DiamondRock Hospitality Company (DRH) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 DiamondRock Hospitality Company Earnings Conference Call. My name is Kim, and I will 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 your host for today, Mr. Brett Stewart, Director of Finance, DiamondRock Hospitality Company. Please proceed.

Thank you, Kim. Good morning, everyone, and welcome to DiamondRock Hospitality Company's First Quarter 2014 Earnings Call and Webcast. I'm here today with Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Executive Vice President and Chief Financial Officer; Rob Tanenbaum, our Executive Vice President and Chief Operating Officer; and Troy Furbay, our Executive Vice President and Chief Investment Officer. Mark will provide an overview of the industry, discuss the company's first quarter results and activities, as well as discuss our outlook for the balance of 2014. Sean will provide additional details on our first quarter performance, as well as provide an update on our balance sheet and key asset management initiatives. We'll then open the call for Q&A. But before we begin, I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities law and may not be historical fact. They may not be updated in the future. These statements are subject to risk and uncertainties as described in the company's SEC filings. Moreover, as management discusses certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP set forth in our earnings press release. At this time, I will turn the call over to Mark Brugger, our President and Chief Executive Officer.

Thanks, Brett. Let me start this call today by stating what has now become obvious, lodging fundamentals are strong. The supply-demand imbalance worked again, in the industry, in the first quarter. Industry demand grew 3.8% against the backdrop of restrained supply growth of less than 1% or about 1/2 the historical average. Building on these positive underlying trends, the industry was able to drive a 6.8% RevPAR increase or about double the historical average. DiamondRock's first quarter results met our internal expectations and outperformed the industry as our portfolio delivered 8.4% RevPAR growth. Profits were up, with hotel adjusted EBITDA margins expanding almost 100 basis points. This strong start to the year provides positive momentum for the remainder of 2014. The portfolio's outperformance in the quarter is attributable to company-specific catalysts. The 3 most significant of which are as follows: one, outsized growth from our recently completed $140 million renovation program; two, enormous growth from the re-branding and renovation of the Lexington New York Hotel; and three, strong group performance at several of our hotels. We really like our group exposure, group is a segment we've been constructive on for some time now. It may be helpful for me to touch on each of these 3 key points in more depth. First, as I mentioned, we will benefit from the recent investment of over $140 million in the high-impact hotel renovations, the final phase of which was completed just in the last few months. This capital program involved the renovation of over 1/3 of our portfolio since early last year. The list of renovated hotels is a long one and includes our 2 New York City Courtyards; the Lexington Hotel; the Westin San Diego; the Hilton Boston; the Hilton Burlington; the Westin Washington, D.C. City Center; and the Hilton Minneapolis. We expect a significant return on much of this investment, both in 2014 and 2015, as guests and meaning players experience the renovated product and we start to move market share. Second, the renovation and rebranding of the Lexington Hotel, now part of Marriott's Autograph Collection, is ripening into a powerful growth catalyst for the company. The Lexington stats in the first quarter were impressive, achieving 57.5% RevPAR growth and nearly 2,000 basis points of margin expansion. Moreover, the Lexington is penetrating rival hotels, gaining over 32 percentage points of market share during the quarter. Importantly, it is winning on both occupancy and rate. Its share of ADR was up 11.5 percentage points in the quarter. The hotel ramp is playing out as we hoped it would, with 80% of its business now coming from the highest-rated business transient segment. This success with transient is a testament to the power of Marriott's distribution system, with fully over 50% of rooms sold coming through Marriott channels. We are on track to meet our underwriting and deliver over $20 million of hotel-adjusted EBITDA during 2014, with several more years of upside. In total, we think hotel EBITDA has the potential to increase 50% by 2016 at the Lexington. The third and final key point that should be highlighted relates to the group segment. Our group segment, which represents 32% of first quarter revenues, outperformed. First quarter group revenue increased 13%, the highest across all our customer segments, in addition, our group spend, a critical barometer of the segment strength, grew over 8% during the quarter. Group outperformance also led to 12% growth in the important area of banquet and catering sales. This group strength was driven by our hotels in Boston, Fort Worth, St. Thomas and Los Angeles, more than offsetting weakness in Chicago and Minneapolis. For our entire portfolio, we project a group business, at our hotels, will outperform in 2014. Although we expect a dip during the second quarter, due to some cyclical city-wide calendars, before reaccelerating into the third quarter. I would like to now turn our attention to acquisitions and dispositions. As you know, DiamondRock has been executing an aggressive capital recycling program during the past few years that now totals well over $1 billion in transactions. 2014 will be a continuation of that strategic effort as we believe 2014 will be a good year to prudently both buy and sell hotels. There are positive signs in the transaction market. We are seeing owners who held on and rode out the downturn, now selling. This trend is evident in the data. Last year, transaction volume increased over 35% to $22 billion. Going forward, leading prognosticators are calling for transaction volume to climb another 10% in 2014 to over $25 billion. With Troy, a 25-year industry veteran leading DiamondRock's disposition and acquisition efforts, we are well-positioned to execute deals that create shareholder value. Let me touch on some of our most recent activity. On the disposition front, we improved our portfolio quality with the sale of the Oak Brook Hills Hotel located in suburban Chicago. The Oak Brook Hills Hotel was sold last month for $30 million, including $4 million of seller financing. The hotel was our lowest-quality hotel and inconsistent with our current portfolio strategy. On acquisitions, the Hilton Garden Inn Times Square Central is nearing completion, with construction proceeding on schedule. We still expect to close on this hotel and welcome our first guests near the end of this summer. It's worth noting that we put the hotel under contract at a fixed price over 3 years ago. Hence, we are paying 2011 prices for a 2014 hotel. At $450,000 per key, we believe this extraordinarily well-located hotel will immediately create real shareholder value. On a point potentially related to acquisitions, the company recently received an official notice from the owner of the Allerton Hotel that it intends to prepay our $58.5 million loan during the second quarter. This event will bring a happy ending to our Allerton investment and bolster the company's dry powder for acquisitions. So, what's next for DiamondRock? Well, we are selectively hunting for deals that fit our strategic and financial criteria. Our focus is on urban hotels, generally in top 15 markets, as well as select resort locations. We will continue to work hard to find good deals in this market, and we will remain disciplined throughout the process. We may also look to sell 1 or 2 noncore hotels over the next 24 months. With that, I'll now turn the call over to Sean Mahoney who'll provide details on our operating results, asset management initiatives and balance sheet management.

Thanks, Mark. Before discussing our first quarter results, please note that our reported pro forma RevPAR and margin data exclude the Oak Brook Hills Resort, which was sold early in the second quarter. As Mark highlighted, our 2014 operating results are expected to benefit from several portfolio-specific catalysts, including outsized growth from the $140 million capital renovation program; enhanced performance from the Lexington Hotel joining Marriott's Autograph Collection; strong group booking pace led by our hotels in Boston; and the opening of the Hilton Garden Inn Times Square Central. Now, let's turn to the first quarter numbers. Overall, it was another strong quarter and was consistent with our expectations. The company reported adjusted EBITDA of $37.3 million and adjusted FFO of $0.15. The first quarter reflected some exceptionally strong results at many of our hotels, with 9 hotels reporting double-digit RevPAR growth. The overall portfolio's 8.4% pro forma RevPAR growth was the result of a 4.5% increase in rate and a 2.6 percentage point increase in occupancy. Despite the first quarter being a seasonally slow quarter, we achieved pro forma hotel adjusted EBITDA margin expansion of 95 basis points. We expect stronger hotel margin expansion during the remaining quarters of 2014. Now, let me spend a few minutes highlighting some individual hotel achievements. As expected, the Lexington Hotel's first quarter benefited from last year's renovation and the re-branding of Marriott's Autograph Collection. The hotel achieved 57.5% RevPAR growth and approximately 1,900 basis points of margin expansion. The LAX Marriott achieved impressive 24% RevPAR growth and 478 basis points of margin expansion. The hotel benefited from taking advantage of a strong group base to drive revenues by restricting low-rated discount and international wholesale segments. The Boston Hilton continued its multi-quarter run of double-digit RevPAR growth. The hotel was able to drive over 20% RevPAR growth by taking advantage of both compression from city-wide activity and the recent renovation. In addition, the hotel outperformed the market, gaining over 14 percentage points of market share during the quarter. The Boston Westin also benefited from strong city-wide activity, which contributed to a 16.6% increase in group room revenues and a 30% increase in F&B revenues. The hotel took advantage of strong corporate demand in Boston, achieving over 30% growth in business transient rooms sold at an 8.5% higher rate. Our 2 New York City Courtyards benefited from their 2013 renovations, with a combined 18% RevPAR growth and over 700 basis points of margin expansion. The Worthington Renaissance also had a strong quarter, achieving RevPAR growth of 14.7%, which contributed to a 680-basis points gain in market share. The hotel's F&B also outperformed, achieving revenue growth of 19%, which was led by banquets and catering. Finally, our Denver hotels also outperformed, with the JW Marriott Cherry Creek and the Courtyard Denver achieving combined RevPAR growth of 11.7%. The RevPAR growth led to strong margin expansion of 508 basis points at the Courtyard Denver and 385 basis points at the JW Marriott Cherry Creek. Challenges in the New York City market partially offset these performances. Upper-upscale market RevPAR was flat as the positive impact of the Super Bowl was more than offset by the impact of new supply and difficult Hurricane Sandy comparisons. Additionally, New York City was impacted by several severe winter storms and freezing cold spells during the quarter. In addition, our Chicago hotels finished modestly behind expectations, due primarily to close to a 30% decline in city-wide activity and severe weather during the quarter. Shifting back to positive trends, our group business outperformed during the first quarter, achieving over 13% revenue growth. The group segment was led by Frenchman's Reef, the Worthington Renaissance, the LAX Marriott, and the Boston Westin with group revenue growth of 65%, 49%, 28% and 17%, respectively. Another encouraging trend was the 8.3% increase in group contribution during the quarter, which provides evidence of a healthy group recovery. Our group business is well positioned to outperform over the remainder of 2014, with group revenue pace up 8.2%. Our 2014 group pace is being driven by a 5% increase in rooms and an approximately 3% increase in average rate. We currently have over 83% of the forecasted 2014 group business on the books. Before discussing the balance sheet, let me provide an update on recent asset management initiatives. Our team has spent significant time identifying opportunities through enhancing sales and marketing strategies, implementing new cost containment initiatives and maximizing opportunities within our existing portfolio. We are pleased with the progress the portfolio has achieved to date and we see a number of additional significant opportunities. Let's start with a summary of recent revenue management achievements. We successfully increased average rates by shifting into premium retail segments, while yielding out lower-rated leisure business. Specific strategies included taking advantage of compression opportunities, replacing lower-rated wholesale and contract business, implementing view category rooms and replacing non-repeat group demand with higher-rated business transient. Our recent implementation of resort fees at The Lodge at Sonoma and the Vail Marriott resulted in $0.6 million of incremental revenues during the quarter. We also took advantage of group strength to increase group room nights and aggressively price during compression periods, which resulted in an impressive 8.3% growth in group spend. We are also working to identify cost containment opportunities across the portfolio. Recent successes include a 1.3% increase in labor management productivity through improved scheduling and reduced overtime; a 1.3% reduction in food costs and the elimination of dinner service at one of our urban select service hotels helped to increase food and beverage margins by 300 basis points; our recent restructuring of parking contracts and parking rate increases contributed to a 17% increase in first quarter parking profit; and lastly, we implemented several energy initiatives, including installation of low-flow toilets at both the Boston Westin and Boston Hilton that are expected to have 2- to 3-year payback periods; and installation of LED lighting in all guestrooms at the Minneapolis Hilton and Boston Westin that are expected to reduce annual operating expenses at each hotel by approximately $50,000. We are currently focused on continuing our cost containment efforts through the following new initiatives: consolidating management positions in 2 hotels, which is expected to reduce annual operating expenses by approximately $200,000; further restructuring telephone maintenance contracts, with expected annual savings of $800,000; and analyzing portfolio laundry operations for cost saving opportunities, including outsourcing and contract restructuring. Another asset management focus has been the implementation of value-creating ROI opportunities within our existing real estate. The most significant projects include: converting unfinished space at the Boston Westin into 12,500 square feet of valuable meeting space, with an underwritten IRR close to 30%; adding over 40 new rooms to the Boston Hilton; and evaluating the opportunity to create new rooms at the Vail Marriott, JW Marriott Cherry Creek, Westin Washington D.C., our 2 New York City Courtyards and the Sonoma Renaissance. We are also in the earlier stages of evaluating other opportunities such as converting over 10,000 square feet of vacant office space at the Minneapolis Hilton into valuable new meeting space; leasing restaurants at several hotels to third-party operators; creating incremental meeting space out of existing admin offices at the Operetta Marriott and the Salt Lake City Marriott; and analyzing options from the maturity of a significant space lease at one of our resort hotels to either increase rent or add approximately 20 new keys to the hotel. Finally, we are focused on creating value from our existing contracts. We recently amended one of our management agreements to reduce space fees by over $500,000 over the next 3 years and we also negotiated a multi-year base fee reduction at 2 brand managed hotels due to our objection to new competitive hotels within these markets, with an expected fee reduction of approximately $400,000. Lastly, I would like to touch on our balance sheet and capital allocation. We continue to believe that DiamondRock's balance sheet is among the best of any lodging REIT, and we are committed to being prudent stewards of our investors' capital. We have a nearly decade-long track record of consistently maintaining a straightforward and low-risk balance sheet that has essentially no corporate debt. We adhere to a disciplined capital structure philosophy that rests on 5 principles: first, we maintain -- we believe that maintaining low leverage is the most prudent strategy for a public lodging REIT. Based on our base case long-range projections, which assume no new equity assurance, we expect net-debt-to-EBITDA of less than 3x by 2016; second, we believe that our capital structure acts as a defensive tool to mitigate the risk of lodging cycle volatility; third, we continue to believe in the value of a simple capital structure and have a bias against preferreds and converts; fourth, we preserve significant borrowing capacity by maintaining approximately 1/2 of our portfolio unencumbered by mortgage debt; and fifth, we have a bias against corporate debt and currently have nothing drawn on our line of credit. Our conservative balance sheet is a key element of our strategy that positions DiamondRock to deliver superior shareholder returns across all phases of the lodging cycle and also provides the ability to pay a meaningful and sustainable dividend. Since our IPO, we have paid dividends of approximately $475 million to our shareholders. Our liquidity position has improved as a result of the proceeds from the Oak Brook Hills disposition and the upcoming repayment of the Allerton Loan. After funding the Times Square acquisition, we expect to end 2014 with over $180 million of unrestricted cash, which will allow us to remain opportunistic if we identify attractive acquisition targets. We will continue to focus on prudent capital allocation and be thoughtful in positioning the balance sheet for upcoming capital needs. I will now turn the call back over to Mark.

Thanks, Sean. Let me turn to our outlook. Our outlook continues to reflect both positive industry dynamics, as well as DiamondRock's unique growth catalyst. We are essentially reaffirming prior guidance after adjusting for 2 important transactions. First, our guidance is updated for the sale of the Oak Brook Hills Hotel. Our prior guidance included $3.5 million of adjusted EBITDA and $2.5 million of adjusted FFO for the period after our sale date. Those amounts have been removed from the updated guidance range. Second, our guidance is updated for the pending prepayment of the Allerton Loan by the new hotel owner. While we may have a one-time book gain with this transaction, we plan to adjust out that benefit from our reported earnings to provide investors with the most comparable results. Additionally, our prior guidance included $3.5 million of adjusted EBITDA and adjusted FFO for interest income that would have been earned during the period after the prepayment date. That amount has been removed from the updated guidance range as well. Please note that while we believe the prepayment will likely happen, and it is our best guidance at this point in time, we would strongly caution you that it is not guaranteed. So, for 2014, DiamondRock is providing the following updated guidance: RevPAR growth of 9% to 11%; adjusted EBITDA of $223 million to $233 million; and adjusted FFO per share of $0.83 to $0.87. I do want to emphasize that no new acquisitions or dispositions have been incorporated into our updated guidance. In addition, please note that for the second quarter we expect to earn roughly 29% of full year adjusted EBITDA. To sum things up, we had a strong first quarter and are well-positioned to deliver solid full year results. Moreover, we firmly believe that DiamondRock's strategic focus, attractive portfolio and strong balance sheet form a platform for multiple years of growth ahead. We are very excited about our prospects, as well as upcoming catalysts such as the second buff from our renovation program in 2015 and the potential upside from deploying our sizable war chest. On that note, we would now like to open up the call for your questions.

[Operator Instructions] Your first question comes from the line of David Loeb from Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Mark, you hired Troy and you said, a bunch of different ways in your prepared remarks, that you're looking at acquisitions. Can you talk a little bit about what the look and feel of those might be, what you think the returns could be, what impact that might have on shareholder value or NAV and how you look at that?

Sure, David. I'll start and actually I'll turn it over to Troy as well. As Sean mentioned, assuming the Allerton Loan gets prepaid, we'll be sitting on about $180 million of cash year end. The goal is to actively pursue deals in the marketplace that we think will further diversify the portfolio and increase our growth prospects. As I mentioned in the prepared remarks, we're seeing more transactions, we're seeing more volume in the marketplace and we think that there might be some exciting opportunities. But I'll let Troy jump in and tell you what his perspective is.

As you know, we use a very meticulous and proven process. I personally have about a 20-year career buying hotels, and while I haven't always had the lowest cost of capital, that's never precluded me from being able to find good transactions to invest in. As I said, we're very meticulous in our study. We look at about 30 different markets around the country, at any given time, study a lot of data and are constantly updating that data. We look at asset types, mostly in the full-service space. We look very closely at the cost of replacing those assets and look at that data on a market-by-market basis. We're also very closely looking at the management opportunities, where we can make changes to management, make changes to, brands. As you know, in my career, most recently, I've spent a considerable amount time in the lifestyle space, so we are -- while we have a lot of the big brands in our portfolio today, we're increasingly looking into the lifestyle space, in some of the brands there, where customers are gravitating towards. So we're looking at those types of assets, those types of brands. We're looking at where we can apply capital to upgrade the properties, and we're looking at, frankly, probably focus on top 15 to 20 markets around the country, with a particular focus towards the West Coast. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's very helpful, Troy. Can you just talk a little bit more about, for example, whether you would look at doing deep turn renovations or rebranding, as that might be a little bit disruptive for a couple of quarters. And then, kind of back, maybe to Sean, about where you think the value proposition is today relative to your stock price and relative to multiple things like that.

This is Mark, I'll jump in here. So as we said on prior calls, we think it's mid-cycle right now, so maybe a little before, somewhere around the mid-cycle. So we think that now isn't the time to do a multiple year turnaround type project, so at Lexington, where you buy it, you figure out it takes a year to plan and get the new brand, a year to execute, and then, 2 years to ramp up. You shouldn't expect DiamondRock to do a deal like that unless there's something -- a really extraordinary opportunity. The deals that we're looking for are high growth -- in high-growth markets, a Miami; West Coast, like West L.A; San Francisco, if the cap rate's not insane. We expect to be in those high-growth markets. We look for value-add opportunities where there might be something where we could up-brand it without a lot of disruption. But it's probably too late to do -- unless it is a small property to do really a kind of shutdown reposition, renovation that takes a long time to get there, given where we are in the lodging cycle.

And David, to answer your question on sort of cost of capital and our capital allocation, acquisitions are, clearly, only one of the options we have with the dry powder that we're going to have. Other options include deleveraging. We have the ability -- we've got debt maturity in 2015. We do have a share repurchase program in place, that's an option as well. So if you look at the -- if you think of the deals that we're looking at, clearly being accretive is very high on our requirements. Just because we have the capital, we're going to continue to be disciplined in how we allocate that capital. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. Last follow-up, Sean, for you. It's really easy when you have cash on your balance sheet and a low cost of debt to buy subs that's accretive to FFO. It's harder to make it accretive to NAV, so is that what you mean when you say accretive?

We mean accretive to NAV for sure.

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

It's Austin Wurschmidt here, with Jordan. Just following up on the acquisition theme, or switching dispositions rather, sticking with the investment theme. You had talked previously about selling 3 hotels for about $150 million. And since you guys have closed on 2 for $105 million, Mark, you mentioned the additional sales, potentially 2 hotels, so does $50 million kind of fit within that framework of 2 additional hotels, or do you think you could exceed that amount?

That's a good question. We really like -- generally, really like our portfolio today. There are 1 or 2 assets that, I think, if we could get the right price for, we would consider recycling. So I think we're going to be very careful about bringing those assets to market at the right point in time. I think, $50 million, give or take, is probably still a good marker, might be a little less, might be a little more, depending on which assets are selected. But there's -- and we sold Oak Brook Hills which was our #1 asset, we wanted to sell, probably, the least core asset we had in our portfolio. With the year-end balance of about $180 million in cash, we're more likely to see how the pace of acquisitions proceeds before bringing more things to market. But we'll continue to monitor the market again, I think it is a good time to buy and sell right now in 2014.

And then just on the value creation opportunities that Sean went through, you talked about not doing any big renovations at this point. Could you just give some additional detail on how you would prioritize those opportunities? And would you consider undertaking any of these initiatives in 2014, 2015?

So you're -- so I understand your question, the question is will we consider entering into any big renovations in 2014 on our existing hotels?

Yes, related to the addition of the meeting space and additional room additions that Sean sort of walked us through.

Yes, I think what we said, just to be clear, is that we've completed our $140 million renovation program, some of which had a lot of disruption associated with it, which you saw in our 2013 numbers. In 2014, we're going to continue to pursue all these smart value creation opportunities, many of which we've talked about in prior calls, which may be adding 3 keys here, 11 keys at another hotel, splitting some seasonally lower winter seasons in Boston. Those should not be very disruptive. There's always a little bit of noise in your numbers, but those kind of -- what we consider smart value add opportunities, we're going to continue to pursue. What we're trying to say is we're not planning to undertake in 2014 any big renovations that are going to have the kind of material disruption that we had last year.

And then, any sense on the timing on any of those?

On the room additions?

Yes.

Austin, it's Rob Tanenbaum. The room addition in Boston Hilton would be in the end of the fourth quarter, and in the Boston Westin, meeting room opportunity is going to occur in the second quarter and finish up at the end of the third quarter.

This is Sean. I just want to emphasize, on the 2 meeting space projects that we have, both of those projects are in space that is currently unused at the hotel, and will be very undisruptive. The Boston Westin is part of unfinished retail space that's the building next to our hotel. And the Minneapolis Hilton that we're evaluating is outside of reach of what Really guests spend a lot of time, so we anticipate both those projects to be completed with no -- or virtually no profit disruption.

And then just one last one. Following the completion of the renovation at the Westin Washington D.C., you'd previously talked about 2015 being a big year for that hotel. And just curious, sort of the -- some of the success that you've had there, thus far.

Sure. Austin, it's been an incredible opportunity, having guests and meeting planners come through and say, "Wow, I would never have imagined this hotel looked this great." In fact, Starwood awarded us the Presence Award, given our renovations, at both the D.C. Westin and the San Diego Westin, given the impact. It was really amazing to walk through both properties with senior management from Starwood. And one individual who had actually worked at one of the hotels previously, and said, "I would never think of this the same hotel that I worked in a few years ago." So from that viewpoint, it's been fantastic. We've had companies like the World Bank now very interested in our D.C. Westin. We're finding meeting planners coming back for walk-throughs and going, "This is fantastic it fits their needs, being strategically located in the marketplace. So it's been -- what we're doing right now is relaunching the product out to the marketplace, and our initial results have been very favorable.

Your next question comes from the line of Thomas Allen from Morgan Stanley.

I believe Chicago and New York is still your biggest markets. Can you -- I'm guessing what you expect your exposure to each market will be in 2015, once your new Times Square property opens up? And then, what's your outlook for kind of market growth for those 2 markets at 2014?

Sure, this is Mark. I'll take that one, So for New York, as you know, New York, I'll tell you about the market. It underperformed in the first quarter, we expect it to be a little bit better for the balance of the year, and full year outlook would be kind of low single digit RevPAR growth for the full year. Our pro forma for -- including Hilton Garden Inn Times Square would make the New York market [indiscernible] about up 22%, 23% of our overall portfolio by EBITDA. Boston and Chicago would be our next largest markets at about 15% or so of our pro forma EBITDA for the company. Chicago had a tough first quarter. City-wide, that city is very sensitive to the city-wide calendar. It was down significantly in Q1, we see it getting better for the balance of the year, especially in the back half of the year. So we feel decent about Chicago but it was a rough start.

And then just your garden in Chelsea RevPAR, I think it was down slightly more than I thought it would be down. Anything specific driving that supply or anything like that?

It's a good great question, Thomas. We had a some revenue management opportunities there since moving out, particularly individual we've seen an increase in that, so just some pricing challenges that came about from -- through and that's been addressed.

Your next question comes from the line of Ryan Meliker from MLV & Co. Ryan Meliker - MLV & Co LLC, Research Division: Just a couple of quick ones here. First of all, with regards to the RevPAR forecast, obviously, 1Q came in, below your full year guidance range. You indicated that 2Q is going to have a lighter group revenue dynamic than you saw in 1Q. Are you expecting 2Q to also come in below that 9% to 11%, or do we expect RevPAR really to be back half weighted? Or is it just seasonality kind of a little choppy?

Hey, Ryan, no , we expect the RevPAR to accelerate in the second quarter and then further accelerate in the third quarter within the portfolio. Our implied guidance for the back half or -- for the last 3 quarters of the year is from anywhere to a little over 9% to about 11.5% RevPAR for the portfolio. So we expect it to accelerate. On a related point, we expect the same trend for our margin expansion as well. We expect that to accelerate as the year progresses. Ryan Meliker - MLV & Co LLC, Research Division: Great, that's helpful. And then another question I had was David talked a little bit about the acquisition strategy and how things were unfolding. I noticed in your EBITDA guidance that you now include $200,000 of acquisition-related costs that weren't there a quarter ago. Are you any closer to an acquisition today than you were last quarter when we last spoke?

Ryan, I wouldn't read really anything into that -- into that $200,000. And we -- as a general don't comment about where we are relative to our acquisitions but there's nothing to be read into that $200,000. Ryan Meliker - MLV & Co LLC, Research Division: Okay. And then lastly, $110 million of cash on the balance sheet, at the end of the quarter, you've got another $90 million are still coming through. I know you've got the acquisition, the remaining capital for the Hilton Garden Inn, but you certainly have a lot of capital on the books. At what point, if you can't find an acquisition do you guys choose to, I guess, prepay some debt that you've got outstanding? Obviously, you've got a couple of loans that have over 6% fixed interest rates. I would imagine you could probably get materially below that level today. Not sure what the prepayment penalties would be, but are you guys looking at that at all?

Sure, Ryan, we are. As part of our capital allocation strategy, prepaying debt and deficiencies is one of the things that's on the table. I think, our preference, all things being equal, we think we can probably deploy that capital more accretively through acquisitions, than deficiencies, because a, the cost is pretty expensive and the fees as well. If you look at the -- particularly, our '15 debt maturities, our average debt yield on that, on our '14 numbers is high teens, so that actually would make the problem -- we'd have more capital because there's significant unused -- wouldn't there be incremental proceeds from those maturities? That's certainly something that we're looking at. Ryan Meliker - MLV & Co LLC, Research Division: How about with regards to the Courtyard Midtown East that's coming due in October, is there an opportunity to prepay that, maybe a few months beforehand?

Yes, we're looking at that, as we speak.

Your next question comes from the line of Anthony Powell from Barclays.

In Chicago, how's the citywide counter look for 2015?

It's looking -- if you're looking for '15 [indiscernible], it's looking a little up about 3.5%, compared to the '14.

Great. And on the acquisitions, I think before you've mentioned the desire to simply acquire more resort hotels. How are cap rates trending for resort hotels compared to some of the urban full service hotels?

Sure, this is Mark. I'll lead off on that. So what we said on the prior call is one of the opportunities that we see in the market place, we're obviously looking in the urban core centers, in the top growth markets, but we're also focused on trying to find resort opportunities where this -- where the real economic growth is in this recovery, where that transient guest is doing well. We're trying to capitalize on that because there's less competition for those deals. I think you saw Hershed [ph] recently did that deal in The Keys at the 7 cap or so, which compares much more favorably than, obviously,, what we're seeing in markets like San Francisco. But we're going to continue to cast a relatively wide net within the marketplaces that we're seeing. I think the cap rates are a little -- it depends. So if it's more stabilized, obviously, and less growth, we're going to get better capital -- cap rate, but we're trying to find higher growth opportunities, and so that's always the balance in the kind of cap rate discussion, we'll pay a lower cap rate for higher growth, obviously.

I'll just add to that, Anthony. The resort business is getting better, particularly skewed by better performing group business, so those resorts that have been slowest to recover are starting to look more attractive today as their cash flows start to build back to peak performance. I think cap rates are probably still a little bit across the board, depending on which region you're referring to, but those are becoming a bit more stable asset these days.

Your next question comes from the line of Nikhil Bhalla from FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Mark, the first one is for you here. In terms of the EBITDA from the Hilton Garden Inn, that's going to open up -- open in August. Are you still expecting $5 million of EBITDA accretion from that hotel for this year as you were when you had your Analyst Day last year?

Yes. So the hotel's on schedule to open late summer. $5 million is our best guess at this point. It may vary a little depending on the exact opening date, but that's what's implied in our guidance. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. And just going on to your booking pace, I think you mentioned booking pace is right now talking about 8% as of your last call. I think it was up 10%. Could you just reconcile for us, was there more outperformance in 1Q versus what you expect in the back half?

Nikhil it's Rob Tanenbaum. The booking pace was 9% at the end of -- or into Q4 and it's now 8.2%. The real difference came from Frenchman's Reef in quarter 2 bookings for this upcoming quarter. This is a large group that didn't repeat year-over-year. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay, so fairly consistent. And one last question on the Allerton prepayment, Mark, what would be the reasons why this may not close?

They've given us notice that they intend to refinance it with a major institution sometime in the second quarter. They have the ability to withdraw their notice that if their financing doesn't come through.

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

Looking at the group spend, the ADR, it looks like it's going to be up 3% for the balance of the -- for the pace. Is that being driven by mix shift or are you guys actually raising the rates there?

It's a combination of both. We're seeing opportunity to raise rates during compression and as well as just overall strong demand.

Okay. And you guys appear much more confident now on the group and I guess increasingly confident each quarter. Are you going to get more aggressive on the rate increase, or is the idea just to get them in the door and then get them with the F & spend?

I will have to say combination of both. There's time where we'll take a group like, for example, over Father's Day stay weekend, we have a walking dead group and really doing that weekend, it's fantastic rooms only business with very little F & B spend so again all depends upon the time of the year that you want to drive the business.

Okay. And for the first quarter, did you have any cancellations on the group set, especially in cities like Chicago where the weather was pretty bad?

No, we actually had very little cancellation business year-over-year and that was part of the impact.

Your next question comes from the line of Steven Kent from Goldman Sachs.

There is Anto Savarirajan on for Steve Kent. My first question is on the Lexington. At the Investor Day last September, you mentioned that the hotel had a $90 ADR gap to comparable Marriott. And 6 months in can you update where the differential stands plus where do you now stand on the retail repositioning at the property?

Certainly. Our retail repositioning continues to grow each day. We have since -- from September through March, we have seen a positive momentum both our bar preferred corporate rates. Our bar rates are up over 400-plus percent in terms of revenue during that time period. Our preferred corporate is up over 425%, so we continue to see strengthening in that market segment for us. In terms of the rate differential between us and the competitive set, I think we're at $40 to $45 of our expected growth.

Got it. I have last one more acquisition-related question. You mentioned some attributes like West Coast management opportunity, full service, lifestyle replacement value, et cetera, for acquisitions. Can you elaborate a little more on the value creation? Are Troy and team seeing off-market transactions that you can create value out of? Or is it dependent on Bob and team mining cost opportunities without not really going down the path of extensive renovations? Or is it more a desire to diversify geographically? What's driving this thought process?

This is Troy, I'll field that first. I think it's a little bit of all of that. There's a lot of competition out there for all of these assets and at least I personally in my career, had a pretty successful run at being able to find assets off-market, working at pretty broad network of owners and operator relationships. So not everything can you source off-market. And I think probably the large majority of transactions you see are going to be done on-market. But we will certainly try to get in and find those relationships where we can buy directly principal to principal. I'll let Rob kind of comment on the value creation on the operating side and the brand side.

Yes. As we continue to focus on the value creation side, and Sean alluded to through the prepared remarks, we continue to feel that there's additional upside for us as we -- as our teams further partner with our operating partners properties. And we're seeing great collaboration. I mean, you see it in the fact that we're able to consolidate management among 2 hotels of the same operator. Looking at our ways we can increase revenues, we can improve our productivity. So this is a continual process, and we expect this to have a nice run for us as we go forward.

The next question comes from the line of Lukas Hartwich from Green Street Advisors.

Can you comment on why you think group business has ticked up?

Sure, this is Mark. I'll take that one, which is what we're seeing at our hotels, particularly in markets like Boston, you're seeing more bookings on city-wides, you're seeing a number of the groups have more attendees. On an ancillary note, we're seeing groups exceed their minimum spend. I think that the groups, generally corporate America, as well as a number of the associations are feeling better. They're getting their people back out into meetings. They're focused on growing revenue. We're seeing increases -- and I don't want to overstate the dramatic -- in a dramatic way, but we're seeing increases in things like incentive travel where the sales group's being rewarded and getting sent to a Frenchman's Reef or Sonoma. So we're seeing more and more of that business come back, which is what you would have anticipated in any normal recovery, it just seems to be a delayed given the more in need [ph] nature of this economic recovery.

That's helpful. And then assuming the Allerton Loan gets repaid, do you guys have an estimate of the IRR on that investment?

Sure. It's probably mid, high single-digits, 7, I guess right around there. We made about $16 million -- a little over $16 million on that investment.

You guys invested in that in 2012 or was it '11?

Lukas, this is Sean. 2010.

2010, okay. And then my last question is given the strong top line growth, I was kind of surprised that EBITDA margins didn't grow much more than, I think it was 95 basis points. And you guys obviously have kept your full year guidance. I'm just curious what was the interesting to note in the first quarter?

Sure, Lukas. It's Rob. We still -- we have ramped-up costs associated with the Lexington, especially with franchise fees now being part of Marriot's Autograph Collection. We did see a very large increase in energy costs throughout their Northeast properties during Q1. We also had sales and marketing costs associated with the relaunching of both San Diego and DC Westins, which are onetime effects. And we did have the renovation at 5 hotels. Though we do expect that Sean has spoken to us and then, Mark we do expect our margins to accelerate over the remainder of the year now that all that work is completed.

Yes. And Lukas, this is Sean. Just to add, our margin performance for the first quarter was right in line with what we expected, when we gave original guidance. So there is no surprises to us. Clearly, Chicago being a tough market, New York slows and slowness in New York City, as well as hotels being under the knife during the first quarter, hurt our ability to push margins. That was all factored in to what we provided to the street at the beginning of the quarter.

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

I just want to follow up on the opportunity in the resort -- on the resort side. I think, historically, you guys have referenced maybe having a 10% to 15% of your assets on the resort side. Is that changing a little bit or given the opportunity set here, or how should we be thinking about it?

Jordan, there's not a change. Somewhere between 10% to 20% would be our comfort level with resorts. We've had great success with Vail, Sonoma, Charleston Historic District, St. Thomas, those have performed very well. What we're looking -- when we track very closely, the type of customers that are, really, the most robust right now, that upper-end traveler, leisure traveler is doing very well. And there's a number of resorts that are benefiting. So if we could find an attractive one for $50 million, $100 million, that would fit in our sweet spot.

Okay. And would you say this is more cyclical in terms of the opportunity set being a little bit better on the resort side today? Or do you think it's secular in that there's more competition now for the key or gateway markets?

Well, I think, it's both. So when you're doing acquisitions, you're always trying to find the trend line, right? You're trying to find something that gives you greater confidence and may differentiate your strategy a little bit from your peers. And so this is one area, we can see it in our, again, our Vail and Sonoma-type resorts. We see that customer doing very well, so that's a place that makes sense to allocate capital. Conversely, your second theme there, in markets like San Francisco, there's so much demand for those assets, that they often get priced out of the kind of good real estate deal to the too expensive type deal. And so, we're not likely to win a lot of those marketed deals in a market like that. So we're trying to find places that -- where there's a good trend line and where we can find value.

We're also just not seeing resort development, practically. It's a very stagnant pipeline for resorts. So that cost of replacement far exceeds where you can buy. So we're looking at that very closely.

No, that makes sense, and I appreciate you guys being tactical. I guess, along the same lines on the disposition front. I mean, obviously, you've got some non-core stuff that aren't your favorite children, so to speak. Is there anything in the portfolio, in the hotter markets, that could be called, incrementally, to the extent that there is additional opportunity on the resort side, so would you sell anything in New York or Chicago or Boston opportunistically to the extent that there are more opportunities?

Yes, that's a great question. I think, you've seen our last couple of years, where we are very active capital recyclers, we do think that is kind of a core tenet to our strategy and to being a proactive lodging REIT. Right now, we're sitting on a fairly large cash balance, year-end cash balance, so we're likely to deploy that before we would sell our best growing assets. We also would look, even in markets like New York or Boston, for assets where we think selling today might be willing to pay us for all the future value creation we can generate at that hotel. Some of those opportunities may arise. The focus has generally been on selling slower non-core, lower-quality assets. And I think you'll see more of that, that's more likely than selling in these core markets.

That concludes our question-and-answer session. I would now turn the call back to Mr. Mark Brugger.

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

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.