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Edited Transcript of DRH earnings conference call or presentation 3-Aug-18 1:00pm GMT

Q2 2018 DiamondRock Hospitality Co Earnings Call

BETHESDA Aug 21, 2018 (Thomson StreetEvents) -- Edited Transcript of DiamondRock Hospitality Co earnings conference call or presentation Friday, August 3, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jay Lecoryelle Johnson

DiamondRock Hospitality Company - Executive VP & CFO

* Mark W. Brugger

DiamondRock Hospitality Company - President, CEO & Director

* Sean Kensil

DiamondRock Hospitality Company - Director of Financial Planning & Analysis

* Thomas G. Healy

DiamondRock Hospitality Company - Executive VP of Asset Management & COO

* Troy G. Furbay

DiamondRock Hospitality Company - Executive VP & CIO

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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

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Anthony Guarino

Green Street Advisors, LLC, Research Division - Senior Equity Research Associate

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael Joseph Bellisario

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

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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

I would now like to turn the conference over to your host, Sean Kensil, Director of Finance. You may begin, sir.

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Sean Kensil, DiamondRock Hospitality Company - Director of Financial Planning & Analysis [2]

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Thank you, Nicole. Good morning, everyone, and welcome to DiamondRock Second Quarter 2018 Earnings Call and Webcast.

Before we begin, I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities laws and may not be historical fact. 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 release.

This morning, Mark Brugger, our President and Chief Executive Officer, will provide a brief overview of our second quarter results as well as discuss the company's outlook for 2018. Jay Johnson, our Chief Financial Officer, will provide greater detail on our second quarter performance and discuss our balance sheet.

With that, I'm pleased to turn the call over to Mark.

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

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Thanks. Good morning, everyone, and thank you for joining us on DiamondRock's second quarter earnings call.

I'll start by providing a few brief remarks on the current economic environment then discuss our second quarter results, followed by a general company update. Jay will provide some additional color on our results and balance sheet. We will conclude the prepared remarks with our outlook for the remainder of 2018.

Consistent with our more positive outlook on the last quarterly call, we continued to see the U.S. economy growing at a healthy pace. In the second quarter, GDP grew at an annualized rate of 4.1%, the best quarterly growth in years. Importantly, GDP growth was bolstered by several of the economic indicators that are closely associated with lodging demand, including strengthening consumer spending and nonresidential business investment. Lodging fundamentals accelerated in the second quarter with the top 25 markets growing RevPAR 3.9%. In fact, we've now had 100 consecutive months of positive RevPAR growth. The supply/demand balance continues to be favorable with demand outpacing supply by over 100 basis points. Overall, macroeconomic and lodging fundamentals suggest that this cycle has room to run.

Turning to DiamondRock's second quarter results. We are pleased with our RevPAR growth of 2%. RevPAR met the heightened expectations that we articulated on our last call, overcoming the impact of onetime items at our Vail Resort and Boston Westin. Displacement at the Vail Resort, which is undergoing a major value-enhancing renovation during the second quarter, reduced RevPAR by approximately 50 basis points. Disruption at the Boston Westin from the Starwood/Marriott merger issues reduced RevPAR by another 130 basis points. Excluding the Boston Westin and Vail Resort, portfolio RevPAR increased 3.9%, which is in line with the accelerating trends in the broader U.S. and top 25 markets.

We are pleased with second quarter EBITDA of $75.8 million and profit margins of over 34%. Portfolio EBITDA margins contracted 79 basis points in the quarter, but if we excluded the impact at Vail Resort and Boston Westin, profit margins were actually flat and GOP flow-through was a healthy 56%.

Our asset management team continues to do an excellent job of managing our expenses in a rising wage and cost environment. They continue to find new opportunities for cost containment in labor efficiencies, food cost and energy cost to drive value and partially offset other cost pressures. Jay will touch on those successes in a minute.

Our second quarter adjusted FFO per share came in at $0.32.

Before going further, I'd like to now provide you with a brief update on our insurance claims for hotels that were impacted by hurricanes and wildfires that occurred in 2017. We have opened claims for 3 impacted hotels: Frenchman's Reef in the Virgin Islands, Havana Cabana in Key West and The Lodge at Sonoma in Northern California.

Frenchman's Reef continues to be a work in progress. We are developing a full rebuild and relaunch path forward on the resort while continuing our dialogue with the insurers. It will likely be early 2020 before the resort would reopen, but when it does, it would be a world-class resort with potential to generate new levels of profit. We hope to have a more definitive update on our next call as we continue to be in sensitive discussions with our insurers.

The Havana Cabana in Key West is completely refurbished and was fully relaunched in May. The feedback from guests has been terrific. The hotel has already moved up 15 spots on TripAdvisor. Havana Cabana is well-positioned for the coming high season.

The Lodge at Sonoma was closed for 9 days last year because of nearby wildfires. The resort was back in business shortly after the wildfires were contained and it will benefit in the fourth quarter from the easy comp to last year.

In total, DiamondRock recognized $2 million of business interruption insurance income during the second quarter. The amount recognized was less than originally expected, primarily because we did not recognize any business interruption insurance income for the Havana Cabana and The Lodge at Sonoma during the quarter as those claims were agreed to with insurers shortly after the end of the quarter. We still believe that $20 million in business interruption income for the full year is reasonable, although the timing of proceeds is difficult to estimate as it requires undisputed agreement with the insurers.

Turning to our internal growth strategy. We continue to actively invest in our hotels where we see outsized return opportunities. Here are a few of the more exciting projects underway.

At the Vail Resort, we are in the middle of transforming this spectacularly well-located property into a luxury resort. We see big upside here as there is a $175 rate gap to the luxury comp set and $3 million to $5 million of EBITDA upside with the right renovation and rebranding. Our first phase is underway and includes upgrading the rooms and meeting space to a luxury level. This asset has been one of our best-performing hotels over the years, generating a 15% NOI yield last year. We will continue to renovate sections of the resort over the next few years during the offseasons and finish the renovation when the hotel becomes completely unencumbered and optionality value hits its peak in about 36 months.

The Westin Fort Lauderdale Beach Resort, which is already benefiting from the recent opening of the Lona Restaurant by Chef Pablo Salas, will be enhanced with the guest room upgrade project during the third quarter to enable it to push leisure guest rates higher and book additional group business.

The Hotel Rex San Francisco is undergoing a true transformation and will be closed in Q4 to do the sale most efficiently. The hotel will reopen and relaunch by January with a new name in the Viceroy Urban Retreat Collection, where all of Viceroy's San Francisco hotels sit.

We are also encouraged that our 2017 renovations appear to be working well with nice gains at hotels like The Chicago Gwen with RevPAR up 24%, the Charleston Renaissance with RevPAR up 9.3% and the Shorebreak Huntington Beach Resort with RevPAR up over 6%.

I'll now turn to our external growth strategy. Our team is working on a number of small to midsized acquisition opportunities. As we updated you last month, the company raised a little over $90 million under our ATM program to replenish our investment capacity following our acquisitions in the first quarter. Our balance sheet positions us to be opportunistic on the deals we are currently evaluating.

In total, we estimate that DiamondRock has over $400 million in buying power. While we are unlikely to deploy all of that investment capacity this year, we are encouraged by the deals we are uncovering. The current acquisition pipeline has about a half a dozen hotels that we are in some stage of evaluating, the majority of which are off-market and resort-focused.

We have a clear external growth strategy and our recent deals give you a good sense of the direction we are taking DiamondRock. Those deals include L'Auberge de Sedona, Orchards Inn, the Palomar Downtown Phoenix and The Landing Resort & Spa on Lake Tahoe in California.

Each of our deals is carefully selected to deliver solid financial results while continuing to build one of the highest-quality portfolios among all lodging REITs. As measured by average daily rate, we are already among the top 3 in portfolio quality and we intend to elevate it from here. Our pipeline deals have an average ADR of over $300, which is currently higher than any public REIT.

With that, I'll turn the call over to Jay.

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Jay Lecoryelle Johnson, DiamondRock Hospitality Company - Executive VP & CFO [4]

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Thanks, Mark.

Before I discuss our first quarter results, I would like to remind everyone that comparable RevPAR, hotel adjusted EBITDA margin and other portfolio metrics include L'Auberge de Sedona, Orchards Inn, The Landing Resort & Spa and Palomar Phoenix, while excluding Frenchman's Reef and Havana Cabana Key West for all periods presented.

Overall, we were pleased with our results for the quarter. Excluding the Vail Marriott and Boston Westin, our portfolio RevPAR grew 3.9%, driven by a 4.5% increase in rate and 50 basis point decline in occupancy. April started out the quarter strong with RevPAR growth of 4.1% benefiting from the Easter shift into March. May results were approximately flat as expected, while June reaccelerated with RevPAR growth of 2.2%.

F&B results were much better in the second quarter with revenue and profit both up around 2%, while margins also improved by 13 basis points. Although the Chicago Marriott's group revenue increased 8%, it was a tough comp with several unique non-repeat banquet events in 2017 that weighed on overall F&B results. Excluding the Chicago Marriott, F&B margins were up an impressive 120 basis points with profit up nearly 7%.

Cost containment remains a top priority for the company. Although slightly better than our prior forecast, second quarter comparable hotel expenses were up 3.3% from the prior year. Expenses were driven primarily by increases in property taxes and insurance premiums, which impacted margins 70 basis points. Excluding property tax, insurance and some small non-repeating items, expenses were up 2.2% from the prior year.

The success of our asset management team was clearly evident this quarter. The team's focused and largest expense opportunities center around 3 areas: labor efficiency, energy programs and food cost. In the second quarter, productivity at our hotels improved 60 basis points while wage and benefit growth was limited to only 2.4%. Energy costs to the 13 hotels that have fully implemented our program were reduced an impressive 4.6%. Food costs were another good story as they were reduced 66 basis points in the quarter. We are proud of all these wins.

For the full year, our guidance implies holding margin contraction to approximately 50 basis points, which will translate into a margin expansion of approximately 30 basis points, excluding insurance premium and property tax increases.

Now, let me spend a couple of minutes discussing our quarterly results and trends in our 3 significant segments. Business transient was once again our strongest segment this quarter with revenues up 9.1%, ADR up 4.8% and rooms up 4.1%. This segment was strongest in our 2017 renovations with the Charleston Renaissance, Chicago Gwen, Lodge at Sonoma, Shorebreak and Worthington Renaissance growing a combined 40%. Business transient demand has been a bright spot this year and we expect this trend to continue with increasing corporate demand supported by tax reform and improving fundamentals.

The group segment was relatively flat this quarter. Outperforming were our 2 Chicago hotels, which were up a combined 7.2% in group revenue. We also continue to see strong group performance in our resort portfolio, in particular The Lodge at Sonoma, Charleston Renaissance and Westin Fort Lauderdale. In the quarter -- for the quarter, group bookings were up approximately 30% in the second quarter, continuing a strong trend in short-term group bookings. Pickup for the remainder of the year was up high-single digits with over 90% of our group business under contract for the year. Our 2018 pace is up approximately 1%, which is an improvement of over 100 basis points from last quarter. The momentum in group bookings has increased our confidence in group business for the remainder of the year.

Leisure transient, as expected, was softer this quarter. Revenue was down 3.3% due to a 7.5% decline in rooms and was partially offset by a 4.5% increase in rate. The Easter shift, renovation at Vail and softness at the Boston Westin were the primary drivers. However, we remain confident that the leisure customer overall is quite healthy.

I would now like to touch on some of our major markets. Our New York City hotels performed well again this quarter with 5.2% RevPAR growth, 100 basis points better than the broader market, and 200 basis points of margin expansion. Year-to-date, our New York hotels have grown RevPAR by 4.4% with 287 basis points of margin expansion.

We are encouraged by our strong performance in New York this year and the signs of positive momentum in the market overall. With supply normalizing after this year and both international and domestic demand steadily increasing, there are many positive tailwinds for our New York portfolio. The recent advancement of a new law against illegal short-term rentals should be another positive for the market.

Turning to Chicago. The Windy City remains one of our strongest markets year-to-date. The Gwen and Chicago Marriott grew RevPAR 24% and 8%, respectively, in the second quarter. The Gwen continues to ramp and gain market share following its renovation and conversion to the Luxury Collection. In addition, it remains firmly embedded in the top 10 for TripAdvisor hotels in the city.

The Chicago Marriott is also outperforming following completion of its multiyear renovation and continues to receive great reviews from guests and meeting planners. To put the benefit from our $100 million renovation in perspective, the average guest satisfaction score of a renovated room is a remarkable 20 points higher than the pre-renovation room score. That kind of difference will drive demand. We also have one of the best fitness centers of any Marriott. Guest satisfaction scores are 26 points above brand average and drive business.

We expect our Chicago hotels to outperform the market with combined group pace for the second half of 2018 up approximately 11%.

Boston has been a more challenging market for us as well as for some of our peers. While the Boston Hilton outperformed the market with 1.3% RevPAR growth and 5 points of market share gain, the Boston Westin struggled this quarter.

As we mentioned on the last call, the Boston Westin is underperforming largely because of ongoing integration issues from the Marriott/Starwood merger. RevPAR contracted 9.4% this quarter. When Marriott reorganized the cluster sales team following the merger, there were major integration issues that essentially caused the legacy Starwood teams to freeze their sales efforts. As a result, the hotel's pace fell behind. While Marriott had since made efforts to remediate the merger impact, it will take time to get the hotel completely back on track and we expect the third quarter to remain challenging for the Boston Westin.

Before turning the call back to Mark, I would like to briefly touch on our balance sheet. We strengthened our conservative leverage profile and ended the quarter with a pro forma net debt-to-EBITDA ratio of only 3.1x, cash of approximately $135 million and no outstandings under our $300 million revolving credit facility.

Simply put, it is a great balance sheet. We have $400 million of investment capacity and will remain conservative in order to be prepared for the unexpected.

I would now turn the call back over to Mark.

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

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Thanks, Jay.

Yesterday, we reaffirmed our guidance for full year RevPAR growth of 2% at the midpoint. As you will recall, on our last call, we raised DiamondRock's full year RevPAR guidance by a full 100 basis points. Our current guidance does include the impact from the Marriott/Starwood integration, which we estimate shaves off about 50 basis points on full year RevPAR growth.

Our guidance for full year EBITDA and FFO remains $254 million to $263 million of adjusted EBITDA and $205 million to $212 million of adjusted FFO. As mentioned in our recent 8-K, we are updating our FFO per share range to reflect our recent ATM issuance. The updated guidance is for $0.99 to $1.03 per share.

Looking towards the second half of the year, we expect lodging demand to remain robust with industry RevPAR growth in the range of 3% for the third quarter.

DiamondRock's third quarter results will be impacted by about 225 basis points from a combination of repositioning of renovations and the timing of citywide calendars. However, we expect our fourth quarter to be the strongest of the year with RevPAR growth reaccelerating to over 3% with better citywide calendars, favorable comps to last year's natural disasters and tailwinds from recent renovations.

To wrap up, DiamondRock is well-positioned as we move forward with a high-quality portfolio that will be largely renovated by the end of this year, a number of unique internal growth catalysts still to be tapped like the repositionings at Vail, the Rex San Francisco, and Frenchman's to drive performance and the company has over $400 million in dry powder to be opportunistic in pursuing acquisitions.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Austin Wurschmidt from Keybank Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [2]

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I know you guys have talked about -- and appreciate some of the data points and the positive signals we've seen into the economy, but some certainly expect this could be short-lived. And I guess, with the move towards building a more of a luxury resort-oriented portfolio, it's certainly building a differentiated portfolio. But I'm curious, based on your research, how do you see this segment or how does it perform later cycle and maybe how are you accounting for this risk as you continue to pursue additional acquisitions in this segment?

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

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Austin, it's a great question. This is Mark. So our research and our experience has been this is actually, on a risk-adjusted basis, the best allocation of capital at this point in time. If we look back historically over the last downturn, the resort portfolio that we had outperformed the urban portfolio. So in a downturn, it seems like this is more resilient.

As we move forward and we're allocating capital and you look at our current resorts or if you had the opportunity to look at our pipeline, they're in much more supply-constrained markets where it may be -- either there's a moratorium on building like a market like Key West or Lake Tahoe or there are natural barriers like a Sedona where it's surrounded by national parks, which no one could build hotels in.

So we think if you look forward to allocating capital now and the external growth front, that's probably your best risk-adjusted return. We also like the general demand outperformance of experiential resorts. We do think that segment probably will be more resilient in the next 3 to 5 years and outperform the national average.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [4]

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Great. And then, just curious at The Landing Resorts. The hotel has been a little soft here before. And I'm just curious how that stacked up relative to your underwriting and maybe when should we expect to see some improvement there on either the margin side or from a RevPAR growth perspective?

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

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Sure. So we remain really excited about The Landing and all the value enhancement opportunities ahead. I would tell you, don't be fooled by the RevPAR change in Q2. It is somewhat the law of small numbers. For instance, if we sold only 4 more rooms every night in the quarter, RevPAR would have been up 4% versus down 4%. So it's just -- it's very sensitive given its size.

We have a great plan here. We've only owned it for about 120 days. We're executing. We brought in the same manager that we did in Sedona and we're copying that playbook. As you know, at the Sedona acquisitions last year, that we were able to increase RevPAR 19% and implementing a lot of the things that we're implementing currently at The Landing. So we expect The Landing in the back half of this year to have mid-single-digit RevPAR growth as our initiatives start to take hold. And remember, none of this includes the real nugget of NAV accretion here, which is building the 20 incremental entitled rooms at the resort.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [6]

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Yes. I was going to follow-up with that. What's kind of the time frame? Do you have anything in mind at this point on the build-out?

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

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Yes. So it will probably take us about a year to get through all the processing and then we'll build them the following year would be the kind of current thinking of the company.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [8]

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That's helpful. And then more broadly for the portfolio, just curious how you're thinking about, directionally, capital expenditures in 2019?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [9]

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We're -- we haven't even started. We're in the very preliminary discussions with operators about our '19 forecast. But it will probably be something similar to this year, although we won't have, hopefully, the same year-over-year headwinds we're having with property insurance and real estate taxes.

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Operator [10]

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And our next question comes from Anthony Powell from Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [11]

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Just a question on the Westin Boston. Is the sales force, I guess, staff and their approach there has it been fixed to your satisfaction? And what is Marriott's response been to your concerns? Or how did they react to your -- in the discussions with you?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [12]

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So I can tell you it's a top priority for DiamondRock and we've had discussions at the highest levels of organization. Tom spent probably every day interacting with Marriott on how they're addressing it. They do have a detailed action plan. I'll let Tom add to it.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [13]

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Hi, Anthony. This is Tom. We -- Marriott has been very responsive. We've added additional resources and we've -- obviously the -- everyone was rehired April 1. And so they're -- we've structured it similar to how we're doing the Marriott Chicago, which has been, obviously, fairly successful. So we'll have people at the property level. We've retained our own revenue manager, not clustered. And then, we're still dealing with the global sales, national sales and cluster sales organization and the way that's structured. So it's a work in progress, but they've been very supportive and open to listening to our suggestions. And they're -- and we expect that this -- we're going to have some positive wins here as we look forward.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [14]

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Anthony. I think the best thing to think about this is integrations are tough. It's obviously a major acquisition by them. The best analogy is probably the Gaylord when they took over the operation of those. There are hiccups when you do this kind of large integration, but Marriott almost always gets it right and the power of that system and the expertise of the executives and the sales force there, over the extended period of time, is hard to top.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [15]

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Got it. And moving onto Chicago, the performance there has been pretty strong. That said, the market tends to have on years and off years. So how does the Chicago calendar look in '19?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [16]

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So we're -- it's good this year, but we're going to significantly outperform the market. We have been outperforming the market. We'll benefit in 2019 from the comparison of having our meeting space out in the Chicago Marriott for the first couple of months of '18, so that will help. '19 is down a little bit versus '18. So the citywide will have to work its way -- we'll have to work our way through that in Chicago, but already 2020 looks like a very good year. So we're setting up for what we think will be a reacceleration in '20.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [17]

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This is Tom, Anthony. The other piece that we've mentioned in the past is choose Chicago and having the marketing to leisure guests, making sure that Chicago is not just a city that's thought of as a convention city, but all the other features, retail, restaurants. The leisure demand into Chicago has been outstanding and we believe that's obviously going to continue. International travel into Chicago is up. And we have the 2 best locations in the market. We're at the river and on Michigan. So we feel pretty positive about, one, the group patterns next year. Our new meeting space. Our prospects are strong. And with leisure, it bodes well. So I think -- and then I think that we're -- Chicago is a very positive story for us looking forward.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [18]

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Okay. Maybe just one more for me. You have been very focused on the resort acquisitions, which was very different than some of the peers. What do you think your peers are maybe missing about in this space? What -- how is your underwriting maybe different? Or why do you have a conviction on the space than others?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [19]

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I'd hate to speak for our peers. You should ask them. I think that -- really, hats off to Troy on uncovering a lot of unique off-market deals. Our team works very hard. We've got a very good database of these kind of one-off resorts in these unique markets like Sedona. And Troy's team has really done -- I mean, some of these stories behind these acquisitions are really quite remarkable and sometimes quirky. But I think one of the things that we do really well, and particularly, again, I'll give credit to Troy, is uncovering these deals which are hard to do. It's kind of become a specialty. And the more we do, the better we get at it, the more we have the reputation as the go-to company that you want to be dealing with when you have one of these kind of resorts. So I think it builds on itself a little bit.

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Operator [20]

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And our next question comes from Michael Bellisario from Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [21]

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Just want to go back to Vail and Boston. Can you maybe give us a sense of the disruption that you experienced in the quarter versus your expectations? And then, how those 2 hotels are affecting full year guidance? Any changes that you see in the back half of the year from those 2 relative to expectations 90 days ago?

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

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So I'd say the Vail is right on expectations that we had at the beginning of the year. So it's pretty much playing out as we thought it would. The rooms out of service and the meeting space out of service, so we had that buttoned up. Boston is playing out the same as we thought it would on the last earnings call, but it was below our expectations if you asked me on January -- asked me on January 1, it's below those expectations. But we had it pretty well forecasted for Q2 and for the back half of the year. Vail rooms renovation will finish up in early September and then be able to get back on track before high season. The Boston Westin, as Jay said in the prepared remarks, is a little less bad in Q3 and gets substantially better in Q4. Hopefully, we'll set up to perform at least at the market level in 2019.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [23]

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And did I hear you correctly that, that one hotel in Boston is 50 basis points of RevPAR impact for the full year? How you're thinking about it?

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Jay Lecoryelle Johnson, DiamondRock Hospitality Company - Executive VP & CFO [24]

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No. It's 130.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [25]

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For the quarter?

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Jay Lecoryelle Johnson, DiamondRock Hospitality Company - Executive VP & CFO [26]

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For the quarter, yes. 50 for the full year.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [27]

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Got it. And then just maybe high level back to the acquisition and underwriting topic, how are you thinking about the out-years differently today than maybe 180 days ago or even 90 days ago kind of as you're doing your 5-year model? And then how are you adjusting expense assumptions any differently today?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [28]

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Well, then -- the 90 or 180 days ago, I would say the -- so we run different sensitivities when we have a discussion. When we review it with our executive team and we review it with the board, we have sensitivities on kind of a baseline, an upside scenario and a downside scenario. I would say the scenarios are relatively the same. The difference versus 3 or 6 months ago is I think we have more confidence that we're going to be in the best case or upside scenario and there's probably less risk that the downside scenario will come to fruition.

On the expense side, we're watching it carefully. We try to put it in there correctly. The variable, I think, is what the risk is on wages over the coming years and that really depends on what markets we're in. So in New York, for instance, there's a long-term union agreement, locking in wage -- we're at about 2.6% over the coming 5 years as a CAGR. So that one we feel good about. We do have to think about in these resort markets about how we are staffed and the ability to control cost over time. So each one is a different story. As you know, in a couple major markets like San Francisco, the union agreements are coming up. So you have to be careful about making assumptions about what the new union agreements look like and what wage and benefit increases will be.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [29]

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Got it. It sounds like the 3 different buckets, your underlying assumptions in them haven't changed, but your assigned probabilities, that's really the only change. Is that fair?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [30]

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That's fair assessment.

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Operator [31]

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And our next question comes from Bill Crow from Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [32]

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Mark, what is the cost inflation differential between resorts and typical urban properties?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [33]

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It's a great question without a specific answer, but each one's different. I would say the advantage of many of the resort markets that we're in is that they are nonunion markets and often we're the most important employer in town and we're often the best employer, some of the highest-rated jobs in a number of those markets. And we can get productivity gains with new labor systems because, again, we're not fighting against work rules and fixed labor contracts.

In our portfolio, I'd have to go back and back test our particular -- our portfolio, but my guess is, if I went back and did the analysis, it's going to be less than certainly the major markets that are -- where wages and benefits are controlled by the union increases.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [34]

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Okay. You provide a good detail on Chicago and indicated citywides are down next year. I'm just wondering if you could quickly run through some of your major markets comparing the citywides this year to next year?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [35]

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Tom's got that on the seat in front of him.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [36]

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Obviously, everyone, well, reported on San Francisco and how strong San Francisco is doing next year. San Francisco is up. And most of the other major cities are slightly down next year. When you look at Boston, Chicago, Denver, Fort Worth, Fort Worth's up -- Fort Worth's down slightly. Many of the major citywide markets are down, but I think what we're seeing is in some of our -- in our markets, the patterns are positive like first and second quarter are good and the back half of the year is down. A lot of -- I've been talking to some of the different cities, we've found that they believe, obviously, that it's really about peaks on the citywide. And so -- and we're heavily focused on self-contained growth in all of our markets to make sure we insulate ourselves from citywide pace. So it varies city to city. San Diego is slightly down next year. And in Salt Lake City, obviously, slightly down, but our self-containment in Salt Lake City is up. So it varies, but for the most part, San Francisco is pretty positive and everybody else seems to be flat or down -- slightly down next year.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [37]

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Yes, but I would say New York's not really relevant. It's not a citywide, so that's going to be really in transient demand. Chicago is down a little bit, but 2020 looks really good. We are going to benefit with Gwen continuing to ramp and the renovation comp in Chicago. So hopefully, we'll do -- we should gain on the market there. Boston is down a couple of citywides, but the pattern is better for next year so that should help with stronger -- in the kind of the weakest periods. So year-over-year, that should be okay, but down a little bit. And then the resort markets, that's going to be the strength for us. It's not going to be as focused on the citywide.

We are implementing in a number of these markets in-house group strategies, that's how -- I'm kind of alluding to. In Chicago, we have good -- the solution -- when it's not a good citywide issue, you try to get as many small and midsized groups and really group up with your own business. And that's been the strategy we've already started implementing in a number of these markets.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [38]

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Yes. All right. I got one more question, which is just remind us -- or maybe you haven't articulated it yet -- what are the major kind of disruptive capital projects that we're going to be talking about next year that are impacting results, if there are any? And then, what is the delta as far as the disruption expectations from '18 to '19?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [39]

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So we're in the process right now of -- actually, we just had a board meeting this week where we're talking about some major renovations. We would expect less disruption in 2019 than '18 by a couple million dollars and less disruptive projects generally in 2019 versus 2018.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [40]

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So it should be kind of back to a normalized year. Is that the way to think about it?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [41]

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Yes.

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Operator [42]

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And our next question comes from Chris Woronka from Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [43]

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Wanted to -- if we could revisit the group out of room spend because we've heard that is a source of strength from you guys and some others. Is that more a function of pricing or volume or both? Is it sustainable? Or is there some kind of onetime, I guess, ramp-up this year?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [44]

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Okay. So I'll just jump in and let Tom kind of get in the granularity. But in this quarter, industry we saw group leading the way. It's one of the strongest segments. So when group is stronger, you're going to get more out of room spend. It has been a pretty good trend for us. We're obviously a fairly small portfolio so ours will go up and down. It won't necessarily correspond every quarter with the industry averages, but anecdotal evidence we're getting from our properties has been positive on the out of room spend, but quarter-to-quarter depends a little bit on the type of groups that we're booking.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [45]

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Yes. This is Tom. For the second quarter rev, 2.3% on -- with our banquet contribution. And there's a heavy focus on the asset management side to really start paying attention as with regards to incremental spend, looking at banquet pricing, looking at into all the incremental revenue opportunities that could be driven, audiovisual, other room rental, making sure that attrition clauses are right, sliding scale exists with regards to pickup. So that is low-hanging fruit that sometimes gets forgotten. And so the asset management team is heavily focused on that, but that should be the second most profitable business coming into the hotel. So there's a heavy focus to it and metrics against it.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [46]

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Okay. Very good. And then just on kind of the Marriott group, the integration issue on the Westin, I think you mentioned 50 bps impact RevPAR this year. I mean, should we assume that, that just reverses next year? Or is there -- are there cases where a competitor took multiple years of business as a result of this?

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

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No. I don't think there's cases where multiple years of business, but we don't know about '19. I mean, we're seeing that our pace is better than a number of our peers in Boston for next year. And so we would anticipate that it's going to be fine next year, but I think it would be too early for us to say we think we're going to outperform the market because we're -- it's going to be 100% better by next year because there's some loss of -- in the year for next year business that will take a little while to put back on the books.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [48]

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Okay. Great. And then just on the leisure comment, should we assume -- I know you mentioned that the room nights were down on the quarter. Should we assume that, that's all function of kind of an intentional remix and not any kind of -- should we not think about it as the leisure segment being maybe tapped out? How do you guys look at it?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [49]

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No. I mean, leisure remains strong for us. I mean, if we take Vail out of our portfolio, we're up about 3.5% in RevPAR. Our Asset Management Group is very focused on maximizing, obviously, the rate because it's got the better flow. House has been implementing a number of strategy about room types and trying to up-sell and create new rate categories, which are allowing us to push rate, and that will continue to be our focus as we move forward. But we feel good about the leisure demand. We feel good about the leisure customer. And we have a lot of ideas and asset management initiatives to kind of continue to push the rate on the resorts.

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Thomas G. Healy, DiamondRock Hospitality Company - Executive VP of Asset Management & COO [50]

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About the Easter shift, right? Easter in March versus April is a big driver of rooms. And some of that noise was in Fort Lauderdale. Fort Lauderdale for the quarter was up in group and probably displaced some leisure. So that was positive because the spend was good. And then the Easter shift -- obviously, Easter drives a lot of leisure business and so that's a piece of it as well.

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Operator [51]

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And our next question comes from Jeff Donnelly from Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [52]

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Mark, you were using the analogy or the comparison to the Gaylord integration into Marriott. That ended up lasting a few quarters. I guess, I'm just curious, do you think there's a chance that the integration issues in Boston could actually spillover into 2019 in some -- and even in some reduced way?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [53]

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Yes. I mean, I know it's not a perfect analogy because here it's -- they're taking on the whole system. No, I mean, if we're looking at our forecast and we're looking at our numbers, it books less that in Q3, but still not great and then it looks like it's getting more on -- back to track in Q4. But in the quarter 4 next year, we lost -- we just lost some of those groups, right, when they weren't selling the hotel effectively and we'll have to climb out of that hole a little bit as we move into 2019. So I think we get back on track just the exact -- slope of that curve is still uncertain, but it feels like they got the right sales people in place. We've added some sales folks on property now pull through the business. The action plan, our team is working closely with their team. It seems like all the pieces are in place now. It's just a matter of executing on the strategy and getting the groups into the hotel.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [54]

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Is there ever any -- this might sound laughable, but is there any ever recourse you as an owner have against the other brand in these situations considering that much of the issue, ultimately, seems to be caused by them?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [55]

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Not really. I mean, trying to prove that claim would be tougher. Remember, they're -- what we're really looking for them is not to make it whole on the lost profits here, but it's to take the hotel ultimately to a highest possible stabilized NOI. I'd much rather than recouping a little bit of money, get them to take this to a new level of profitability. And that's our goal with them.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [56]

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And just so I'm clear, I mean, this is really kind of an issue of assets that were formerly Starwood-managed because I'm guessing you didn't see similar issues at your Westin San Diego?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [57]

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Yes. Well, it's -- this is our only Starwood-managed property. This is really where you're going to see the most impact. But for franchise, you're not in there -- you're not necessarily as much affected by the cost of sales. There will be some impact, but it's not as dramatic.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [58]

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Yes. And to switch gears. I know -- I heard your prepared remarks, but on Frenchman's, do you have a better sense of whether you'd be leaning towards rebuilding versus maybe selling at this point? And, I guess, if you do decide to rebuild, do you just have an estimate of how long that might take?

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

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So let's take the easier question first, which is the length of time to rebuild. So the goal is try to get it reopened, if possible, for the high season in 2020. So that would be the goal if we rebuild. And we have time lines where we're in that ballpark depending exactly how the construction schedule goes. We have a meeting scheduled with insurers a little later this month. So there's a lot of sensitivities around that discussion in that meeting. So -- and we have additional conversations going on with the local government about our partnership there as well as talking to brands about financial participation. So there's a lot of moving pieces. I'd say the design looks great that we have and the enhancements that we have for the property. I think it will really be terrific, but I think it's too -- we're at too sensitive of a juncture at this moment to elaborate too much on this call.

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Operator [60]

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And our next question comes from Lukas Hartwich from Green Street Advisors.

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David Anthony Guarino, Green Street Advisors, LLC, Research Division - Senior Equity Research Associate [61]

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This is actually David on for Lukas. I was wondering, can you comment on how the union buyouts at the Lex are going? It looks like the full year severance guidance came down a bit. I'm just wondering how we should read that.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [62]

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Sure. I mean, the way the program works is you need to offer it to all the workers in the various departments and you don't know what the actual take rate would be until they elect the option. It met our original expectations. We had a little bit higher and they were still trying to have some discussions of kind of a win-win on a couple of other smaller groups within the hotel. We did spend about $10 million on severance so far. We think with that will increase profits at the hotel by about $1 million in the back half of this year and about $2 million in 2019. So it's been a smart deal for us and we think it's a win for the employees at the hotel as well.

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David Anthony Guarino, Green Street Advisors, LLC, Research Division - Senior Equity Research Associate [63]

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Okay. And then just kind of switching gears on the Havana Cabana hotel you guys just opened. Just curious how that's been received in the market? And then how long will that typically take, kind of the full rebranding and refurbishing of the hotel before it returns to a stabilized level?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [64]

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Yes. So it's totally transformed from the project it was before. It's 15 points higher the space's ranks ranking, I guess, would be the right word to say. In TripAdvisor -- if you go on TripAdvisor, you could see the feedbacks are very positive. We would expect it to be significantly ramped by high season Q1 of next year, but it will -- at the balance of this year. And one of the reasons it was kind of great to open it in a softer time of the year is we'll have time to ramp it up before the highest rate of business comes in January, February.

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Operator [65]

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And our next question comes from Stephen Grambling from Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [66]

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Maybe this has been addressed a little bit. But how was the competition for the resort assets that you're looking at evolve relative to maybe some of the other segments of the space as it relates to buyers in the bid process? And who typically is that competing bidder?

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [67]

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Troy, you want to take that?

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Troy G. Furbay, DiamondRock Hospitality Company - Executive VP & CIO [68]

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Sure. Well, I would say, look, we've really been focused on off-market deals. I would like to think we sort of had less competition because these weren't public auctions. My concern would be, as we have success in this area, that more sort of jump onto that bandwagon. So we're always concerned about competition, but I think if we -- the more we can source off-market, the more we can mitigate a lot of competition that runs the price up.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [69]

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And then, I guess, why do you suppose more of these types of deals or situations are available in the market now?

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Troy G. Furbay, DiamondRock Hospitality Company - Executive VP & CIO [70]

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Well, I don't necessarily think there are more available. We've been more focused on it and trying to identify them, but I don't necessarily think there are more out there that we haven't seen in the past.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [71]

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Got it. And then, I guess, perhaps I missed this. Maybe if you could just contextualize why you feel acquisitions are a better use of capital at this point relative to ROI or other areas of distribution?

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

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I'll take that one. So we're doing internal and external growth. We're spending over $100 million on projects like the Rex transformation in San Francisco or the Vail upgrade. So we are pursuing that kind of -- the high ROI projects within the portfolio.

External growth. I mean, I think the 2017 acquisitions speak for themselves. We bought 2 hotels. They were trailing 15x EBITDA multiple. Based on our current forecast, they're about 9.5x EBITDA multiple on our total investment for 2018. So if we can find deals like that, it's pretty obvious that they create a lot of value for our shareholders. Now, they're not all going to be that good. That one certainly created a bunch of value for our shareholders.

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Operator [73]

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And I'm showing no further questions at this time.

I would now like to turn the call back to Mark Brugger, Chief Executive Officer, for any further remarks.

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Mark W. Brugger, DiamondRock Hospitality Company - President, CEO & Director [74]

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Thank you, Nicole.

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

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Operator [75]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.