DiamondRock Hospitality Company (DRH) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to DiamondRock Hospitality's First Quarter 20156 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 call is being recorded. I'd now like to introduce your host for today's conference Mr. Brett Stewart, Vice President of Strategy and Capital Markets. Sir, you may begin.

Thank you, Kristin [ph]. Good morning, everyone, and welcome to the DiamondRock's first quarter 2016 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 the Company's major activities during the quarter, as well as the Company's outlook for the balance of the year. Sean will then discuss our first quarter results and recent capital markets activities. Following their remarks, we will open the line for questions. With that, I'm pleased to turn the call over to Mark.

Thanks, Brett. Good morning, everyone and thank you for joining today. As was expected, the first quarter was volatile for the lodging industry. Performance was uneven week-to-week and from market-to-market. We continue to see mixed signals with regard to the strength of lodging demand and overall [indiscernible] demand growth in the quarter. However, new hotel supply growth increased during the quarter, thus notably in the major market creating a headwind for hotel to drive growth on the top line. Our view of the lodging for 2016 however has not materially changed since the beginning of the year. We entered the year with cautious view of demand trends and we continue to be mindful of the choppy operating environment, which is likely to persist throughout the balance of the year in many markets. As a result, we are focused on setting up our hotels for success with strength in cost containment strategies and defensive revenue management plan. We are proud of how these initiatives have played out in our portfolio so far. Additionally, as this lodging cycle gets into the late stages of growth, the company is being strategic in taking step to fortify its balance sheet to not only weather it slow down but to position highly opportunistic during periods of future market dislocation. Now let me turn specifically to our operating results for the first quarter. EBITDA grew 3.7% which exceeded consensus estimate. However, consistent with our expectations going into the quarter and as factored into our original full year guidance, hotel revenues were challenged during the quarter. As recall, we indicated on our most recent earnings call that we expected RevPAR growth to be slightly negative during the first quarter. So our first quarter RevPAR contraction of 2.1% is in line with that guidance and our initial expectations. The primary drivers for RevPAR contraction were the impact of new hotel supply in New York City and challenging group business patterns including reduced convention activity in several of our major markets like Chicago. Our team working closely with our operators performed at a high level in response to a tough demand environment. We are particularly proud that we grew hotel adjusted EBITDA margins 14 basis points on a RevPAR decline, a phenomenon result. Our asset management team aggressively implemented tight cost controls which resulted in profit flow-through of over 122%, a record for DiamondRock. We are extremely pleased with these margin results and believe that our asset management platform is among the best in the industry. In discussing the first quarter results, I did want to touch on Chicago. Chicago is a challenging market during the first quarter with RevPAR for CBD Hotels down 10%. The Chicago market is historically seasonally slow during the first quarter, due to the difficult winter weather. However, the first quarter of 2016 was exceptionally challenging with citywide events down over 50%, which generated 80,000 fewer room nights of demand. DiamondRock took advantage of this low demand period to complete renovations at the Chicago Marriott and The Gwen. While well times, the renovation disruption combined with the lack of group business, resulted in double digit RevPAR contraction at these two hotels. Collectively, the results of these hotels held back our portfolio RevPAR by approximately 240 basis points. Let me take this opportunity to recap those two renovations. The Chicago Marriott completed the comprehensive renovation of 460 guest rooms adding the latest Marriott prototype room elements in converting tubs, showers in all the king bedrooms. Additionally, we invested $2 million to create state-of-the-art fitness centers that will be a major draw for groups in transient guest in the future. The reaction from meeting planners that the new product has been terrific and it’s showing off that our group, which is now mid-single-digits for the balance of the year. Looking out future bookings of the hotel 2018 are currently up 46%. Separately, as part of the Gwen, Chicago’s conversion to start with luxury collection, we transformed the guest experience like creating a new lobby, new restaurant and enhancing the rooftop bar with fire features. This public space renovation while disruptive is now complete and a view to the public only five days ago. We are positioning this hotel to be among the top luxury hotels in Chicago and are building awareness which takes time. We’d expect to start gaining momentum in the back half of 2016 with very strong RevPAR gains in 2017. Now before turning the call over to Sean to discuss our first quarter results in more detail let me recap our latest strategic moves. DiamondRock is focused on creating long term shareholder value throughout all phases of lodging cycle. At this stage of lodging cycle, we believe that it is prudent to build dry powder. I am pleased to announce today that we’ve taken two additional steps towards achieving that objective. First, this morning we announced that we place two hotels under contract to be sold for approximately $200 million. Of course these transactions are subject to customer closing conditions and thus not guarantee to close. While confidentiality agreements for us from disclosing details of these transactions prior to closing, I can say that these two hotels have collective RevPAR that is more than 30% below our portfolio average. Even after these two deals, we are looking to be net sellers for the balance of 2016 with an emphasis on our New York City assets. While we will be disciplined on pricing, we believe that there is a potential opportunity to take advantage of the seemingly robust apatite of foreign based capital for New York City assets in order to right size our market allocation in an accretive fashion. The other major initiative we took to build investment capacity was a successful completion of a new and greatly expanded $300 million line of credit that was couple with a new $100 million term loan. These financing transactions increased our liquidity and created significant investment capacity for us to be opportunistic in the future. Before providing our outlook, I’ll ask Sean to provide more details on our first quarter results and our recent capital markets activities. Sean?

Thanks Mark. Before discussing our first quarter results, please note that our RevPAR and margin comparisons are presented to include the Shorebreak Hotel and Sheraton Suites Key West as if they were owned for all periods presented. Our hotels performed in line with expectations in the first quarter. Despite the lack of group activity particularly in Chicago, a difficult New York market and business trends in choppiness, our hotels successfully maintained market share. First quarter RevPAR contraction of 2.1%, which driven by a 3 percentage point decline in occupancy partially offset by a 1.8% increase in average rate. It is important to note that room revenues only declined 0.7% as a result of the addition day in February and the addition of the new rooms at the Boston Hilton. Our profit flow-through in the first quarter was excellent as our asset management initiatives drew over 122% flow-through. Most impressive was the success of our asset managers working with our operators to reduce quarterly operating costs by approximately 2%, which resulted in hotel adjusted EBITDA margin expansion of 14 basis points. The first quarter was led by the leisure and contract segments which achieved 5.4% revenue growth, driven by a 2.3% increase in demand and a 3.1% increase in rate, so leisure and contract segments were led by our resort locations including the Vail Marriott and Fort Lauderdale Westin as well as Boston Hotels. Recently choppy business transient trends continued during the fourth quarter with revenue declining 1.4%. The decline was driven by a 1.6% decline in average rate, partially offset by a slight increase in demand. Despite the revenue decline, business transient was strong at our Boston Hotels and the Hilton Garden Inn Times Square Central. However, this strength was offset by our Chicago and Washington DC Hotels. We expect the difficult business transient trends to continue, reflecting two consecutive quarters of anemic GDP growth. As expected, our group segment was challenge this quarter, largely driven by the lack of citywide activity and Easter shipping to March. First quarter group revenue declined 7.9% as a result of a 10.4% decline in demand, partially offset by a 2.8% increase in average rate. Citywide activity during the quarter was light in our most significant group markets of Boston, Chicago and Minneapolis, which experienced group revenue declines of 16%, 31% and 16% respectively. It is important to understand that the first quarter group results were in line with our expectations and incorporated into prior earnings guidance. The group softness contributed to the 5.2% decline in the first quarter food and beverage revenues which primarily impacted banquet and catering. Despite the decline in revenues, food and beverage profitability exceeded our expectation achieving nearly 200 basis points of margin expansion and a 102% profit flow-through. In addition, group contribution increased over 8% during the quarter, which provide evidence that meeting planners are continuing to spend at their events. In addition, there are some other positive group tends worth noting. First, group is expected to improve for the balance of 2016, where pace is up approximately 5%. Second, there were strong 2016 booking activity during the quarter, where over $18 million in the quarter for the balance of the year group revenues were booked, representing a 5.8% increase compared to the same time last year. And finally, early 2017 trends are encouraging with over 40% of expected group business already booked. Our 2017 group pace is up in a mid-single-digit, largely driven by increase demand and a slight increase in rates. The most significant bright spot for DiamondRock in the quarter was the ability of our asset management team to drive positive profit margin, despite the negative RevPAR. Total expenses declined approximately 2% during the first quarter. We’re most successful in the food and beverage department where we were able to reduce the part menu expenses by 7.9%. In addition, total labor and benefits decreased 1.3% as we flexed our staffing models to account for the lack of group activity. Utility expenses were down 8%, partially due to the more moderate winner and group commissions were lower as a result of less group business. Before turning the call back over to Mark, I would like to touch on our balance sheet. Prudent balance sheet management and conservative leverage have been cornerstones of DiamondRock strategy for over a decade. So for this year, we have completed several transactions to further strengthen our balance sheet, reduce borrowing costs, extend and stagger our maturity schedule and provide capacity to repurchase shares when market dislocation create attractive opportunities. Most recently, we’ve refinanced our line of credit which increased capacity from $200 million to $300 million, lowered the interest spread by approximately 25 basis points, added covenant flexibility and extended the maturity date. In addition, we entered into a new $100 million by the year term loan which bears interest at a slightly lower rate than the line of credit. The proceeds will be used to repay the most of the outstanding balance on our line of credit and repay the $48.1 million maturity of the Courtyard Fifth Avenue, which bears interest at 6.5%. The transaction will result in over $2 million of annual interest savings and increase our unencumbered hotel pool to 19 hotels. Our balance sheet has never been better. After factoring in the two pending asset sales that Mark discussed, we expect to end the year with 19 unencumbered hotels, less than three times net debt-to-EBITDA, no near term debt maturities and over $450 million of balance sheet capacity including an undrawn $300 million line of credit and over a $150 million of corporate cash. Further, our weighted average interest rate will be below 4% and our average maturity will be approximately seven years. I will now turn the call back over to Mark.

Thanks Sean. As we look forward to the reminder of the year, we expect the lodge industry results to modestly improve. With the first quarter behind us, we expect group business trends to turn positive its financing activity in many of our markets improves throughout the year. As expect, leisure transient demand to remain steady and a primary driven of lodging results. Business transient is the one segment that has the most risk and we are watching it closely. Our outlook assumes that the current business transient trends continue for the balance of the year. For DiamondRock, our results and forecast are in line with our original expectations and we are reiterating our guidance for the full year RevPAR growth of 2% to 4%. We expect our second quarter RevPAR growth to be in the low single-digits. For example, our April RevPAR grew 1.2$. We expect the third quarter to our strongest RevPAR growth quarter because of strong group bookings. The fourth quarter RevPAR growth is expected to moderate somewhat from the third quarter as group booking patterns are less robust towards the end of the year. For quarterly, we are reiterating our full year adjusted EBITDA and adjusted FFO guidance at this time. Our guidance for the full year remains for $265 million to $278 million of adjusted EBITDA and $1.04 to $1.09 per share of adjusted FFO. There are few assumptions build into our guidance. First, as mentioned earlier, we expect a material improvement in the performance of our Chicago Hotels as group business improves and the current year renovations are complete. Second, we expected challenges in New York City to continue and the results for the 2016 market RevPAR in New York City to be negative. Lastly, we did not incorporate any dispositions into guidance, including the two penny dispositions discussed earlier. Finally before we open it up for questions, let me briefly address our capital allocation strategy. We firmly believe that capital is increasingly progresses. We’ve been active in building that investment capacity to the recent expansion of line of credit, our new term loan and our disposition program. This naturally raises the question of how we will utilize all this investment capacity. Well, opportunistic share repurchases are clearly at the top of that list, since we are trading in our estimation at a NAV discount in the range of 25% to 30%. As you may recall, our Board of Directors authorized a $150 million share repurchase program last year. As at the end of the quarter, we now repurchased any shares but we are regularly monitoring the market opportunity with our board. Alright, I’ll sum up the prepared remarks by emphasizing that DiamondRock has two major priorities for 2016. One, stay focused on asset management to drive maximum profit flow-through. And two, the old capacity to remain liquid and opportunistic. With that we’d now be happy to answer any questions that you might have.

Thank you. [Operator Instructions] And our first question comes from Ryan Meliker from Canaccord Genuity. Your line is now open.

Hey, guys. I just had a couple of questions. First of all margins were obviously better than we were anticipating on cost down as you guys mentioned. I am wondering two things, one is you know were there any onetime items impacting margins, obviously you talked about how cost and general down across all the different lines, just wondering if anything stood out as non-recurring? And then two, should we expect to see similar cost reductions throughout the rest of the year or we comping much softer? Just give us some color there that would be helpful thanks.

Sean, you want to take the onetime items?

Sure. Ryan, with respect to the onetime items, there were only two unique things recorded during the quarter. The first is we had a successful property tax appeal at the San Diego Westin which was about $400,000 now that was offset by increased property tax across the portfolio, so net-net our taxes are up but that $400,000 was a win for us during the quarter. And then the other unique item that was booked this year and also will be booked in the balance of the year was the amortization of our key money for The Gwen which is recorded against these which is about $600,000 recorded during the first quarter.

Ryan, the other question on margins, obviously we’re implementing a lot of those practices, a number of successes particularly on the labor and benefits front flexing the model there. Our goal is to try to achieve flat margins for the year, so that’s what we’re targeting, that’s what essentially built into our guidance.

Okay, that’s helpful. And then the second thing that I was hoping, you guys might be able to give a little color on and then again maybe not is with the assets sales that you have under contract, any idea or expecting timing, and can you give us any color on cap rates or EBITDA multiples that you are selling at?

Yeah, Ryan, it’s Mark. Based on the company agreements, we really can’t disclose too many details on the metrics of the deal or the particular deals themselves. As there are a number of moving pieces of one’s timing but we are trying to getting closed in the second quarter, but that could slip depending on some of the debt issues around the hotels.

Okay, that’s what I figure - about the figure I asked. And then just real quickly lastly, you mentioned in your prepared remarks that your outlook assumes that continued challenges associated with the business travel or business transient segment, we’ve heard from a lot of other guys if they are seeing strength in business transient coming out of April, I am wondering if you are seeing any of that, if you are seeing it but don’t have confidence and it persisting yet, you know in other words is there more upside and downside to guidance numbers at this stage?

Well, I would say again, best guest days on the trends we are seeing now you know if you look at the three segments, group is the one that we have the most confidence in, although the transient has picked up in the first quarter, but the people that are showing up are spending well and they are booking as Sean noted in the prepared remarking, some strength there. Leisure is the one we are actually most encourage about and that makes sense given where consumer sentiment is and where consumer spending is which both were very favorable. But business transient is one as we mentioned we’re the most concerned about if you look GDP growth you know 0.5% for Q1. And if you look at corporate profits, the two kind of best quarter where is they are not terribly encouraging now, GDP picks up for the balance of the year which is kind of consensus view, we’d expect it to get a little better, but we aren’t feeling great about business transient. And April, well maybe a little better certainly is in a rebound in our mind.

Alright, thanks for the added color, Mark.

Thank you. Our next question comes from Anthony Powell from Barclays. Your line is now open.

Hi, good morning, guys. Follow-up on the asset sales, do you expect any taxable capital gains from the sale?

Sure Anthony, this is Sean. Any taxable gains from the sale is we don’t believe not just our dividends, depending on what asset, there might be slight gains or slight losses within each of those assets but it’s not going to move the needle for the entire company’s distribution requirements.

Got it. Thanks. And just on the dry powder for opportunities, the capital regulating seems to exceed, you wanted $50 million here repurchase authorization, so how far is your repurchases, what are the other opportunities you’d be looking at?

Yeah, this is Mark. I would say, it’s going to be opportunistic based on what the market does and obviously what our share price is doing, so we can certainly go back and go for a bigger authorization if the opportunity is right into the marketplace. So we are monitoring it right now where our cost of capitals would be very difficult to justify any acquisition. So we are going to continue to build the dry power and I think share repurchases look like the best opportunity in the near future given kind of disconnect between NAV and stock prices.

Got it. And just maybe one more, your April RevPAR growth of 1.4%, it’s a bit below the STR preliminary 46 that assumption in New York, Chicago or is there anything else going to driving that delta?

No, New York, Chicago, we expect this to get little better, really Chicago to get better starting in June by the held back to April results.

Alright, that’s it from me. Thank you.

Thank you. Our next question comes from Jeff Donnelly from Wells Fargo. Your line is now open.

Good morning. Mark, maybe just on the dispositions, not so much about the specific details of this transaction but maybe could share some color about the depth of the buyer market and maybe who sort of showed up and maybe just in the general terms, I mean valuation that your expectations and I guess I am curious to buyers were sort, key valuation buyers are multiple based leverage yield, et cetera, just maybe give some thoughts there.

Yeah, I’ll probably put comments and I’ll turn it over to Troy for his view as well. So the two assets that we have under contract, one was a reverse enquire, so it wasn’t a market of process. The second was a fully market of process. And I’ll let Troy kind of spend on number of offers. I would say our experience and probably get the markets now, it really depends of the kind of as you are selling, what kind of letters are showing up in the debt of the market. The yield play, given the dislocation the debt markets over the last six months has been more difficult for those kind of players clearly the public lodging with couple exceptions are sidelined right now. But I’ll turn it over to Troy to provide some more color.

Yeah, Jeff, on the one that was marketed, we had quite a dozen offers on the property and frankly we’re pleased with that and our pricing expectation versus where we ended was inside a 5% of target. So we’re pretty happy with where we ended up on value.

It’s helpful. And I am just curious what I guess answers are you guys speaking to make the decision to sell hotels in New York or you just sort of hoping for reverse increase or you looking for something to kind bear out to make the decision?

You know we have - we make we have one hotel that’s in a flow, that will be on a full marketing process there. So we’re - and there is a lot of unusual buyers if you look at what’s transpired in those the recent transactions, there is a lot of first time buyers in the U.S. And I think they are the ones that are going to pay the premium that to get the value for the assets. So that’s the focus of the marketing activity. Troy, do you have anything to add to that?

I would just add to that that you know despite marketing hotel, we are getting a large volume of enquires about any assets in New York. So it just seems to be quite a lot of interest in New York asset as dispositions acquisition in addition to our marketing efforts.

And then Mark, I think in your remarks you said that you expect corporate transient trends to continue, I guess what precisely do you mean by that, do you just for that segment do you sort of see that as almost flat over the prior year, is that declining slightly, I am just want to be more specific about how you are thinking about it?

Yeah, I think - so far we are not encouraged by what happened in Q1, I mean there is business transient but we’ve seen some weakness. We expected based with that trend line to persist for the balance of the year. Sean?

Yeah, so the last two quarters, we’ve been down in the mid-ones as a percent of business transient revenues for the two quarters. Interestingly now the fourth quarter business transient decline was really driven by a little over 5% decline in demand, which was concerning to what we gave for your guidance. The first quarter demand stabilized. We actually we’re slightly up in demand but we aren’t able to push pricing. And so when we think through for the balance of the year, we are assuming that business transient revenue was down kind of in the 1% to 2%, what’s - there some encouraging signs which is that there is a demand, their discouraging side is it’s difficult to push pricing on the business transient front.

And some for you - Sean, I have a question for you. There is a good volume -

Only because I talked?

Only because you talked. You guys have a good volume of renovations occurring in I guess slower period in the ‘16 and ‘17, do you guys have a dollar estimate either for revenues or EBITDA that you guys can share with folks on how you see disruption coming through in the next three to four quarter, I think it will help people like modeling in ‘17 and ‘18, just maybe that gets comped against?

Yeah, Jeff, it’s really not significant disruption. When you look at the - even though there is big dollar amounts going out with the $150 million, the vast majority of that were Chicago based and it was in the first quarter which was a slow quarter for us anyway. The next handful renovations that we have which comprise most of $150 million is in markets where there are seasonality such that you can do the renovations during this low period and that we now displace much business. So I would say there isn’t renovation disruption necessary to model within folks forecast.

And one last question. I am just curious how you guys are thinking about the pending Marriott, Starwood combination, you know sometimes when you see like an individualize, I know it’s very different, but when you see an individual asset change brands, you know you can have some description or loss of people that property that impact performance, I know that’s not quite what’s happening here. But here is any reason why you are thinking might see sort of asset level performance issues as a result of that combination or for the most part, do you think it’s going to be fairly smooth transition with no real property level impact?

Jeff, it’s Mark, it’s great question. I think long term we are pretty excited about the power of the compliant company and what is going to do for market share gains particularly at the Westin. So we’re optimistic that’s long term positive and they are talking about reducing costs particularly on the Starwood properties 2,000 or less rooms reducing the cost. So that’s positive. I think on integration, there is still a lot of different question. And so we’re cautiously watching. I think the conversations we’ve had with senior management are very encouraging but I think we’ll have to see how the integration works. And I am sure there’s going to be some bumps in the rood. I wouldn’t expect it to have a material impact on the hotels in 2016. I think the theme that we are really focused on is if they merge or change the point system and change the way they are reviewed, there is going to winners and losers among the hotels when that point system changes and I think that’s the one we want to participate with them in and understand and make sure that we are maximizing the benefit of any program change there.

Okay, thank you.

Thank you. Our next question comes from Lukas Hartwich from Green Street Advisors. Your line is now open.

Thank you. Good morning, guys.

Good morning.

Hey Mark, I am just curious, what sort of timeframe should we be thinking about for additional dispositions?

The earliest it would be Q3, okay. And less thing exceed our timeline but that’s kind of what we’re assuming. There is always a number it depends on what asset sales, if there is loan to be assumed, if there is that always adds several months to the closing process.

That’s helpful. And then Sean one for you, I think this is the first time DiamondRock issued non-property level debt. I am kind of curious is there a change in strategy there or is it just the terms are more attractive in property level and kind of curious what drove that decision?

Sure, thanks, great question, Lukas. And so the term loan is part of our overall strategy to build capacity. When we evaluated it, the line of credit refinancing, we evaluated a $400 million line of credit versus a combination of funded versus not funded. And really what drove our decision to have a portion of it funded with a term loan were really four things. The first is you correctly state there is a lower cost associated with the term loan. Second, our strategy was to use a portion of the proceeds of the term loan to repay the $48.1 million maturity on our Courtyard Fifth Avenue. There is some tax reasons why we would do that from a standpoint of the mortgage recordation tax in New York, you can preserve that, do funded. And so having down the term loan versus the line of credit provides our ability to preserve that tax credit which is about a 1.3 million of value. Third is our macro view is it interest rates are going to rise overtime. We might be wrong on that. And so having a floating rate piece of debt helps us to have roughly 25% of our debt is floating, is essentially a hedge for DiamondRock in cash our long term interest is incorrect. And then finally, we don’t really view the term loan that different then the line of credit in the sense that it has the identical corporate covenants as the line of credit and it is pre-payable any time. And so although it’s funded, the structure of the term loan relative to line of credit doesn’t vary dramatically.

Great, very helpful. Thanks guys.

Thank you. Our next question comes from Chris Woronka from Deutsche Bank. Your line is now open.

Hey, good morning, guys. I want to ask if you have or if your operators have kind of changed strategy through the year thus far in terms of grouping up. I mean I know there is a certain amount on the books going in and certain amount to go, but are they actively kind of grouping up due to the weakness in transient?

Hi, Chris, it’s Rob. Yes, we are in various properties. We’re doing in different ways actually. So we have a continued focus on pricing appropriately based on day of week. We are growing our group based were appropriate for example at the Lexington, we recently completed completing a Chinese restaurant on the level into 3,000 square feet of meeting space, so we are to shift our mix in there. And then we’re also looking at, you know we adding airline contract business where feasible and that’s reflected in our 35% increase in contract and other for the quarter. So we’re taking a view that we’re looking at all different angles here of driving additional demand.

Okay, thanks.

Chris, this is Mark. I’ll just add, it’s a defensive revenue management plan for the year, right. So we are taking the steps to grouping up the airline contract crew in the lower demand period. We want to defensive and we want to position to handle our choppy environment.

Great and Mark just on - follow-up on the New York question on the asset sales - potential asset sales. Would you guys if you - you go through a process and you get an offer that you really like, do you envision yourselves kind of announcing it when it goes hard or announcing it when it closes, because we’ve obviously seen cases where just fits a foreign capital situation, it’s - there is always uncertainty on timing, right, so how would you guys kind of approach that with the market?

Yeah, our general approach which we are deviating from today is that we don’t like to announce the deals until they are closed because we have this deal under from contract and we have the quarterly earnings call, we thought it was appropriate to talk about them. But as a general rule, we think it’s prudent thing to do is not to announce them until they close. I say it depends on the buyers, some buy’s great confident. We have sold - we sold to Marriott several years ago to a Asian based group which had never deployed any money in the U.S. before and I think until why are actually heading closing, we weren’t sure that we’re going to be there. So right now the two buyers that we have for the pending contracts are built in that profile, we have confidence for close, although nothing is guaranteed. But I think give the target of buyer list for the New York City assets, we try to wait until it closes, although we have our earnings call between May.

Great. And I just want to ask on the Vail Marriott, I know you still have a little bit runway before the contract, but are you doing any work there in terms of thoughts on longer terms strategy there?

We are still about five years on the current franchise agreement, so it’s a premature to shift gears on that one, but the asset itself has a lot of potential. Those assets if you potential to come part of it or more of it into condominium, so we have to understand that real estate value potentially, trying to unlock that as part of any extension or change in brand.

Right, very good, thanks guys.

Thank you. Our next question comes from Thomas Allen from Morgan Stanley. Your line is now open.

Hey, thanks for the comments around the defensive revenue management strategy. I was curious I was thinking about your distribution channels by mix kind of what it was in the first quarter versus a year ago and how you think that’s going to trend? Thanks.

Sure. Tom, this is Rob. So our OTA business is actually down about 30 bps to about 12% and again that’s part of our strategy to go for additional higher rated business. And we’re focusing throughout the portfolio in getting additional special corporate demands. For example, at The Gwen, our special corporate business is up 31% there compared to 10% same time last year. And at Lexington, our special corporate business is up quite a bit in fact it was 400 basis points up to 18%. While internet normal paid there is down 100 basis points to 22%. So really doing a strategy try in all of our hotels to reduce our lower rate of business and go with higher rated demand.

And do you feel like the brands greater push for direct bookings is having any material impact?

Yeah, it’s little too early to say, right now, we are seeing - again as you can see in some of our numbers, a push that is coming out, it’s helping a little bit that’s still early right now.

Perfect. And then just one last thing, one of your peers called out a I think it’s a heightened competitive environment for transient bookings, do you feel like that’s the case and where you are seeing that?

Yeah, Thomas, that’s reflected in New York City and so we really take a strategic approach in how we pricing out 30 days out, 10 days out, 4 days out and a day out. And what we’ve seen in New York for example is that the pricing power has decreased as we get closer to the day of arrival. So we are being strategic in how we are placing business 30 days out in order to gain the largest rate opportunities.

All things are very enlightening. Thank you very much.

Thank you.

Thank you. Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Your line is now open.

Hi, good morning. Just on the dispositions, could you give us sense what the net proceeds you are expecting will be? And then separately I know that you’ve discussed the stock trading big, any discount and share repurchases on an option but given your comments on building dry powder, are you guys considering at all sitting on the cash with a thought that there could be better opportunities down the road to either buyback stock or redeploy in the new investments?

Yeah, it is Mark. Let me take first and then turn. So on the dispositions and thinking about the confidential agreements we have probably difficult to disclose what the net proceeds are, if you just look back into what hotel there are, what the debt is. On your broader question that’s share repurchases, it’s a great question. So I guess I would note a couple of things, one is the two dispositions that we mentioned are still pending, we don’t have that cash yet to deploy. The other think I would point out on valuation is that just two months ago, which was during a blackout period for share repurchases the stock was 20% lower. So I think we’re being patient and trying to be opportunistic about our share repurchased. And although we do think the stock is trading and they discount NAV as we mentioned probably 25% to 30% in our estimation. Moving cost is as we what some of our peers hit that buyback button too early over the last six months. So we’ll continue to monitor the markets and try to make the right calls on why we deploy the capital.

Would you consider putting a program in place so if the stock did drop more precipitously and you are in a blackout period that you’d still be able to buy back stock?

Yeah, we have that option within our plant, it’s got a 10B51 plan where we - you could set price if you can get so compelling that you would buy back stock and then that can be traded during all periods of the year.

Thanks for the color. And then just lastly, what is that you think is driving the difference between the booking trends in group as well as the FNB spend versus what you are seeing in the business transient trends?

It’s Mark, it’s a great question. So group looks like it’s been lagging for this recovery rate, so it’s kind of the latecomer to the party. I think there is pent-up demand for groups that needed to meet. Finally got the momentum and now we are seeing those groups actualize and we’re seeing a lot of new groups that haven’t met in the while coming to our hotels. So I think there is a little bit of a pent-up demand element to the group transient what’s going on there. On the business transient, as we mentioned earlier, I think a lot of that is just more real time in how Corporate America is doing. And if you look at profitability of Corporate American and if you look at the coloration the GDP, it’s a little mimic over the last couple of quarter. So if there is improve, we would expect the business transient more quickly to react to that improvement or that change either way I guess.

Thanks for taking the questions.

Thank you. Our next question comes from Steve Kent from Goldman Sachs. Your line is now open.

Hi, good morning. How much of your occupancy is business transient and are there any specific subsectors or sectors of business travelers that are the most active or depressed any specific industries you’d call out?

Hey, Steve, from a mix perspective, about 29% of our first quarter rooms revenue was business transient, about 29 was group and the balance was leisure contract and other. From a sequencing perspective, business transient was down relative to where it was first quarter last year about 1%, group was down about 2% and leisure contract and other went up 3%. And so that’s a function of what we talked about in our prepared remarks which is the leisure contract and other business has performed strongest during the quarter at the expense of both group which was down 7.9% and business transient which was down 1.4%. With the respect to where the demand is coming from, I’ll turn it over to Rob.

Sure. Business transient, you’ve taken an approach where we are casting a wider net with special corporate and going out. And so two great successes we’ve had like Lexington for example, we’ve increased our special corporate counts by over 25 there year-over-year and certain at The Gwen, we continue to have great growth in that as we change brands and having a new awareness campaign. So we’re really again a group within a special corporate comes from going out and being more aggressive as we get the payment and try to generate new business.

Yeah, Steve, this is Mark. I’ll just add two comments to that. One is you know we have a portfolio of only 29 hotels. We do have an allocation to business transient that seasonality plays a lot - a big role, so we thinking about New York, Chicago and even Boston in the first quarter. It’s not necessarily indicative for what’s going on for the full year business transient. So we don’t read through too much the general industry. The other is what we’re - we have witnessed is actually our special corporate accounts have increased but at a number of the special corporate just their production is down. So IPO I have seen still becoming or may have added just their level of activity that they are producing has been chive our expectation, so they are coming, sometimes they are paying the rate but the production of up selling of our best customers is down.

I guess what I was asking Mark was, is it more business service companies, consulting companies, technology companies, healthcare companies, that’s what I was trying to get a sense, if you are able to know that or all?

I think especially based on the Q1 and based on the segmentation get from operators, it would be hard to give you precise numbers on that kind of segmentation by type of special corporate account if you will.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Smedes Rose from Citi. Your line is now open.

Hi, thanks. I just wanted to ask you the - as you introduced the new and renovated rooms at the Marriott Chicago, what sort of premiums are you getting to your regular rate?

Sure, Smedes, this is Rob. Last year when we did the original 140 rooms, we were able to generate a premium between $30 and $50 throughout the year based on the seasonality. The rooms came back, the first even rooms without 460 that came back during the first week of March and the last rooms came back on the April 15. So again it’s still early to tell on this year’s approach. But we expect premium pricing for rooms as we go into to stronger parts of the year.

Okay. I mean do you think it could still be in that same range or given that there is more available, would you expect it to dissipate a little bit?

Probably a little bit less - between $25 and $30.

Okay, right, that’s was it. Thank you.

Thank you. Our next question comes from Bill Crow from Raymond James. Your line is now open.

Hey, good morning, guys. Question about Key West and I am thinking you addressed it early but both hotels showed negative RevPAR growth, what’s going on with the market fears over zika virus anything else that we should be aware of?

I’ll start on the Key West and then turn it to specific hotels for Rob to comment. But you know Key West market, it’s a great market because more this year and is it flat but what we’ve seen is there is some volatility because people have taken - market people have taken a bunch of the older products, taken them out and then they reintroduced them, that’s create some volatility in what kind of supply if you will. Right now we are experiencing that there is a full factor hotels that high gated purchase that we are taking offline, completed renovated and now coming back online. And so I think there is some absorption there. And then we think will happen over next couple of quarters and we get back to the kind of the regular trend line. Now we do own two hotels that had the particular things going on, so I’ll let Rob expand on that.

At the Key West, we have put in the new manager in the late September and so the management transition continues there. We are actually making great strides. We are really pleased to see that. We’ve been able to increase our occupancy by 220 basis points for the quarter to 96.5%. But I think from a rate perspective, we had to take quite a bit of OTA there because the coverage will be there upon the transition. So let’s the new management team continues to market the hotel and the fact I think some of the best marketing that we have out there in keywest.com not to do, probably. It’s fantastic going to have their reposition in hotel for the transient customer. But we really believe as we go forward here and it’s probably going to start in June. We will be less focused on the OTA, we’re going to be driving higher rated direct channel bookings and we feel very confident about that. As Mark said, the fore pack representing the 500 rooms really had a bit on an impact from a REIT perspective to the market, but we really do believe that will be absorbed shortly. And then last but not least in Key West, we have a new general manager that started there who brings a wealth experience to the team and we feel strongly that impact will be nearly realized. So we are feeling very, very good about that hotel. From the share and suite perspective, the teams done a great job remixing the mix, generating higher transient rated business as compared to the reward redemption business and that’s allowed us to capture addition revenue in our outlets parking and resort fees. Just as a side, resort fees for the quarter were up 40% as we focused here, the assurance in the Key West are two hotels have been significant providers to that growth.

It’s Sean. I want to add real quick, both those hotels there, the fact that their new supply was coming back was all factor into our underwriting. Both of those hotels are actually trending about 10% ahead of our underwriting on a bottom line. And so it’s just a matter of how we thought through the market, this was factors into our underwriting.

Alright and then one other asset specific question, my history for incidence RIET goes to prime hospitals days through the years and just been lot more disappointment then positive surprises. I know you got a lift from the renovation but RevPAR is down this quarter, strong leisure demand quarter. Is the core holding, what’s going there?

Yeah, I’ll answer that. We - I think see our expectations for the quarter if you look at the bottom line, the margin growth there, rightly really did a terrific job. There were some issues in the way we layered in the group, last year they created some versus this year, but overall we are actually pleased with how the first quarter played out for incidence we’ve been - and actually at the second quarter I think we’ll - is starting off on a relative strong foot. As far as a core holding, where we own this hotel in five years, I would say it’s less likely the more likely given the volatility and seasonality of the kind of asset of fly to only market, you know just have some inherent issues in a way trying to get consistent earnings, so it could be uptick or could be downtick on the weather which isn’t initially ideal for public company. The market as we seen in the Caribbean, it goes hot and cold very quickly. We are going to wait for - one we’ve been waiting to maximize profitability and you’ve seen revenues and EB ITDA grow pretty substantially in the last three years at this hotel. Still we’ve been waiting a little bit to get that EBITDA backup to where we think it should be. And then we’re getting some of the markets we’ve talked, we regularly talk to the brokers that are experts in the Caribbean market. Based on those conversations as recently two months ago, it doesn’t feel like the ideal time to monetize the asset, we certainly don’t want to sell it below what we think it’s worth. So we are going to continue to watch it. If there a good opportunity to monetize the asset in the Caribbean, we think we can get decent pricing for it. We are going to do that. I think the reason you have, you must be more proactive on that front for last couple year unless we sell the upside in both the revenue and the EBITDA there that we want to get there. We are now have that point and we’ll just continue to watch the market.

Thanks.

Thank you. And I am showing no further questions from our phone line. I would now like to turn the conference back over to Mark Brugger for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.