DiamondRock Hospitality Company (DRH) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2014 DiamondRock Hospitality Company Earnings Conference Call. My name is Denise, and I will be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Mr. Brett Stewart, Director of Finance. Please proceed, sir.

Thank you, Denise. Good morning, everyone and welcome to DiamondRock's Fourth Quarter 2014 Earnings Call and Webcast. 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 risks 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 reconciliations to GAAP set forth in our earnings press release. At this time, I will turn the call over to Mark Brugger, our Chief Executive Officer. Joining Mark today on today's call are Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. Mark?

Thanks, Brett. Well, this is one of those earnings calls that you really look forward to because all of the pieces seem to have fallen into place. The fourth quarter finished strong and closed out a record year for DiamondRock. During 2014, our portfolio generated pro forma RevPAR growth of 11.6% and 275 basis points of profit margin growth. Both of which are among the highest, if not the highest, in the peer group. The overall execution of the company was excellent on a number of fronts in 2014. Our asset management -- our initiatives to maximize hotel operating results were equally effective on both the top and bottom line. Our asset management team's motto is Gentle Pressure Applied Relentlessly. Acting as a strong guiding hand and proactive partner with the teams that are our properties, we work as diligently to implement new, often aggressive, revenue management strategies across our portfolio. The payoff in 2004 was evident as almost 1/2 of our hotels generated double-digit RevPAR growth. The cost containment and profit flow-through efforts also yielded great results with 15 of 27 hotels growing hotel adjusted EBITDA margins by more than 200 basis points. I'm very proud of our asset management team and our COO Rob Tanenbaum in particular, for these successes. Equally important, our investment program had a number of wins in 2014. As we started the year, the strategic goal was to continue recycling capital from slower growth, non-core assets into higher quality hotels located in great long-term markets. Frankly, we exceeded our original expectations as we found unique buyers and uncovered several high-quality accretive acquisitions despite a very competitive environment. In 2014, we successfully sold 2 non-core hotels. The Oak Brook Hills Resort in suburban Chicago was sold for a 30x -- for 30x the trailing 12-month EBITDA. And the Los Angeles Airport Marriott was sold for a 6% cap rate including deferred capital to a Chinese entity. To put it in perspective in terms of quality, the combined 2014 RevPAR for those sold hotels was only $108, which is 33% lower than our portfolio average. This really is the case of addition by subtraction for DiamondRock. We are even more pleased to talk about our acquisitions in 2014. Last year, we invested approximately $325 million to acquire 3 hotels and each one is turning out to be a compelling story on its own. The Hilton Garden Inn Times Square Central finished the year with an average RevPAR of $262, and is on track to generate an impressive 9% EBITDA yield in 2015. As you may know, we booked a $24 million gain on this acquisition last year. The second acquisition was The Inn at Key West, which has a high average RevPAR of $184, exceeded our underwriting and our purchase price now represents an 8.2% to cap rate on 2014 NOI. The final acquisition in 2014 was The Westin Beach Resort in Fort Lauderdale. We replaced the hotel manager upon acquisition, and we are implementing our asset management initiatives. In the first year, we underwrote to pullout over $2 million of cost and expand the profit margins by 1,000 basis points. I am pleased to report today that the hotel is currently forecasted to beat our underwriting by almost $1 million this year. As you can imagine, we are really thrilled with this investment. Additionally, this morning we announced the acquisition of the 157-room Shorebreak Hotel, which is located beachfront in Southern California. We brought in Kimpton to take over management of this lifestyle hotel. Our purchase price represents a 12.8x multiple of 2015 forecasted EBITDA. The Shorebreak deal met all of our investment criteria. It's located in a target West Coast market with great growth prospects, it's immediately accretive, and it has ample opportunities for us to implement new asset management initiatives to enhance performance. Moreover, the acquisition of the Shorebreak was match funded with proceeds generated in the fourth quarter from our aftermarket equity program. The decision to match-fund the acquisition with equity was primarily driven by 2 considerations: first, we were able to opportunistically lock in value creation through spread investing as we issued stock at a gross price of $15.13 per share or an implied 14.5x EBITDA multiple on the midpoint of our guidance. We redeployed that capital at more than 1.5x better multiple; secondly, the equity issuance allowed us to maintain approximately $200 million of investment capacity, which sets us up nicely for 2015. Of course, we will remain disciplined in evaluating capital allocation opportunities and are confident that our team will be able to identify acquisitions that meet all of our investment criteria. The team is particularly focused on adding West Coast exposure and finding unique opportunities to create value, primarily through asset management initiatives. We are generally shying away from larger bets as well as deals that might require significant capital investment and lengthy turnarounds. We are primarily targeting medium-sized acquisitions in the $50 million to $150 million range. Our last 4 deals, as I've described above, and the Hotel Rex San Francisco before that, really represents the kinds of deals that we are looking to do. Before I turn the call over to Sean, I want to take a moment to discuss the New York City market. We remain bullish on the long-term fundamentals and real estate values for New York City, although supply clearly remains a short-term issue. However, the city recently set a monthly occupancy record and finished last year at over 85% occupied. The city also set another record in 2014, with more than 56 million inbound visitors and expects to break this new record again in 2015. As important as the long-term demand trends, which have been double the national average over the last 25 years, real estate values in New York City continue to rise. New York remains, by a wide margin, the most liquid and globally sought after market for real estate investment in the United States. And these have made solid gains over the last year as average prices exceeded the prior peak with select service hotel trades hitting $650,000 per key and full-service hotel trades recently hitting $1.4 million and then $2 million per key. New York City hotel transaction volume for the last 2 years was $5.5 billion, double that of the next most active market. New York City also commanded the largest amount of international investment dollars with offshore investors accounting for 55% of total Manhattan hotel transaction volume. Now we do expect the first quarter to be difficult for the market as supply will impact the first quarter the most because it's the seasonally slowest demand period of the year and there is a difficult Super Bowl comp. However, to put it into perspective, the first quarter only represents about 6% of full year EBITDA at our hotels. As we move through the year, we do expect RevPAR to strengthen and demand to outstrip supply for the balance of the year. I want to emphasize on this call that DiamondRock has a differentiated New York portfolio. Our New York City hotels grew RevPAR approximately 9% in the fourth quarter, which outperformed the market by 800 basis points. We expect this trend of significant outperformance to continue into 2015 for 3 reasons: first, the Lexington Hotel, which accounts for more than 40% of our New York City exposure is still ramping up from its $47 million renovation and brand [ph] conversion. For 2015, we expect the Lexington to outperform the market with RevPAR in the high single digits; second, our newly opened Hilton Garden Inn Times Square is also ramping up and is expected to have a terrific 2015; lastly, in total, approximately 70% of our hotel exposure is located in the Midtown East submarket, which expects less than 2% cumulative supply growth during 2015 and 2016. As evidence of why we believe that some markets do matter, RevPAR growth for hotels located in Midtown East exceeded the broader New York City MSA by 260 basis points during 2014. Performance could be enhanced even more if pending hotel to residential conversions occur in Midtown East over the next few years. With that, I'll turn the call over to Sean to discuss our fourth quarter and full year operations in more detail. Sean?

Thanks, Mark. Before discussing our fourth quarter results, please note that our reported RevPAR and margin data are presented on a pro forma basis to include The Inn at Key West and Westin Fort Lauderdale as if they were owned for all periods presented and exclude the Hilton Garden Inn Times Square Central, the LAX Marriott and Oak Brook Hills Resort. Let me start by reiterating Mark's comments that the fourth quarter was another outstanding quarter for DiamondRock. Our portfolio RevPAR grew 8.3%, which significantly exceeded industry upper upscale RevPAR growth of 6.7%. Just as important, our portfolio generated strong hotel adjusted EBITDA margin growth of 196 basis points during the quarter. Now let's jump into the fourth quarter numbers. Overall, it was a great quarter for both the industry and DiamondRock. Our fourth quarter outperformance was led by both our hotels in Boston, the Lexington Hotel, the Washington D.C. Westin, and our 2 hotels in Denver. The company reported adjusted EBITDA of $60.8 million and adjusted FFO per share of $0.21. It is worth noting that fourth quarter adjusted FFO was negatively impacted by approximately $4 million or $0.02 per share from a non-cash income tax expense recorded on the gain from the sale of the LAX Marriott. This non-cash expense was not factored into our prior guidance. Our fourth quarter RevPAR growth of 8.3% was driven by our ability to push rate, which increased 4.5%, and an incremental 2.7 percentage points in occupancy. Our top line growth, combined with good cost controls, allowed our hotels to achieve hotel adjusted EBITDA margin expansion of 196 basis points. Additionally, 15 of our 27 hotels generated double-digit RevPAR growth and 12 hotels grew margins by more than 200 basis points. Overall, our portfolio benefited from strength in the business and leisure transient segments, which increased revenue 9.3% during the quarter. Our group business also performed well during the quarter, achieving 4.7% revenue growth, which was primarily driven by increased rates. Recent positive trends in the short-term group booking activity continued this quarter, with a 15% growth in the quarter -- for the quarter bookings, compared to the prior year. Our group segment was led by the Chicago Marriott, the Boston Hilton, and the Lexington Hotel, which achieved group revenue growth of 13%, 30% and 50%, respectively. Additionally, the group segment contributed to a 6.2% increase in quarterly banquet and catering revenues, which contributed to the 87 basis points of F&B margin expansion. In addition, group spend on F&B and AV increased 6.5% during the quarter, which we believe is a corollary to group confidence. Now, let me spend a few minutes highlighting some truly outstanding individual hotel achievements. The Lexington Hotel continue to ramp up from the 2013 renovation and rebranding to Marriott's Autograph Collection. The fourth quarter was the first quarter that didn't benefit from renovation disruption during the prior year and the hotel generated approximately 15% RevPAR growth. We continue to be happy with the direction of the hotel, which finished approximately $1 million ahead of our 2014 underwriting. We expect the ramp up to continue for several more years and to achieve approximately 50% growth in hotel adjusted EBITDA during this period. The repositioned Washington D.C. Westin gained traction in all segments during the quarter and achieved over 27% RevPAR growth. The Boston Hilton extended its 6-quarter run of double-digit RevPAR growth, delivering over 20% RevPAR growth through a coordinated effort of driving both group and special corporate demand. The hotel continues to outperform the market, having gained 11.5 percentage points of market share during 2014. The San Diego Westin continues to draw incremental business from its recent renovation and repositioning, achieving over 15% RevPAR growth and over 1,000 basis points of margin expansion during the quarter. Our hotels in Denver also outperformed during the quarter, achieving combined RevPAR growth of over 12% and combined hotel adjusted EBITDA margin expansion of over 200 basis points. Finally, the Hotel Rex in San Francisco had a another great quarter, with RevPAR growth of over 25% and hotel adjusted EBITDA margin expansion of 862 basis points. This hotel really hit its stride during 2014, and we are very bullish on its future. The hotel's expected to generate an attractive NOI yield over 8% during 2015. Partially offsetting the positive trends in the quarter was a change to the Marriott Rewards redemption program, which negatively impacted fourth quarter room revenue at the Vail Marriott by $1 million. This led to the fourth quarter RevPAR contraction at the hotel. This policy change negatively impacted our consolidated fourth quarter RevPAR growth by 70 basis points and margin expansion by approximately 50 basis points. For the full year, the company reported pro forma RevPAR growth of 11.6% and hotel adjusted EBITDA margin expansion of 275 basis points, which was slightly ahead of our expectations. For the full year, transient revenue was up 12.3%, driven by a 7.9% increase in ADR. Group revenue for the full year increased 8.9%, which was the result of a 4.8% increase in rooms sold and a 3.9% increase in average rate. While Mark will discuss our 2015 outlook in more detail, I would like to point out that we expect group business to take a backseat to business transient as our primary growth driver this year. During 2015, group will shrink 100 basis points to 30% of room revenues with business transient increasing 200 basis points to 35% of room revenues. We are coming off 2 good years of strong performance, which was achieved through a combination of capturing incremental group demand and increasing group ADR. We are happy with our existing group base and expect group revenues to increase 4% during 2015, which is expected to be driven by rate growth. Our 2015 portfolio growth will be driven by the business transient segment, which commands a $50 rate premium to group and is expected to achieve double-digit revenue growth. Next, I would like to provide a brief update on our asset management initiatives. The asset management team is firing on all cylinders. The success of recent asset management initiatives, including revenue enhancement strategies, cost-containment measures and ROI projects is beginning to show up in the numbers. Our portfolio achieved hotel adjusted EBITDA margin expansion of 196 basis points during the fourth quarter and 275 basis points for the year. These growth rates are the highest among our peers. We expect our asset management initiatives to contribute to healthy margin expansion again in 2015. Let me spend a couple of minutes providing an update on a few of our significant initiatives. We are in the middle of our project at 41 rooms at the Boston Hilton. This project is still expected to cost approximately $9.5 million. We expect this project to generate an IRR of approximately 20% and add over $15 million to the hotel's net asset value. At the Boston Westin, we completed the project to convert unfinished space into new meeting and pre-function space during the fourth quarter. This project is expected to achieve an IRR close to 30% and did not cause material disruption. At the Fort Lauderdale Westin, we are currently implementing several initiatives identified during our acquisition process, which included replacing Starwood with HEI, being opportunistic in our revenue management, rightsizing hotel staffing levels, terminating the restaurant franchise agreement, closing an additional food and beverage outlet and introducing a resort fee. Our initiatives contributed to December's impressive 25% RevPAR growth. We are very bullish on this acquisition and the hotel's potential for outsized growth during 2015, which is already tracking ahead of our underwriting. Initiating premium view categories at several hotels has also been very successful, generating $400,000 of incremental revenue during the quarter. We will continue to selectively roll out this initiative as well as introducing resort fees where appropriate in 2015. We are also focused on creating value by uncovering opportunities to add limited new guestrooms at existing hotels, including the JW Marriott Cherry Creek, Westin Washington D.C., our 2 New York City Courtyards and the Sonoma Renaissance. Finally, we have recently executed on a restaurant lease in Charleston, which is expected to result in $400,000 of incremental NOI. Lastly, I would like to touch on our balance sheet, which we believe is among the best in the industry. Being prudent stewards of our investors capital has been a cornerstone of DiamondRock since we founded the company. We have over a decade-long track record of consistently maintaining a straightforward and low-risk balance sheet that has essentially no corporate debt. This discipline has allowed us to return over $0.5 billion in cash dividends to our shareholders since our IPO. Today, we continue to maintain ample liquidity and ended the year with over $140 million of unrestricted cash and an undrawn corporate revolver. We also opportunistically issued approximately $71 million of equity under our ATM program, which match funded the accretive Shorebreak acquisition without decreasing investment capacity. Finally, we have the opportunity to create value through refinancing our 2015 and 2016 debt maturities. The average interest rate of the maturing debt is approximately 5.8%, which is above current market. We will opportunistically refinance these loans at market interest rates, which we expect will result in annual interest savings of $8 million to $12 million, or $0.04 to $0.06 per share. These refinancings are expected to reduce our weighted average borrowing cost by 75 basis points to approximately 4.25%. I will now turn the call back over to Mark.

Thanks, Sean. Now let me turn to our outlook for 2015. We spent a lot of time looking at data to understand the market, overall, and our market specifically. As you are aware, in 2014, industry generated RevPAR growth of 8.3%. Importantly, this was a reacceleration of growth. Going into 2015, the data portends another strong year of performance as new hotel supply nationally remains muted and most of the significant corollaries to demand growth appear to be flashing green. Employment growth, GDP growth and consumer sentiment are all favorable. I would note that the strengthening dollar will likely have some impact of major -- on demand in major international cities, but does not represent a large segment of demand for DiamondRock. In fact, even in New York, our international guests represent less than 15% of our business. And that is weighted towards U.K. guests that, obviously, have a more favorable currency. The data also suggests that the future for rate growth is bright for the next few years. Last year was the sixth year after recovery and yet 40% of the RevPAR gains still came from occupancy growth. Historically, that's just that there is significant rate growth potential remaining in the cycle. We are very encouraged by that data. For DiamondRock, we entered 2015 with a number of unique growth catalysts that we expect to enhance our performance. I'll just mention 4 of the big drivers for us: one, outsized growth from recent acquisitions, particularly at the Westin Beach resort in Fort Lauderdale and the Shorebreak; two, upside from our intense asset management initiatives and pay off from the recent portfolio renovations, including meaningful market outperformance at the Lexington Hotel and from ROI projects, such as the building of a new ballroom at the Boston Westin and adding new keys at the Boston Hilton; three, lower interest rates on near-term refinancings are expected to save us several million dollars a year in interest expense; and lastly, external growth from our existing investment capacity. It is also worth noting 2 other longer-term catalysts the company is evaluating: value from our expansion option at the Westin Boston Waterfront and changing the brand at the Chicago Conrad. We will provide additional details on those opportunities later in the year. As you can see, we are extremely excited about the growth ahead at DiamondRock. And we believe that our guidance today reflects that. Our guidance for 2015 is a RevPAR growth of 6% to 7%, adjusted corporate EBITDA of $262 million to $272 million, and adjusted FFO per share in the range of $1 to $1.03. For the full year, we expect our portfolio hotel adjusted EBITDA margins to expand by approximately 100 basis points. Our confidence in our guidance is enhanced by our strong results so far this year. With January pro forma RevPAR growth of 8.8% for our entire portfolio. So to wrap up the prepared remarks, we will conclude by saying that DiamondRock is well positioned for growth in 2015 and should continue to benefit from strong execution on the asset management and capital investment fronts. As always, we are grateful for your interest in our company. On that note, we would now like to open up the call for your questions.

[Operator Instructions] Our first question comes from Anthony Powell with Barclays.

Just a question on New York, and particularly, international visitors. And I know in, like, the Lexington Hotel, you do get a lot of, I guess, European visitors on discount packages on the weekends. What are you doing to maybe price that business out and how that business trend do you think at the hotel so far this year?

Anthony, this is Rob Tanenbaum. 15% of our business at the Lexington is international business. And we've adjusted our pricing by removing some wholesale business that we had last year, that we feel was not appropriate business for the asset. And we continue to utilize our Marriott channels to further drive revenue sources available to us.

And on the acquisition this quarter, very good pricing and very good use of proceeds from the equity sales. How much competition are you seeing from these types of deals across your target markets and how much runway do you think you have in adding more deals in this type of price range?

Anthony, this is Mark. So when we look at our pipeline as we sit here today in the environment, it's obviously very competitive. There's about 8 deals in our current pipeline, about half of those are off market. I think we will continue to face a very competitive environment. Last year was competitive as well. We were able to find a number of deals that we were very excited to be able to execute on. So we're optimistic that this year, given the similar constraints and competitive environment that we'll find a number of good deals.

Our next question comes from David Loeb with Robert W. Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Clearly, New York is an extremely liquid market. Have you thought about using the strength of that market to recycle capital, basically to take advantage of that liquidity and sell 1 or more New York assets?

Yes, David, this is Mark. So obviously, our recycling focus has been focused on selling slower growth, non-core assets. Everything's for sale at a proper price. I think on the New York City assets, we have received a number of inbound inquiries, so it will depend on the pricing if we decide to do something with that. But we, generally, asapolicy, don't comment on dispositions or acquisitions until there's something under contract or it's closed. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Well, then let me go to one that actually is closed. The Shorebreak, can you just give us a little rundown on whether that is fee simple versus condo versus leased?

David, it's Troy. Yes, that's fee simple. The project was developed as a mixed-use project by CIM. And it had a distinct retail component to it and then the hotel set essentially above the retail. Those are all held together and then were bifurcated on this sale. So we have a fee simple interest in the hotel.

I believe that, just as a complication, there is a 5% piece, that city owns that was part of the original deal that we have a right to buy out in a short period of time. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. But you're saying it's a condo interest, but the condo association owns the land?

That's -- it's a complicated explanation, but that's essentially correct. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And how about the parking there? Do you own that as well?

Owned by the city. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. So you're basically leasing the parking?

We have an operating agreement with the city. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Got it. Okay, okay. And what else is going on, on Huntington Beach? Is there any supply that's coming out of that market?

There's a hotel down the beach that's under construction. It's about a 200-room hotel. Luxury hotel, it's been in the works for 5, 6 years. It's got a big retail component there also. And that's the only addition to supply on the market. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: So in the release, Troy, you guys talked about barriers to entry. Clearly, stuff does get built there, right? This one got built a few years ago, the other one is on the way. Are there others contemplated or in the pipeline or in the approval process?

There aren't. It actually took CIM -- they started this project in the late '90s. And it took them 7, 8 years to develop it. So building on the California coastline, heavily restricted, very difficult to get entitled. The project down the beach was similar. So we don't see anything beyond that in the foreseeable future. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: That's very helpful. If I can keep going, what are your thoughts -- I guess, this is to whoever. What are your thoughts about the Boston Westin expansion? I'm talking about the rooms tower, not the ballroom.

Sure, this is Mark. So David as you know, we paid for an option when we acquired the hotel a number of years ago. We're currently evaluating that. Obviously, we were waiting for a decision to expand the convention center before we moved forward with that. So we're in the, I would say, intensive investigation stage on that. And we'd have more to talk about later this year on whether we do something there or not. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And as you evaluate that, what's your thought about other potential supply in that market? Do you think that there's a chance that you actually preempt some of that or is it just going to come anyway?

Well, there's obviously sense of conversations going on with the Convention Center Bureau with some of the local entities there. Certainly, if we did the expansion, there is a chance that, that may have a chilling effect on the new convention center hotel but that's yet to be determined. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And Sean, one for you, probably an easy one. When you talked about the margin expansion expectations, what impact are property taxes in IMF increases having on your assumptions for those margins?

Sure, David. The property taxes for 2015 are going to have a 50-basis-point impact on margin expansion. As you recall from 2014, we essentially had flat property taxes year-over-year because of a couple of successful wins, the biggest ones being in Vail and the D.C. Westin. So that's about a 50-basis-point impact on 2015 taxes. On the IMF, we actually expect IMF to be relatively flat year-over-year. And so it's actually -- there'll be no impact on margins because of IMF year-over-year. We have 10 hotels in IMF in 2014, we expect to have 9 hotels in IMF in 2015.

Our next question comes from Jordan Sadler with KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. Just wanted to follow up on the -- one of the acquisition questions. Just curious what markets are you guys looking at today, given you sort of filled some of the holes you talked about last year, in sort of the South Florida markets and along the West Coast?

Yes, this is Mark. So if we look at our priority list, which is of the 8 hotels, I would say, are the ones that were most focused on now, they're all West Coast. They go, really, from Portland down to San Diego and a number of markets in between. So we're trying to find places where there may be some strategic advantage in the location. Huntington Beach, for instance, where we're not facing as intense competition but there's excellent dynamics for growth and high barriers-to-entry. So we're looking to find a way to create value for our shareholders that isn't all in the pack, if you will.

And then separately, on margin expansion. You guys have kind of talked about 360 basis points of upside versus the prior peak. If I recall correctly, a big portion of that's at the Lexington, it seems like you guys are expecting good growth there. I guess I would've expected a little bit of greater upside than 100 basis points assumed in guidance. So is there anything else beside the property taxes that's holding that back? Or do you expect it to be drawn out?

Yes, Austin. This is Sean. There's a couple of other things that are impacting the margin expansion. The change in the uniform system of accounts, where, effectively, we have to gross up revenue on banquet sales, impacts margin expansion by about 15 basis points year-over-year. In addition, there was a couple of contract increase in both management and franchise fees across our portfolio, which impacted margin expansion in '15 by about 10 basis points.

Are you still comfortable with, I guess, achieving that 360 basis points of upside, I think you said it's $4 million to $8 million of EBITDA?

We are. As of year-end 2014, because we outperformed, our expectations we're about 325 basis points behind prior peak as of year end. And so we remain confident that that's a bogey that we expect to achieve over the next 2 to 3 years.

Our next question comes from Thomas Allen with Morgan Stanley.

Just trying to understand your RevPAR guidance a bit better. So you guided 6% to 7% RevPAR growth for 2015, but January is trending up 8.8%, despite weaker New York trends. So what's driving the deceleration? And then also, what are you factoring in for overall U.S. industry RevPAR growth for 2015?

Tom, this is Mark. So the 8.8%, obviously, January is one of our lowest in terms of nominal dollars, it's a small month. So the fact, that that's outperforming doesn't necessarily carry the weight we expected. The first quarter would be roughly in line with our full year guidance. Sorry, what was your follow-up question to that?

Well, it was just -- yes, I mean -- it was -- so when I look at, I guess, GR and PKF and PwC forecast for the year, it's anywhere from 6.4% to 7.6%. So which one of those are you factoring in to get to your guidance?

Well, we look across the industry. It's about 5% to 7%, but obviously, we look more market-to-market to determine what our guidance is. So we take a market up look, if you will, versus just the national average. But if I had to look at national average, probably 5% to 7% is the right baseline.

Okay. And then just 2 questions on the Shorebreak. I didn't hear you guys say what the margins are in the property today. So just wondering where those are and maybe discuss a little bit the decision of bringing in Kimpton? How long is the management contract, the decision around it and everything?

Sure. So I'll start with Kimpton. So obviously, we try to marry the right manager for each individual asset. Kimpton has a very strong presence in Southern California, all of California. But this was a great strategic location, given where their other hotels are located. We also thought they could do some things with the -- on the revenue side with their marketing capabilities that weren't currently being done at the hotel. We asked to sell a number of opportunities that they were willing to do such as adding a resort fee to enhance our performance at that hotel. So those are significant on the, I would say, the top line. On the bottom line, there's a number of efficiencies given their distribution that we want to utilize. So those were really the big drivers for bringing in Kimpton. We really think they're the right manager for this particular asset. On margins...

Tom, this is Rob. EBITDA margin is a little bit south of 28% for 2014, and we expect that to go, to lag a little over 30% as we go forward.

Actually, I just got a last-minute deal e-mail from Kimpton with Shorebreak on it, so showing their marketing expertise already.

That's great. I'm glad they're excited about it.

Our next question comes from Ryan Meliker with MLV & Company. Ryan Meliker - MLV & Co LLC, Research Division: I just had a couple of, I guess, follow-ups. First of all, with regards to the Hilton Garden Inn Times Square, any changes to the $11 million EBITDA expectation for 2015 that you had guided to prior? And if not, any more or any stronger or weaker conviction in that number now?

Brian, this is Mark. The hotel finished up very strong in the fourth quarter. We feel very good about our forecast for 2015 at the hotel. It's really done -- it's done terrific, right out of the gates. And so we expect, given the demand that existed at that location, we feel very good about that forecast.

Better than you did 3 months ago or 4 months ago before it opened or about the same?

I'd say we feel that it's the right number. Our confidence level is even higher today than it was a couple months ago. Ryan Meliker - MLV & Co LLC, Research Division: And then the second question, I was hoping you guys could just give us some color on was -- you mentioned that you're kind of grouping down, I guess, for 2015, which probably makes sense given where occupancy levels are and with the focus on pushing rate. I'm hoping you can kind of provide some color on where your group pace is today versus last year and how much of that is driven by rate?

Sure. Ryan, it's Rob again. Our group pace is down 1.9%. And it's driven by -- the rate is up 1.7%, with room nights down 3.5%.

Ryan, I would just add, strategically, what we're trying to do, there's a couple of big drivers to individual hotels, where we're trying to take out the lower rated group and put in the difference between the lot of the business transient rate. Or the leisure transients, depending on which hotel, there seems to be a real opportunity. And given where occupancy levels are in the marketplace, we are -- we have strategically taken some mix risk if you will, because we think the upside's there.

And Ryan, one follow-up, this is Sean. I think for the full year, we expect group to go up about 4% for the entire year, basically that's the midpoint of our guidance. And essentially, all of that is going to be through rate gains on a flat number of rooms for the full year. Ryan Meliker - MLV & Co LLC, Research Division: That's helpful. It makes sense. And I understand the concept of kind of trading up the transient, that's a little bit of mixed shift. Also, just as a comment, I really appreciated all the color on New York. I think that's really helpful.

[Operator Instructions] Our next question comes from Ian Weissman with Crédit Suisse.

This is Chris for Ian. It looks like your guidance of about $85 million in capital improvement in 2015, and appreciate the color on the Boston Downtown Hilton, but just wondering if you could talk about the total displacement for the portfolio of projects under renovation? Maybe how that distribution will be or how that displacement will be distributed throughout the year? And then what kind of return do you think you can get on that total CapEx spend?

Yes. Chris, this is Mark. So we do -- $85 million is our guidance for capital spend. It's obviously a big portfolio. So spreading that across, there isn't any project that's going on that we expect to have a material impact on our operations in 2015. The Hilton in Boston, we are adding 41 keys, but that's getting done during the seasonally slow winter. And whatever impact we have there, we expect to gain a little bit later in the year, but it shouldn't materially alter any of the numbers. As far as the return, we really put it into different buckets. As Sean mentioned earlier, we expect a significant return on the $9 million we invested in the Hilton Boston. Various other projects, it depends on what the -- whether it's an ROI project, whether it's a rooms refresh or what the strategic reposition of the hotel is. There's not one particular number that we have for the whole $85 million.

Okay. And then just -- that's very helpful. Going back to your 2015 acquisition pipeline, I guess, what are your thoughts on how you're likely to fund those acquisitions, given where all the prices are at today? Whether that would be dispositions, property level of debt or maybe more ATM offerings?

Yes, as we sit here today, as we mentioned in the prepared remarks, we have over $200 million of investment capacity with the balance sheet that we have. So that, obviously, is the primary driver. We have cash and we'll have a combination from a number of property level refinancings that are going to occur during 2015. So we think we're very well positioned for that amount of acquisitions.

Our next question comes from Patrick Scholes with SunTrust.

Just a quick question here on your guidance. You have a -- in the EBITDA guidance, income tax expense of $8 million to $12.5 million. Just remind me again what that is and when do you expect that to hit the income statement?

Sure, Patrick. That is income tax expense on our taxable REIT subsidiary. And we expect that to be more back end loaded. During the first quarter of the year we tend to record an income tax benefit because of the seasonality of our portfolio. And then as the quarters go on, you'd expect higher income tax expense. If you look at our -- where our portfolio income tax expense has been for 2014, directionally, that's a fair proxy for where you would expect it would be for 2015.

Our next question comes from Chris Woronka from Deutsche Bank.

Jumped on a little late, I apologize if you already covered it. But on the acquisition outlook, Fort Lauderdale was a new market for you guys, it's somewhere we haven't seen any of the other REITs yet. Given kind of where prices are generally, do think it's more likely that you'll look into some of these -- just other markets not saying they're better or worse than the big 5 or 10 markets, but do you think there's more opportunities in some of these markets where we haven't seen you guys or some of your peers own before?

Chris, this is Mark. So Fort Lauderdale, we really liked the economics and what's going on with the demand trends here. We thought we could buy much smarter than we could buy in Miami with similar characteristics in growth over extended periods of time. So we thought that was a better way to allocate our capital for our investors. On that deal, as we mentioned in our prepared remarks, we're about $1 million ahead of our original underwriting, and that's probably 11.5x the EBITDA multiple on our acquisition there, which is, I think, a terrific result in this competitive environment. As we look towards our pipeline, it's really West Coast oriented. We are looking -- it is Portland, it is San Francisco, it is West L.A. We will look within those submarkets to try to find if there are strategic places we could be that are a little different than where everyone else is looking. I think Huntington Beach is a good example of West Coast exposure that's a little different from what other people are chasing, and we think has just excellent characteristic growth potential.

Okay great. Just a quick one for Sean. How much variability do you think property taxes might have on '15 relative guidance, or where are you guys kind of on appeals versus what you've realized? Just trying to get a sense for the model, how to think about that.

Sure, Chris. There's always variability, as you know, in property taxes in a sense that we don't record any appeal wins until we actually win them. We have about 1/3 of our property taxes under appeal for 2015. We're optimistic and hopeful that we'll be successful there, but we won't bake out any of the numbers until we get resolution. Property taxes, year-over-year, are up excluding Time Square, which is an obvious noncomp, about 13% year-over-year. And that's coming off a very favorable 2014 where we had a handful of property tax wins, where our taxes were flat year-over-year. And so some of that is just catch up. But we expect the big driver there, Chicago, has a reassessment. And so we expect property taxes to be up in Chicago as well as our Denver assets, our big drivers of our 2015 increase.

Our next question comes from Nikhil Bhalla of FBR. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Question on Chelsea Hilton Garden Inn. Why were the margins down 950 basis points? I'm sorry if you had touched on this before.

No, no problem. The hotel converted to union earlier this year so that's impacted the increased union costs. It's obviously a small hotel and the numbers were material on a relatively small basis. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. And if you can address Vail Marriott as well and the Minneapolis Hilton?

Sure. I'll take the Vail, then I'll turn it over to Rob for the Minneapolis. The Vail was impacted by a change in the Marriott Rewards redemption policy, which lowered rooms revenue about $1 million, which without that RevPAR, it would've been flat to maybe slightly positive year-over-year. But that was unique to a change in policy. Rob?

Certainly. Nikhil, on Minneapolis, we had a late group cancellation worth over $0.5 million in the fourth quarter. That obviously impacted the margins as well as affirm average [ph] contribution. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. And just on the reward points, this is -- that was very specific to the Vail Marriott, right? I mean, that's not something that's impacting systemwide across Marriott vendor properties?

So to be more specific, they changed the rules in August of this year, effective immediately. As I understand it, there were 4 hotels impacted by that -- significantly impacted by that rule change. So that's obviously a small portion of their whole system. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. Just diving a little bit deeper on that, Mark. Does that mean that it's become harder for people to redeem their points now the threshold has been raised?

No, so it's -- the way the rule was changed is that they only allow you to take up to 50 -- the rate of 50% of the rooms have to be at market and not redemption rules. So it's really formulaic on the owners' part, it doesn't affect the people that are redeeming the points. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay, got it. Another question on what you're assuming from the Shorebreak Hotel in terms of EBITDA for full year 2015 in your outlook?

Sure. We're expecting it to be a 12.8x multiple on '15, which is EBITDA of a little over $4 million -- sorry $4.6 million. Nikhil Bhalla - FBR Capital Markets & Co., Research Division: Okay. $4.6 million. Okay, so that was my math too. Okay. And final question on G&A, it looks at the high-end, the G&A went up by about 8% year-over-year. What may be some of the drivers of that?

Sure. The primary driver of the G&A increase is we had a credit-to-legal expenses, in 2014 in conjunction with our settlement of the Boston Westin litigation, which impacted -- positively impacted 2014 by about $1.5 million. And that really drives the year-over-year change. In addition, there was incremental personnel changes, but that was much less impactful than the credit recorded in 2014.

We have no further questions. I would now turn the call back over to Mr. Mark Brugger for any closing remarks. Please proceed, sir.

Thank you, Denise. To everyone on this call, we appreciate your continued interest in DiamondRock, and look forward to updating you with our first quarter results.

This concludes today's conference. You may now disconnect. Have a great day, everyone.