impact from PG&E's unscheduled power outages in California, which affected our Sonoma and Sausalito hotels in October. All of our California hotels are currently open and operating at full capacity, and our new guidance assumes stable power delivery for the balance of the year. Despite these impacts, we are able to maintain the bottom end of the prior adjusted EBITDA guidance range of $256 million while appropriately adjusting down the midpoint of the range by $2 million.

On a positive note, total RevPAR remains a good story, and we were able to raise the bottom end of our total RevPAR growth outlook despite the reduction in the top end of guidance for rooms RevPAR growth. This is a testament to the great efforts of our asset management team and operators working side by side to implement numerous programs to drive other revenue streams.

Our adjusted FFO per share guidance was also raised at the bottom end because of interest expense savings stemming from both the unforecasted receipt of additional insurance proceeds related to Frenchman's Reef that will be used to pay down borrowings on the revolver as well as lower overall borrowing costs.

We at DiamondRock continue to seek out ways to drive shareholder value for you regardless of the economic environment with a focus on 5 areas. One, resorts. As I said earlier, our research shows that there is a strong secular demand for experiential travel that should drive outperformance for years to come. We believe destination resorts, particularly in geographically constrained areas, face lower supply growth and lower expense pressures than in the top 25 urban markets and the overall industry.

Two, ROI projects. We have identified $90 million of significant ROI projects that we believe will generate an incremental $17 million to $19 million of EBITDA. In total, that's about $0.79 per share of incremental value over the next few years. Additionally, we are optimistic that we can grow this pipeline of ROI projects in the future as we continue to uncover new opportunities.

Three, relaunching Frenchman's. We will relaunch Frenchman's Reef as 2 distinct resorts: Frenchman's Reef Marriott Resort & Spa and the Noni Beach Autograph Collection Resort. Reconstruction is well underway with a grand opening currently expected in the fall 2020. Reopening the Frenchman's resort complex will be a strong and differentiating driver to our earnings growth in 2021. We believe these connected resorts can generate $25 million in EBITDA at stabilization, which translates into a great driver of portfolio profit growth over the next several years.

Four, opportunistic recycling. We are exploring the opportunistic sale of 1 or 2 assets to lock in attractive private market pricing. Proceeds would be recycled for debt reduction, share repurchases or reinvestment, depending upon market conditions at the time. A broker has been engaged, and any sale is unlikely to be completed this calendar year. It is our policy to not discuss sales until they are closed given the uncertain nature inherent in these processes. Accordingly, we will not comment further at this time regarding dispositions.

And five, asset repositionings. To improve profit and build shareholder value, we are pursuing several opportunities to change managers and continue our strategic transformation of the portfolio to be comprised of a majority of short-term agreements. We believe our proactive changes will provide a source of both outsized NAV and outsized profit growth for DiamondRock even in a challenging environment. It is premature to announce specifics, but we do expect to have continued success on this front in 2020. We believe these 5 focus areas will continue to distinguish DiamondRock going forward. And we are especially encouraged by our 17%-plus group pace for 2020.

On that note, we'll now open up the call and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Anthony Powell from Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [2]

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Welcome, Jeff.

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [3]

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Anthony, thank you.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [4]

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No problem. Just a question on leisure versus corporate. You mentioned that your resorts were up over 4%, but you also said business transient was good in the quarter. What's really the stronger segment right now, if there's any kind of difference? And can you continue to see resort RevPAR growth at this level if you keep seeing kind of softer overall trends next year?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [5]

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Yes. This is Mark. So the destination resorts outperformed, and it's really going to track consumer sentiment. So the consumer is doing well, which means the resort business is doing well. So we expect that trend. As long as the consumer sentiment index is up, we would expect that our leisure at the destination resorts to continue to outperform the industry averages. Business transient did look good in the third quarter, but I would say that's less about business transient being good than mix shift. We had a good group quarter. We were able to fill a fair amount of available rooms with group, leaving less rooms to sell for business transient, which meant we were able to put in higher-quality business transient, and we were able to wash out the lower-rated business transient, put in some higher-rated. It wasn't true that we were getting more rate from the same BT customer. We were just mix shifting because of the group power in the third quarter.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [6]

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Got it. And a lot of your Marriott properties seem to gain share in some of the urban markets. Are you seeing kind of better traction on the Bonvoy program? And how is that going to impact your RevPAR, you think, next year?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [7]

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Yes. We're encouraged overall by the changes that Marriott is making. There is some lapping effect of some things that happened last year, and there are some changes coming as well that we think are going to allow them to continue to gain share in the marketplace going into 2020.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [8]

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Got it. And you mentioned the Vail Marriott. Are you talking about the off-peak/on-peak redemption changes there that can impact the quarter?

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [9]

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We don't -- we -- it started, and we don't anticipate it to have an impact, but it's hard to know. No one really can tell how the shift from off-peak and peak will -- how it will affect the festive in the fourth quarter. But for the third quarter, it was consistent to prior year.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [10]

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Yes. I would say we're excited about the concept of the high-low demand periods and having a flexible redemption rate. We think that makes a lot of sense for the points. We think we'll get -- ultimately capture more business. But we don't have a history of how it will play out and understand the algorithms and making sure we get that right. There could be a learning curve there as it gets implemented. But ultimately, it should lead to higher index and greater profits for the hotels.

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Operator [11]

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Our next question or comment comes from the line of Austin Wurschmidt from KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [12]

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Mark, with respect to your comments on changing your management agreements to shorter duration, can you give us a sense of what the remaining term is on your in-place agreements and what types of termination payments that you would have to absorb in order to shorten that term?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [13]

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Interesting question. So if you look at what we've done in the portfolio over the last 3 to 5 years, we've transformed it from what was 10 years ago almost a 90% encumbered by long-term management agreement to a portfolio that's rapidly becoming majority subject to short-term agreements. We made recent changes at the Two Roads properties, unencumbering those with a fairly small termination payment. The unencumbering of additional assets over the next couple of years, we think, will come at a very minimal cost to us, often making other considerations in that exchange.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [14]

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Okay. Fair enough. So separately, I guess with the comment about wanting to continue to grow the resort exposure, I mean it seems like with these asset sales that you discussed, you'd be lightening up in your -- some of your existing urban markets. Can you give us a sense of what markets you feel like you're a little bit overexposed to today and where you still want to maintain kind of some footprint longer term?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [15]

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Yes. So I don't think we're overexposed to any one market right now. So we'd like to be about 10% in every bucket. We're, I think, at max 15% in any -- in one market. So I don't think that the concentration or diversity is the driver, but we would like to sell some of our urban assets and either redeploy that into share repurchases or redeploy that into resort acquisitions. That will continue to be our event on external growth for the foreseeable future as we redeploy capital.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [16]

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And should we expect that you would still want to maintain your current exposure to group or that some of the larger group houses could be a source of proceeds in order to redeploy into the resort strategy?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [17]

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Yes. So we're not getting the specifics of which assets we're thinking about monetizing. But I'll just say we're looking at ones where we think that there is an arbitrage between what we think the NAV is of the asset and what we think the private market may be willing to pay for it. We think that it's a good time to test the market and to see if we can essentially exploit the public-private gap in valuation for a lot of these assets.

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Operator [18]

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Our next question or comment comes from the line of Smedes Rose from Citi.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [19]

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I wanted to just ask on the expense side. It looks like year-to-date on a same-store basis, hotel expenses are almost 4% trending up, and they went up a little bit higher than that in the third quarter specifically. And just as we think about 2020, I mean is there any reason to think that, that 3% to 4% range of cost increases would change at all, either higher or lower?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [20]

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Yes, Smedes, this is Mark. So the total expenses this quarter were 3.7%. That's elevated because our -- as you know, our total revenues were up over 3% with great F&B contribution, primarily from banquets. Banquets, we pay people -- banquet servers are higher on the wage scale, so it drives up the expenses commensurate with that additional revenue. So not surprising that it's a little bit elevated this quarter.

Our current forecast for the full year has total expenses coming in at 3%, almost on the nose. Next year, we're just rolling up the budget on the expenses, but there will be wage pressure as we move into next year on both wages and benefits. So we anticipate that it will be at least 3% as we move into 2020.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [21]

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Okay. And then just I think on your last call -- so putting aside any proceeds from asset sales. You talked about, I think, about $300 million of investment capacity. So maybe going from here, I mean you put a pause on repurchase activity. It wasn't -- you didn't do more from the -- when you did your second quarter call, and you announced these repurchases in August. What sort of are your updated thoughts, I guess, around near-term uses of capital?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [22]

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Well, I think acquisitions are highly unlikely at this point. We still believe that we're trading at an enormous discount to NAV, so share repurchases remain a very attractive way to capture that value for our shareholders. And it's a -- I'll tell you it's a continuing dialogue in the boardroom about when and how much to do, but we're going to be opportunistic and not telegraph that.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [23]

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Okay. I mean was there a reason why you wouldn't continue to purchase shares over the course of the third quarter then or...

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [24]

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Well, we had authorization for a certain amount, and then we had a board meeting that just occurred in the last 2 weeks. So we regrouped at the board meeting to discuss the next actions on share repurchases.

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Operator [25]

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Our next question or comment comes from the line of Patrick Scholes from SunTrust.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [26]

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A couple of questions for you here. One thing I found very interesting in your earnings release and guidance was your total margin guide going up, and you touched briefly on your asset managers and property managers are helping with that. Any more specifics that you can give on that? Certainly, it's not something we've -- that margin increase we've seen with other names. I'm curious what the -- shed some light on this secret sauce that DiamondRock is using here.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [27]

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Tom, do you want to take that one?

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [28]

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Sure. We've -- we continue to implement and focus on driving compliance on our food program. We look at energy holistically. We're working on some additional water savings programs and biodigesters, small nickel and dime savings on waste. Energy continues to come in. Our energy was down 20 basis points, I believe, for the quarter on more rooms sold. The labor piece is something we continue to focus on and measure on a weekly basis. And then the goal is obviously to try to drive more revenue, which helps reduce your -- as a percentage of cost. And so we have a host of revenue initiatives, smaller ones that we continue to push through.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [29]

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Yes. Patrick, I would just add. It's -- so it's systematic across the portfolio on expense reduction on a couple of programs. Labor is our most -- is our largest cost category. That's our #1 focus because it's our largest cost category. So we've implemented new systems and technologies at a number of properties, which have allowed us to increase productivity to better schedule the employees and to be more efficient, pay less over time with new efficiencies. And there's new technologies that have been implemented at some of the properties, particularly the nonbrand-operated properties that have allowed us to reduce some of the labor inefficiencies and increase the profitability there.

Food costs, similarly, we have a program that we've been rolling out over the entire portfolio. It's a program that Tom had brought with him from Strategic when he came over. And as you saw in our third quarter, we lowered our food cost to improve margins there by implementing that.

And then energy probably would be the next category. And here, it's a lot of nickels, dimes and quarters, whether it's thermostat or biodegradable machine to take care of the waste from the kitchen. It's a lot of smaller items on the energy front. But we're always thinking about being better members of the community on the green front but also about how we can reduce our energy footprint and reduce cost on the energy front.

And then there's a whole host of very, very small things. When I sit with Tom and his team of asset managers who are communicating what they're doing at the properties, the discussions on some of the small cost items are -- sometimes get lost when you talk about what you're doing hundreds of millions of dollars of revenue, and they're focused on things that save us $6,000. But it's the $6,000 items and, I think, the general culture and attitude about expenses that permeate into the better cost controls, generally.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [30]

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Great. I appreciate the color there. And then just one additional question here. I saw that you picked Aimbridge for Frenchman's Reef as opposed to, say, Marriott. What -- I'd like to hear your thoughts around that.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [31]

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Well, we remain big fans of Marriott, and they operate a number of our properties. At this particular property, we thought that Aimbridge, with their experience in the Caribbean and, frankly, our personal relationships with the CEO of Aimbridge and their dedication of specific resources to position this hotel to success, were really the right solution in choosing the operator. They really have some terrific talented people that are experts on the Caribbean market, and they've made a commitment to dedicate a number of those resources almost exclusively to this property in a way that, I think, no one else could given their scope and their desire to build the partnership with DiamondRock.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [32]

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Okay. Great, great. And Jeff, congratulations for joining DiamondRock. I will save my detailed accounting questions on contra revenue accounts and sales allowances to you next call.

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [33]

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I appreciate that, Patrick. Thank you.

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Operator [34]

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Our next question or comment comes from the line of Rich Hightower from Evercore ISI.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [35]

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Jeff, it's equally good to bury the hatchet here now that you're on the other side. So...

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [36]

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Thanks, Rich.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [37]

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Yes, yes, of course. So we've covered a lot of ground already, but maybe just following up on Patrick's question on Frenchman's, not with respect to the manager but with respect to the brand. How many other brands were seriously in contention for the asset or assets as it were? And maybe walk us through some of the other deciding factors that -- where you went with Marriott and, of course, Autograph in the package there. Just sort of take us under the hood to the extent that you can in a public forum like this.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [38]

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Sure, Rich. So we had essentially an RFP process, where we went out to the brands, the big brands that you can imagine would do well in the Caribbean and could source a lot of business, particularly from the Northeast markets. It came down to a competition to 3, and then it was, I'd say, a hot competition between the final 2. There are a number of reasons, ultimately, that Marriott, we think, will be the most successful brand there. Not that the others aren't very powerful, but the established reputation of Marriott within the island carried a lot of brand equity at this particular property. We think that their size, their system and the success that this hotel has had within their system being proven on the redemption side carried a lot of weight. And frankly, Arne's personal commitment to ensure success of the asset, we thought, made a big difference in kind of setting us up again for success at the property.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [39]

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Okay. That's helpful. And then maybe this is a question for Tom. But just since it's been heavily in the news this week, what do you guys make of Google increasingly promoting its own travel content at the expense of the OTAs? And how does any of that impact DiamondRock's revenue strategy? Is this a meaningful trend for the REITs? Or is it really not that impactful at the end of the day?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [40]

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Tom, maybe I'll jump in. This is Mark. So Rich, we've actually been spending a lot of time on digital or, I'll call it, digital marketing and the cost of intermediaries. And listen, Google is another intermediary and another person that's trying to take a toll on our cost of procurement on the customer. It's something we need to be aware of. I think the great advantage we still retain is that we control what happens to the customer once they get to the front door in a way that we haven't given over to them the ability to pick the room and really customize the service when someone walks in the front door of the JW Marriott or whatever the hotel may be. So we're thinking about how we continue to differentiate and customize our service. But no, I think we are well aware of it. I think we need to be smart about what we give over to the Googles and the Amazons and the Apples and the Facebooks of the world over the next decade. Probably the person who loses isn't the hotel owner. It's really probably going to be the existing OTAs that are going to be cut out of the process. So over time, we think that it's manageable, but we do think that the intermediaries will change over time.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [41]

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Yes. And any follow-up from Tom on the topic? It's just -- it's a really interesting one that's kind of been at the forefront this week.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [42]

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Rich, the competition is good. You can't -- you're not -- we're not -- you can't fight Google. You just have to find out the best way to use it and leverage it. The tools -- we have tools out there now to go direct to the customer. Social media is more important than it's ever been before. How you -- how the hotels perform, how they perform their social score, we continue to look at improving their lobbies, improving sense of arrival, improving customer experience. That TripAdvisor ranking is critical. We've moved in a quarter, our trip rank, and we took it from 63 -- the 63rd percentile to almost 66 percentile. Heavy focus on improving our -- the reputation of the hotels. Mark spoke of our awards. But when you think about some of the things we've been doing, we're trying to improve the guest experience. That guest experience and sense of arrival and customer-facing interaction will certainly help us in the Google channels in driving additional revenue. And then it's just our job to control it and to monitor and get the right price. But you think like the Westin Fort Lauderdale is 9 out of 131 on TripAdvisor. The lone concept we put in is the #1 Mexican restaurant and the third best restaurant in Fort Lauderdale. Havana Cabana has won numerous awards. It was just 11th on Condé Nast Readers' Choice. The Palomar, some of the changes we've made there, it's sixth in the Southwest for readers' choice. Sedona was 16th in the Southwest for Readers' Choice in Condé Nast. A lot of the improvements we've made in Denver, at the JW, all the renovation capital. That hotel is now 20th on Condé Nast Reader Choice for the awards. And then The Gwen continues to perform well in that sector. It's sixth.

So you could see where we're allocating capital and how we're spending it is critical to the guest experience. And as we improve those and improve the recognition and the placement of those hotels, the algorithms and -- we'll drive that up to the top of the list for Google, and we'll take advantage of it where we can. We like the independent hotels because we can control the business and we control going directly to the customer, which gives us an advantage. When you look at how Havana Cabana has been performing against the comp set, which includes the Hilton and Marriott brand, it is outstanding because it's authentically relevant. And when we can do that in our hotels and create that authentic relevance, people will buy that. And so the good news -- it's another channel. The good news is I think it's going to compete against the OTAs. Competition will drive down pricing. And I think in the end, if we are strategic in how we handle that, I think we should do okay with it.

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Operator [43]

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Our next question or comment comes from the line of Thomas Allen from Morgan Stanley.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [44]

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So when I do a simple average of the quarters, it implies that Q4 RevPAR guidance is about down 2% to up 1%. Is that right? And then can you just talk about results in October and kind of how you're thinking about things that can influence November and December?

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [45]

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Thomas, this is Jeff. You're correct in your math on fourth quarter that's effectively in the vicinity of what the RevPAR would be for the fourth quarter implied by our guidance. As far as October, we actually don't have a good estimate at this time of our RevPAR for October mainly because of some of the disruption that was caused in the quarter from the voluntary power outages out in California, but -- so of course, we don't have anything else we can add at this time.

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Thomas Glassbrooke Allen, Morgan Stanley, Research Division - Senior Analyst [46]

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Okay. And then just one thing I noticed on your balance sheet was that you only had $27 million of cash at the quarter-end. Is that a new strategy? Is that a one-off thing? And did that influence your buyback decisions? Can you just help us think about that going forward?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [47]

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Thomas, this is Mark. Now we try to keep about $25 million as the minimum cash. We try to use our revolver very efficiently to keep our interest expense down. We still think we have, very conservatively, $300 million of investment capacity at our current level of leverage. So I wouldn't take the cash balance as signaling anything one way or another other than we're trying to be efficient on our interest expense.

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Operator [48]

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Our next question or comment comes from the line of Chris Woronka from Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [49]

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Jeff, welcome on board. So I want to ask about New York for a minute and kind of your -- I think your 4 hotels, I think you have mixed results kind of year-to-date. But overall, I think in the aggregate, you're down a little bit. Do you still have a really long-term positive view on that market? Or do you think there's some secular impairments from a margin perspective? And maybe you might delineate your answer based on kind of your select service assets versus the Lex.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [50]

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Sure. I'll take this. I think the long term for New York, structurally, looks pretty good. So supply, after we get through next year, starts getting a lot better. And we know that there's a number of hotels that they're talking about taking out and converting that -- those hotels turning down and building office towers. So particularly on Midtown East, the setup over the next 5 years, we think, looks favorable. We don't think next year is going to exceed the industry average, but we do feel fairly confident New York will rebound over the next few years and will be a good market to be located in. There's no doubt that we have expense issues. It's a union -- it's the way of union hotels. I would say in this particular market, it's constructive in that the current contract goes through 2026, and the CAGR of wage growth is below 3%. But real estate taxes have been going up. Wages have gone up more than inflation over the last -- well, forever, really. So there are the expense pressures, similar pressures that you get in a market like San Francisco. But we do think once the supply starts to subside, which we think occurs after next year, we do think that the New York market will once again return to healthier levels. It doesn't mean they will return to prior peak, but we do think that it will start exceeding national average growth rates as soon as we can get the supplier under control, which is probably the next 18 to 24 months.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [51]

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Okay. Great. And then I wanted to stick on the cost topic but to the portfolio more broadly. You guys had a lot of success in this kind of low RevPAR growth environment. But at some point, we hit a downturn. I mean has what you've done to date, does that impair at all your ability to take a step down in further cost reductions if you need to do something more severe later?

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [52]

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Chris, this is Tom. We have, as part of the process, the budgeting process this year, we're really focused on -- we're very focused on costs and contingency plans. In case -- certainly, in case there is a downturn, we have opportunities to try to reduce costs, fixed costs, and certainly, variable costs will go down. So does it get more challenging? Certainly, it gets -- in an extended period of low RevPAR growth, with low unemployment, it certainly creates a challenge for the asset management team. But we have a road map, and we have a plan. And so what we'll do is implement that plan to whatever level that's required to try to maintain margins. It's certainly -- it's well documented. It's a tricky, tricky time to do business with wage pressure, low unemployment and then low RevPAR. And the focus will continue to be cost, but we also have to find other ways to get other revenues, and we have to find ways to drive incremental revenue and rate out of our properties. And that's what we'll do. But we do have plans. We have contingency plans in place for revenue, RevPAR, total RevPAR declines. And we have it at different levels, and we have a plan to pull the trigger on the different levels.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [53]

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Okay. Very good. And then just on Frenchman's, it's an impressive stabilized EBITDA target you guys put out there. Is there any -- and I know there's clearly going to be some revenue upside, but is there anything that's changed with the structure of how the properties operated or any of the -- is there more flexibility in some of the ways that you staff or things like that?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [54]

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Yes. This is Mark. And Tom can jump in here, too. So we're going to open up new F&B outlets that we didn't have before. Everything will be -- everything essentially that got replaced from the hurricane will be new, on the stuff that was damaged previously, so it gives us a very nice product for the consumer. So we think that there's a lot of savings that come from having the new infrastructure projects. So there'll be not only a better revenue, but we expect to have better profitability because we'll have a new energy plan, new water plan and other efficiencies that we didn't have before.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [55]

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And structurally, we think we have a better opportunity creating 2 resorts to separate pricing. So you won't get the upgrade from up top-down to the beachfront. We have 2 separate pricing plans. Noni Beach will have its own market strategy and sales deployment. Noni Beach, we believe, will be able to play in some luxury channels, which will drive incremental rooms that didn't exist before and will drive incremental rate. And then we have some additional revenue streams that we will retail, leisure services and activities that we believe will drive significant revenue increases outside the room.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [56]

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Chris, as you know, above the claim we've talked about before, above the claim monies, DiamondRock is going to invest over $50 million to enhance the property. So we expect a very strong return on our enhanced dollars.

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Operator [57]

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Our next question or comment comes from the line of Michael Bellisario from Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [58]

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Just on the same topic of Frenchman's, can you maybe give us your estimate of how much more capital that you need to spend or that you do expect to spend and then maybe explain why you did get that $40 million, the commitment from the insurance companies? Because I think I heard you say it was unexpected. And then how might that impact any potential settlement payment you'll get down the road.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [59]

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So let me take the last one first. So we're in litigation over the insurance claim, with the trial date in January. So as you can imagine, we need to be sensitive about our discussion around Frenchman's Reef. The payment is a small piece of what we think we're owed. They have an obligation to continue to adjust the claim all the way up to the trial date. We didn't expect and didn't want to build in any expectations to receive any cash before that trial date because it really depends on their judgment. We're not going to get anything forced until we get to court. So that's kind of the story on the cash. I don't know that has an influence on whether we settle or not before we get to the trial, but we appreciate the cash, certainly. Michael, remind me your other parts of your questions.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [60]

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And just how much more cash out the door that you think you'll have to spend?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [61]

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So from above the claim, we're well over $50 million of enhancements. So the majority of those are things like the Noni Beach Autograph Collection. We think that there's a significant rate premium by extensively renovating those rooms and taking them up quite a notch, that there's well over $100 of rate potential by making that kind of investment by us. There's some F&B enhancements that we're doing on our dime that we think will be a great customer experience but also help the ultimate performance of the hotel as well. There's a number of those. But I think the number to think about is a number north of $50 million from the company going into this above the claim.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP & Senior Research Analyst [62]

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Got it. I sense you probably don't want to go down this path, but I was going for more, so the kind of gross cash out the door for you guys. Just trying to figure out potential balance sheet leverage impact between now and when a settlement is ultimately received. But we can discuss that offline further. Just switching gears, one more maybe for Tom on the group side. It seems like everyone is pursuing the group-up strategy. I know you guys have talked about it for a few quarters now. I guess my question is, do you sense it's getting more competitive to capture incremental group because everyone else is trying to go after that same group? How much more group is out there to actually get? And then how are you guys changing your approach here, if at all?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [63]

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So we still think it makes sense to group up in the defensive posture given the moderation in business transient demand. A lot of your success or failure in group and your ability to execute on that strategy depends on the strength of your particular market. So in Boston and Chicago, we have good city-wide that's going into 2020, so it's easier to execute on that strategy. And we think -- actually, Tom's group with -- along with Marriott at those 2 properties, has done a tremendous job in capturing a lot of in-house group and, really, more than their fair share as we move into next year. So it looks like based on our pace and our ability to execute on it, we're having success and continue to have success on that front. The group pace at the Boston Westin is up something like 40% for next year. And I think we're up almost 25% in Chicago Marriott. So I think a lot of people will pursue this strategy because it makes sense in light of the weakness in business transient. But so far, we continue to have success despite the competition for those groups.

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Operator [64]

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Our next question or comment comes from the line of Dori Kesten from Wells Fargo.

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Dori Lynn Kesten, Wells Fargo Securities, LLC, Research Division - Associate Analyst [65]

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Welcome, Jeff.

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [66]

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Thanks, Dori.

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Dori Lynn Kesten, Wells Fargo Securities, LLC, Research Division - Associate Analyst [67]

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Given the strong group pace for 2020, how should we be thinking about total RevPAR growth versus RevPAR growth for next year?

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [68]

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Dori, I think this year, we've actually had good success. Obviously, our total RevPAR growth, I think, has exceeded our rooms RevPAR growth by about 150 to 200 basis points. And I think next year, as we think about that revenue mix, I think we're optimistic that we can maintain that pace for next year. Yes, I think that's the way we were thinking about it.

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Dori Lynn Kesten, Wells Fargo Securities, LLC, Research Division - Associate Analyst [69]

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Okay. The $90 million of ROI projects that you talked about, how long do you expect it to take to generate the incremental $17 million to $19 million in EBITDA?

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Jeffrey John Donnelly, DiamondRock Hospitality Company - Executive VP & CFO [70]

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Those projects, that's going to be capital that's expended. It's actually already been occurring in 2019, 2020. And we think most of those projects will probably have about a 2-year ramp after that. So I think you're going to see this come folding into our numbers in 2020, 2021, 2022.

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Operator [71]

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

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [72]

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We'd just like to thank everyone for participating in today's call, and we want to thank you for your continued interest in DiamondRock. Have a great day.

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Operator [73]

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