DiamondRock Hospitality Company (DRH) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 DiamondRock Hospitality Earnings Conference Call. My name is Latacia, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Thanks,Latacia. Good morning, everyone, and welcome to DiamondRock's Third Quarter 2012 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. They 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 set forth in our earnings press release. Before jumping into the numbers, we would like to point out that we continue to see good strength in lodging fundamentals and the macro trends indicate longevity and endurance to the cycle. We take the most confidence in the constrained new hotel supply, which is allowing incremental demand to be harnessed more fully at existing hotels. With hotels trading at significant discounts to replacement costs and the long lead time for the development of major full-service hotels, we believe that the industry is in the early stages of a multiyear run, where annual supply growth is one or more percentage points below the long-term average. On the demand side of things, despite some mixed macroeconomic signals, hotel demand in many of our markets has returned to prior peak. Our portfolio ran an impressive 81.7% occupancy in the third quarter, with 7 of the hotels running over 90% occupancy. This is the highest third quarter occupancy level in the history of DiamondRock. Leisure was a particularly strong segment for us in the third quarter, with standout results at our 3 resort-focused hotels in Vail, Sonoma and St. Thomas. Turning to the third quarter numbers. We were pleased with our third quarter results, which were consistent with our expectations. The company's third quarter RevPAR growth number of 3.4% is somewhat distorted by comparisons at Frenchman's Reef with rooms out of service last year. The more indicative number that we will draw your attention to is rooms revenue growth, which increased 6.3% in the third quarter. Profit flow-through was relatively good in the quarter, with hotel EBITDA adjusted profit margin growth of about 59 basis points. As a result, third quarter adjusted EBITDA was $46 million, an increase of the 10% from the comparable period in 2011. FFO per share was $0.18. Several of the recently acquired assets from Blackstone were particularly strong during the third quarter. RevPAR growth at the Boston Hilton, Burlington Hilton and San Diego Westin was 9.7%, 16.3% and 9.8%, respectively, very strong numbers. We also saw strong growth in the quarter at a number of our other hotels. The Salt Lake City Marriott's RevPAR increased over 10% as it continues to benefit from the recently opened City Creek Project by Taubman. The Sonoma Renaissance's RevPAR was up above 10%, as well as a result of the continued strength in the San Francisco market. And the Bethesda Marriott Suites benefited in the quarter from demand created by the AT&T National PGA Tournament and unexpected major storms that knocked out power in the greater Washington D.C. area for several days. As we highlighted in our last earnings call, our large group hotels in Chicago, Boston and Minneapolis were negatively impacted by soft third quarter convention calendars. Despite these headwinds, the Westin Boston and Chicago Marriott Downtown each delivered solid RevPAR growth of around 4%. Group pace for the fourth quarter is up over 9%, with each of our big group hotels benefiting from strong fourth quarter convention calendars. Specifically, group booking pace is up 10% at the Westin Boston, 6% at the Chicago Marriott and up 5% at the Hilton Minneapolis. Additionally, we expect strong group performance from the LAX Marriott and the Chicago Conrad with fourth quarter group pace up 42% and 29%, respectively. Our New York City hotels had varying levels of success in the third quarter. The Courtyard Fifth Avenue had RevPAR growth in excess of 12%, whereas the Lexington Hotel's RevPAR growth was only 1%, partially due to reduced European traveler demand over the summer. The Washington, D.C. market, which has been one of the best long-term hotel markets in the United States, remains a growth challenge market during 2012. The Washington D.C. Westin City Center Hotel experienced RevPAR contraction due to the local market challenges, as well as being in need of capital investment. The company has accelerated the timing of the comprehensive capital renovation in order to allow the hotel to regain its rightful market position. We are currently planning the scope and timing of that renovation, which will most likely take place in mid-2013. We remain confident in the upside opportunity at this well-located hotel, which is one of only 2 Westins in D.C., and its ability post-renovation to regain significant market share. In St. Thomas, our Frenchman's Reef Marriott continues to gain traction following our $45 million transformational renovation last year. Total revenues increased in the quarter by $9 million over the comparable quarter, which experienced large renovation disruption last year. However, the hotel is facing some demand challenges this fall, which are partially attributable to the recent limitation of local government subsidies for USVI flights. We will discuss this in greater detail in a moment in connection with our new outlook. In analyzing our third quarter results, there are a number of one-time items that should be noted. One, as I mentioned earlier, the comparable room night issue at Frenchman's Reef resulted in a 290 basis point delta between the 6.3% rooms revenue increase in the quarter and the 3.4% reported RevPAR growth. Two, disruption at Worthington caused about $2 million of profit displacement from the planned facade restoration project and impacted profit growth by about 60 basis points in the quarter. And three, the company expensed approximately $600,000 of fees related to the exploration of the new ballroom at the Chicago Marriott. This expense was not in our prior guidance. Turning to the balance sheet. We expect to end 2012 with a debt-to-EBITDA ratio of approximately 4.5x. As importantly, 15 of our 26 hotels are unencumbered by debt. To give you an idea of how much borrowing power that provides the company, our cost basis in these 15 unencumbered hotels is about $1.5 billion. We feel very good about the balance sheet and fundamentally believe that conservative leverage creates shareholder returns. This conservative leverage strategy, along with solid operating results, allows DiamondRock to pay a well-covered and competitive dividend yield of over 3%. I would like to add that being an income company is another core tenet in our strategy to deliver superior shareholder returns. I'll now turn the call over to John to review our results in further detail and discuss our recent portfolio of recycling activity. John?

Thanks, Mark. Third quarter results met our expectations as the continuing positive demand trends resulted in portfolio RevPAR up 3.4%, with ADR up 4.3%. Leisure transient revenue was up almost 13% in the quarter, led by our resorts and seasonally strong leisure performance at the Boston and Burlington Hilton, that's up 21% and 18%, respectively; the Denver Courtyard, up 19%; the Minneapolis Hilton, up 16%; the Salt Lake City and Torrance Marriott, up 27% and 24%, respectively; and the Worthington Renaissance, up 15%. The balance of the revenue gain was the result of modest increases in group and business transient and some well-placed contract business we put into the Lexington Hotel in New York and the LAX and Torrance Marriotts. Food and beverage revenues were up 4.3% in the quarter, but margin growth was restrained because the increase was concentrated in less profitable outlet sales as the third quarter is seasonally low for higher profit banquet and catering revenue. Rooms margins were impacted by the cost of employee benefits and travel agent commissions, which impacted margins by 41 and 30 basis points, respectively, this quarter. Support costs were well controlled and were up 4.6% in the quarter. Overall, our asset management team did an excellent job in the quarter working with the hotel operators to control costs through cost containment plans. We were pleased to achieve profit flow-through for the quarter of 59 basis points of EBITDA margin expansion on 3.4% growth in RevPAR. We do want to comment specifically on our recent portfolio of acquisition from Blackstone. As you will recall, the portfolio includes the Hilton Boston, Hilton Burlington, Westin D.C. and the Westin San Diego. The portfolio generally performed very well during the third quarter for our period of ownership. The Boston Hilton achieved RevPAR growth of 11%. Margins are not comparable because the food and beverage operation was leased out in March and the property began operating under union wage and benefit scales in July. The San Diego Westin achieved RevPAR growth of 15.4% and adjusted EBITDA margin growth of 175 basis points. The Burlington Hilton grew RevPAR by 17.6% and adjusted EBITDA margins by 788 basis points. Finally, the Washington, D.C. Westin was impacted by a very weak August in D.C. against a strong comp and finished down 7.6% in RevPAR. However, some very effective cost containment measures and a property tax reduction allowed the hotel to gain 254 basis points in adjusted EBITDA margin. This hotel will see the most upside in the portfolio from capital investment, which will occur next year. We remain very bullish on the long-term prospects for the portfolio and have begun the planning and design work for the capital we expect to invest in the portfolio during '13 and '14. These hotels are well-located in strong markets. And once the hotels are renovated and repositioned, they should enjoy considerable upside potential. The acquisition of the $495 million portfolio from Blackstone represents a significant milestone in the execution of our strategy to redeploy capital from lower-growth secondary markets into urban core markets. Turning to the balance of 2012, I want to add a few thoughts to Mark's comments on the fourth quarter. Overall, we expect solid growth during the fourth quarter despite some challenges in New York City market during September resulting from the timing of Yom Kippur and Rosh Hashanah and lower-than-expected turnout at the UN General Assembly. In addition, we expect meaningful growth from the group segment during the fourth quarter as group pace for the quarter is up over 9%. Although we're not providing 2013 guidance at this time, I'd like to provide some color on our 2013 outlook. Despite difficult comps to 2012, our 2013 group booking pace is up 3.6%, which is slightly better than as of the second quarter. The '13 booking pace is currently weighted towards the first and second quarters of 22.8% and 12.5%, respectively. While the pace for the back half of '13 is currently behind the same time last year, the hotels have plenty of time to focus their sales efforts in both groups, particularly in the high group volume fourth quarter. On the special corporate rate, we're early in the process but our hotels are targeting increases for next year in the mid-to high single digits. On the business and transient and leisure segment, the bookings are too short term to provide you with any real color. We're generally optimistic given the low supply backdrop and the high occupancy levels in most of our hotels, which should allow us to manage market segmentation and drive rates. Now I'd like to provide color on our current significant capital projects. We expect to invest in our portfolio when we identify significant upside opportunities. We're very excited about the potential of the portfolio, and I want to highlight the major capital investments on the horizon. The rebranding of the Lexington Hotel represents a significant return on investment opportunity for DiamondRock. We're confident that our upbranding and repositioning will allow the hotel to close the $90 rate gap compared to the most comparable Marriott-branded hotel in the market. To put that in perspective, each dollar of incremental ADR translates into $250,000 of incremental room revenue every year. We've completed the planning and scope of the comprehensive $32 million to $34 million renovation of the hotel. We're currently bidding the work and intend to begin construction in late December. Post renovation, the hotel will join the Autograph Collection, Marriott's premium lifestyle brand. The renovation will touch every aspect of the guest experience at the hotel, including the guest rooms, guest bathrooms and the hotel public space. This project will be completed in mid-2013. The project will be phased to minimize disruption, but since the hotel runs over 90% occupancy, disruption is inevitable. We expect that majority of the renovation disruption to impact the first half of the year. We're also finalizing the planning and scope of the renovations of our 2 Manhattan Courtyards, which will take place in early 2013. We've identified an opportunity to reposition these 2 hotels to better compete with the full-service hotels in their respective competitive sets. Upon completion in Q2 of '13, we expect each of the hotels to command room rates that are closer to the full-service rates in the markets. Additionally, we are redesigning underutilized space at the Courtyard Midtown East to add 5 new and highly valuable keys. Based on recent market transactions, we estimate these incremental keys to be worth approximately $2.5 million in incremental asset value. We completed the first phase of the renovation of the Worthington Renaissance facade on time, on budget and within budgeted displacements. We've decided to accelerate the second phase of the project into 2012 rather than next year as originally planned because it will mitigate the estimated overall disruption. We're also finalizing a lease for third-party operation of the restaurant lobby lounge and room service at the hotel, which will reconfigure a portion of the lobby and dramatically improve food and beverage margins as well as guest satisfaction. At the Minneapolis Hilton, were designing a room refresh project that is expected to begin in Q4 of '13 and be completed in Q1 of '14 with little disruption. The Conrad ballroom addition, which was added in previously non-revenue-producing space, opened on budget in July, as scheduled. The reaction from meeting planners has been tremendous. Group revenue pace at the Conrad is up almost 30% in the fourth quarter and 14% in 2013. The lobby upgrade will further reposition the hotel to gain share among the higher-end hotels in Chicago. That work will begin this December and be completed early in February of 2013 and should result in very little disruption. As Mark mentioned, the Westin Washington, D.C. hotel will undergo a complete repositioning during the middle of 2013. This hotel is one of only 2 Westins in D.C. and has significant upside from the capital investment. We believe there's significant revenue lift by enhancing this product and it should be able to close the $50 rate differential with the Westin West End. We're currently evaluating the timing and renovation of the Westin San Diego. We expect to complete the renovation no later than early 2014. We're investigating the best timing in order to minimize renovation disruption. Since there is over $1 billion in construction projects within 2 blocks of our Westin San Diego opening up between the end of this year through 2016, we want to get the renovation done as soon as practical to capture the demand from these new buildings. Finally, the Hilton Boston and Hilton Burlington are currently scheduled to be renovated during the seasonally soft winter of 2014 and renovation disruption should be very manageable. To conclude my comments on capital, I would say that while we expect a big payoff from the investment opportunities, these types of investments inevitably come with some profit disruption during the process. We estimate disruption from capital plans the range of between $7 million and $10 million in 2013, with most of it concentrated in Manhattan in the first half of the year and some in D.C. in the third quarter. While we're talking about capital projects, it's worth reminding you that construction has begun on the 42nd Street Hilton Garden Inn and it's scheduled for completion in mid-2014. This is 282-room hotel is at 42nd and Broadway, the heart of Times Square. Our cost is fixed on this project, and we have no construction risk. When completed, I believe that this will be the single best located select service hotel in Manhattan. On the acquisition and disposition front, we recently completed the sale of the Atlanta Westin Hotel for a high EBITDA multiple. The hotel required $12 million to $15 million investment to comply with Westin brand requirements, which we determined was not a good allocation of capital. We've now reduced the company's Atlanta exposure to approximately 2%. This transaction like the prior sale of the 3 assets in suburbs of Lexington, Austin and Atlanta, furthers the execution of our strategy to continuously upgrade the portfolio and reallocate capital into higher-growth markets. On the acquisition front, we're seeing a better flow of quality assets in our target markets. We'll continue to pursue acquisitions to grow the company in a thoughtful and disciplined fashion. However, right now, our real focus is mining the extensive internal value that we see in the existing portfolio. Thanks for your continued interest in DiamondRock, and I'll turn the call back over to Mark.

Thanks, John. To recap our results prior to discussing our revised outlook, year-to-date, the portfolio has delivered rooms revenue of 7.3%, year-to-date RevPAR growth of 5.9% and year-to-date profit margin expansion of nearly 100 basis points. We are pleased with those results. Now I'd like to turn to the outlook for the balance of the year. We remain confident in the lodging recovery. However, we are adjusting our expectations for the fourth quarter and lowering the midpoint of the EBITDA guidance by approximately $9 million, excluding the impact from the sale of Atlanta Westin. We want to make sure that we clearly articulate to our investors the rationale for this change. First, we'd like to take you back to our first quarter earnings call this year. On that call, the company raised its original outlook for full year EBITDA guidance by $9 million based on the early positive trends, and our operators raised hopes of accelerating hotel fundamentals during the back half of 2012, specifically for a really exceptional fourth quarter. In simplest terms, our operators got a little ahead of themselves and have now adjusted forecast back to their original expectations for growth in the fourth quarter. While that's not the whole story for changing our outlook, it's a big part of it. In addition to this overall change in operator expectations, there are a few specific things that are impacting the fourth quarter. I'll try to hit each of the major items. One, we have made the business decision at the Worthington Renaissance to combine what had originally been a 2-phased façade restoration project into one project and completed the disruptive portion of the work entirely during 2012. While this decision adds about a $1 million in previously unforecasted profit disruption to the fourth quarter, we believe it eliminates what would have been another $2 million in profit disruption in 2013. We are pleased that our asset management team working with the hotel staff to figure out how to move groups around in the fourth quarter in an efficient and less disruptive way. While originally not budgeted for this fourth quarter, we are obviously happy that we will have the opportunity to save $1 million in total disruption from this project. Two, there are 2 previously unanticipated headwinds at Frenchman's Reef that lead us to reduce the hotel's fourth quarter forecast by about $1.5 million. The first headwind, which I mentioned earlier, relates to increased airfare to the island of St. Thomas this fall. The local government has already spent its travel promotion fund to subsidize airlines flying to the island. This has raised ticket prices and impacted demand. We expect this to change as the new year brings a new travel promotion budget and the ability to aid the #1 demand generator to the island -- tourism. The second issue at Frenchman's relates to some previously unscheduled maintenance at the hotel that requires partial [indiscernible]. These types of activities are unfortunate but necessary to maintain our hotel in first-class condition. Three, our Westin Washington, D.C. City Center Hotel is being impacted by both a weaker-than-anticipated D.C. markets from the pre-election pause, as well as some group and government business inflations from the federal government's recent travel restrictions. We expect our D.C. hotels to experience RevPAR contraction of 5% to 7% in the fourth quarter. Going forward, this hotel should benefit the most from our capital investment as groups are holding off from booking until after the renovation and from comparisons to this year with its short-term loss of government business. Four, as we have discussed, our portfolio experienced some weakness in September, most notably in New York City, which was impacted by the timing of Rosh Hashanah and Yom Kippur, as well as the lower-than-expected attendance at the UN General Assembly. This moderating of demand in September also put additional risk to our interim independent hotel strategy at the Lexington Hotel. As a reminder, the strategy for the fourth quarter was to remove Radisson, save $1 million of the franchise expense and, even with some revenue displacements, net higher profits. Obviously, the success of this interim strategy is contingent on strong demand patterns in New York City for the balance of the year. Lastly, in light of recent trends, we have built in some additional conservatism into the new guidance range. While we certainly want to put forth achievable guidance, we believe that our approach is prudent. While I've just gone through a rather long litany, we do expect a good fourth quarter. Our outlook is for rooms revenue to increase 5% to 7% in the fourth quarter, which is consistent with recent guidance from industry bellwethers. As with last quarter, the RevPAR number is distorted by comparisons to Frenchman's Reef. Our full year guidance shows solid growth, as you would expect in this part of the lodging cycle. For the full year 2012, our outlook is for rooms revenue to grow 6% to 7% and RevPAR growth of 5% to 6%. Accordingly, we expect adjusted EBITDA of $184 million to $190 million and adjusted FFO per share of $0.74 to $0.76. Before concluding the prepared remarks, we want to talk about the great potential that we see in DiamondRock. To that point, we would like to leave you with 4 main takeaways today. The first takeaway is that DiamondRock's portfolio quality and growth potential has never been better. With $3 billion in hotels, the company spent the last 3 years redeploying capital from dispositions of hotels in suburban and slow-growth markets like Atlanta into new strategic markets such as San Diego and Washington D.C. while building DiamondRock's footprint in key markets such as Boston and New York City. We believe that our portfolio today is concentrated in some of the best long-term the markets in the country. The second takeaway is that our portfolio has tremendous growth potential from operations just from lodging recovery and good asset management. To put it in perspective, our comparable hotels are still $70 million below prior peak EBITDA and 500 basis points below prior peak margins of 32.5%, that's a lot of growth potential. If we just returned to prior peak hotel profits and we expect to exceed that over the next few years, as we have already crossed over prior peak occupancy, that would translate into more than $4 of incremental share price at the long-term average valuation multiple. The third takeaway is that there are numerous capital and branding initiatives within the existing portfolio to create above-market growth over the next few years. The highest potential ROI project in 2013 is the conversion of the Lexington Hotel to Marriott's Autograph Collection. This is in addition to the renovation of our 2 New York City Courtyards, which will create 5 new keys. We also have upgrade opportunities through renovations of our recently acquired hotels, most notably the Hilton Boston, Westin San Diego and the Westin Washington D.C. While we will have related profit displacement in 2013, we believe that the return from these capital investments is going to lead to some exceptional upside in the portfolio during what is likely to be the most lucrative part of the lodging cycle. The final takeaway is that we have purposefully maintained a best-in-class the balance sheet to reduce risk and preserve valuable optionality throughout the cycle. For a lodging REIT, balance sheet management is arguably the #1 driver of value to shareholders. In conclusion, our team remains committed to delivering shareholder value and believes that the internal growth opportunities will be the main driver of DiamondRock's strong relative performance over the next few years. With that, we'd now like to open up the call for any of your questions. Operator?

[Operator Instructions] Your first question comes from the line of Shaun Kelley with Bank of America.

Mark and John, I'm filling in for Andrew. So I just had a couple of quick questions about the guidance. Mark, you gave a lot of really good color on that, so I'm probably going to beat the dead horse here a little bit. But the thing that I guess caught my attention the most regarding the fourth quarter was, I guess, the change in underwriting or outlook from kind of some of your operators. So could you give us any more color on just what gave them the optimism in the first quarter? Was it particularly group bookings that they thought they had on the books that were canceled? Or just what are the different -- they gave them that confidence then, they're kind of backing off it now?

Shaun, this is Mark. I think that there are a couple of things operating at the beginning of the year. One is they were exceeding their forecast and budget for periods 1, 2 and 3. So as we moved into it, they were extrapolating some of those trends even on the kind of some late revenue month, extrapolating that for the full year. In the year, for the group pace and the ancillary pickup, I think they were expecting more of traditional recovery, and I think this recovery is even more a moderate and extended recovery. So their trajectory was a little different than they're anticipating. So I think those are the 2 major drivers.

Okay. Because I guess on that last point then, so the group pace actually looked very good for the fourth quarter, right? If I caught it correctly, I think you said it was up 9%. So was it transient and some other categories that aren't coming through in some of these hotels that aren't giving you the compression that you were expecting? Or how is it working?

Yes. I think the business transient is still relatively good. It's just not accelerating at the same clip that they forecasted. And then on the group, it's not so much the room nights, as it's the ancillary spend where we're seeing the difference in the profitability go-through.

Okay, that's helpful. And then I guess, one last one on a couple of the acquisitions and renovation plans for next year. So I'm wondering. I'm just trying to understand this for [indiscernible] Westin Washington, D.C., is this in terms of accelerating some of the renovation spend or the challenges at that hotel? Is that different than your underwriting, I guess, when you guys acquired it, and how? It seemed in the language that you guys had in both the release and in your prepared remarks that maybe it was. So just kind of trying to understand that. And probably a similar question for the Lexington asset here in New York. Just given, is it really just Europe that's kind of different than what you guys were targeting there? What's different at that hotel?

Okay, let me take those in turns. So in Washington, D.C., when we underwrote the hotel, we do 10 years underwriting. And we had the renovation sometime in the first 18 months. What we've seen in our short period of ownership is there's more group reluctance to book the hotel in the current physical state. It needs a renovation. And so what we see is the quicker we can get that renovation done, the quicker we can get to our pro forma returns at the hotels. So we are trying to book that in the least disruptive but as quickly as possible. So there was a -- this first underwriting was going to happen somewhere between mid-2013 and the end of the first quarter of '14. We decided to take the more aggressive position in that range because we see the returns from the other side it. On the Lexington in the summer, the European demand at Radisson is tied internationally, mostly the European demand, which was softer in the summer. They don't have the same kind of distribution for countries like Korea and China and some other ones that were making up for some of the international inbound traffic to New York during the summer. So that was particularly impactful at our hotel.

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

Two questions. First, just on New York. Can you talk a little bit more about your expectations for New York for next year? I know you're not giving official guidance, but given some of the supply coming on the market and with the renovations, what kind of RevPAR or relative RevPAR to the industry you think you could see in New York? And then just on your relative exposure to New York, will you be happy with it after the Hilton Garden Inn opens up in '14 or do you need more or do you think that maybe be a little bit too much? And then the second question is just on Frenchman's. Just want your updated thoughts on the property. Obviously, you've had a big renovation there. Some issues since then. I'm just wondering on your outlook for the property and its existence within your portfolio.

Okay, that's a lot. This is Mark. I'll take 2 of those questions and then turn over to John for the outlook generally on New York. So as far as the -- taking the last question first -- Frenchman's Reef, the property looks great. The meeting planner reaction to what we did there was fantastic. I think what we're seeing in the fall is just a more temporary condition. Obviously, the maintenance issue is a one-time issue, and then the increase in airfare. The way the local government manages its travel promotion budget is always a little bit unpredictable, but we're anticipating that, that won't happen again. So I think it should be great, and we like that asset a lot. It's performed very well this year for us overall. As far as our New York concentration, I think being 25% New York, which is kind of where going to get to, is probably about where we want to be. We believe that New York over the next 10 years is probably the #1 demand growth market in the country, especially with the patterns that we see happening in international travel over the next decade. It's the place we really want to be. It's probably not prudent to have more than a quarter of your portfolio tied to any one market, so we think that's probably the optimal place for DiamondRock to be somewhere in the mid-20s exposure to the market. I'll turn the call over to John to talk a little bit more about what we're seeing for the fourth quarter and maybe a little bit into next year for New York.

Okay, Eli. What we're seeing in the fourth quarter in New York is a slightly softer demand environment than we'd anticipated when we made the decision to take the Radisson brand off on September 15. We lost the market share in the summer, as Mark explained, because of the slowdown in European wholesale business primarily. In the fourth quarter, we're seeing -- we anticipate a continued loss of market share that was in the underwriting, but what we didn't underwrite was a relative softness, and I do want to over-emphasize this, but a relative softness, particularly in September because of the holidays and the lack of UN pickup, which has been the most reliable September demand generator for years in New York. And 45 countries just decided not to come this year. In terms of the supply, we see probably a continued above-national average supply in New York. Fortunately, a lot of it is outside of our direct market environment. But there is some impact regardless in the entire city, as you see, a 4% increase next year that pans out. It will inevitably impact our rate potential in the city. Now having said that, once we complete this renovation of the Lexington and the 2 Courtyards, we're going to have a dramatically better product. In the case of the Lexington, we're going to have a dramatic improvement in the RevPAR index. As I said in my statement, there's a $90 spread between this hotel, the Lexington, and the most comparable Marriott branded hotel in the market. We expect to pick up a lot of that $90 once we open the renovated hotel. We'll be able open the renovated hotel before the completion of the renovation. As the last rooms go under construction, the balance of the hotel will be complete, and that's the point at which we will convert to Autograph. So we have very high hopes for the Lexington, particularly in the second of next year.

Your next question comes from the line of Will Marks with JMP Securities.

Just continuing on the New York. What is the supply growth that you're showing for maybe the remainder of the year as well as next year?

Okay. Yes, this is John. I think the overall estimate is about 2% for this year. That includes the entire year, not just the balance of the year. I'm looking at about 4% for next year and about 2.5% to 3% in '14. Hopefully somebody can come up with a higher and better use of land and hotels in New York within that time period.

All right. It doesn't seem like you and others are that concerned with the ability to absorb the demand [indiscernible] of the supply.

Well, there are a couple of things that have been working in New York. First of all, there was lot of displaced demand in Manhattan that went out into New Jersey suburbs and the boroughs. That demand has pretty much been brought back into the city. So at this point, the new supply has to be directly related to the demand growth. So far, demand has outpaced supply. As long as that continues, think you'll continue to see the absorption that you've seen. And it's not without some impact, I have to add. I mean, depending on your location within the city and where the new supply is coming, which is kind of West Side and downtown, there's additional impact in those markets. We've maintained all along that if you have the right location in the city, the Midtown East, Chelsea and soon to be Times Square, that's going to minimize the impact of the new supply. It won't completely mitigate it but it will minimize it. So that continues to be our feeling. As long as demand continues to outgrow supply, absorption will continue and the impact will be mitigated.

Okay, great. And just one more question. I know you haven't given RevPAR guidance for next year. Would you say that, let's take New York, Chicago and D.C., where will those 3 markets at this point fall in terms of above, below your -- what you think next year will look like?

All right. So this is Mark, Will. For D.C., our anticipation is for a better D.C. next year. Obviously, the inauguration is worth between 1% and 1.5% increase in RevPAR all by itself generally in the city. We've also seen easy comparisons to what's going on with the lobbying effort, which is the big demand generator in the city, should be very active next year. Although the citywide counter is not strong, that's not going to affect the number of the properties like ours in the city. So I think D.C. will be a much better story next year than this year. And I think granularly with the government here and the high offices that D.C. runs, it's a great market to be in. Chicago, the convention calendar looks good for next year. Our group bookings look relatively good, so we're anticipating Chicago has a decent year in 2013. We haven't guided our preliminary budgets yet, so I'm a little hesitant to say exactly what we think that market is going to do. And then New York City, our hotels are transient-based hotels. So we're going by trend lines. There's not a group booking that kind of provide you clear guidance. But the special corporate negotiations are beginning. The hotel operators feel like they have the leverage. They're going for high single-digit increases there. So I think, as John mentioned, it's really going to be, I think, a different story depending on the location of your hotel next year in New York City. But we feel that even with some supply, there is a lot of demand growth that's going on in the city. There is good special corporate negotiations leverage, I think, on our side this year. So we're relatively optimistic for next year.

That doesn't sort of answer my question. Actually, what I was trying to find out -- that's helpful -- -- but if you came out with a RevPAR guidance number next year for the whole portfolio, where would those 3 perform relative to that RevPAR number for the whole portfolio?

Yes, Will. I think we're hesitant to give 2013 guidance, and I don't want to back into it, either.

Your next question comes from the line of David Loeb with DiamondRock (sic) [Baird] David Loeb - Robert W. Baird & Co. Incorporated, Research Division: David Loeb with Baird. This one is probably for Sean. I have 2. In the release, you noted that you expect the line balance to be at about $50 million at the end of the year. That's about $17 million less than what we would have thought given the timing of the write-down of Oak Brook and its book value now of a little north of $15 million. Are you contemplating sale of that by the end of the year?

No, David. The balance of the line is really going to be paid off from proceeds from the Atlanta Westin disposition, which is roughly cash proceeds of $40 million, as well as excess cash flow generated during the fourth quarter in excess of our dividends. The Oak Brook write-down was noncash, so that does not impact our estimated line balance. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: But we're calculating in cash flow from the quarter, free cash flow. But my question was really that since it's now $15 million of net book value, more or less, were you thinking of selling it? I know it's a noncash write-down. Are you thinking of selling it? And is that in that estimate for the $50 million?

Yes, there is no sale of the Oak Brook here in our fourth quarter estimate. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. So it sounds like what you're suggesting is that maybe there's a lot more free cash flow than what we're estimating.

That's right. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then second, this one on Burlington. There's a perception among investors that Burlington came with the package. And it wasn't like you're going out looking for assets in Burlington, Vermont. I have to assume that you underwrote it and decided that it was a good investment for DiamondRock. But particularly in light of other assets within the portfolio that had been underperformers over the years, Atlanta, perhaps, being an example of one that has been kind of a flat IRR, 0 IRR, or Oak Brook which clearly has not been good, can you just give a little bit of explanation of where you see the returns in Burlington and why you think that, that asset makes sense for DiamondRock?

Okay, this is Mark, David. I'd be happy to take that one. So stepping back in time, when we initially went up and negotiated with Blackstone on what a portfolio would be for DiamondRock, we went through 2 dozen assets, I would say, come through and try to pick the best portfolio. We were targeting about $0.5 billion. We went through those, and somewhat the size dictated the composition of the portfolio. Burlington would not be strategic market for the company, but we are actually fairly excited about that asset. It's pretty simple, it’s franchised, so the exit is we think relatively strong with local independent operator managers. And Burlington, our allocated price of $55 million represents a 10.4x EBITDA multiple in 2012 numbers, which we think is strong. And the hotel is going to grow, I think, about 15% in RevPAR this year over last year. So on an independent basis, we think that's actually a fairly compelling investment, obviously not a core target market, but we like the hotel a lot. On your related comment about the sale of hotels like Atlanta or the return on Oak Brook, I think our strategy generally is to sell the hotels that haven't performed as well as we would have anticipated. So I think you're going to see that more on the sales. The home-run deals on the portfolio that we've done over the last year are ones we'd probably least likely to sell. So just to give you an example, the 2 Courtyards in New York, our cost base is probably about $240,000 a key in those. But I don't think you're going to see us sell those anytime soon even if we can get $0.5 million a key and make a huge again. We think the growth potential in those hotels is too valuable to give up.

Your next question comes from the line of Tim Wengerd with Deutsche Bank.

I just wanted to talk a little bit more about your 2013 bookings. Can you talk about the rate increase that you have on the books? And then how much of your expected group revenues for 2013 are on the books? And when you look at the booking window, how is it comparing to the booking window at the peak of the prior cycle?

Tim, this is John. I'll take that one. The 2013 group pace is currently room-night oriented. So it's actually down a little bit in rate. That's not unusual. The early group business that you put on the books is typically you're going for volume. As you get into the year and do in the quarter, for the quarter, in the year, for the year, then the rate becomes the driver. In terms of how much is on the books, right now, about 60%, 61% is on the books for 2013, that's in the anticipated group. Again, Mark mentioned we don't have budgets yet, so we don't have full clarity on how much group business will do next year. But if we maintain about 30% of the portfolio revenue, and it represents about 60%, we expect to cross over into 2013 with about 70%, which is our historic average of the total '13 revenue on the books January 1.

Okay. And then that 70% that you mentioned entering the year, what was that like at the peak, say, entering 2007 or entering 2008? Do you have an idea of that?

It's not a comparable number because the portfolio has changed. But I think 70% to 75% is probably typical of a crossover rate for typical group hotels. Some large convention hotels would have a higher percentage on the books as you cross over. Some of the more standard 30%, 35% group passes would have less. So it's a blend of roughly 70%.

Okay, all right. And that 3.6%, the group pace that you mentioned for 2013, that's based on the 61% that you mentioned?

That's right. It's compared to the same time last year.

Your next question comes from the line of Nikhil Bhalla with FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: When you mentioned about your group base being a little bit stronger for the back half of next year, given most of the renovation activities kind of front-loaded for 2013, I'm just trying to reconcile what's causing sort of the group fall-off in a way in the back of the year of next year.

Okay, this is John. I'll take that. The group pace is up 3.6 overall, but it's up dramatically in the first half, 20-something percent in the first quarter and 12.5% in the very heavy volume second quarter. There's-- the balance of the year, again, it depends on how far in advance the groups are booking, and a lot of our -- we have 3 major convention hotels where advanced booking windows are lengthening, and that's important. In the other hotels, the nature of the business is that it's much shorter-term oriented. So corporate groups tend to be much shorter-term bookers. And therefore, we feel comfortable that at the back half of the year, we have plenty of time to put groups on the books. It's really not related to the renovation. The renovation work is done primarily in transient hotels in 2013. So it really doesn't have an impact on the group booking cycle. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Got it. And just when you look across the major convention cities in your portfolio, your Chicago and Boston, if you can just give us some sense of how you see these cities shaping up in terms of just convention activity, not specific to groups at your hotels but just overall market convention stuff next year versus this year.

Okay. In Boston, there are more citywide conventions with significantly more room nights associated with them, over 40% in room nights. In Boston, it's important to distinguish between BCEC and Heinz [ph] -- sorry, what did I do? Oh, I'm sorry. That was for '14 I gave you. For '13, pace is down at BCEC in Boston, and I believe it's flat to slightly down at Heinz. '14 is up significantly. Again, distinguishing between BCEC, where even if there are fewer number of room nights, the groups are smaller, we're attached to the Convention Center and, therefore, we get the first 800 rooms. In Chicago, next year is a decent pace. Right now, it's roughly flat to down just slightly. But it should be a very good year with the way the pattern of the demand is falling. Then at '14, right now, they're behind a little bit, but they anticipate that they'll catch up. In -- you didn't ask about Los Angeles. But Los Angeles is down significantly in the number of conventions and room nights for '13. Minneapolis, which is very important to us, is about 8% up next year in the number of conventions. And again, we're attached to the Convention Center, so the number of room nights is not as important as the number of conventions. Salt Lake City, which is important to us, sees a fall-off next year in terms of room nights, but the booking pace at the hotel is quite strong. And San Diego has a good pace next year. It's up 10% in the number of conventions and roughly flat in room nights. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Great. That's great color. One final question. I'm looking at your balance sheet and it seems like you have $41.8 million as assets held for sale. Any color?

Sure, Nikhil. That is the Westin Atlanta North, which closed after the end of the quarter [indiscernible] classified as an asset held for sale.

Your next question comes from the line of Ryan Meliker with MLV & Co. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Most of my questions have been answered. But I was just hoping if you can add a little bit of color. You mentioned that there was some unexpected maintenance that occurred in the quarter at Frenchman's Reef. Wondered if you could tell us or give us any color what that was, and if it had any, property [indiscernible] is there a concern that there might be other things that might be following as a result.

Well, this is Mark, I'll take that one. So the maintenance at Frenchman's Reef's, which is one of the maintain tower, which is one of 4 buildings, the property be shuttered for 1 week, relates to replacing some sewer lines that after so many decades you'd need to do that under the floor. We went in a couple of months ago. We scoped all the pipes, found ones that needed to be repaired or replaced, and that's the maintenance that we're going to undertake here. It was not related to the renovation. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: Okay. And I guess, there wasn't [indiscernible] that could have been looked at during the renovation and could have been resolved at that point in time or just weren't -- hindsight is 20-20, but...

That would've been great. We didn't scope -- you don't normally scope pipes -- every pipe in the building unless there is a problem, and here we had some indication that there was a problem but not until about 1.5 months ago.

I would now like to turn the call over to Mark Brugger for closing remarks.

Thank you. To everyone on the call, we'd just like to express our continued appreciation for your interest in DiamondRock. We look forward to updating you on the next quarter. Bye-bye.