DiamondRock Hospitality Company (DRH) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter DiamondRock Hospitality Co. Earnings Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Mark Brugger, Chief Executive Officer. Please proceed, sir.

Thanks, Dominique. Good morning, everyone, and welcome to DiamondRock's First Quarter 2013 Earnings Conference Call. Today, I'm joined by Sean Mahoney, our Chief Financial Officer; and Rob Tanenbaum, our Chief Operating 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 investor presentation posted on our website at www.drhc.com. Let me start today by welcoming our new Chief Operating Officer, Rob Tanenbaum. Rob joined the company last month and has already implemented fundamental changes to the asset management function in order to make the most of the internal growth opportunities within the portfolio. We are fortunate to have added Rob to our team. Turning to the first quarter. The favorable trends in lodging fundamentals continued. Demand was very solid in the quarter with industry RevPAR increasing 6.4%, mostly from rate. Despite negative headlines about the sequester and overburdened consumers, our portfolio growth has passed prior peak levels of occupancy. Several key corollaries to lodging demand are also improving. In April, the Consumer Confidence Index increased significantly to 68% from 62% in the prior month. Last Friday, we had an unexpectedly good jobs report, with a net creation of 165,000 new jobs to bring the unemployment rate down to a 4-year low. It's also important to note that this increasing demand is bolstered by terrific supply picture. New hotel supply is only expected to increase by 1% in 2013 and 1.5% in 2014. Both are well below the long-term average of 2%. Overall, we feel very good about the positive dynamics of the lodging industry, and it's quite apparent that 2013 will be another good year. Before we review our results for the quarter, I want to take a minute to review our strategy to drive shareholder value. As you know, the company made great strides repositioning our portfolio by acquiring hotels in premiere gateway markets with outsized growth potential and disposing of non-core hotels located in secondary markets with lower growth potential. We also increased the number of hotels operated by independent managers, which now represent close to 40% of our portfolio. The successful execution of this strategy resulted in a $16 increase in portfolio RevPAR and a 240 basis point increase in hotel adjusted EBITDA margins. In short, our portfolio quality and internal growth prospects have never been better. Our acquisitions have consisted of hotels with value-creation opportunities because of the ability to rebrand, invest incremental capital or change management, and we are excited about the opportunities these present. To take advantage of that upside, we are in the midst of a $140 million capital expenditure program, as well as making brand and management team changes at a number of the hotels. While 2013 will be impacted by renovation disruption, and in many ways can be characterized as a repositioning year, it will lead to sustained future growth opportunities. Sean will go into more detail on these projects in a moment. Importantly, our projects are progressing as planned. And as expected, we have some heavy lifting to do, particularly in the second quarter. In summary, the company's 2013 priorities are threefold: One, focus on internal growth opportunities; two, explore the sale of select non-core assets; and three, remain highly disciplined in allocating each dollar of capital. As we look past 2013, we expect the successful execution of our capital renovation plan to position DiamondRock well to outperform in 2014 and beyond. In other words, we are setting the table in 2013 for the future. Now let's get into the numbers. The first quarter results were in line with our expectations and reflect strong lodging fundamentals. We increased RevPAR, adjusted EBITDA and adjusted FFO during the period, despite our operating results being impacted by more than 24,000 displaced rooms at our 3 New York City hotels that are currently under renovation. Excluding hotels under renovation, RevPAR grew 5.6% and EBITDA margins expanded 93 basis points, resulting in an impressive 16.5% hotel adjusted EBITDA growth. For the entire portfolio, including properties under renovation, RevPAR grew 2%, and the company generated adjusted EBITDA of $34.3 million. Adjusted FFO per share was $0.14. In a moment, Sean will get into more detail on the operating results and capital plans. But before turning the call over, I would like to spend a few minutes highlighting some of our significant recent wins. First, the Lexington Hotel in New York City. We continue to be thrilled about the growth potential for this hotel. There are several floors back in the room inventory and the renovated rooms in the building already command a $35 rate premium even before bringing conversion. Second, we are confident that we can add a lot of value to the Westin Washington, D.C. City Center hotel through our comprehensive repositioning plan. Meeting planners are already enthusiastic about booking post-renovation. The promise of the renovation resulted in the hotel booking $1 million of group revenue during March alone. The hotel is positioned for growth as this work concludes, with the 2014 group booking pace up 56%. Third, the Westin San Diego is benefiting from our new sales strategies. First quarter RevPAR index was 125%, up almost 18 percentage points. We are also benefiting from the newly opened $300 million federal courthouse, with law firm-related business doubling in production. Fourth, the Boston Hilton is beginning to gain traction from the management changes we made at the end of last year. As we noted on the last call, we replaced virtually the entire ops team. In the first quarter, the hotel gained a strong 7.5 percentage points of market share. More importantly, the group pace for 2014 is up an amazing 60% versus the same time last year. Lastly, we are happy to report that construction is progressing very well on the Times Square Hilton Garden Inn, which is now over 20 stories out of the ground and 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, we are confident that this will be the single-best located select service hotel in Manhattan, and at a price that is $100,000 to $150,000 per key below current market value. With that, I'll hand the call over to Sean who will discuss our operating results, capital program and our outlook for 2013.

Thanks, Mark. Before discussing our first quarter results, I want to highlight that the quarterly comparisons for our Marriott-managed hotels are impacted by Marriott International's recent calendar year conversion. First quarter results for the Marriott hotels includes 7 more days than the 2012 first quarter. Please note that this will only impact our quarterly comparison, since as a REIT, we have always reported annual results on a calendar year. In order to provide investors with comparable operating data, Marriott provided restated 2012 revenues and RevPAR, but did not provide data to enable us to restate the first quarter 2012 P&L. Therefore, our reported first quarter comparisons for Marriott-managed hotels will compare to period from January 1, 2013 to March 31, 2013, to the period from January 1, 2012 to March 23, 2012. To the extent that there are meaningful differences between the comparisons, both the years will be discussed. We understand that this change may create confusion. Now let's turn to the first quarter numbers. Our results were in line with internal expectations. Total revenues increased 8.5% or 3.2% on a comparable basis. And RevPAR grew 2% or 1.8% on a comparable basis. Despite modest top line growth, our hotels did a fantastic job of preserving the bottom line, with hotel adjusted EBITDA margins only decreasing 38 basis points. Hotel adjusted EBITDA increased 6.6% from the comparable period of 2012 to $38 million. Adjusted EBITDA totaled $34.3 million, an increase of approximately 9% from the first quarter of 2012. As expected, our first quarter was significantly impacted by the renovations of the Lexington Hotel, Courtyard Midtown East and the Courtyard Fifth Avenue. In a few minutes, I will provide the current status of these renovations. The renovation disruption was the result of decreased occupancy as more than 24,000 rooms or 20% of available inventory were taken out of service. The good news is that the hotels were still able to achieve mid-single-digit rate growth while under the knife. In total, renovation disruption had a 360 basis point impact on first quarter RevPAR growth and 131 basis point impact on hotel adjusted EBITDA margin expansion. If the 3 hotels were excluded from our first quarter results, our RevPAR growth was 5.6% and hotel adjusted EBITDA margin expand -- expansion of 93 basis points. We continue to expect $10 million to $12 million of full year 2013 renovation disruption. We expect significant disruption during the second quarter, moderate disruption in the third quarter and lesser disruption in the fourth quarter. We were pleased with our food and beverage performance during the quarter. Our healthy F&B results were driven by a 26% increase in banquet revenues. Specifically, the Chicago Marriott contributed to the strong quarter, with banquet revenues increasing over 60%; and Frenchman's Reef, where banquet revenues increased 23%. Most importantly, our group revenue per room night increased over 9%. Now let me spend a few minutes discussing the individual hotel results. New York City continued to surprise to the upside. As I mentioned earlier, our 3 hotels under renovation were able to grow rate despite being under renovation. In addition, the Hilton Garden Inn Chelsea, our only New York hotel not under renovation, delivered outstanding RevPAR growth of close to 16%. Our results continue to outperform during the quarter, led by The Lodge at Sonoma, with approximately 30% RevPAR growth. Sonoma was able to drive business transient production from the strength of San Francisco. The hotel also benefited from short-term group and transient pickup from a local competitor being under renovation. The Vail Marriott also outperformed, with RevPAR increasing over 14% during the quarter. Frenchman's Reef also achieved 14% RevPAR growth and a $3.3 million or almost 20% increase in revenues. We were also pleased with our first quarter in Chicago. Traditionally, a seasonally slow quarter in the market. The Chicago Conrad gained market share and generated 11% RevPAR growth during the quarter. Our results at the Chicago Marriott benefited from strong group production in both rooms and F&B. First quarter RevPAR increased 16.7% or close to 8% on a comparable basis. The Chicago Marriott achieved over 50% profit flow-through as a result of the group production. Another strong performer was the JW Marriott Denver Cherry Creek, with first quarter RevPAR growth of 15.9%. The hotel benefited from its superb location within the city's high-end Cherry Creek neighborhood. The hotel's revenue strategy of aggressively pushing corporate rate was a huge success during the quarter, as business transient revenues increased 14%. Another hotel worth highlighting is the San Diego Westin, with 15.6% RevPAR growth. The hotel continues to gain traction from recent sales and marketing initiatives and incremental demand from the newly-opened $300 million federal courthouse. Finally, the recent renovation allowed the Alpharetta Marriott to achieve 10% RevPAR growth during the first quarter. Boston Westin's quarter was negatively impacted by a difficult prior year comparison. Despite this headwind, the hotel did a terrific job by achieving hotel adjusted EBITDA margin expansion of 91 basis points on 2.5% RevPAR growth. The Westin D.C. benefited from the Presidential inauguration, with first quarter RevPAR growth of 8%. We expect moderate RevPAR growth from the Washington, D.C. market during the balance of 2013. Although, sequester seems to be less impactful to our hotels given its prime location. As introduced during the last earnings call, we plan to invest approximately $140 million in the portfolio in 2013. Our cost estimates have not changed from the year-end call. We expect to fund the capital projects as follows: $60 million from existing cash reserves, which are classified as restricted cash on our balance sheet; and the remaining balance from corporate cash, about half of which will come from excess hotel cash flow and the balance from excess cash flows proceeds from recent financing. We continue to believe that the successful execution of our 2013 capital plan will be a major catalyst for earnings growth in 2014 and beyond. We are confident in our ability to deliver long-term outperformance by making the right investments to harness internal growth opportunities. I want to highlight the current status of our most significant projects. We are currently completing the renovation of the Lexington Hotel in New York, which we believe is the single-biggest opportunity for sustained growth in our portfolio. We currently expect the renovation to cost $45 million, and the conversion to a Marriott Autograph to occur late this summer. The final rooms will be completed in the third quarter. Marriott will provide over $4 million of key money that we will use to offset the cost of the renovation. The lobby will be completed within a month and renovation work has started on 14 of the 28 floors. We are pleased to report that approximately 140 renovated rooms are back in service and commanding a $35 rate premium. We are still in the middle of this exciting project, and we'll provide an update during the next earnings call. After renovation and rebranding to Marriott's Autograph Collection, we expect to realize significant rate gains, with the hotel generating hotel adjusted EBITDA of $20 million during 2014 and ramping to over $30 million 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 this fall. The $12 million renovation of our Manhattan Courtyard will be substantially complete by the end of the second quarter, including the addition of 5 new guestrooms at the Courtyard Midtown East, which will cost less than $1 million. We expect these new keys will add approximately $2.5 million to the hotel's net asset value. We are already experiencing positive customer reaction from the renovation. We were able to push rate an incremental $15 on a renovated King room during the week and $10 on a renovated Double Doubles on the weekend. We are finalizing the scope and timing of the $60 million renovation of the Westin Washington, D.C. and the $14 million renovation of the Westin San Diego. We expect the renovations to commence during the fourth quarter of 2013. Finally, we are planning the renovations of the Hilton Boston and Hilton Burlington. The renovation's scope and costs are expected to be consistent with our underwriting. The renovations are expected to start during the seasonally soft winters, which should minimize disruption. As we look ahead, we have great conviction that our 2013 capital investment will lead to outperformance in 2014 and beyond. We are reaffirming our full year 2013 guidance. It is worth noting that our 2013 results will be impacted by 2 major items: First and most impactful, we still expect $10 million to $12 million of renovation disruption during 2013, which will reduce annual RevPAR growth by 3 percentage points. Second, our 2013 group segment will be impacted by the decrease in city-wides in Boston and Minneapolis, which are expected to have a 50 basis points impact on our RevPAR growth. For the full year 2013, we continue to 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 were active in the financing markets during the first quarter when we raised $102 million through 2 nonrecourse secured loans. These loans have 10-year terms and sub-4% interest rates. The company has raised more than $175 million of 10-year secured debt since December, all at rates below 4%. These transactions lowered the weighted average interest rate on our mortgage debt from 5.5% to 5.2%. We have consistently maintained a simple and low-risk balance sheet with virtually no corporate debt. We currently have $1.1 billion of mortgage debt, no outstanding borrowings on our line of credit and 13 of our 27 hotels unencumbered by debt. To give you an idea of how much borrowing power that provides the company, those 13 unencumbered hotels are expected to generate over $80 million of hotel adjusted EBITDA during 2013. We expect to end 2013 with net debt to EBITDA under 5x. We believe conservative leverage is essential to delivering superior shareholder returns across the lodging cycle. I'll now turn it back over to Mark for some final thoughts. Mark?

We are very excited about the future of DiamondRock, with 27 hotels concentrated in perennially strong great -- 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, based on convention calendars, group for our portfolio is likely to increase moderately in 2013. The company successfully booked over $19 million of incremental 2013 group business during the quarter, which is 10% more than was booked during the same period of 2012. It is worth noting that the incremental group revenue was booked at a 10% higher rate. Our current 2013 group pace is up 3.1%, with 82% of forecasted 2013 group revenues already on the books. Excluding the Boston Westin, which is facing a difficult year at the BCEC, our 2013 group booking pace is up 7.1%, driven by a 2.9% increase in rate and a 4.2% increase in rooms sold. More importantly, the convention calendars are trending dramatically better in several of our main markets in 2014. Boston alone will be a big driver of growth next year. Our 2014 group pace is up an impressive 12%. In conclusion, our team remains committed to delivering shareholder value and believes that internal growth opportunities will be the main driver of DiamondRock's strong relative performance over the next few years. 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 Will Marks of JMP Securities.

I guess I want to first ask about -- just looking at general Smith Travel data, trailing 28 days in the last week. I mean, it looks like things have slowed a little bit. Just any thoughts on that and kind of also expectations this year, maybe on a quarterly basis, if there are any comps that are tougher than others, second, third, fourth quarter?

This is Mark. We're obviously watching the numbers everyday and every week. We're not seeing a slowing in a number of our markets. I mean, obviously, we have a portfolio of 27 hotels, so it's not representative of the whole nation. But I would say, overall, we're not seeing trends. We're seeing group continue to book at a decent clip. We are seeing some higher-rated group come back this year, which is a very positive trend. Transient seems to be solid and hanging in there in most of our markets. So I would say, so far, we're not seeing any indications of slowing at our particular hotels.

Okay. And then looking at New York in particular, I know you've got that renovation disruption. You've got what's going on at the Courtyard and obviously your bigger hotel, but do you see -- and this is the market where supply concerns -- where there are supply concerns of anywhere, do you see it impacting the market this year?

Yes, it's interesting because you do have the new supply coming in which is sizable, which we don't think will have a huge impact on occupancy, but obviously hurts the ability to push rate. The big offset so far this year has been the FEMA and the Sandy-related business. You're talking about a $50 billion government stimulus program to the Greater New Jersey, New York area. So it's difficult to know exactly how that plays out for the full year, kind of this incremental demand from that injection of demand, as well as the counterbalance of the supply. We're also -- on the positive in New York, we're seeing more inbound travel to New York, international inbound travel, which is increasing and may help offset the supply. But it's difficult to know. I think everyone was surprised by the strength in New York, Q1. We're seeing that continue in April in our hotels, particularly at the Chelsea, which isn't being renovated, so that's really the best gauge. So fourth quarter will be, I think, very telling for us of our ability to push rate, particularly given the Sandy comparison and the supply.

Okay. And just last question. Looking at your guidance for the year, the RevPAR range, can you just give us a sense or maybe you don't want to. But second, third, and fourth quarter, how do you expect RevPAR to come out approximately?

Sure. Will, this is Sean. We obviously have not given quarterly guidance. So I'll give -- the implied guidance for the back half of the year is consistent with our full year guidance because we came in right down the middle of our expectations for the first quarter. So with respect to what the balance of the year will be impacted by, I think the renovation disruption is worth noting because we expect the bulk of the renovation disruption to occur in the second quarter. So you should expect our second quarter to be impacted by renovation. And then the third point is our calendar comparison, they're going to be difficult for the entire year this year because of the shift in Marriott's calendar. So it's going to be difficult to gauge a lot from our individual quarters. And our full year stays the same, but the quarters are going to create a little bit of comparability issues within the models.

Your next question comes from the line of Rich Hightower of ISI Group.

I was appreciative of the clarification on the guidance because I was wondering about the back half of the year as well. But my second question, actually, if Rob is in the room I'd like him to answer. But if not, either of you guys are just fine. But you highlighted some of the potential changes that might occur with the new COO in the mix. I think you highlighted brand and management changes at some of the properties. But given that the CapEx budget and the plans haven't really changed over the last few months, can you sort of give a little more clarification as to what changes you would expect in the portfolio with Rob in place?

Rich, it's Rob Tanenbaum. It's nice to speak with you.

Nice to speak with you.

Thank you. I'm thrilled to have joined the team at DiamondRock. And with over 15 years of asset management experience, I've developed a unique asset management approach which has led to some remarkable improvements in hotel profitability. I've started to implement this approach at DiamondRock and expect to achieve earnings upside in our portfolio using the same techniques that I've employed over the years. The system's focused on 3 core tenets of asset management: Revenue management, cost containment and capital allocation. I'm extremely proud of the great professional relationships that I have developed over the years with many of the key players and our hotel operators. I'm also a big believer in accountability as the key to driving operating results. In my first 6 weeks on the job, I have already made changes to the asset management group. For example, we brought an in-house head of capital expenditures with over 30-years experience. Most recently, as a consultant with Goldman Sachs. This individual is bringing a new level of precision and execution capability to our platform. At the same time, it will allow the asset managers to focus their attention on maximizing hotel profitability through implementing revenue-maximization strategies and cost-containment plans. I'm excited about the opportunity to drive above-market growth in hotel profits over the next few years.

Okay. My next question, guys, concerns non-core asset sales. I'm wondering if you can give an update on maybe some of the airport properties that you guys have penciled in as candidates for that.

Sure, Rich, this is Mark. Overall, we're really happy with our portfolio of hotels, the DiamondRock collection. However, as we mentioned in the call, consistent with our strategy of upgrading the portfolio, we continue to look at monetizing some of our lower growth, a few lower growth assets and redeploying that capital into better value-creation opportunities. We're currently focused on a couple of potential sales right now. But our corporate policy is not to talk specifically about any one disposition until it's probable. At this time, we do not have any dispositions that meet that definition, but we are actively looking at monetizing a couple of assets.

Okay, Mark. And then last question, I'll hop out of the queue. Look, the balance sheet's in very good shape, and you did a couple of mortgage financings in the quarter. But I noticed that you do have some high-cost debt on the Courtyard Midtown East, and I don't know if the renovations factor into this, but is there a refi opportunity there before it matures in 2014?

Rich, we have -- we run on a quarterly basis the defeasance cost of each one of our mortgage debt, and it's pretty cost prohibitive to do that. But we do look at all of our options. I think when you look at our capital structure, one of the core tenets that we have is to maintain as much flexibility as we can. That includes having nothing outstanding on our line to mitigate the risk of refinancing risk and to deal with our -- not only the funding of the Times Square development in '14, but also our '15 and '16 debt maturities. We also have the ability to refinance one of our '13 unencumbered assets, as well as -- if we're successful in selling non-core assets, we have capacity from there. So we feel very good about where our balance sheet sits today. But that is a question that we wrestle with internally, whether we could take advantage of defeasance.

Your next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. Just circling back. I know you said, not too much color on the disposition side, but what are your plans for reinvestment? What opportunities are you seeing out there? I know you've got the Hilton Garden Inn Times Square deal next year, is there anything else that you're seeing in terms of opportunities?

This is Mark. We made a decision -- just kind of stepping back, DiamondRock made a decision to be an early mover and buy aggressively early in the lodging cycle. So we've done over $1 billion of hotel acquisitions in the last 3 years. At this time really, we're focused on creating the most shareholder value by mining our internal growth prospects. And that's our -- currently, our highest priority. We have been monitoring the acquisition market. Obviously, we're looking at every deal that comes in the door. But frankly, there's been nothing compelling that's come through the door so far this year.

That's helpful. And then turning to the disruption, the $10 million to $12 million. How much of that occurred in the first quarter? And sort of how you expect the balance of that to play out over the next several quarters?

Sure. Austin, about $3 million impacted our first quarter. And then we expect the balance of the year to really -- the second quarter will probably be the most impactful and the most significant, although we do expect moderate disruption in the third quarter and less disruption in the fourth quarter. We have not provided specific quarterly guidance. So we won't give you a breakout of that number, but we continue to believe that the annual disruption is $10 million to $12 million. And what we can confirm is $3 million of that was -- impacted our first quarter.

Your next question comes from the line of Joshua Attie of Citi .

On the quarter, looking at the Blackstone asset, that seems like in Boston and in D.C., RevPAR was up really nicely, but EBITDA and EBITDA margins were both down. Can you just explain what happened at those hotels?

Sure. The Hilton Boston property is now a union hotel. And at the same time last year, it was not. And so this is in our underwriting, but it shows the reflection Q1 over last year.

And then Josh, this is Sean. On the Westin D.C., we got a reassessment on property taxes, which had a pretty big impact on margins year-over-year, which is skewing the numbers.

Will that impact the numbers for the balance of this year?

It will.

Okay. And was that factored in when you bought the hotel?

It was.

And then also you mentioned that group bookings at Lexington and Boston seem like they were up a lot, which has positive implications for next year and the year after. Can you remind us what percentage of the overall business at those 2 hotels are group?

For the Lexington?

I think, Josh, this is Mark. We mentioned that the Boston Westin is up over 40% -- for about 40% for next year. That's obviously mostly group, well over 50%. The Hilton Boston is also up, similarly between about 50%. And then the Westin D.C. is up over 50%. For the Hilton and for the Westin Washington, D.C., that's probably 25% to 30% of the business at those 2 hotels.

Okay. Just a couple more questions. On asset sales, can you just give us some sense of -- I know you don't want to talk about individual assets, but some sense of the dollar volume that you have either on the market or that you could complete this year?

Looking at what we're looking at monetizing now, it will be less than $150 million. But we -- yes, we have a lot of price discipline. And I think asset prices are appreciating over the next year, so we have a lot of integrity of what prices we'll let the -- let these hotels go at, but that's kind of the range somewhere below that amount.

Okay. And just one more question on the balance sheet. You clearly like where rates are today. You've done some long term asset-level financing. Have you reconsidered issuing preferreds, where you could obviously lock-in rates forever?

Sure, Josh, preferreds are one of the tools that we evaluate as an opportunity. We currently like the simplicity of our existing capital structure, and we believe that sub-4% 10-year debt is very attractive. It's as attractive as it's been since we formed the company in 2004, and that's the choice that we made. Although we do evaluate preferreds on a very frequent basis, we just have never gotten excited enough about them to make that move because they do represent a level of corporate debt. We strive to have a balance sheet that has no corporate debt, and so we prefer the secured execution.

So at this point, it's fair to say they're off the table or are they being considered?

They're always being considered, but I would say that they are lower odds for that execution.

Your next question comes from the line of Ryan Meliker of MLV & Co. Ryan Meliker - MLV & Co LLC, Research Division: Just a quick follow-up to Josh's question with regards to the Blackstone portfolio. Can you just give us a rundown of how those properties have performed relative to your underwriting? I mean, it looks like over the past 3 quarters, the Boston Westin is down $1 million in adjusted EBITDA, and I think D.C. is down $1.7 million or so in year-over-year adjusted EBITDA. I know you bought the assets at a 14.4x 2012 EBITDA multiple. So I'm just wondering, was that -- were you underwriting this type of EBITDA decline and indicating a higher multiple on 2013 numbers?

Ryan, this is Mark. I'll take that one. So if you think about the 4 assets, Burlington's clearly exceeded our original underwriting. San Diego is performing very well, particularly in Q1. So that's actually at or slightly above our underwriting. The Boston Hilton, which we obviously acquired last July, a couple of major things going on there. One, we are getting the union. It's converted to a union, so we're getting that impact, wage parity, which will burn off the third quarter of this year. So the year-over-year is tough. That was built into our underwriting. The opportunity we saw at that hotel was really to get rid of the existing management, replace the entire property level team and bring in new management. We saw a lot of upside in the revenue potential of that hotel, particularly with 66 suites. The transition in the fourth quarter was, I think, a little tougher than we originally anticipated. We lost over 20 points of market share as part of that transition. Now that's a temporary phenomena. And as we stated earlier in the call, we're up 7.5 points of market share in Q1 alone. Although, we got a long way to go to get back to parity. But that's really the upside as the new management team kicks in there. So I would say Q4, the transition was more than we originally underwrote, but we still believe the potential is there because of the lost market share. Shows you that, that's kinds of a temporary phenomenon. D.C. is a little bit different. D.C. has its own special piece. 2 things going on there. The upside and the value-creation opportunity is really the capital and the renovation. So our underwriting, the big growth there is post-renovation. And as we mentioned, just telling the meeting planners about the renovation, we booked $1 million of incremental business in March alone. So that one, I would say D.C. was a little softer we anticipated. Certainly, we didn't factor in the Sandy impact in the fourth quarter of D.C., where RevPAR was down over 30% for that week. But D.C -- D.C. our bet is in our underwriting, is really based on the post-renovated product. So we feel very good about that potential still. And as we mentioned, group booking is incredibly strong for that hotel for next year as one indicia of the upside that's going to be realized there. Ryan Meliker - MLV & Co LLC, Research Division: Sure. And I understand you guys aren't buying these assets for year 1 returns, you're taking a longer-term view. I just wanted to get some color on that. And then in terms of a modeling perspective, as we think about these assets, it looks like you guys are expecting all of those assets to go under renovation late this year, start of next year. Is it following that renovation that we'll start to see some of that growth that you guys believe is embedded in these assets?

So again, let me just walk through. So Burlington, the renovation won't be -- it will be good. There is not as much upside from that capital. Although, we're talking about building some new meeting space to take advantage of the [indiscernible]. So that one will continue to tick along. The Hilton Boston is going to be less about the capital. I think you'll start seeing significant rate growth as our marketing strategies are implemented with the new team. The Westin D.C. will go under renovation probably starting in October of this year. It's really going to be post that renovation which we'll wrap up during this winter where you start seeing what we hope will be the big gains next year. Somewhat market dependent, but certainly, above market growth. And then San Diego will have the renovation, but you can see already what the growth in the first quarter, the sales strategy change there is making an impact. But the dramatic change in the lobby, both -- at both Westins, I think will lead to significant upside. While we -- our underwriting has for those assets, is getting to kind of mid-40s EBITDA for the portfolio over the next couple of years, which should outpace certainly the industry growth and the balance of our portfolio.

And Ryan, this is Sean. So I think from a shape of the curve perspective, you should expect consistent EBITDA year-over-year from '12 to '13, with the ramp really starting in '14 and into '15 getting to that mid-40s number that Mark mentioned. So this year will be relatively flat year-over-year, maybe slight growth in the portfolio for those 4 assets. Ryan Meliker - MLV & Co LLC, Research Division: Okay. That's really helpful color. And then one more kind of modeling question. I don't know if you can give me any color, Sean, but in the quarter, you guys obviously had a $6 million benefit on taxes. Your full year tax expense guidance is unchanged. Can you give us an idea in terms of how we might -- how we should look at that over the remaining 3 quarters? Is it going to be lopsided to one quarter or another, et cetera?

Yes, a lot of the taxes is seasonality, Ryan, because of the way the leases are structured. So we generally almost always have a significant tax benefit in the first quarter, as you can see, relative to last year. And it moves more into an expense position as the year goes on. So the fourth quarter would be where it really shifts to an expense just because of the seasonality. So I would have it modeling where you should expect probably second quarter, I believe, we'll have a small expense. Third quarter tends to be closer to a benefit, but all within the rounding. And then the fourth quarter, it tends to be an expense, which gets us to the full year expense guidance.

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

I'm looking at the Frenchman's hotel. Last year was hurt by the lack of travel subsidies towards the end of the year. Is that looking like a one-off event, and they should be fine this year?

Wes, it's Rob Tanenbaum. We think there's a complete amount of upside for this property. And it reminds me of when I was involved with the Aruba Marriott and the potential that we received, we realized there. So we do see quite a bit of upside potential in Frenchman's.

Okay, but the subsidies should be there the whole year? And I know -- anything going on at the end of the year like last year?

Yes, they're still doing marketing from the tourism board and so we believe that we will be able to work with that number, yes.

Okay. And then looking at the Lexington Hotel. How should we model that one, I guess, for stabilization? Maybe a lower initial yield in '14 and then a full stabilization in 2015?

Wes, this is Mark. So the Lexington Hotel obviously, we have an enormous amount of impact this year. Next year, our underwriting, I'll give you that guidance, would be kind of $20 million, a little over $20 million and then ramping up to the low kind of $30 million range.

And that will be in '15 you think, or '16?

Probably '15.

[Operator Instructions] And your next question comes from the line of Lukas Hartwich of Green Street Advisors.

Sean, do you have an estimate of the RevPAR growth that you fully adjust for the change in the reporting that Marriott had?

For the quarter?

Yes.

It's 1.8% versus 2%.

Okay. And then just one other quick one. Do you guys have any plans to change the managers at your hotels that are performing below the performance targets, in the management agreement?

We are -- well, Rob's been on board for all of 6 weeks, so we are currently evaluating several management changes at the properties. But we want to make sure that Rob has time to get up to speed to make sure we're making the appropriate changes and taking advantage of his expertise before we actually pull the trigger on this.

Your next question comes from the line of Nikhil Bhalla of FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Mark, this question is for you. When you look across your portfolio and take maybe a 5-year view from here on, you've renovated a substantial portion of your portfolio already. How much of these kind of disruptions should we expect over the next several years? I mean, are you pretty much done with all the major capital expenditure plans at this point in time in your portfolio as it exists today?

That's a great question. Obviously, we put in over -- in the last 5 years, we've spent well over $300 million on our properties. We're embarking on $140 million right now. This is the renovation disruption and immediate needs. This will be -- this $140 million program represents about 1/3 of our portfolio by EBITDA that we're renovating currently. So we don't anticipate significant disruption or any new -- currently any new renovations to be announced for 2014. So expect 2014 to be a very clean year as we complete these up. I'm sure as we get to '15 and '16, there are always room cycles and other things that we'll have to evaluate in making sure that we're keeping pace with the market. But we don't have anything on the table currently. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: So when you look beyond 2014, you're not envisioning, as the portfolio stands today, maybe another $130 million or $140 million of spend, say in '15 or '16 at this point?

Well, if you think about our program that we're currently embarked, what we did strategically is take advantage of early mover, buy a lot of repositioning assets. And so if you think about the majority of the capital that we're putting in right now, it's really related to the repositioning of recent acquisitions. So we're not forecasting being a large acquirer over the next couple of years, so we won't have those. But as Rob gets through these, and if we see value-add opportunities, that view may change for '15, '16, if there's a lot of upside. But currently, what we're anticipating is that we'll get through '13, we'll have a good '14 and then we'll have to evaluate the properties in the future.

And you have a follow-up question from the line of Joshua Attie of Citi.

I just want to follow-up on 2 things that you said earlier. I guess, first, why did the Hilton Boston need to go union if it wasn't union previously?

Josh, this is Mark. They had signed the neutrality in the union agreement before we actually acquired it, about 2 months before we actually acquired it. And the reason why union is because the wages, really that was set by Columbia Sussex when they owned it were substantially below market. So that was built into our underwriting, obviously, we would have probably paid more if it was non-union. But that occurred before our watch.

Can you give us some sense of what the incremental cost would have been on a full year basis last year or a full year basis this year?

Josh, the incremental cost from primarily work rules and getting up to market was about $1.2 million per year.

Okay. And then also, the same for the tax assessment on the D.C. property. Can you give us a sense for what the annualized impact of that is?

Bear with me a second, Josh, on that one. Why don't we take that one offline, Josh?

Okay.

Sorry, it's about $0.5 million, Josh.

For the full year?

The full year.

And we have a follow-up question from the line of Rich Hightower of ISI Group.

One other hiring question. I think you guys had mentioned a while ago, you were looking to bring on a CIO maybe towards the end of this year. And I'm wondering if you can provide an update there, please?

Sure, this is Mark. As you know, we decided to split -- change the structure of the company and split the COO and CIO position. On the CIO, we plan, as we mentioned last call, to begin the process later this year. We don't see acquisitions as the top priority near term because we see the real catalyst for our stock focusing on these internal growth opportunities. But our plan is to have a CIO in place by the end of this year.

This concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Mark Brugger for any closing remarks.

Thank you, Dominique. To everyone on this call, we would like to express our continued appreciation for your interest in DiamondRock and look forward to updating you next quarter. Also, I would like to remind listeners that the company has scheduled an Investor and Analyst Day on September 10 in New York City, where we will offer tours through some of our renovated hotels to showcase the upside potential. We look forward to seeing you all at that event. Thank you.

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