DiamondRock Hospitality Company (DRH) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 DiamondRock Hospitality Earnings Conference Call. My name is Karissa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed.

Thanks, Karissa. Good morning, everyone, and welcome to DiamondRock's Fourth Quarter and Full Year 2011 Earnings Conference Call. Today, I'm joined by John Williams, our President and Chief Operating Officer; as well as Sean Mahoney, our Chief Financial Officer. As usual before we begin, I would like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities law. It may not be updated in the future. These statements are subject to risks and uncertainties as described in our SEC filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP in our earnings press release. DiamondRock achieved great success in 2011. We executed on our strategic objectives. And as a result, DiamondRock continues to be a leading lodging REIT with exceptionally strong balance sheet and premium portfolio of high-quality hotels in top growth markets. Overall, we hold firm to our conviction that lodging fundamentals are in early stages of a recovery that will benefit the entire industry. However, we are particularly bullish on DiamondRock for several specific reasons. First, there's a lot of upside in our existing portfolio. To put our upside in perspective, if our portfolio only reaches prior peak levels of 2007, and we project much greater growth, that will mean that we will see $80 million in additional hotel EBITDA growth from last year's results, equivalent to 48% growth over 2011. Importantly, since our portfolio is forecasted to exceed prior peak occupancy in 2012, much of our future growth is coming from highly profitable increases in room rates. Second, after the disposition of the 3-pact hotels under contract Inland, which we expect to close very soon, the company will have completed over $1 billion of transformational hotel transactions since early 2010. After these transactions, the portfolio quality is even higher with 95% of our hotel profits coming from hotels located at gateway cities and destination resort locations. By all accounts, these urban resort markets will outperform the rest of the lodging industry over the next decade. We expect our portfolio weighted in New York City, Chicago and Boston to lead the way for the company going forward. Third, our $45 million repositioning effort at Frenchman's Reef resort is substantially complete. We expect to exceed our original 2012 pro forma underwriting, our 2012 budget for Frenchman's reflects over $14 million in EBITDA growth from 2011 and the hotel's future funnel of booking continues to indicate that these coming years will be very successful. Fourth, we signed a term sheet with Marriott to convert one of our largest hotels, the Lexington Hotel in midtown Manhattan, from a Radisson to a member of the Marriott Autograph Collection. In connection with this rebranding effort, we plan to invest $30 million of incremental capital to upgrade the hotel. We anticipate significant rate potential arising out of this repositioning. Finally, with the completion of the sale to Inland and our Lexington Hotel financing, we will continue to maintain one of the most enviable balance sheets among our lodging peers, with 2012 debt to EBITDA of just over 4x, an undrawn corporate revolver, no corporate debt and significant cash. Our balance sheet strength gives us ample dry powder to be opportunistic in the acquisition market. Turning to operating results. Today, we are pleased to report strong results for the fourth quarter and full year 2011, a continued evidence of substantial recovery in lodging fundamentals. For the full year, pro forma RevPAR increased 6.3%, and adjusted EBITDA was $162.1 million, which resulted in adjusted FFO per share of $0.62. Results would have been even higher except for the impact of 2 one-time items, the $10 million in total renovation disruption at our Caribbean resort, and we recorded an unexpected write-off of approximately $1 million in receivables related to the American Airlines bankruptcy. We saw exceptional performance from a number of our hotels in 2011. Particularly noteworthy, we experienced double-digit RevPAR growth at the Chicago Conrad, the Sonoma Renaissance, the Alpharetta Marriott and the Chicago Oak Brook Hills Marriott. Additionally, the Hilton Minneapolis, a 2010 acquisition, turned in a RevPAR gain of almost 9%. Results were more challenged at the Griffin Gate Marriott due to a difficult comp and the Austin Renaissance. Both of these hotels are included in the 3-pact sales transaction, which is expected to close in short order. We wanted to quickly touch on the much publicized snowfall out west and its impact in our Vail Resort. We're happy to report that the snowfall has been considerable better over the last 7 weeks. In addition, one of our asset management initiatives last year was to implement a 45-day cancellation policy at the hotel. This policy allowed us to preserve our December reservations and report a 6% RevPAR increase for December at our Vail resort. We'd also like to take this opportunity to update on some particular events in the company. First, the Lexington Hotel in New York City. As John will discuss in more detail, we are planning to rebrand the Lexington Hotel and invest capital to allow this asset to reach its full potential. While the hotel already runs over 90% occupancy, we're convinced that implementing a strategy of rebranding the hotel will result in significant rate upside. We are also close to finalizing a $170 million loan on this hotel at an attractive rate. This loan allows us to completely pay off our corporate revolver and further positions us to be opportunistic on acquisitions. Second, an update on the Allerton Chicago Hotel. We hold the senior note on the Allerton Hotel on Michigan Avenue in Chicago. As you may recall, we took advantage of a distressed debt situation and purchased the note for approximately $60 million or the equivalent of only $135,000 per key, which is a substantial discount to the face value of the note. The note is in bankruptcy or the hotel is in bankruptcy, and we feel good about our cost basis and secured position. We expect resolution of this matter later this year either by attaining ownership of the hotel or receiving a valuable new note. We will keep you advised as this one plays out. Lastly, an update on the Chicago Conrad Hotel. The Conrad Hotel had a great 2011 and looks like it'll have another terrific year in 2012. However, during the downturn in 2010, the hotel failed its performance test. We used this as an opportunity to negotiate a win-win deal with Hilton that gave us a brand-new multiyear performance guarantee, which paid us $750,000 last year and is projected to pay us $800,000 this year. As John will discuss, we're also investing $3.5 million in valuable ROI projects at this hotel. As I mentioned earlier, we remain optimistic about lodging fundamentals. With supply growth that less than 1/2 of the historic average and occupancy levels already up, the industry has a terrific backdrop for pricing power as demand continues to improve. Our outlook for upper upscale hotels in North America is for 2012 RevPAR growth in the range of 4% to 6%. This outlook is based on our valuation of key indicators for demand such as corporate profit growth, corporate investment, employment trends and leisure spending trends. We do expect certain markets to outperform in 2012. Among the markets in which we are concentrated, Boston is likely to be the strongest. An operator budget is showing double-digit RevPAR growth for our Westin Boston Waterfront Hotel. Chicago Austin should enjoy a good year with a very strong financial calendar. Although we do expect our Chicago Marriott Downtown to experience some negative but isolated impact from the G-8 Summit in May. Salt Lake City will be another top-performing market with a solid commencing calendar and a grand opening next month of the exacting $1 billion City Creek mixed use project, which is adjacent to our hotel. We expect our Salt Lake City Marriott to achieve close to double-digit RevPAR growth in 2012. New York City, our most important market, has started off strong with double-digit RevPAR growth in January. We are budgeting 5% to 7% RevPAR increases in 2012 for our 4 hotels in that market. Other strong markets for us include Charleston and Sonoma, a prime beneficiary of the resurgence in the San Francisco market. we would also note that we expect more modest growth at the Hilton Minneapolis due to a tough commencing calendar comp, Bethesda Suites from a soft year in DC, and at the Vail Marriott as a result of delayed snowfall. Additionally, 2012 RevPAR guidance will be 75 basis points higher and adjusted EBITDA will be higher by $3 million, but for the expected displacement from the facade project at Worthington Renaissance and the impact of the G-8 Summit on the Chicago Marriott Downtown. Real estate taxes are also expected to be up $4 million in 2012. Overall, I am pleased to report that 2012 is off to a very strong start. In reviewing our January operating results for the portfolio, excluding noncomp Frenchman’s, we achieved impressive RevPAR growth of 10%. We experienced particularly outstanding results from our hotel in New York City, Chicago, and Sonoma. These results reaffirm our convictions of the company's portfolio is well-positioned for growth. Now let's turn to 2012 guidance. I'd like to emphasize the disclosure in our press release that our 2012 RevPAR guidance includes our hotels that were owned since January 1, 2011, with the exception of Frenchman's Reef and the 3 hotels classified as held for sale. In addition, the adjusted EBITDA and adjusted FFO guidance includes the presale operations from these 3 hotels. Finally, adjusted EBITDA and adjusted FFO guidance excludes cash interest payments and legal fees related to the Allerton Hotel, which is a change from 2011 and may be different than that way you want to model it for 2012. Accordingly, the company expects the following full year 2012 results: RevPAR growth of 4% to 6%; adjusted EBITDA of $167 million to $176 million; adjusted FFO per share of $0.68 to $0.72. For the first quarter 2012, we expect RevPAR growth of 5.5% to 7.5%; adjusted EBITDA of $18 million to $21 million; and adjusted FFO per share of $0.06 to $0.08. Before turning the call over to John to discuss operating results in more detail, I do want to comment on dividends. In 2007 DiamondRock's shareholders were paid over $54 million in cash dividends. We believe that dividends are an important part of the investment thesis of being a REIT. To us, paying a meaningful dividend generally indicates prudent balance sheet management and a commitment to shareholder returns. With that, I'll turn the call over to John.

Good morning, everyone, and thanks for joining us today. As Mark mentioned, the lodging industry in 2011 enjoyed continued improvement in operating trends. We believe that we're set up for a sustained recovery and an extended lodging upturn because of the absence of new supply, the indications of continued recovery in the U.S. economy and increasing international travel activity. The fourth quarter continued the positive trends of the year and even showed improvement in areas that had previously lagged, like banquet sales. In describing our results and to provide our investors with the clearest report on how our portfolio actually performed, I will exclude the 3 hotels held for sale and Frenchman's Reef, which had inventory out of service for several months from the renovation. In the fourth quarter, RevPAR for the DiamondRock portfolio increased 6.2%, driven by equal contributions from increases in rate and volume. Fourth quarter food and beverage revenue was up 7.1% and included a very encouraging 7.9% increase in high-profit margin banquet and AV. Our aggressive initiatives on food costs and menu refinements, along with higher banquet sales, enabled food and beverage margins to increase 64 basis points in the quarter. Cost controls remain a focus of management and house profit margin increased 113 basis points compared to Q4 2010. Demand was good in the fourth quarter with all segments showing growth, more evidence of continued demand recovery. Group revenue in the quarter was up 7.6%. Business transient was up 1.8%; leisure and other discount revenue was up 5.5%. And contract and other revenue was up 40%. The room segmentation for the portfolio by revenue in Q4 was 32% group, 33% business transient, 29% leisure and 6% contract and other, reflecting the very balanced revenue mix of our portfolio. We are encouraged by productivity gains and wage controls. Overall, productivity for the portfolio was good with man-hours per occupied room down slightly, and sales per man-hour up 4% in the quarter. Overall for the quarter, salaries and wages were up 2.1% and benefits were up 2.7%, a very good result in light of the higher volumes of both rooms and food and beverage at the hotels. Travel agent commissions and credit card fees continue to negatively impact costs and trend higher at approximately 15% and 5%, respectively. Support costs in the quarter were well-controlled and were up only a total of 3.7%. In support costs, sales and marketing and G&A costs were higher partially from increased occupancy, up 5.8% and 4.7%, respectively. These costs were partially offset by modest increases in repairs and maintenance, up 1.4% and utilities, which were lower by about 3%, reflecting the $4 million we've invested in energy savings initiatives across the portfolio as well as energy contracts we've negotiated in the past year. Our most recent group booking pace continues to be strong. Including Frenchman's Reef, 2012 revenue pace is up a robust 10.5% at the end of period 1. Some other favorable trends for the DiamondRock portfolio. In 2011 portfolio pro forma occupancy reached within 70 basis points of its prior peak. We expect to surpass the prior peak level of occupancy in 2012 and gain additional pricing power. Consequently, future revenue growth should come primarily from rate, resulting in greater flow-through. 2011 group revenue was up about 5% for the full year, mostly in rate. Short-term bookings are down in volume but up in rate. Together with the increasing pace, this is a clear indication that booking windows are lengthening. Therefore, with less inventory to sell given the near peak occupancy and lengthening booking windows, segmentation strategy will be better and group pricing should continue to strengthen. Even more telling about our ability to improve profits through mix shift. In 2011, business transient room nights and average rate were both approximately 13% below prior peak levels of 2007. Leisure and discount room nights are 20% above prior peak and leisure average rate was 12% below prior peak. Therefore, the opportunity to shift share and recover rate in both segments is very clear. Shifting business within the BT segment was already taking place in 2011 as the trend of replacing lower-rated special corporate business with premium-rated business was present for the full year and accelerated in Q4. In summary, the fourth quarter was a very good quarter for the company with revenue, costs in both transient and group pace continuing to trend well, and with food and beverage margins lead by increased banquet sales improving at an accelerating rate. We believe that these trends will continue as the recovery continues. And if supply remains muted, we'll allow our portfolio to surpass prior peak revenue and profit levels in the next couple of years. Turning to asset management. Our asset management efforts on both capital projects and operational initiatives have been extensive. First, the Frenchman's Reef resort, after substantially completing the $45 million renovation, is open and has been very well-received by both leisure travelers and group meeting planners. We are excited that year-to-date today 2012 it has outperformed its aggressive budget and has raised its forecast for the quarter. The resort looks fantastic and the future is bright. Unfortunately, the recent past was more choppy as the Q4 results were dramatically impacted by expected one-time events, occurring at the end of the renovation. In the fourth quarter challenges in the turnover of rooms from the contractor created a significant revenue displacement. Additionally, wholesalers were more cautious than we anticipated about booking the hotel before they could see the finished product, which led to a slower ramp in the fall. Finally, we had some bad luck with a break in the intake pipe that provides water for the chillers that run the property's air conditioning system. This led to significant displacement of several hundred room nights. These 3 unforeseen problems caused a $4 million miss to the Q4 budget. Total 2011 renovation disruption came in at $10 million. As I said, the future looks great for the resort. At this point, the resort is fully operational, and we have hosted familiarization tours with most of the high-producing wholesalers and group meeting planners, all of whom are very enthusiastic about the renovation. The hotel guest scores are the highest in the recent history of the resort and customer comments are dramatically better. So we're very optimistic that this flagship Marriott Resort will perform well from this point forward. Secondly, we've determined that we will rebrand the Lexington Hotel in midtown Manhattan to an Autograph Collection hotel, which will occur after a $30 million upgrade is complete in 2013. We believe that the Autograph affiliation will give us the power of the Marriott reservation and marketing system while allowing the hotel to continue to capitalize on the significant brand equity of the Lexington name and provide a unique independent hotel guest experience. Third, as we mentioned last quarter, we're in the design phase of a re-concepting and significant meeting space addition at the Conrad Hotel in Chicago. The plan will include a dramatic activation of the lobby and food and beverage outlets on the fifth floor, including upgrading the popular outdoor terrace. We'll add over 4,000 square feet of meeting space by relocating be nonrevenue producing administrative offices. We will gain an additional suite by splitting the presidential suite into 2 deluxe suites both with outdoor terraces. We anticipate the project will cost approximately $3.5 million and will provide a very substantial return on investment. As we mentioned, we have restructured our financial relationship with Hilton which will provide a significantly better NOI at the hotel. Overall, our asset managers are working tirelessly with our operators to maximize results in our properties. We're seeing results from the adjustments we and Marriott made to Marriott new sales organization as it relates to DiamondRock's portfolio with lead generation and closing ratios both up substantially. Turning to capital recycling. The dispositions of the hotels Mark mentioned will improve our portfolio of quality, profit and growth metrics. The proceeds from the sales and the reduction in mortgage debt will improve our capital structure and substantially increase our investment capacity. This has also been a great time to buy. In 2011, we bought 3 hotels and agreed to acquire the exciting development project at 42nd and Broadway in Times Square. As Mark said, and it's worth emphasizing, all 6 of the hotels that we acquired since 2010 are performing in line or above our underwriting proformas and have significantly upgraded the portfolio. We're encouraged that 2012 will be a good year for acquisitions. We're seeing increasing number of opportunities after a pause last fall. We anticipate that there will be motivated sellers in 2012 because of the backlog of debt maturities, private equity funds recycling assets and a stronger demand from public companies to acquire assets as market strengthens. Because we believe that we are still early in the cycle, we are optimistic that we can use our strong balance sheet to buy high-quality hotels that will create significant shareholder value. 2012 is setting up for a strong year. The fundamentals of our portfolio including both group and transient pace, strong citywide conventioneers in Boston and Chicago, the completion of the $1 billion City Creek Project surrounding our Salt Lake City Hotel, the renovated Frenchman's Reef resort and limited supply increases in most markets, make us optimistic that 2012 will be another great year for DiamondRock. Thank you.

Thanks, John. With that, we would now like to open the call for any questions you might have.

[Operator Instructions] And your first question comes from the line of Will Marks of JMP Securities.

I think, my first question, I just wanted to ask about, Mark, the comment you made, I think, early on about was it $80 million of EBITDA that you had at the peak that you don't have now.

That's correct. So if we look at our hotels, the entire portfolio of what they earned in 2007 versus what they earned in 2011, it's an $80 million difference in hotels, adjusted EBITDA.

And what portfolio are you referring to? Would it be pro forma for the asset sales?

Yes, it's pro forma for the asset sales for the 23 hotels -- pro forma asset sales.

Next question on the acquisitions you're looking at. Who are the sellers these days?

Well, I would say the sellers are primarily private equity. You know the public company hotels sell for disposition, but the ones that we're seeing are primarily private equity that may have debt maturities coming up or anticipating a relatively early debt maturity. So, I think, that's going to be the bulk of the traffic. Having said that, in the first quarter, we have not seen a dramatic increase in inventory for sale, but we anticipate that it will come.

And the assets you're looking at, are they assets that maybe have some distressed issues or you'd have solid initial yields?

Yes, I think, given the level of capital activity that we've got going in the portfolio right now, I think our preference would be for relatively stabilized assets. We will obviously look at opportunistic turnarounds if we think there's enough upside. But we, I think, stable yielding assets would probably be our first choice at this point.

Will, this is Mark. Just to reemphasize that point, we're looking for assets in top growth markets that can outperform over the next 5 years so the distinction is with a 0 cash flow we need to put rooms in, vacant floors either half done with kind of building it or renovations. We're looking for assets in markets like Seattle, San Francisco, Miami, where maybe there is a rebranding opportunity or some light amount of capital for a reasonable amount of effort we can see all the upside in that market along with potentially a rebranding opportunity or repositioning effort on those assets.

And your next question comes from the line of Jeffrey Donnelly of Wells Fargo.

Mark, I'm just curious, I mean, how do you think about the prospects for consolidation in the sector now that some companies are trading at or above NAV and some below. And, I guess, maybe as a follow-up to that, do you guys think that your balance sheet is at a point where you're positioned to take advantage of any opportunities should they come to pass or do you think anything else needs to be done there?

Yes, I think, a couple of comments on consolidation. One is, I think, there is logic to a consolidator in the space and having alternative to host at some point, so I do see Marriott in that proposition. As far as a likely combination, I think we have a balance sheet to be an acquirer or one of the best balance sheets of the industry. But as far as the particular sellers, there's a lot of factors that go into that from companies that may be too small to survive over the long-term and efficiently. To other people where they may just have capital structures where they need a solution, which can only come through a combination of companies to solve their balance sheet challenges.

Do you want to name any of them? Maybe that's helpful. And if I could ask switch gears maybe with John, what's the term on the agreement with Marriott. Do they look for or -- or I should say Autograph, do they look for 3-year agreements? And maybe as a follow-up. How do fees compare with say a full-on Marriott branded hotel with any of the capital that you have to put in that hotel sort of influenced by Autograph or is that really kind of all driven by you guys?

Okay, Jeff, the agreement with Marriott for the Autograph is a franchise agreement. Those typically run for a 20-year term. The fees for Autograph and Renaissance are lower than the fees for Marriott. I think that was your question. And what we have for Marriott is a combination of key money, and a ramp in the fees for the early years to help compensate for the renovation work that needs to be done.

And Jeff, this is Mark. Just to add on, one of the things that's unique about Autograph is they'll let you franchise a large hotel, where the brand may not let you do that or with a Marriott brand, I don't know of any hotel that -- say would let you franchise, and we see a big advantage to franchise. We also really like the Autograph over some other brand alternatives because it allows you to appeal to that guest that wants a unique experience in New York, but also wants to be able to submit that to his company on expense account as a hotel that they're allowed to stay at and they can get their points and make the reservations through the reservation system. So we see a lot of efficiencies in going with the Autograph brand there.

And, I mean, thus far based on what maybe the folks at Marriott are telling you, do you guys think you get the full power of Marriott`s reservation system kind of on the cheap, going this route?

Yes. I wouldn't call it on the cheap. But I think we do feel you get the full value of the Marriott reservation system. We show up at the same time as Marriotts and Renaissance show up on the webpage, and I think, in general, the customer will be aware as they book that they're going to get the rewards points, they can make the reservations through the brand.com and when they get to the hotel they will have a certain level of expectation, which we hope to augment by driving the independent brand equity of the Lexington Hotel.

And I apologize if I missed this in your remarks, and I know Frenchman isn't in your same-store pool for 2012 but I just to be sure I am capturing it right in our model this year and for next year, can you give us a sense of maybe what the year-over-year change in EBITDA is looking like for '12 versus 2011? Just I know last year had the disruption in it, but I would imagine there should be a pretty substantial increase, and I guess maybe can you give us a sense how it is faring in the first 60 days of the year versus your expectations.

Jeff, this is Sean. Let me start with a top level sort of a bridge from 2011 to 2012 at the midpoint of our range. We reported $162 million of EBITDA. You have to back out 10 from the impact of on our dispositions as well as our acquisitions or dispositions for the full year and the acquisitions for the pre-period, the pre-acquisition period and back out 1 for the net Allerton, difference between 2012 when we are going to exclude that versus 2011. So that, to get the midpoint of our guidance, that gives us a little bit over $20.5 million of portfolio growth within DiamondRock. And of that $20.5 million about $10 million of that is disruption from Frenchman’s and the balance from the other portfolio. Now Frenchman’s, specifically, is going to have some year-over-year growth is also we are expecting approximately $14 million of growth in Frenchman’s from 2011 to 2012, which is assumed within that little over $20 portfolio growth.

That's very helpful. And just one last question actually on Vail. I'm just curious, what's happened in room demand overall in that market. It sounds like asset management plan to kind of change the cancellation policy, really helped during Q4 and you can see it in your EBITDA numbers but maybe I'm misreading your comment about how you expect Vail to be underperforming this year. Does that mean subsequent to quarter end, you guys have seen some falloff in demand in the market or is it really just more of a supply threat that kind of is triggering that comment?

Yes, Jeff, January started as a low snow month so to the extent we didn't have the reservations on the books, pickup was slower. It wasn't down dramatically, but it was slower. As word has gotten out of the snow conditions' dramatic improvement, we see great results coming in February and March. So overall, for the quarter, I think we will probably lose a little in January and hopefully not much in February or March and Easter is late this year, so we'll get a little bit of a pickup in early April assuming the snow keeps coming.

Your next question comes from the line of Sule Sauvigne of Barclays Capital.

You mentioned your group pace was up 10.5%. Is that for 2012?

It is for 2012 and it includes Frenchman's Reef. And excludes the disposition hotels.

Okay. It includes them?

Excludes the disposition hotels.

What would be the pricing that you're seeing for those bookings?

The 10.5% is about 70% rooms and 30% price. We expect that in the year -- for the year, pickup will be the reverse of that. We'll be higher price and lower room nights. So net, net we expect it to be a little bit different ratio.

Okay. And specifically your Frenchman's Reef, can you provide more details on kind of forward group bookings for the property post renovations?

Sure. Frenchman's Reef, the pace in 2012 is up about 43%.

How about pricing?

That 43% is about -- it's mostly room nights, but that again because we had rooms out of service. And 3% in rate.

Okay. Any early indications of 2013 bookings there?

Yes, we have -- well, not really there's not enough volume, but it's up about 6% so far, but it's pretty early -- that's a short-term booking house.

And the next question comes from the line of Eli Hackel with Goldman Sachs.

Just 2 questions. You just again mentioned Marriott group sales programs. What are some of the things that we've done there? I know you've added back staff where necessary, but are there other things you've done to improve the flow and the close rate there? Then, second, can you just give us an updated timeline on Times Square, when you think it should open and what kind of EBITDA you expect in stabilization of that asset and when do you think -- when do you expect it to be stabilized? Thank you.

Sure. On the Marriott sales programs, some of the changes we made specific to our portfolio is we added destination salespeople at the hotel and the purpose of that was to basically feel the leads, do site visits and help close the business. With respect to the sales offices themselves, in Chicago for example, we worked with Marriott to create a downtown sales office where the original organization called for Chicago land sales office covering 100 hotels. We created a downtown specific sales office, which obviously helps us with the largest Marriott presence in downtown Chicago. In some of the other markets it was really kind of refocusing of efforts and what Marriott concentrated on was 2 things in particular. And that was improving the closure ratio in other words, the leads are already well above, but the closing ratio was down, and they have done a really good job of improving that. And then the what they call pitching and catching -- the export of business, if you will, from one sales office to another area.

Have you seen real evidence of the pitching and catching working in effect?

Well yes, we - the numbers Marriott gives are our actual numbers. With respect to our individual hotels, we've not necessarily tracked it. In terms of 42nd Street, we anticipate that, that will -- has started construction, will take about 2 years to complete. So sometime in '14 it will open -- I'm sorry, sometime in the second quarter of '14 it will open, and we anticipate a $15 million EBITDA for the hotel.

And that $15 million, that's under stabilization or in '14?

That's stabilization.

Your next question comes from the line of Andrew Didora of Bank of America Merrill Lynch.

Just it seems like you had a nice acceleration in the New York market in January from 4Q. Can you give a little bit more color around what's driving this and then can you also give us a breakdown in terms of whether the strength is coming more from the Radisson property or from your more limited service properties?

Yes, A couple of things in that. First of all, the first quarter if you remember in '11 had a weather impact. So there were some snow events that caused a fairly easy comp. Number two, and this is specific to our portfolio obviously, because so much depends on where you are within the city. At the Lexington Hotel, we were able to put in a contract of airline room nights of $200 a night, which had a dramatic impact on the January results and fourth quarter results and will go going forward. And then at the Marriott hotels, it was on the Midtown hotel, we felt the impact of Citibank, which is a major producer out there and Fifth Avenue, I think -- a little bit of a supply but in January they both performed pretty well.

Got it. And then just a follow-up on the Marriott sales transformation process. Is there any way for you guys to quantify in terms of your current booking case how much might be attributable to the transformation?

Not really, but I can tell you the Marriott component of our pace report is up about 500 basis points more than the balance. That's not really meaningful because it's not a fair sample size, but it's encouraging to us because the 13% pace improvement in the Marriott portion of the portfolio is a very strong pace.

Your next question comes from the line of Smedes Rose of Keefe, Bruyette, & Woods. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask you said your group trends were up 10.5%. What are they if you exclude Frenchman's Reef?

If you exclude Frenchman’s, they're about 9 and change. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So I think that's kind of in line with what you guys had given on your last conference call. So is that what you would have expected, that the pace is kind of flat sequentially, or is that better or worse than you would have thought for now?

Yes, I think we saw last year a trend every quarter the pace improved. I think it flattened out a little bit in the fourth quarter, but it's still very positive. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just another thing I wanted to ask you. Why is the G8 meeting in Chicago a negative at your hotel I tend to think of those big meetings as positives for the hotels.

The problem with the G8 is the amount of protest activity, if you will, that it generates. And so we've had one major group cancelation, about $1 million worth of State Farm business. They paid the cancellation fee and hopefully we'll be able to replace the business, but we're anticipating that other groups are going to be reluctant and transient travelers are going to be reluctant to show up coincidentally with the G8 just because of the protest activity.

Your next question comes from Dan Donlan with Janney Capital.

Just a question on the Allerton. So where should -- is the cash interest payments -- are they going to be coming in through interest income or how is that going to flow through the income statement now.

Again, this is Sean. The cash -- the accounting treatment is going to continue year-over-year. Any interest that we receive will be accounted for at the reduction of bases. The difference that we're doing this year versus 2011 is because of the uncertainty on the timing of the resolution of the bankruptcy, we thought it just made more sense to exclude both the expected cash interest payment coming out of the hotel as well as the legal fees that we plan on incurring during 2012 from our adjusted EBITDA and adjusted FFO guidance.

Okay, that's helpful. And then just curious on the asset management plan in Vail. Was it -- was a new policy to enact a 45-day non-cancellation policy?

This is the first time we've done it, yes, beginning this season.

Do you worry at all that those people that booked rooms that had to pay for them 45 days that they potentially may not ever come back to the hotel?

We work pretty hard to keep those people happy just for the reason that the skiing was limited, but there was skiing and there were other activities going on in Lions Head in particular and Vail, in general. So we didn't have a lot of dissatisfaction among the guests. We anticipated it and we've put in some programs to make sure that the guest service was exemplary, and we made sure that they understood exactly what parts of the mountain were open.

Okay. Just moving on to the Lexington Radisson. So is there going to be a point in time where you’re not going to have access to Radisson's reservation system and not have access to the Marriott's reservation system as well?

There may be a period when we run as an independent. We have analyzed that pretty carefully and we're still working with Radisson about timing of the termination of that relationship. We feel pretty comfortable that although there'll be a revenue hit, it won't be substantial because our operator Highgate operates several independent hotels in the city and has a pretty good handle on what we can generate as an independent from a revenue standpoint and of course we don't pay fees, and we have other costs we can scale back in the interim while we are operating as an independent.

Okay. So you're definitely going to keep Highgate in as the operator even when it does potentially or will potentially become a Autograph?

That's right.

Your next question comes from the line of Enrique Torres of Green Street Advisors.

Over the last 2 quarters, you gave us a segment break out of the transient and leisure segments. It seems like leisure has been keeping pace, you're doing better than your overall RevPAR growth and transient's been the opposite, kind of been lagging. Can you provide us a little bit more color on those 2 segments and your outlook for them in '12?

Yes, if you look at the numbers I gave you were for the quarter. If you look in the total year, excluding Frenchman's and Inland, it's about 4.5% group growth, 6.7% business transient growth and 5% leisure and discounts. The area where we have had a different increase, but it's kind of higher increase but kind of law of small numbers, is in the contract and other. And I just described an air line contract we put in the Lexington, which had an impact on that number. So what we're seeing in general though is we are able to shift demand within each segment to higher-rated categories and that trend has accelerated in the fourth quarter. We expect it to continue into '12. So it's both the increase within the segment itself but it's also the shift in the rate strategy within the segments. So if the numbers I gave for the comparison to peak show that we've got between room nights and rate in business transient, we've got a 13% cap to what we did in the same portfolio in 2007. And in leisure and other we've got 20% more room nights than we had at peak and it's at a significantly lower rate. And so there's obvious opportunity for revenue management within the segments and among the segments.

Your next question comes from the line of Wes Golladay of RBC.

Once you guys source new acquisitions, will you look to sell more assets?

So currently the Inland sales for $262 million, that will put our balance sheet if I think about that, the proceeds from that to pay down the debt and the new proceeds from the Lexington loan, after dividends that will leave us year-end cash balance of about $150 million in debt-to-EBITDA a little bit over 4x for the year, which probably gives us at least $0.25 billion of investment capacity. We're still being well within our target leverage -- what we think is a very conservative target leverage level. So the issue in equity will depend if we think that we're going to do more than $250 million of transaction during in the near term. So it will be a valuation of what the pipeline looks like at that time.

So there's no real assets in the portfolio right now that you guys might want to recycle.

There is always -- I think we said in the last call there is probably 2 -- everyone by definition has a bottom 20% of their portfolio. We're constantly striving to improve our portfolio. So there are 1 or 2 assets that we might consider for dispositions this year.

Okay. And what were your guys pro forma peak margins?

Our pro forma peak adjusted EBITDA margins were approximately -- a little under 32%.

[Operator Instructions] And your next question comes from the line of David Loeb of Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: I just have a simple clarification, Mark, I apologize if you went over this. But I believe you said with the Allerton note, the resolution is likely to be either you own the hotel or you have a new note. Can you just talk a little bit about what that now might look like? And, Sean, does that mean when you take over that new note, would you book again then from your now lower basis?

Okay, David, this is Mark. So it's currently in bankruptcy court now. They submit the plan. We may object to that plan or go through a couple of literations and one of the resolutions may be that the bankruptcy judge decides to let them stay in foreclosure and allows us to foreclose the asset and take ownership. So that's one possibility. The other is since we are a secured creditor that they need to give us something of equivalent value to the face amount of our note. The face amount today and there's a lot of moving pieces here, but it's significantly more than we pay for the note. So they would have to give us a new note at market terms, which is of equivalent value to the note we currently have now. So exactly what that looks like, we're not sure at the moment. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: So getting paid off is not really on the table anymore.

Well, getting paid off. We can't put ourselves in the shoes of the debtor here but my guess is that at some point they want to sell this asset and the potential new acquirer may decide that they don't want this debt on the hotel, so that's when we would most likely get paid off.

So David, with respective to the gain I wouldn't anticipate a significant gain on this transaction. What we will do is if, in fact, we get the new note, we would record that at fair value at that time, but I wouldn't anticipate a big significant gain from that note, because the face value of our note is already in excess of our carrying value, but we would mark that to fair value. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then I guess finally, on that point, this is, I guess, a 2 part question. The new note might that not be assumable so that the new owner, if the hotel was sold, would be in a position to keep that debt, that's number one. Number two, would have interest in keeping that note or would you likely look to sell it?

David, it's all part of the negotiation. What the bankruptcy judge decides ultimately is the market value about the transfer provisions. The current note that we have is a typical securitized debt, which has loan assumption, has misfeasance and has loan assumption provisions in it. So theoretically it could be transferred. As far as whether we'd want to sell the note or not would probably depend on the interest rate and the duration of the note at the conclusion of the process.

And there are no further questions at this time. I'd like to turn the call back to Mr. Brugger for closing remarks.

Thank you, Karissa. To everyone on this call, we would like to express our continued appreciation for your interest in DiamondRock and look forward to updating you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.