DiamondRock Hospitality Company (DRH) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the DiamondRock Hospitality Company Third Quarter 2015 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to our host of today’s call, Mr. Brett Stewart, you may begin.

Thank you, Tania. Good morning, everyone, and welcome to DiamondRock's third quarter 2015 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 risk and uncertainties as described in the company's SEC filings. In addition, 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. With me on today's call is Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will provide a brief overview of our third quarter results as well as provide an update on the company's outlook for the rest of 2015. Sean will then provide greater detail on our third quarter performance and discuss our recent capital markets activities. Following their remarks, we will open the line for questions. With that, I will now turn the call over to Mark.

Thanks, Brett. Good morning everyone. Let me start by saying that we remain constructive on the lodging cycle despite an increasingly uneven operating environment. For the Industry, third quarter Industry RevPAR growth was a strong 5.9% despite a difficult comp relative to third quarter 2014 growth of 9.2%. The macro supply picture remains accommodating with new hotel supply only exceeding the historic average in two of the last 14 years. The demand corollaries we watch are mixed. GDP growth of 1.5% was subpar and corporate profits are being weighed down by the energy sector. But consumer sentiment remains elevated and employments are trending well. For DiamondRock, the portfolio base is difficult comparison to our record quarter last year in which the portfolio delivered an outstanding 18.6% RevPAR increase. Moreover, we knew this third quarter will be challenging with weak citywide calendars in our markets. The quarter was also impacted by the late Labor Day holiday and the change in the Jewish holidays. For the third quarter, DiamondRock’s pro forma RevPAR increased 2.2%. Excluding the impact from the brand transition at The Gwen, our pro forma RevPAR grew 3% which was in line with the lower end of our guidance. We actually saw excellent demand growth in our transient segment with transient revenues up 7.6%. Business transient demand was especially strong with revenue growth of 9.5% while leisure demand was also solid with revenues growing 7.7% for this segment. The group segment however laid down the portfolio as group revenue declined 7.2%. Importantly though, our asset management best practices were a bright spot. As a result of the teams hard work, we were effective in driving most of each incremental dollar revenue to the bottom line as we achieved house profit flow-through of 74% and house profit margin growth of 94 basis points during the quarter. Because of the strong flow-through, DiamondRock was able to increase pro forma corporate adjusted EBITDA by approximately 6% despite a difficult demand period. There are two items negatively impacting the quarter results that are worth noting. First, results were significantly impacted by greater than expected disruption from the conversion of the Conrad Chicago to The Gwen. This disruption reduced third quarter RevPAR by almost 1 percentage point and held back EBITDA margin expansion by 53 basis points. Excluding this impact, our pro forma RevPAR growth would have been 3% and pro forma adjusted EBITDA margins would have been 92 basis points. While transitions are often difficult during initial ramp up, we have a great plan in place for the hotel and expect double digit growth RevPAR growth next year. Second, we were hit with a larger than expected property tax increase at the Chicago Marriott. The new assessment reduced EBITDA in the quarter by $1.1 million and held back EBITDA margin expansion by 47 basis points. We are appealing this assessment. Now, let me provide you a brief update on our New York City assets, which have continued to outperform the market. Navigating successfully through a challenging environment, our New York City hotels excluding the Hilton Garden Inn Times Square for the period it was not opened last year finished the quarter with RevPAR growth of 2.3%. Our New York City hotels have outperformed Manhattan market every quarter this year. Importantly the new Hilton Garden Inn Times Square is still on track to generate a healthy 9% EBITDA yield this year on our investment. The markets in our outperformance were consistent with our expectations and underscore our confidence in our New York City portfolio. Now, let me turn the call over to Sean to discuss our third quarter results and our capital markets activities in more detail.

Thanks, Mark. Before discussing our third quarter results, please note that our reported RevPAR and margin data are presented on a pro forma basis to include the Shorebreak Hotel and Sheraton Suites Key West as if they were owned for all periods presented, and only include the Hilton Garden Inn Times Square Central for September since it opened September 01, 2014. Our hotels operated in a challenging environment during the third quarter as a result of the holiday shift and lack of group base which contributed to our portfolio generating modest 2.2% RevPAR growth. The RevPAR growth was driven by an average rate increase of 3.2% which was partially offset by 0.8 percentage point reduction in occupancy. It is worth noting that the total revenue growth of 3% exceeded our RevPAR growth as a result of the additional revenues generated from the new rooms at the Boston Helton and the 4.2% growth in food and beverage and other revenues. Our aggressive asset management initiatives led to excellent third quarter flow-through of 74% and hotel adjusted EBITDA margin expansion of 39 basis points. The margin expansion was held by higher than expected transition disruption at The Gwen and the unforecasted increase in the Chicago Marriott property tax assessment. Excluding these two items, the hotel adjusted EBITDA margins would have expanded close to 140 basis points. For the year-to-date period ended September 30, the company reported pro forma RevPAR growth of 5.2% which was the result of a 4.3% increase in the average rate and a 0.7 percentage point increase in occupancy. Year-to-date hotel adjusted EBITDA margins have expanded by 114 basis points. The third quarter benefited from 9.5% revenue growth from the business transient segment which represents the highest quarterly growth so far this year and an acceleration from the 5.5% second quarter growth. Business transient was led by the Boston Westin, the Chicago Marriott and at Lexington Hotel with business transient revenue growth of 34%, 26% and 15% respectively. As expected, our group segment was challenged this quarter with revenue declining 7.2%. Although we are never satisfied with revenue declines, the group segment was above expectations as group pace was down 13% at the beginning of the quarter. The outperformance was the result of picking up $6.4 million of in the quarter, for the quarter group revenues which was 50% above the pickup from the same time last year. A stronger pickup was led by the Minneapolis Hilton, Lexington Hotel and Worthington Renaissance. Finally, the 5.7% growth in leisure transient revenues was modestly below expectations which assume the continuation of robust leisure transient revenue growth which grew 14% during the first half of the year. This segment was negatively impacted by the third quarter’s challenged holiday pattern which was most impactful to August and early September. Additionally, food and beverage results exceeded our expectation this quarter achieving 4.2% top line growth that coupled with tight cost controls resulted in over 360 basis points of margin expansion and 119% profit flow-through. Despite group challenges in the quarter, banquet and catering outperformance was the primary driver in F&B where banquet and catering revenues increased more than 10% and margins grew over 460 basis points. In addition, group spend on F&B and audio visual increased over 26% during the quarter which we believe is a sign of group confidence. Moreover, our portfolio continues to benefit from recent ROI projects. The new rooms at the Boston Helton generated a $121 rate premium in the quarter, which continue to exceed our expectation. At the Chicago Marriott, the first phase of renovated rooms commanded a $50 rate premium which also exceeded expectations. In addition to the transition disruption at The Gwen that Mark discussed, our third quarter results were impacted by two additional items. First, property taxes at the Chicago Marriott were impacted by a 33% increase in the asset value which was significantly above guidance expectations. We recorded a third quarter adjustment of $1.1 million to true up the year-to-date 2015 property tax expense, which negatively impacted third quarter hotel adjusted EBITDA margin expansion by 47 basis points. As Mark mentioned, we have already started the appeal process. Second, early in the fourth quarter, we received a 15-year extension of the Frenchman's Reef income tax agreement which is retroactive to February. Under GAAP, a retroactive impact of the extension cannot be recorded until the fourth quarter. While the timing of the benefit does not impact full year income taxes it did impact the third quarter which resulted in our third quarter tax provision being $1.1 million higher than guidance. Turning to New York, the operating environment in the city continues to be challenging but we remain confident in the positioning of our New York portfolio. Third quarter revenue growth for our New York portfolio was 2.3%, which outperformed the Manhattan market RevPAR growth by over 200 basis points. The Lexington Hotel which represents close to half of our New York portfolio outperformed the market with third quarter RevPAR growth of 2.7%. Our manager change at the Hilton Garden Inn Chelsea began to take hold as the hotel significantly outperformed the market during the quarter achieving 12.2% RevPAR growth and gaining close to 8 percentage points of market share. Finally, the Hilton Garden Inn Times Square which represents over a quarter of our New York portfolio is continuing to ramp up and is currently tracking ahead of underwriting. Before turning the call back over to Mark, I would like to touch on our balance sheet. After the recent financing activity, we are very close to completing our initiative to reduce borrowing costs, extend and stager our maturity schedule, and expand our pool of unencumbered hotels. Recent financing successes include financing the Boston Westin with a new $205 million ten year mortgage bearing interest at a fixed rate of 4.36%. We intend to use the proceeds from the Boston Westin loan to prepay the $203 million Chicago Marriott mortgage loan which is prepayable without penalty in January 2016, refinancing the Renaissance Worthington with a new $85 million ten year mortgage bearing interest at a fixed rate of 3.66%, refinancing the JW Marriott at Cherry Creek with a new $65 million ten year mortgage bearing interest at a fixed rate of 4.33% and have or will increase our encumbered hotel pool by prepaying the Frenchman's Reef Marriott, Orlando Airport Marriott and Chicago Marriott mortgages. We are extremely pleased with the success of our refinancing initiatives. During 2015, we have refinanced over $350 million of 5.8% interest rate debt with new ten year fixed rate debt bearing interest at approximately 4.2% resulting in annual interest rate savings of approximately $5.8 million. I will now turn the call back over to Mark.

Thanks, Sean. Now, I will turn to our outlook for the remainder of the year. We have updated our full year guidance to incorporate third quarter results including the impact of The Gwen transition and property taxes at the Chicago Marriott. We not expect full year RevPAR growth to range from 4.25% to 5.00%, we expect full year adjusted corporate EBITDA to range from $264 million to $269 million, and we expect full year adjusted FFO per share to range from $1.00 to $1.02. In October, I’ll note that our portfolio RevPAR came in just under 4% including continued impact from The Gwen ramp up and the impact from the thousand year store on the Charleston hotel. Our full year hotel adjusted EBITDA margins are projected to increase by more than 100 basis points which is in line with our expectations at the beginning of the year as asset management continues to be laser focused on profit flow-through. Lastly before I open it up for questions, let me note that yesterday we announced that our board of directors has authorized a $150 million share repurchase program. We will take it opportunistic approach and believe this can be an important value creation tool. We would now be happy to answer any questions you may have. Operator?

[Operator Instructions] Our first question comes from Jeff Donnelly of Wells Fargo, your line is open.

Good morning guys. And I think a lot of our questions are answered actually last evening, so I just had a few follow-ups. Mark, I guess the first question I have is on resorts, what’s the outlook you guys are seeing in Q4 and Q1 for your resort properties in St. Thomas and Vail.

St. Thomas was impacted in the third quarter by two storms and so obviously that’s why we have to make it a 5% RevPAR in the quarter. Rob, I’ll let you talk a little bit more about the trends we are seeing the Virgin Island as well as in Vail.

Sure. Jeff, in St. Thomas we are seeing a bit of softening associated with the property, the Vail is holding steady, and we believe our first quarter looks strong especially from a group perspective for those two hotels.

And just when you say softening in St. Thomas do you think it’s the lingering effects of the storm or do you think it’s something that we’ve seen across all the Virgin Island as we look into 2016?

[indiscernible] is airfare and opportunity for getting into the island.

And may be just a follow-up question for you Rob is on booking channels. I am just curious if you have good visibility into what the trend has been on the component of your bookings that are coming now from third-party online channels such as like a TripAdvisor versus traditional channels you’ve guys have used in the past, are you seeing a rapid or significant change there?

Jeff, not at this point.

Thanks guys.

And our next question comes from Anthony Powell of Barclays, your line is open.

Hi, good morning guys. Just on the share repurchase program here, a number of your peers are becoming more aggressive in their share buyback activity. What’s your view on maybe you’re doing buybacks a bit more quickly than you have in the recent past?

Good morning, Anthony. This is Mark. Our perspective on share repurchase is, it’s a valuable tool. I think we’re going to be very thoughtful. I am not sure this is the right time in this cycle to significantly increase leverage at the company. Obviously if there is dispositions that freeze up capacity to do repurchases without changing the leverage of the company and then we’re going to continue to monitor obviously a lot volatility in the stock prices and we think we are trading well below NAV but we’re going to continue to monitor that.

Got it, thanks. And on your group pace, did you mention how you’re tracking for next year and in terms of group rooms booked and also the number of rooms booked in revenues?

Obviously for the third quarter it was very challenging. The fourth quarter, we are seeing a pickup in group were up about 6%. Next year, it’s a little bit all over the board, we are just getting the budget now, we are looking at pace. So it’s roughly flat but we hope that more of that comes together in the next couple of months.

Got it. I guess one follow-up on that is, I guess Chicago will probably be down next year in terms of group but didn’t looked at kind of this city-by-city group outlook for next year that would be great.

Sure. Good morning. So for DC we have – it’s a strong convention calendar there for both 2016 and 2017, it’s up to 19% those two years. So we feel very good about DC. Boston is going to have similar room night at 2015 with six more citywide, they are down in the first quarter about 20% and then very strong calendar in 2017, it’s about up 24% room nights. And Chicago as you mentioned had a soft citywide calendar especially during the first half of the year which is down by 10% and Minneapolis is also down a 4% in 2016 though there is no citywides in Q1 as compared to same time last year but it is a very strong Q3, again looks extremely strong which is up 29%. Denver is down 8% in 2016, Salt Lake City is also going to have a down year as well, and then San Diego is going to be up 46% next year which we are very encouraged by it.

All right. That’s it from me. Thank you.

Thank you.

And our next call comes from Chris Woronka of Deutsche Bank, your line is open.

I guess congratulations on some of the F&B initiatives you got definitely really impressive margin performance. And I want to ask you how do you feel about the sustainability of that whether new things that went into effect this quarter that can last you through next year or is there some kind of maybe exogenous items this quarter?

Chris, it’s Rob. This is a continuation of our program which we are thrilled about. We really look at how we menu engineering throughout our hotels and combining our banquet menus with our food and beverage outlet menus. In Chicago in particular, we opened up a grab-and-go pantry which has been very, very successful and essentially we’ve minimized our room service program revenues for the quarter, our cash rate in Chicago for example for the quarter was up $1.77 per occupied room. It generated an incremental $142,000 of revenue but our profit was up over $300,000. So it’s programs like that and how we are looking at everything. At our Shorebreak hotel, we’ve really seen an opportunity to reduce our food cost by looking how we purchase and have been very, very successful. And then our beverage program has been very successful throughout the portfolio, we’ve had over 360 types of reduction in our beverage cost for the quarter so we see that continuing as we move forward.

And Chris, one more hotel to add to that, Fort Lauderdale where we’ve totally reconcepted the food and beverage operations down there, a data point there. So in the third quarter, our revenues were down $500,000 in F&B for that hotel for the quarter but profit was up $300,000 and that’s all a result of our efforts to eliminate the Charlotte franchise that was there on the past and to reconcept that in-house and that’s been very successful for us and we continue that to continue.

Great. And then I guess a question for Sean. Chicago has certainly made some headlines this quarter in the earrings release with property tax, but as you guys look out to next year I know it’s kind of tough but is this going to be more a theme more broadly do you think that the assessments are going to keep going up and up in more cities and you’ll have to going through the appeals.

Yeah. Chris, I think property taxes generally move with the cycle and what we’ve seen over the last three years is pretty steady increases across a lot of our jurisdictions of property taxes. Chicago is unique in the sense of there is a triennial assessment and the Chicago Marriott which had renovation activity triggered a pretty significant increase in the assessment of the 33%. But we believe that 2015 is essentially big than what we expect the run rate to be. Hopefully we’re going to be successful in the appeal that we’ve started. We’ve had success there in the past but we think Chicago is fully baked in and then other cities to a great extent we’ve seen property taxes reset over the last couple of years. So if we look forward, we wouldn’t anticipate really significant increases year-over-year.

Okay, great. And then just finally for me, as you look over the portfolio, you’ve obviously made the change in Chicago with The Gwen. Are there any other franchise or management the company changes you see on the horizon going forward?

Chris, this is Mark. The only one that we are evaluating now is in Key West, we bought the Sheraton Suites and so we are looking at in the next two years not changing the manager but potentially covering that potentially to attribute or to an independent, so that’s one that we are still evaluating.

Okay, very good. Thanks guys.

And our next question comes from Lukas Hartwich from Green Street Advisor, your line is open.

Thank you. Good morning guys.

Good morning.

Some of your peers have noted an increase in cancellation activity over the last couple of months. I am just curious if you guys are seeing that as well?

Luke, this is Mark. So cancellations in the third quarter were up a little bit. We did about 900,000 third quarter of last year, we did about a 1.01 million this third quarter, so it’s up incrementally. We will continue to keep an eye on it. I wouldn’t say that we are particularly worried about it right now but certainly it’s one of the things we’re going to stay focused on and watch very carefully.

That’s helpful. And then given the discount to NAV, I’m just curious are you guys contemplating asset sales at all.

As a policy, we don’t comment on asset sales until they are consummated. But there seems to be a scene of disconnect between NAV and the public stock prices. So clearly that’s on our radar screen.

And then the buyback plan, if you were to use it, should we expect that you would fund it through the sale of assets or would you be looking at using other sources?

Lukas, it’s obviously depended on where the stock price goes over the next several months, so that’s a claim driver but we are less likely to take a leverage significantly this part of the cycle than to fund it with asset sales.

Great, that’s it from me. Thank you.

Thank you.

Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets, your line is open.

Hi, good morning. I was just curious Sean if you could talk a little bit, you guys previously had mentioned targeting leverage three times by 2016, is that still a target that you’re shooting for?

Yes. We are on track for that for next year.

Okay, thanks. And then just a clarification, what was the $1 million of lease preparation cost that’s now in the guidance reconciliation?

So that cost that we’re going to incur in the fourth quarter primarily related to the basement space of our Lexington Hotel in New York. We need to make that wide space in order to prepare that to lease to a new third party and because there is no lease under GAAP, we have to expense as cost.

Fair enough. And then would you expect any disruption I guess from that or because it’s not a space currently being used.

No, there won’t be disruption because its base is separate from the hotel operations and its subterranean and so we don’t anticipate any impact on the hotel ops.

Okay, thanks. And then just last one from me, in the release you guys mentioned $8 million of interest expense savings. I think on the call today you mentioned $5.8 million if I heard you correctly and then earlier this year you had mentioned potentially $8 million to $12 million from refinancing and I was just curious if you could reconcile those numbers and talk about if there is any other opportunity that can get you to the high-end of that $8 million to $12 million range.

Sure. Austin, the $5.8 million was the direct impact of the financing activity we did in 2015. The $8 million to $12 million was the result of the financing activity that we’ve done this cycle. And so after we prepay Chicago, our weighted average cost of debt is going to be about 4%, slightly over 4% and we’re going to have roughly $1 billion of debt compared to our weighted average cost which was around 5.3% or 5.4% at the beginning of the cycle, also at a similar level of debt at about $ billion. And so the cumulative interest rate savings that which is where the $8 million to $12 million comes in is really the change in our weighted average interest rate sort of where we started the cycle, where we are today versus where we’re going to be after we prepay Chicago on a comparable debt level.

Okay. Thank you.

And our next question comes from Smedes Rose of Citi, your line is open.

Hi, thanks. I wanted to ask you maybe if you could just talk a little bit about what do you see on the supply side for next year and we know in Chicago there is at least several new hotels coming on, it seems like cities like Charleston have a huge spike in new supply maybe you can just kind of touch on some of the markets you are in.

So, Troy, why don’t you take that question?

Sure, hi, Smedes. This is Troy. As you quoted, Chicago is obviously seeing an uptick in supply of about 2% to 4% depending on whether you are talking about CBD or MSA. Similarly Boston has about 3% to 4% of supply increases. New York City is obviously getting the high profile anywhere from 5% to 7% supply increases but New York City is still look at some markets where we are predominantly in the Times Square and in the East Midtown area. East Midtown is getting very little supply, Times Square, I’m going to give you a little bit more. I think you look at the rest of our portfolio, the Boston, Chicago, New York, San Diego is getting the highest profile but markets like Fort Worth, Vail, Key West, Salt Lake City, Orlando, San Francisco those are all 1% supply growth. So we are happy about that, but we’ve got a lot of attention on New York, Chicago and Boston at the moment and what that’s doing to the supply dynamic.

Okay, thanks. And then your – some of your room service initiatives at the Chicago Marriott which seem to be helping you drive revenues and reduce costs, is that something that you can roll out across more hotels overtime?

We are looking at that opportunity with our operating partners and even not just in this large hotels, but also in the smaller properties as well. And we like for example at our DC Western, we’ve recently introduced a similar program and in turn that’s been rather successful for the first weeks it’s starting, so we are starting to getting traction on that.

Okay. Thank you.

Our next question comes from Ryan Meliker of Canaccord, your line is open.

Hey, good morning guys. First of all, nice job on the margins in the quarter, I thought they were great. Rob, I’m wondering do you feel like most of the low hanging fruit that you came in with where you saw some quick easy opportunities to boost margins is now played out or do you think there is still some more of that type of margin growth opportunity?

Ryan, we believe that there is additional margin growth opportunity our team is heavily involved with our operating partners, working with them on a daily basis and out in the field with them. So, yes, you’re right, there is not much low hanging fruit but we think in partnership with our teams, we find additional opportunities each and every time we meet with them and speak to them on the phone.

Okay, that’s good color. Thanks. And then I wanted to talk a little about I guess your investment capacity and how you plan to use that. Seems like with your target leverage of three times for 2016, you do have a considerable amount of investment capacity remaining, are you currently in the market looking at deals? Is there anything that you think is close and how do you marry acquisitions versus that $150 million stock buyback that you just put in place?

Yeah, Ryan. This is Mark, it’s a great question. So I would say we’re always talking about cost of capital and always looking at our cost of capital. In fact we were close on two deals in the Pacific Northwest recently but each of our cost of capital change walked away from those deals and there is about $300,000 of deal cost in our numbers this year. We are always evaluating opportunities in the marketplace. Just the cost of capital and were the stock is versus where we think the NAV of our company is makes it very difficult to execute that right now.

Okay. So then I guess you’ve probably sit tight, unless the stock moves higher, you’re more likely to sit tight on your investment capacity for the time being and if that does move higher you might be more accusative, it was lower you might be more accusative in the stock repurchase, is that a fair way to think about it?

Yeah, I think we’re going to be opportunistic on both sides. Now it’s possible we could find a deal that is such a screaming home run, that we would be interesting to do but I don’t – those are very, very hard to find. NAV accretion is easier to accomplish right now, buying stock than as to buy assets in the marketplace.

Excellent, okay. And then just the last thing I wanted to just I guess clarify a little bit, in your prepared remarks you guys talked about really strong business transient trends in the third quarter. We know that in October things fell off a little bit from that perspective. Your 4Q guidance sounds like indicates a bit of a persistence of that October trend rather than what you’ve seen year-to-date and then 3Q, is that correct?

Ryan, I think that’s our takeaway. As we are extrapolating October, we don’t – we want to give our investors our current thinking and so we think the prudent thing to do right now is just kind of assume that what we see in October and there is some delays in there but basically that those trends persist for the balance of the year and that’s how we’ve build our forecast in our perspective.

Gotcha. So then if business transient trends revert back to what we saw through the first few months of the year as oppose to October similar to what we just saw, the unemployment numbers that just came out then there is upside, is that correct?

Yeah, business transient turns out to be better than we are anticipating there would be upside in our guidance.

Great, that’s all from me. Thanks.

Thank you, Ryan.

And our next question comes from Bill Crow of Raymond James. Your line is open.

Hi, good morning. One housekeeping question first and then a bigger picture question. Troy, what was the – what is your supply outlook for DC? I don’t think you mentioned that one.

For DC, we are looking at the CBD of about 1% to 2% and for the greater MSA, closer to 2% to 4%.

Okay, great. Bigger question, guys you are not the first ones that have had deals teed up over the summer that you walked away from rates have gone from being the predominant buyers. Now it seems like everybody has identified non-core assets for sale to fund buybacks and other things. And I guess we’ve had the Asian buyers pull back a little bit in August maybe into September, and it looks like the Fed is getting ready to hike. So my question is what are you seeing hearing from brokers on cap rates because it’s – we are all looking at NAV and certainly you are from a buyback perspective but you start moving cap rates 25 basis points or 50 basis points it makes a difference, so where have we transitioned? Two, what’s the trend look like? Thanks.

Yeah, Bill. It’s Troy. There is not hard data on cap rate change, more anecdotal and sort of what you hear from brokers speak but I would tell you that brokers are sending messages of softness and pricing a bit and that couple of things had been retraded recently have come off price by maybe 5%, but it’s hard to quantify that. And then there has been some high profile deals that just didn’t close and you expect that will come out a lower price. So we are seeing a little bit of directional comments from brokers who have come back at lowering price but it’s hard to – it’s really hard to quantify that at this point.

Would your best guess be 25 bips, 50 bips somewhere in that range?

Too little data points to formulate a trend line yet.

Okay, that’s it from me. Thanks.

Thank you, Bill.

And our next question comes from Ian Weissman of Credit Suisse. Your line is open.

Hi guys, Chris for Ian. Just going back to funding this potential share purchases, I know you don’t talk much about acquisitions but if you were to I mean dispositions, you were to do any dispositions, would that be more to lower your exposure to New York or will it be able to take advantage of the strong for the suburban lower RevPAR assets.

Chris, this is Mark. That’s a great question. So I think we look at both ways, so obviously we’re always trying to look at our growth prospect but we are also trying to take advantage of where they may be discrepancies and what we think are the long term growth potential and asset values versus what a potential buyer may see and we are trying to play that difference or that vig, if you will. So for some of the non-core assets, obviously that would raise our average RevPAR and then may increase our growth prospect and be more of the company wanting more NAV accretion of the next 3 to 5 years. On the flip side, New York, we love our, where we are located in New York, those are great assets and great locations. We think NAV, there is still a strong bid in that market and we think over the next 10 years that will certainly be a good place to have the capital allocated. It is challenging in the next year or two. So, we’re having these discussions now. So, it could be either I would say we’re in continued dialogue on there.

Got you. And then secondly, lowering the RevPAR guidance maybe almost 200 basis points, maybe on a full year basis, maybe The Gwen accounts for what about 50 basis points, I guess there is some storm stuff in there and then little bit weaker trends, can you kind of break us down in terms of how do you get to that 187.5 lower RevPAR growth guidance and then how do we also think about pre-announcements, how do you guys think about and when on a go forward basis?

Yes, I will take the pre-announcement one first and maybe Sean can jump in on some of the math and how we get to the change in guidance. So preannouncement's are, we’re always trying to give our investors our best perspective as soon as we can on what’s going on in the marketplace. What we saw in the third quarter was actually it started off relatively strong. August was disappointing and then we actually saw September starting relatively strong. The Gwen transitioned on September 1, so obviously that kind of happened during the month of September and into October. If you looked at where we are absent The Gwen we were with the within our range to 3% to 5% RevPAR growth for the quarter. And so our opinion was we wanted to have the best data and a complete set on how the fourth quarter was shaping up to including our October results before we kind of came out with a comprehensive deal on what was going on for the balance of the year. So, based on our judgment it may sense to wait till that October data came out and do with on this call. Sean, do you want to walk through the math on some of the changes?

Sure. So, it was roughly 190 basis points of RevPAR change, about 60 basis points of that was related to The Gwen. Our October transient trends, which we extrapolated after the balance of the year was about 100 basis points of the change and then the balance was from things like the Charleston storm impact. Some of the incremental storm impact at Frenchman's Reef et cetera, but that is the general math. So, the majority of the RevPAR changed related to the fourth quarter and the short-term transient trend in October being extrapolated out to November and December.

That's great and then lastly on The Gwen, when you think that's going to be fully stabilized?

Our experience on conversions, of brand conversions is it generally takes about three years to bring the true value of a brand conversion. Certainly, I experienced at the Lexington, especially when you are going from a known commodity and you are reintroducing and branding a software or luxury brand, it would be different if we converted and it was a Ritz-Carlton day one. When you introduce something new, you need to get the trial on the ramp up, so it is probably about three years to get the full value of the brand conversion.

Thank you very much.

Your next question comes from Anto Savarirajan of Goldman Sachs. Your line is open.

Good morning. Last quarter, you were talking about your expectations for the New York City portfolio and how you expected it to outperform the overall market. I believe you called out a 3.5% to 5.5% RevPAR for the back half of the year. Does it still hold? And I understand you still expect to outperformance compared to the broader market. Just curious as to have your thoughts for the back half of the year have changed for the New York City assets, and any leading thoughts into 2016 as well would be greatly appreciated.

Sure this is Mark, I will be happy to answer that question. So, New York was under our expectations in August and then September, while we did have some good compression certainly good results at the Lexington, we would have expected a little bit more super compression from the Pope visit and from the UNG in September. So, I would say it’s mostly before our expectations for the back half of the year for the market. And then within our portfolio, while the Lexington was relatively good and certainly Chelsea with our brand manager change has been exceptional. The two cohorts that we have in the City there is some transition in the way the revenue management is being done by Marriott that probably costs those hotels to lose a bit of market share. So, I would say those are performing on a little behind our expectations because of that shift in the way that Marriott is doing their revenue management within the city.

Got it. The past couple of quarters, you've spoken about F&B as an opportunity and some of the margins have tracked well - as well on that front. What is the long-term goalpost here? How should we think about the opportunity on a long term in terms of how margins can be in that business? And if we were to look back at history, are we close to achieving what might have been a peak level or is there further room to grow? Essentially, how do we think about the opportunity that is still left?

It’s a tough question as each hotel presents its own business case. So, I’d say the portfolio is still about a couple hundred basis point behind prior peak, but there is a lot of things that are changing within the portfolio, while there may be more F&B, some of the hotels may have ramping up franchise fees or something else that would make it, you know some will be above some will be below. We don’t, so obviously on a macro basis, we’re trying to close that couple hundred points of deficit to prior peak, but it’s different with each hotel. I’d say F&B certainly is one of a focus area. We don’t have a particular goal for F&B, every month and every program and every best practice is something that we continue to try to roll out through the portfolio, certainly routs to express a lot of optimism in the ability to take some of this successes like Chicago Marriott and roll them out through a number of hotels with our portfolio and we will continue to work hard every day in finding those opportunities and fighting for every dollar.

Thank you. One last question, if I may. For the past couple of quarters, you've given a little bit of a tidbit on how you've seen international travel and how it's been either impactful or not impactful to your portfolio. Can you give us a read-through for 3Q as well?

Sure. Let me start with by saying the datasets very poor, so it’s very hard and the number of the hotels to track who is really international and who is not international, what we saw - and across our portfolio a lot of our Marriott properties particularly don’t do a tremendous amount of international business, but in New York City what we experience is actually pretty good international demand, it was just much more rate sensitive. So, actually our international is up a little bit in New York City, but the rate was down for those travelers.

Thank you.

And our next question comes from Austin Wurschmidt of KeyBanc Capital. Your line is open.

Yes, thank you. Just one quick follow-up. As you've gone through the refinancing activity this year, I was just curious if there's been any changes in the appetite from lenders or if you've seen any changes in sort of underwriting standard spreads, leverage, etc.?

Austin yes what we are seeing is the spreads have widened out throughout the year, now the tenures have also moved, but what we’re seeing is for larger deals Boston Westin being the most recent loan that we closed. The number of lenders that could bid on that versus where it would have been probably nine months ago was less. I mean it was still robust bidding process where we had double digit number of term sheets from lenders, but the size certainly was more impactful to some lenders, clearly not the bullish bracket. I think the overall cost of lending over the last nine months has gone up. If you just look at what we’ve closed, Worthington was closed at 3.66% versus 4.36% at the Boston Westin, at comparable leverage levels and so what we’ve seen is the leverage levels have not altered dramatically, but the cost has gone up because of just the moment in rates.

Great. Thank you.

And now I’m showing no further questions at this time. I now like to turn the call back to management for closing remarks.

Thank you to everyone on this call, we appreciate your continued interest in DiamondRock and look forward to seeing many of you at the NAREIT convention in a few weeks. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.