DiamondRock Hospitality Company (DRH) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2012 DiamondRock Hospitality Company Earnings Conference Call. My name is Martine, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed sir.

Thanks, Martine. Good morning, everyone, and welcome to DiamondRock's Fourth Quarter Earnings Conference Call. Today, I'm joined by 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. We would also invite you to review our new Investor Presentation posted on our website at www.drhc.com. Let me start today by expressing my sincere thanks to departing COO, John Williams, for his contributions to DiamondRock over the last decade. He played an integral role in founding and growing the company, and we wish him his best in his upcoming retirement. Before we review our results for the quarter, I want to take a minute to provide an overview of DiamondRock strategy and how we plan to drive value. We believe that the combination of a balanced portfolio of premier assets in top gateway assets and destination resorts and a conservative, clean balance sheet positions DiamondRock to deliver above average shareholder returns across the full lodging cycle. We take a long-term approach to investing in our properties and will tolerate short-term disruption when we uncover outside value creation opportunities. We seek to identify and acquire hotels with excellent locations and upside for either under-management, underinvestment or brand conversion opportunities. Moreover, we continually focus our precious CapEx dollars on the best opportunities to drive RevPAR and margin growth. We've assembled the portfolio with a balanced mix of the 3 major demand drivers: business transient, group and leisure. This approach sets the portfolio up for consistent performance across all phases of the lodging cycle. Our balance sheet has lower leverage than most of our peers and no near-term debt maturities. More than half of our assets are unencumbered. We believe this gives us substantial financial flexibility and supports sustainable dividend payments, which are a key component of lodging returns over time. I am proud to say that we returned more than $375 million in cash to our shareholders in dividends since our IPO. To summarize our strategy, our singular goal is to create long-term shareholder value through a high-quality portfolio of assets, a clean and low risk balance sheet and focused execution, and we're committed to providing transparency around our progress related to this strategy through best-in-class disclosures. In a minute, I'll provide more details on several key actions we are taking to drive growth and value. But first, let me touch briefly on our broad sector view. The lodging story remains very strong with good results in the fourth quarter and for the full year 2012, and encouraging trends headed into 2013. Despite mixed broader economic trends, lodging RevPAR continued its strong momentum with 6.3% overall growth in 2012 with solid 3% demand growth. For 2013, we are encouraged by projected 5% increase in corporate profits, as well as improving trends in corporate investment, employment and consumer sentiment. The lodge industry is off to a strong start in 2013 with January RevPAR growth of 8.8%. We believe that 2013 will be another great year for the industry with RevPAR likely increasing 4% to 6%. The overall supply picture for the sector is also very positive. New hotel additions are projected to run at 40% of their historical average in 2013 and '14, and remain well below forecasted demand figures. Industry RevPAR growth will benefit from demand growth which we currently forecast to grow at a CAGR of 2.5% from 2013 to 2016. This meaningfully outpaces our projection of new hotel supply, which we estimate at a CAGR of 1.5% for the same period. With hotels currently trading at significant discounts to replacement cost, we believe this lodging cycle will be an extended one. We thought it would be helpful to discuss the actions that we have taken to transform our portfolio over the past few years, as well as the progress we are making on some recent acquisitions. As you know, since the recovery began in 2010, our execution has been focused on the following strategic objectives: first, improving portfolio quality; second, buying early in the cycle when the most growth is ahead; and third, diversifying brands by adding more Hilton and Westin product, and diversifying managers. Currently, 40% of our portfolio is independently managed and we expect to move to a 50:50 mix of branded and independent management. Ultimately, we believe pairing each hotel with the right operator, whether it's independent or branded, is the best formula for value creation. During the last 3 years, we completed over $1.5 billion in acquisitions and dispositions to fundamentally reposition the portfolio. We sold hotels in markets like Atlanta and Lexington, Kentucky and deployed capital in growth markets like San Francisco, Boston, San Diego, Charleston, Denver and New York City. Importantly, this transformation increased portfolio RevPAR by $16 and EBITDA margins by over 240 basis points. We are pleased with the high-quality portfolio of hotels that we have assembled. Based on our current stock price trading at a significant discount to NAV and what we estimate to be a 30%-plus discount to replacement cost, we don't expect to be active buyers in the near term. Our efforts in 2013 will be focused on mining the unique and exceptional value creation opportunities within our existing portfolio, primarily through the successful execution of our targeted capital investments. In addition, we will continue to explore dispositions of non-core hotels. We believe that this strategy positions us for significant future earnings growth which should translate into outperformance of our shares. While we're talking about the future, I want to report that construction is progressing well on the Times Square Hilton Garden Inn, which remains on schedule for completion in mid-2014. This 282-room hotel is at 42nd and Broadway, the heart of Times Square. Our cost of $450,000 per key is fixed and not subject to construction cost overruns. When completed, I believe that this will be the single best located select-service hotel in Manhattan and at a price per key that is well below current market value. Further, we are anticipating a 9% EBITDA yield the first full year of operations at this hotel. I'd like to now spend a few minutes on our most recent acquisitions. Generally, our acquisitions this cycle are performing as expected and we're happy with how we've increased our exposure to top markets, such as New York, Denver, Boston, Minneapolis and D.C. Most recently, we purchased the Hotel Rex San Francisco. This hotel is immediately accretive. It is a fee-simple, nonunion hotel in the heart of one of the best lodging markets in the country, managed by Joie de Vivre Hospitality, a leader in the non-branded boutique hotel segment. The hotel is performing very well with 20% RevPAR growth in 2012. Last summer, we acquired a portfolio of 4 hotels. Consistent with our strategy, these hotels were under-managed and underinvested in with good long-term upside. Let me review our investment thesis for each of these properties in that portfolio. The nonunion Westin Washington D.C., which is located in the heart of D.C. at the intersections of 14th and M Street is one of only 2 Westin-branded hotels in Washington D.C. We see tremendous upside in this asset from 2 main drivers: first, we believe we can drive meaningful RevPAR improvement with a targeted capital plan beginning late this fall; second, we don't believe that the prior sales efforts maximize the benefits from the Starwood system. We believe that we can introduce a better revenue management strategy. The hotel lost 5% market share during the fourth quarter from some short-term group loss and the impact of being pre-renovation, which we highlighted on our last earnings call. In total, the hotel is off 6 percentage points in market share since prior peak. We believe that we cannot only recapture lost market share but also drive the hotel to record levels of profitability with the right renovation scope. 2013 has started off well with the presidential inauguration leading to a RevPAR increase of 34% for January, which was in line with our expectations. The nonunion Westin San Diego is a well-located hotel near the Gaslamp District and within walking distance to the Convention Center. San Diego is one of our favorite markets because of its exceptional weather, desirable convention venue and strong amenity base. Our Westin San Diego is located across the street from the newly-opened $400 million Federal Courthouse, which we expect to generate incremental demand. The property started off strong in 2013, with January RevPAR up 64%. Another indicator of upside is that the hotel is currently 6 percentage points below prior-peak market share. We believe our hotel will be able to significantly bridge the market share gap after our capital investments. The Hilton Burlington is located in the heart of downtown Burlington, Vermont on Lake Champlain and proximate to the University of Vermont. The hotel has been a pleasant surprise and is outperforming expectations with impressive double-digit RevPAR growth in 2012. Lastly, the Hilton Boston enjoys a premier location in Boston and features 66 suites. We recently renamed the hotel, The Hilton Boston Downtown Faneuil Hall to reposition the marketing of this asset and highlight both its excellent business transient location, as well as its highly desirable leisure location near Faneuil Hall. Moreover, we have taken significant actions to drive upside from this property. In the fourth quarter, we brought in Davidson, a well-respected independent hotel management company, with a proven track record of improving revenues and enhancing margins at luxury upscale properties. We've also installed new leadership at the hotel during the fourth quarter, including a new GM, as well as new directors of sales, catering and rooms. During the transition, the hotel lost 11 percentage points of market share, which should provide additional revenue penetration opportunities for 2013 from the easy comp alone. As Davidson completes the operator transition and works with us to put in place revenue-maximizing strategies, we believe that we will recapture lost market share and expect to realize substantial upside. We feel good about the hotels' projected 2013 revenue growth, including the greater than 10% RevPAR growth in January. Our team remains very bullish on the Boston market. With that, I'll hand the call over to Sean, who will discuss our operating results, the status of our capital renovations and our outlook for 2013.

Thanks, Mark. Turning to the fourth quarter numbers, results exceeded our expectations. Total revenues increased 6.5% and RevPAR grew almost 4%. The flow-through was solid with house profit margin increasing 170 basis points and adjusted EBITDA margin increasing over 100 basis points. Our portfolio's fourth quarter sell-out nights increased over 20% from the same period of 2011. In total, the company generated $72.3 million of adjusted EBITDA in the fourth quarter. Our urban select-service hotels in New York City outperformed expectations post-Hurricane Sandy. Our Courtyard hotels in Midtown delivered fourth quarter RevPAR growth of 15.9% and 8.1%, respectively. Our Hilton Garden Inn in Chelsea delivered fourth quarter revenue growth of over 10%. Our resorts were another bright spot in the quarter, led by Vail with a 15.5% RevPAR increase and record rates during Christmas week. The Lodge at Sonoma also outperformed with increased RevPAR over 13% during the fourth quarter. Frenchman's Reef increased fourth quarter revenues by over $5 million, which represent greater than a 50% increase from the comparable period of 2011. Most importantly, $3.8 million of this incremental revenue flowed to EBITDA. As Mark mentioned, our most recent acquisition, the Hotel Rex San Francisco, delivered RevPAR growth in excess of 20%, among the highest in our portfolio. Another strong performer was the Salt Lake City Marriott, with both fourth quarter and full year RevPAR growth of 18%. The hotel will continue to benefit from our location within the newly-opened City Creek mixed-use project, which has been a tremendous demand driver. The Westin Boston Waterfront, supported by strong group bookings at the BCEC, delivered a RevPAR increase of over 8%. Like many peers, we experienced a softer D.C. market in the fourth quarter, which was dramatically impacted by Hurricane Sandy, as well as some last-minute cancellations of group -- of government group business. Moreover, as Mark mentioned, we transitioned the management at the Boston Hilton, which led to a temporary loss in market share during that period, as well as cost increases related to wage parity. Outperformance in the fourth quarter led us to exceed our full year expectations as well. Our 2012 pro forma revenue increased 7.2% and RevPAR grew 5.3%. The company was also pleased with our flow-through as we achieved hotel-adjusted EBITDA margin expansion of 86 basis points. In 2012, we invested $49 million into our portfolio. For 2013 and into 2014, we plan to invest approximately $140 million into the portfolio. We expect to fund the capital projects as follows: $50 million from existing cash reserves, which are classified as restricted cash on the balance sheet; and the remaining $90 million from corporate cash, about 1/3 of which will come from excess hotel cash flow and the balance from the line. We currently have tremendous borrowing capacity from our 15 unencumbered assets, as well as potential proceeds from non-core asset sales. It is also worth noting that at least 25% of the cash will not be spent until 2014. We believe that the successful execution of our 2013 capital plans will be a significant catalyst for earnings growth for 2014 and beyond. We are confident in our ability to deliver long-term outperformance by making the right investments to harness opportunities for internal growth. We will do our best to minimize the disruption during the renovations, while providing investors with a compelling post-renovation growth vehicle. Importantly, we expect to begin to see results from some of these investments in the second half of 2013. I want to highlight the major capital investments on the horizon. On January 2, we began our multimillion dollar renovation at the Lexington Hotel in New York. We believe it is the single best opportunity for outsize returns in our portfolio. We currently expect the renovation to cost between $40 million and $45 million, which is an increase from our prior estimate. The scope change reflects additional scope to upgrade building infrastructure for the future, as well as a 10% contingency. Marriott will provide over $4 million of key money that we will use to offset the cost of the renovation. The infrastructure items were generally identified in our acquisition underwriting, and we made the strategic call to accelerate these items to minimize future disruption, as well as recurring repairs and maintenance costs. After renovation and rebranding to Marriott's Autograph Collection, we expect to see meaningful rate gains starting in late 2013, with the hotel EBITDA expected to increase to $20 million during 2014 and fully ramped at $30 million-plus over the next few years. This will be a multiyear growth catalyst for DiamondRock. We expect the bulk of the disruption, brand relaunching costs and other transition costs to be behind us by the second half of 2013. We are investing approximately $12 million to upgrade our Manhattan Courtyards, including adding 5 new guestrooms at the Courtyard Midtown East. The renovations will be completed in the second quarter of 2013, which will allow us to benefit from the higher-rated back half of the year. The 5 new rooms are estimated to cost less than $1 million and we estimate that these new keys will add approximately $2.5 million of value to the hotel. We are currently finalizing the scope, timing and cost of the renovations of both the Westin Washington D.C. and the Westin San Diego. We currently expect the renovations to commence during the latter part of 2013. While we will provide estimated renovation costs during our next call, we expect to expand the scope of both renovations beyond the brand-required PIPs in order to better position the hotels to gain market share, although the increases are not expected to be materially above our original underwriting. Finally, we are planning the renovations of the Hilton Boston and Hilton Burlington for 2014. The renovation, scope and costs are expected to be consistent with our acquisition underwriting. The renovations are targeted during the seasonally soft winters in those markets, so disruption should be minimal. We have tremendous conviction that our 2013 capital investments will lead to outperformance in 2014 and beyond. While the disruptions will likely cause some near-term volatility, we are confident that the long-term benefits are well worth it. Now I think it is helpful to talk through our 2013 outlook for certain key markets. Our planned 2013 renovation disruption will result in a dislocation of our 2013 portfolio results relative to their markets, specifically in New York City, Washington and San Diego. Once we are through this short-term growing pain as a result of these renovations, we expect good long-term upside from these investments. New York City demand growth remained strong as the decrease in European demand is being offset by Australian and Asian demand. The current supply dynamics will likely put some limits on rate increases, but we expect the recently-approved $50 billion Hurricane Relief Act to generate incremental demand for the city. Overall, we remain bullish on the long-term prospects for our well-located New York City hotels. Looking to 2014, these hotels should generate outsize growth as they will benefit from our capital investments during 2013, particularly the upside from rebranding of the Lexington to Marriott Autograph Collection. In addition, our 2014 will benefit from the midyear opening of our Times Square Hilton Garden Inn. Boston is expected to have a strong transient year during 2013, which should benefit our Boston Hilton. However, the BCEC Convention Center is having an off year, which will impact the 2013 results of the Westin Boston Waterfront, whose group pace is down 10%. Our 2013 revenue management strategy is to backfill the hotel with higher-rated transients, as we expect incremental demand to be generated from compression from a strong year at the Hynes Center. We expect 2014 to be a terrific year for our Westin, as citywides impact in the hotel are up more than 33%. The Westin Boston is expected to capture more than our fair share of the citywide demand as evidenced by our 2014 group booking pace being up 38%. Chicago benefited from a fantastic citywide demand in 2012. Despite a modest decline in 2013, citywide room nights group booking pace at the Chicago Marriott and Conrad are up 7% and 13%, respectively. For Washington D.C., the 2013 demand picture will be impacted by government travel policies and continued political dysfunction. On the other hand, the inauguration was a help, and Congress is expected to be in session for 75 additional days in 2013 compared to 2012. We are very positive on D.C. over the long run because of its high occupancy, educated workforce and stable employers. With that said, our 2013 is best characterized as a transition year as we invest capital to reposition the hotel. All of our resorts are setting up well for 2013, amidst a solid recovery in leisure, and we expect all of them to exceed the national average for RevPAR growth by a significant margin this year. In particular, Frenchman's Reef is expected to continue to ramp for our -- from our 2011 repositioning project. The expected 2013 hotel results are consistent with our initial underwriting of the capital investment. Our outlook for 2013 is for another growth year for lodging fundamentals. Our outlook will be impacted by 2 major items: first and most impactful, we will experience renovation disruption in 2013. Our renovations will impact RevPAR growth by 3 percentage points. In total, we estimate 2013 hotel-adjusted EBITDA disruption of approximately $10 million to $12 million, which is a few million dollars higher than our prior estimate. The variance is the result of the additional time required to complete the additional scope items at the Lexington, as well as incremental disruption at the Fifth Avenue Courtyard from union activity, which has been successfully resolved. Second, our 2013 group segment will be impacted by the decrease in citywides in Boston and Minneapolis, which is expected to have a 50 basis point impact on our RevPAR growth. With that, for the full year 2013, we expect portfolio RevPAR growth of 1% to 3%, which incorporates 3 percentage points of renovation disruption; adjusted EBITDA of $195 million to $205 million, which reflects $10 million to $12 million of EBITDA renovation disruption; and adjusted FFO per share of $0.70 to $0.74. Lastly, I would like to touch on our balance sheet and capital allocation. We have consistently maintained a simple and low-risk balance sheet with virtually no corporate debt. We ended 2012 with a debt-to-EBITDA ratio of approximately 4.5x, and with 15 of our 27 hotels unencumbered by debt. To give you an idea of how much borrowing power that provides the company, those 15 unencumbered hotels generated over $90 million of hotel-adjusted EBITDA during 2012. We believe conservative leverage is essential to delivering superior shareholder returns across the lodging cycles. With our favorable outlook and strong balance sheet, the board recently approved raising the quarterly dividend 6% to $0.085 per share. This allows us to pay a well-covered and competitive dividend that currently represents a yield of 4%. I'll now turn it back over to Mark for some final thoughts. Mark?

Thanks, Sean. We are very excited about the future of DiamondRock. With 27 hotels concentrated in perennially strong gateway markets, as well as prime resort locations, the portfolio quality and long-term prospects have never been better. We believe our portfolio contains tremendous internal growth opportunities, and that our ability to realize this potential will lead to outperformance in coming years. Additionally, group for our portfolio is likely, based on convention calendars, to moderately increase in 2013. Our 2013 group pace is up 4% and 72% of our estimated 2013 group revenues are already on the books. More importantly, the convention calendars are dramatically better in several of our main markets in 2014. Boston alone will be a big driver of growth in 2014. Our 2014 group pace, which includes approximately 50% of 2012 group revenues, is up an impressive 15.6%. In conclusion, our team remains committed to delivering shareholder value and believes that internal growth opportunities will be the main driver of DiamondRock strong relative performance over the next few years. Before opening the call for questions, I'm thrilled to welcome Rob Tanenbaum as our next Chief Operating Officer and Head of Asset Management. He will start on April 1. Rob brings over 20 years of hospitality industry experience to the job, including over 15 years of asset management experience, most recently at Madison Hotel Advisors, the company he founded in 2004. Madison's portfolio consisted of more than 3,000 rooms for clients, including Goldman Sachs' Whitehall Funds and Sam Zell's Equity Group Investments. Prior to founding Madison, Rob worked as Vice President of Asset Management for Host Hotels & Resorts from 1996 to 2004. Before Host, Rob worked as Associate with PKF, as well as being on the opening management teams for the Four Seasons Resort Wailea in Maui. Rob is a well-known and respected leader in the hospitality industry, and we are very fortunate to have him join our team. We are greatly looking forward to introducing Rob to analysts and to investment communities over the coming months. With that, we would now like to open up the call for your questions.

[Operator Instructions] And your first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan Sadler. Just had some question related to the dispositions. I know you guys have made some good progress of -- through selling assets you viewed as non-core. It sounds like you've still got some work you'd like to do. Could you just talk about that percent of the portfolio you view today as being non-core?

Yes, Austin, this is Mark. That's a great question. As you know, last year, we sold 5 assets. They generally -- generally, when we look at our portfolio, we always focus on increasing portfolio quality, and one measure that it would be average RevPAR. So if you look at our portfolio of 27 hotels, by definition, the bottom 10%, 15% by RevPAR would be the ones that we're continually looking at, trying to monetize as a way of upgrading the portfolio. So I would say there are at least 3 assets in our portfolio, not the big ones, but there are 3 assets that we will be out of over the next couple of years.

And then any color on the timing of when you might be able to execute some of those sales this year, sort of first half of the year, second half of the year? And then how would you describe sort of demand overall in the acquisition market?

Okay. On demand, demand has increased, particularly over the last 6 to 9 months for, what I would call non-core assets outside the main urban areas as the financing markets have continued to improve and as private equity's gotten more bullish on lodging. So I think the markets continue to improve for those kinds of non-core asset dispositions. And you've seen that with some of the sales, not only from our company last year but from some of our peers. As far as specific timing, we don't comment on pending transactions but I will say a number of our hotels, we want to -- we're not -- although we're motivated to sell them, we want to maximize the profitability. So several of them have some work to either be done on the capital front to maximize the value first or may be terminable with the current brand or manager but may not be terminable in the next 30 days. For instance, one of our hotels is terminable in August of this year so we would wait to monetize that asset until that event occurred.

Your next question comes from the line of Josh Attie with Citi.

Mark, your prepared remarks are very bullish on the portfolio, the recent acquisitions and the stock, which you mentioned was a large discount to NAV. Looking at the performance of the Blackstone and Lexington where the bulk of your capital's been invested, earnings have significantly missed underwriting. Blackstone did $31 million in 2012. Your estimates was $34 million, $35 million. That miss was all in the second half of last year. Lexington did $19 million. Your estimate was $25 million. I guess my question is, before you ask us to look forward and appreciate the upside in a company that might be on the come, can you explain to us exactly what caused these assets to miss? And can you give us some EBITDA targets for both Blackstone and Lexington for 2013 and 2014, given that you're starting from a much lower base?

Sure. Those are excellent questions. Let me hit Lexington first. So Lexington, when we initially bought the asset, what we told our investors is that we were buying the Radisson and we were looking at potentially repositioning and rebranding that asset. So after we acquired it, we went through the brand selection process and figured out what the best long-term strategy was for the asset. That involved, in our opinion, removing Radisson, which occurred by contract last September, and repositioning and renovating the hotel to make it a Marriott Autograph. We saw tremendous upside in the rate differential between the closest Marriott and the Lexington Hotel. The current rate gap is almost $100. Obviously, there was a loss of market share when we went unbranded last September, which was part of the transition that we had to go through to make it a Marriott property. We do believe, based on the rate gap and upside of converting it, that we will see tremendous upside. The hotel, we project to do in the low 20s EBITDA next year and to stabilize at 30-plus EBITDA over the next several years as it continues to build traction as a Marriott-branded property. So that's our strategy. It's underperformed partly because it had to go unbranded to get to the other side of what we see as a great value creation opportunity and it should be completed this summer. And I think you'll be very pleased when you see the product and really start seeing the results starting in the back half of this year. On the 4 pack that we acquired last summer, we missed our -- we hit our underwriting on San Diego and Burlington. We missed our underwriting on -- by about $3 million collectively on D.C. and Boston. And that's really -- and we mentioned this on the last call. D.C., obviously, we had the Sandy and the fiscal cliff. We also lost some short-term group, the government group, in the quarter that we didn't anticipate when we underwrote the property. That was about $1.5 million of the miss. The other relates to the Boston Hilton. And as we kind of hurried to transition the property from LXR to Davidson and replace the leadership team, the transition caused about 11 points in lost market share and, obviously, that translated -- the timing of that exact management change was uncertain when we underwrote the asset. We think we'll recover that but that obviously led to us coming somewhat behind our underwriting for the fourth quarter in Boston. But if we look forward on the 4 pack, the reason we bought those assets and the reason we think they're great, not only do they diversify our brand and manager within the portfolio by adding more Westins and Hiltons and more third-party managers, but we bought them because we believe they're under-managed and under-invested in. That doesn't change in 3 months or 6 months, but we'll put the capital in this year. I think we'll realize tremendous upside from this capital investment and from improving the revenue strategies there. And we see the lost market share and we are confident that with the right strategies recovering that market share, with the capital investment and with the right strategies will really allow those properties to perform terrifically over the next several years, but it may not be in 2013.

Can you tell us what you think the EBITDA for those 4 hotels -- what it could do this year and maybe next year?

We haven't given out specifics for the portfolio. It's built -- obviously build into our guidance. We're expecting double-digit RevPAR growth in the first quarter from the 4 assets, but we do anticipate renovation disruption at the properties as we invest the capital into them.

Has your ultimate underwriting changed at all as a result of the last 6 months?

It has not. I think the outlook for D.C. is a little bit more hazy than we anticipated last July. But ultimately, we believe in the assets and where they're going to stabilize.

Okay. And if I could just follow up on -- you mentioned the stock trades at a large discount. Based on the 2013 earnings, it trades about 13x EBITDA, which is about where the peer group trades. So when you say it trades at a large discount, it suggests that you think that there's a lot more future earnings upside then there might be elsewhere. And I guess, my question is, if that's the case, what was the rationale for putting long-term fixed rate debt on the Westin ahead of the repositioning? And also, why -- are you considering putting in a share repurchase program given how strong the balance sheet is?

All right. So let me take the second question first. So the board has had, and continues to have, extensive conversations about the share repurchase program. We do think the stock is a good value at today's price. With that said, we're also very mindful and I think that our history has shown that we're very disciplined about keeping a conservative balance sheet. So I think the -- we are likely to do share repurchase, or more likely, in the event of asset dispositions and matching that up with a share repurchase. But obviously, the board wants to continually monitor what the stock price is, what the opportunity is, to maximize the returns for our shareholders. On the second question, I'll let Sean answer that.

Yes, Josh. This is Sean. The timing of the Westin D.C. loan was really dictated based on our overall long-range plan and capital structure for the company. We had an outstanding borrowing on our line of credit, which over the long term, we want to make sure that we keep as much of our line of credit, the dry powder, free of the line. So we viewed the CMBS market at the end of last year and currently, for that matter, is very attractive. So locking in long-term debt at sub-4% in lieu, in exchange for freeing up the line of credit we thought was the right decision for the company.

And should we assume that the line of credit is what's used to fund the $125 million purchase of Times Square next year?

We are keeping our line free for that. That's right.

Your next question comes from Eli Hackel of Goldman Sachs.

I just had a question also just dealing with the renovations and the impact. Clearly, this year, you gave some guidance. It seems like it's about a 3% hit to '13 on the RevPAR side. Can you just help me think about that conceptually in '14 and beyond? Does that mean if the industry is 6%, your overall pre-renovation will be 6% and in '14, you would be 9% or maybe just how does that phase in over time as we think what should be an expected snapback from post-renovation? And then just the second question, just quickly. I know you're not a big D.C. player, but have you seen anything in terms of sequestration at all so far would be helpful.

Okay, Eli. On D.C., we have not seen any evidence of sequester hurting the property specifically. Obviously, today is the first day that a lot of that goes into effect. In April, we'll actually see more of that. But the property has not reported seeing particular impacts from sequester. Obviously, last year, government group was already restrained. And government business at our hotel in D.C. is only about 4%, and for our portfolio, only represents about 2%, 2.5% of our total business. So it's not a huge demand driver.

On the -- Eli, this is Sean. On the disruption in the '14 question, I think when you look at our 2013 disruption of the $10 million to $12 million, the vast majority of that is going to be the Lexington Hotel. As I mentioned in my prepared remarks, the Lexington Hotel, we expect to get to plus $20 million next year. So I think your assumption of a bounceback for '14 is a fair one. The other item worth noting for 2014 for the portfolio is that we have got great citywide convention activity for 2014. Our group pace is up 15% plus in 2014, which should be another catalyst for the portfolio to outperform in 2014. So we really have the post-renovation bounce plus we've got great group exposure in 2014.

Your next question comes from the line of Nikhil Bhalla with FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Mark or Sean, this is for you. Will you just talk about -- you talked about your group pace being up so much in 2014. What percentage would that represent of the total number of groups you'd probably end up having in the year -- in 2014 at that point?

Sure. Our 2014 group revenues on the books today are about 50% of what was on the books for the entire 2012. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. And then finally, you talked about New York City a little bit. As you look at the city this year, any thoughts on which quarters are a little bit, I suppose -- are likely to be a little bit weaker than the others?

Well, in our portfolio, the first and second quarter is going to be significantly impacted by their innovation disruption for New York City. So generally speaking, we would expect our portfolio to underperform. To put some numbers around it, New York City alone in January and for the first quarter is going to impact our consolidated RevPAR growth by 300 basis points. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. No, I meant more as a city overall, not just your portfolio.

Yes, it's obviously -- this is Mark. New York started off relatively strong. You would expect that Q1 is the weakest, so that would be the most affected by supply but it seems to be holding up very well. The fourth quarter, obviously, you had the Sandy impact, which was both good and bad, depending on where you were in the city. So that may lead to some interesting results as we kind of move through the year. And then obviously, you had the Jewish holidays in September, which had some impact and should be a little better in 2013.

Your next question comes from the line of Jonathan Pong with Robert W. Baird. Jonathan Pong - Robert W. Baird & Co. Incorporated, Research Division: Still on the topic of buybacks. I know you said a potential buyback program would likely be funded through asset sales. When you look at pricing in the preferred market these days, could you look towards maybe changing your stance on preferreds and issuing some buyback on it?

This is Mark. That's a great question. The board has been through a number of different scenarios. Obviously, we have a terrific balance sheet. It's very low risk. We have a lot of arrows in our quiver that we could. We don't have any preferred in our capital stack today. So that is something that the company is evaluating, the board's evaluating, but we don't have any announcement to make on that today.

Your next question comes from the line of Bill Crow with Raymond James & Associates. William A. Crow - Raymond James & Associates, Inc., Research Division: Just a couple of questions. I want to follow up a little bit on Eli's question, which is looking forward to 2014. Obviously, we understand the disruptions this year. So just, again, I want to make -- I want to be comfortable that this year -- or this time next year we're not talking about how there's still 25% of that renovation spend to go and it's going to impact the first half of the year or that there's a longer ramp-up post-renovation in some of these assets. The Hilton Garden Inn opening midyear seems like that should be a bit of a drag on margins as it ramps up. It takes a while to ramp up and maybe a drag on FFO. Could you just kind of put us at ease that won't be the issue at this point next year that we'll be talking about this outperformance? And I understand the citywides which are going to benefit a lot of the peers that are down this year versus '14. So if you could tackle that one.

Sure. Well, Bill, let me start with the beginning. So the majority of the disruption that we're going to experience this year relates to our New York City renovations, which are occurring in the first half. So it's -- as that market runs 90%, 96% in our hotels, that's where you're seeing the biggest amount of our disruption. And so that will be well done by the time we kind of move through this year and into 2014 and set up for that easy comp in the beginning half of the year. The other ones that we have, we have D.C. and San Diego which should start in the fall and be completed in the wintertime, which is obviously the lowest season. We have Minneapolis, which should be done in the wintertime. Those have traditionally, if you kind of look at our past history of -- at those hotels during the winter renovations, are very manageable because the occupancy levels and the rates are so low in kind of December, January, February. So when you think about the bulk of our $10 million to $12 million in disruption, most of that is related -- or the majority is related to the New York activity, which will be done in the first half of this year. William A. Crow - Raymond James & Associates, Inc., Research Division: And then the opening of the HGI, midyear opening, and how much of a drag that could be?

Bill, this is Sean. We don't expect that to be a drag on margins at all. If it opens midyear based on that location and that product type, that's going to be margin-accretive for the company. It should ramp up very, very quickly because of the nature of that product. So we feel comfortable that, that should be a positive for our 2014, not a negative. William A. Crow - Raymond James & Associates, Inc., Research Division: And positive on an FFO basis as well, I guess, if you put it on the line. That helps, right?

Correct. William A. Crow - Raymond James & Associates, Inc., Research Division: Okay. And then I'm just -- I was just looking back here. We launched coverage in October of '09 and I know that's just a random date to use here. But since that time, I think your stock's up just under 8%. And I looked at the entire universe of lodging REITs and the next worst one was kind of 2x that or almost 3x that and we looked from a total return perspective. My question is, what is -- what are you telling the board is the reason that despite all of your good work that you've done in deleveraging and portfolio improvement, why has the Street just not gotten the story?

Well, I think our strategy and a strategy that the board's endorsed is that we are fundamentally moving early in the cycle to reposition the portfolio by high-quality assets. There will be some disruptions in '13, particularly, as we reposition some of the lower performing assets off the books, buy higher performing assets and have to reposition those assets. And we'll really realize those values as we move into '14 and '15. So I think everyone's on board for that strategy. It makes a lot of sense. Obviously, last year, during our last earnings call, we had to lower the full year forecast, which I think has put pressure on where the stock is performing. So I think as we move through the year and perform well and as these renovations start paying off, we expect to outperform over the next 2 years. William A. Crow - Raymond James & Associates, Inc., Research Division: Let me just follow up. Because it feels like we're at least 50% and maybe 60%, whatever the number is, into the cycle, right? We know that funding for new supply growth is starting to loosen up a little bit so as we look out, it seems like, okay, we're in the '15, '16 -- cycle's coming toward an end and maybe you've got a completely different perspective on that but it seems to me that investors make their money early in the cycle and I'm just -- I understand fundamentally outperforming as you get late in the cycle. But I'm just not sure that that's going to translate into out-return -- outperformance for the shares. I guess we're going to have to see. Where are we, do you think, in the cycle?

Well -- we think that 2013 is a good year to invest in our portfolio because we think this will be an extended cycle. We do think '14, '15, '16 and '17 will be the peak profitability years. So we want to position the portfolio to maximize the profitability during those years, and that's what we're trying to implement in 2013. So we're really set up for the peak cash flow years. And doing the right long-term things for the assets and ultimately, doing the right long-term things to maximize the value of assets should translate into stock appreciation.

[Operator Instructions] Your next question comes from the line of Wes Golladay with RBC Capital Markets.

On your last call, you had mentioned that the second half of this year would be a little bit softer on the group front. How are you guys doing for that, I guess, in the group -- I guess, in the quarter for the quarter group bookings, as well as maybe for the next 6 months out?

Sure. This is Sean. Our group pace, compared to where it was last quarter, is up -- it's up 4% for 2013, which was approximately 3.5% last quarter. The trends have continued where the first 2 quarters of the year are very strong in the group pace in the back half of the year is weaker. But the negative pace that we had in the back half of the year has continued to get closer to positive as we progress. So we are making progress during those periods. The other thing worth noting for 2013 is that Boston has a significant impact on our 2013 group booking pace. Our Boston asset, which represents over 20% of our total group revenue, is down 10% in pace for '13. That alone impacts our pace over 300 basis points.

Okay. So it's more maybe you won't, I guess, get a good group like you had last year but '14 will look much better again?

Correct. And our '14 pace is up over 15% and we have 1/2 of the revenues already on the books for 2014.

Your next question comes from the line of with the Whitley Stephenson [ph] with JMP Securities.

Just going back to a previous question, if we could talk a little bit about the significant number of rooms you have coming online in New York post-renovation and maybe just sort of your thoughts on how you see the market differing at the point when those hotels come online versus what we're seeing now? A lot of your peers have had a really good fourth quarter based on New York results and sort of what you see, trends in that market specifically moving forward.

Okay. So our outlook for New York, obviously, there is supply coming on particularly this year and next year. I think what the last couple of years have shown us is that New York is very resilient and continues to absorb -- the supply of this demand has been so strong and continues to exceed people's expectations, particularly for the very well-located hotels within the city. So we remain confident that New York will perform very well over the next several years. Obviously, we have the Lexington Hotel, which is in the filet of 48th and LAX. That's a wonderful location. We feel very confident in the long-term prospects. That submarket, Midtown East, has the lowest amount of supply coming into it. So we feel very good about that and the ability to reposition that asset as a full service hotel and do well in the market and outperform the market over the next several years. Our 2 other Courtyards, also in Midtown, one at 48th and Fifth and one at Third and 53rd. We think those locations are less susceptible to the new supply and should perform very well, particularly with the capital upgrades that we're putting into them this year. And then our 42nd Street Hotel, at 42nd and Broadway, we're convinced that 7-day a market kind of prime location will allow that hotel to be one of the best-performing hotels on a profit-per-key in New York City when it's done. So we feel pretty good about the prospects for New York City and I think what we've seen is that New York will continue to surprise on the upside.

Okay. So I guess for you guys, the whole story, it's just -- we should expect to see a continuation of supply-demand trends that we've seen and then well locations of your specific assets?

Yes, obviously there is supply, which will put some pressure on rates. But I think we have unique demand generators, particularly at the Lexington and then the renovations in the Courtyards.

This is Sean. Put some numbers around it very quickly. New York City metro area is supposed have greater than 6% supply growth in '13 and '14 versus our market tracks within New York are 150 basis points lower in '13 and 300 basis points lower in '14. So when you look at the numbers provided by the experts, our markets do have lower supply. Now there's still 4.6% and over 3% is still significant supply but that's a much easier hurdle for increased demand to get over.

And we have a follow-up question from Jordan Sadler with KeyBanc Capital Markets.

I just wanted to circle back to the recent hire on Rob Tanenbaum and how that may impact sort of what you're teeing up in terms of sales and portfolio positioning overall? Obviously, Rob's coming in and being appointed as COO and EVP of Asset Management. And that's -- as you discussed and outlined, he's got a lot of experience in that area. So you pointed to sort of the low-hanging fruit in terms of lower RevPAR hotels as being the ones that are ripe for pruning, most ripe for pruning in the portfolio, it seems. But will Rob's addition maybe change the character of what may ultimately come for sale and how the portfolio is positioned longer term?

Great question. So let me say a little bit more on Rob. So as you know, the company engaged Ferguson Partners to conduct a nationwide search and our search instruction was to look for a high-impact and game-changing asset management executive. We interviewed a number of leaders in this industry. In that process, it really became obvious that Rob was the guy for the job and for DiamondRock. His reputation is tremendous. He's made an enormous difference at a variety of assets, and we're confident that he's going to make a big difference on the profitability of our hotels and the renovations of our hotels. So we feel great about that hire. With Rob, we will reevaluate the strategic direction of a number of our properties, to understand the maximum profits to that we can generate from them and the best time to do the dispositions. Rob will not be the -- unlike John, we're really splitting the roles of COO and asset management, as well as from a different role of head of dispositions and acquisitions. Kind of that CIO and COO will be separated going forward at the company. So Rob will have a major impact on the strategic direction of individual assets, but he will not lead our effort on dispositions and acquisitions and we may have a different take on some of the assets with Rob's voice in the room to make sure we're maximizing the value of each and every hotel.

You have a follow-up question from Josh Attie with Citi.

Following up on Bill's questions and comments on stock performance. I think the current management compensation structure does not have any element of relative stock price performance as a hurdle. And Mark, I know you said on the board, is the board considering any change to comp structure for 2013 and beyond to more closely align management and shareholder interests?

Yes, that's a great question. So the board at the last board meeting is considering moving to 50% performance, relative performance-based stock. So we'll discuss that as -- obviously when we issue the proxy.

Okay. And one -- just going back to the potential buybacks with asset sale proceeds. I know you mentioned that was a possibility. Should we expect you to put a stock repurchase program in place in the near term so that you have the ability to buy back stock when you execute on dispositions?

Yes, our feeling is we can implement one very quickly within 2 weeks. We can put a plan in place. So we're probably more likely to match the implementation closer to an actual disposition if that's the strategy the board employs.

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

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.