Good day, ladies and gentlemen, and welcome to Second Quarter 2016 DiamondRock Hospitality Company's Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Brett Stewart. Sir, you may begin.

Thank you, Chelsea. Good morning, everyone, and welcome to DiamondRock's second 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 facts. 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 discuss the company’s second quarter results and strategic activities as well as provide an update on the company’s outlook for the balance of the year. Sean will then provide greater detail on our second 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 us. Let me start by highlighting that with the completion of our recent dispositions as well as the refinancings earlier this year, we have successfully executed on our strategic objective for 2016 to build over $450 million of liquidity. This positions DiamondRock well to the opportunistic going forward. Turning to our operating results for the second quarter, we implemented defensive revenue management initiatives that drove a 1.7 percentage point market share gain for the DiamondRock portfolio. More importantly, our team working with their operators, achieved an all-time record profit margin of nearly 36% as a result of tight cost controls. The success with our cost containment initiatives has substantially mitigated the impact from softening transient demand trends. F&B was a particularly bright spot in the quarter with the portfolio delivering better-than-expected profit margin growth of 87 basis points. As I mentioned, we are seeing mixed signals on demand was slightly softer transient demand for 2016 than anticipated on our last call. Given the latest economic indicators, this is not surprising. Second quarter GDP growth came in less than half of consensus expectations at an anemic 1.2% and corporate spending decreased 2.2%. The second quarter is also likely to mark the sixth consecutive quarter of declining revenues for Fortune 500 companies. The positives remain consistent, elevated consumer sentiment, and low unemployment as confirmed by this morning’s staff report. Focusing on lodging fundamentals, uncertainty and volatility remain keep themes. Year-to-date, RevPAR growth for the industry was 3.1% and our outlook for the back half of the year is for the industry to be at similar levels. In the second quarter, RevPAR for the industry grew 3.5% and the top 25 markets grew only 2.5%. In the quarter, top markets in the U.S.…

Thanks, Mark. Before discussing our second quarter results, please note that our comparable RevPAR hotel adjusted EBITDA margin and other portfolio statistics are presented to include the Shorebreak hotel and Sheraton Suites Key West, and exclude the three sold hotels for all periods presented. Our hotels performed in line with expectations in the second quarter. Despite the lack of group activity and a difficult New York City market, our hotels gained 170 basis points of market share during the quarter. Second quarter RevPAR growth of 0.8% was driven by a 1.2 percentage point increase in occupancy, partially offset by a 0.6% decline in average rate. Consistent with the overall industry, second quarter RevPAR was uneven with 0.8% growth in April, 2.5% contraction in May and 4.1% growth in June. Our asset management initiatives drove a solid 57.4% profit flow through in the quarter. Our asset managers were able to work with our operators to limit the increase in quarterly operating costs to less than 1%, which resulted in hotel adjusted EBITDA margin expansion of 11 basis points. Let me now spend a couple of minutes discussing our transient and group segments. Second quarter total transient revenues were flat, as a result of a 2% decline in rates offset by approximately 2% increase in demand. However, transient was impacted by softness in both the Chicago and New York markets. Excluding these two markets, second quarter transient revenues increased 3.5%, which was in line with our expectations. As expected, our group segment was challenged this quarter. Second quarter group revenue declined 1.2% as a result of a 2.5% decline in demand, partially offset by a 1.3% increase in average rates. Citywide activity during the quarter was light in Chicago, which experienced a 9.8% decline in group revenue. It is important to note…

Thanks, Sean. Before we open up the call for questions, I would like to spend a few minutes discussing our current outlook for the remainder of 2016. As previously discussed, we are operating in an environment of continued uncertainty and increased risk with forward bookings. As a result, we are more cautious about industry fundamentals at this point than we were earlier in the year. Our caution is derived from a combination of the softness in transient segment as well as supply impacts in a few markets. Although short-term group has showed some hesitancy, we do expect group business to gain momentum in the second half of the year but not enough to fully compensate for the softer transient demand trend. As a result, we are now forecasting lower overall travel demand for the rest of the year. To reflect these current market conditions, we have reduced our top line expectations and now forecast our comparable 2016 RevPAR growth to be flat to up 1% for the full year. However, we have exceeded our original expectations on cost controls and believe that we can flow more revenue to the bottom line. The team has really stepped up. Based on the full implementation of our cost containment initiatives, we expect to substantially offset the impact from lower revenue growth. As a result, we are maintaining our full year 2016 adjusted EBITDA and adjusted FFO guidance, except as to reflect the impact from our recent asset sales. For the full year 2016, we now expect $250 million to $263 million of adjusted EBITDA and $0.99 to $1.04 per share of adjusted FFO. To sum up, we remain cautious on industry fundamentals and are adapting the business plans at our hotels to adjust for this environment. Even so, DiamondRock has executed on its strategy to build $450 million of liquidity and is focused on creating shareholder value through opportunistic capital allocation. With that, we would now be happy to answer any questions you may have.

[Operator Instructions]. Our first question comes from the line of Ryan Meliker with Canaccord Genuity. Your line is now open.

Hi. Good morning, guys. Thanks for taking my questions. I just had a couple of things. Number one and I probably sound like a – every earnings call it seems like I ask this, but I got to ask, Rob, another great quarter on margins. You guys have been able to maintain full year EBITDA and FFO guidance on lower RevPAR growth. What are the expectations for the back half of the year? And are you going to really have some substantial margin headwinds next year?

Ryan, we’re really – as Mark said in his prepared remarks, we remain committed to furthering our margin expansion and we have not broken the glass yet, so we still feel very confident in all of our initiatives. For example, we just added gestation [ph] fee at the Westin San Diego. That was – just for the month of June was 31,000. We believe that’s going to a $75,000 initiative on a full year basis. Our productivity improved by 2.8% and as we continue to utilize our various labor management systems and assessing our operations, we still believe this opportunity is there. And an item like at the Gwen, for example, we’re looking to reduce our [indiscernible] and chilled water costs by $100,000 and we’re looking to do a combination with our Chicago Marriott to do a partnership with them. So we think there’s opportunities throughout the portfolio that we really believe in. And last but not least, really when we look at ROI investments, at the Chicago Marriott, we just replaced three large 1970 air boilers with 14-small variable one [ph], we’re going to save over $150,000 a year from those efficiencies. So when we look throughout the portfolio, we believe there’s more to happen in the future.

Okay. So it sounds like there’s still more to come. That’s exciting. Second question I have is with regards to RevPAR guidance. Your year-to-date RevPAR is down 0.7%. Obviously, it was a tough first quarter. But second quarter wasn’t exactly stellar, up 0.8 but your guidance for the back half I guess implies close to 1% to 3% growth. Can you just walk us through what gives you confidence that you’re going to see that type of acceleration in the back half of the year, given all the macro color that Mark, you talked about?

Sure, Ryan, you’re right on the back half that roughly 1% to 2.5% RevPAR growth is implied within our guidance. I think when you look at our market concentration for the back half of the year, we do expect obviously positive RevPAR. We think Chicago and group, specifically, get better in the back half of the year and we expect those to outpace the market. Our group pace for the back half of the year in Chicago is up 9%, it’s up 3.4% for the entire portfolio. And so that level of group base gives us comfort that we should generate positive RevPAR for the back half of the year.

Okay, that’s helpful. And then just the last question I had, had to do with share buybacks. I noticed you guys didn’t buy back any more stock and Sean even spoke about it a little earlier. The stock, it seems like it represented some opportunities throughout the second quarter. Did it not in your opinion or did it never reach a level that you guys would have been comfortable buying back stock, or was it that it never reached a level at a time where you felt comfortable with the disposition proceeds coming in?

Yes, Ryan, this is Mark. I guess there’s a lot of things going on in consideration on the share buyback. One is, we just got the disposition proceeds in about a month ago and until they close, you never have a 100% in certainty. So I’d say that’s one factor. We continue to watch the markets. It’s obviously the number one discussion with the Board. I think we want to be flexible and opportunistic. With Brexit, I think there was some uncertainty and we wanted to see how that played out on the stock price. So we’re continuing to monitor, we’re continuing to have discussion in the boardroom. We’re trying to be very thoughtful about deploying our investment capacity.

Got you. So it’s not necessarily that the stock never reached an opportunistic level for you, it’s more that you might have thought it might have gotten to a more opportunistic level following Brexit or that you didn’t have the proceeds in massive sales and you weren’t ready to deploy that capital until it came in, is that fair?

Yes, I would say we continue dialogue with the Board and all those things are factors that go into it. It’s not that we don’t think that it’s a great value, we just want to make sure we’re being very thoughtful about the movements in the marketplace.

Okay, that’s helpful. That’s it for me. Thanks, guys.

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Your line is now open.

Hi. Good morning, guys. So a couple of questions here. First, I sort of want a comprehensive view on group business, maybe not just for DiamondRock’s portfolio because it is concentrated in a couple of really big chunky assets but maybe for the industry at large? It does sound like the back half of '16 is a little bit worse than expected, but everybody sort of consistently says that '17 continues to look pretty strong. So my question here is, would you say that that pattern of behavior indicates that corporate clients are simply trying to make numbers, so to speak, for '16 and then the clock resets on Jan 1, or do you think there’s something – given the uptick in attrition rates and so forth that you mentioned that there is something more fundamental at play there?

Rich, this is Mark. I think there’s – it’s a complicated question. I think there’s a number of currents going on here. On the national trend, while we can see the funnel through our conversations with some of the largest operators in the country is that the short-term funnel and clearly the decisions made in the quarter for the quarter, we are seeing kind of corporate America and a lot of associations not as confident in this moment in time in booking some of that business. So we’ve seen a little uptick in the cancellation on attrition and we see more hesitancy there. There seems to be some conviction – and I’ll probably speak more about our particular markets and our portfolio that we have better citywides in '17, so that’s definitely influencing what’s going on in a number of these markets. And I think people are still – their long-range plans remain intact for the base level meeting that they have to have. But ones that are more optional tend to be the short-term ones. And so those are the ones that we’ve seen have the increased hesitancy on.

Okay, that is helpful color. And then my second final question here just concerns further asset sales in New York City potentially. I think that last quarter you guys said the reverse inquiry was still pretty strong. Just curious if that has held up quarter-over-quarter? And then also, if you don’t mind, give us your estimate of how many assets are on the market currently? We’ve heard anywhere ranging from 30 to 50, so let’s say several dozen. So it would be a very competitive market to sell assets it seems, but just what you’re seeing in general would be very helpful?

Sure. So on our individual – I’ll give you our particular color which we recently sold Hilton Garden Inn Chelsea. We had very good interest in the asset. We had a lot of unique foreign buyers that were interested in reviewing and looking at the asset. So we were very encouraged that there was actually more capital than maybe we would have first predicted to look at that particular asset. As far as reverse inquiries and looking at more asset sales, I think we are comfortable that we have a lot of liquidity at the moment. I think if we got – obviously anything’s for sale for the right price. But unless we got a really full price on an asset, we’re not looking to build more cash than we currently have. On the Manhattan market overall, we obviously stay very close to what’s on the market and what the brokers have in the market. I think there’s a lot of people that are testing the water in New York. So officially there’s probably somewhere between 25 and 30 hotels on the market, there’s probably more that are available and being whispered about. But based on what we’re seeing there’s – a lot of those aren’t going to trade. People still fund them and really believe in the real estate value in New York. While there will be some competition, there’s not enough liquidity to sell 50 hotels in New York at a good price. So my guess is, there will be some deals that clear but it’s going to be a small percentage of what’s on the market. And it’s a lot about price discovery and folks out there that will market and sell it, they get a very full price from a unique buyer but otherwise they’re inclined to hold their assets in New York.

All right. Thanks, Mark.

Thank you. Our next question comes from the line of David Loeb with Baird. Your line is now open.

Good morning. Mark, I appreciate your candor in the prepared remarks about markets and your answer to Ryan’s question. I just want to drill a little deeper. Conservatism is in these days and most other hotel REITs have cut their guidance pretty significantly both top line and EBITDA and FFO. You guys only adjusted the EBITDA and FFO for the dispositions and really left the rest of those numbers intact in the face of the relatively dramatic decrease in RevPAR. Can you just talk a little bit about that? Was it enough? Do you feel like you’re being conservative enough or were you really more ahead of the curve? What’s really behind the decision to leave the guidance alone except for the dispositions?

Sure, David, that’s a good question. So I’d say the first half play out similar to we expected in delivering towards our full year EBITDA and FFO guidance. So with those two quarters we obviously know what they are in predicting the full year. As we look forward it’s probably a combination of two things. One, we probably risk-assessed our initial guidance maybe a little more than some other folks in this space, to that place but really it’s the cost containment efforts. We saw much more success on a number of initiatives that we put in place earlier this year that were coming out and we have more confidence in the ability to implement and succeed on these cost containment initiatives than we did at the start of the year. So it gives us confidence that the range that we have out there is achievable.

Okay. And one specific market question, maybe this is for Rob. What’s going on in Key West? We saw the RevPAR drop, it looks like profits were actually up because of apparently excellent cost control at the Sheraton, but what are the trends there and what are you concerns for the next year or so there?

Sure. David, the introduction of the four pack came on throughout the first two quarters of the year. And so as that’s being reintroduced to the marketplace that’s creating some impact on just being absorbed. We account for that in our underwriting for the end of Key West and we have just changed on our revenue management personnel, we have a non-island person there now and we feel very – we’re seeing a positive effect from that change.

David, I’ll just – Key West is a market that we still – it’s still one of our favorite markets. On the north end of the island there is four hotels that were renovated and came back in. We think that they’re getting absorbed fairly rapidly but has some impact in the Key West. We have a transition revenue manager there too, but we feel very good about the future of that asset. On the Sheraton Suites, we’ve actually exceeded our expectations on some of the cost initiatives there and the resort initiative at that hotel. So while the RevPAR may be a little bit more challenging than we actually anticipated, the bottom line is it’s actually slightly ahead of our underwriting expectations.

And I’m getting asked, so I feel like I need to ask. Any concerns about Zika in any of your properties and the reefs in Southern Florida, any change in the activity?

Yes, it’s a great question. Obviously there is recent headline news about the warning in Miami. So far and we obviously have that on the radar screen and there’s constant dialogue with our operators, we haven’t seen any material impact of even really an anecdotal impact at our hotels in Florida or in the Virgin Islands. In fact, there’s probably some markets that people are more concerned about in the Caribbean that benefits other islands. So no, we’re not currently seeing it but we’re monitoring it very closely. But as of now, we’re not seeing any impact.

Great. Thank you.

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

Hi. Good morning, guys. I want to ask about going back to the guidance and I guess given how the second quarter ultimately unfolded with uptick in cancellations and a little bit less in the quarter, how did you kind of haircut what you’ve got on the books for the second half when thinking about guidance?

Sure, Chris. So what is implied within our guidance is less pickup from group than we picked up last year. And so we expect the – the group expects anywhere from 2% to 5% or 6% last pickup this year than was there last year. And so we think we’ve got an appropriate job of haircutting what in the quarter, for the quarter group pickup is going to be for group.

Okay, very good. And then just to revisit the asset sale question, some of your suburban assets are actually kind of the top performers year-to-date, but we think that pricing on those isn’t always as strong or demand’s not always as strong. But longer term and I hear your comment about not wanting or needing any more liquidity, but how do you view still maybe the five lowest RevPAR assets in the portfolio?

Chris, great question. I think we really like all of our 26 hotels that we have now. We’ll constantly look at the bottom 10% to 20% and quality and think about monetizing those as we move forward. I don’t think that this is the optimal time necessarily to do that given where the market is to maximize value for our shareholders. But again, everything’s for sale at the right price. But right now, sitting on $450 million of capacity dispositions on our top strategic priority.

Okay, got it, very good. Thanks.

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

Hi. Good morning, guys. A question on York. How are your hotels preparing for the closure of the Waldorf next year? Is Lex maybe booking some new group activity or are you trying getting more corporate contracts in? And how should that impact that overall market for you guys?

Good morning, Anthony. With the Lexington we’re very excited about the Waldorf closing in the second quarter. One of the things that we’re doing right now is – and the property was just reintroduced into the market in April, and so that’s being absorbed. But as we look at, we’ve added 3,000 square feet of meeting space. We converted a Chinese restaurant into a meeting space and so we’re looking to further group up. And we’re working to further drive additional accounts in terms of airline contract as well as business transient. We believe there’s more in the market that can be secured as the Waldorf comes out.

All right, great. That’s it for me. Thank you.

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

Hi. Good morning. I know you guys have talked a lot about getting some of your markets, like New York City down to 10% and you’re being thoughtful about allocation today. But are there any markets over time that you’d like to increase your portfolio allocation to?

Yes, so that’s a great question. We’re big believers in a diversified portfolio. There’s a number of markets that we have either small exposure. We’d like to have greater exposure. I think we’d like to limit our portfolio to 10% in any one market just because we believe that markets obviously move in different ways at times even if they’re top markets over an extended period of time. So we’re not Seattle right now. That would be a market that we’d be interested. The Pacific Northwest generally, a number of the West Coast markets, we’re pretty bullish on DC over the next several years. We really like resorts, experiential resorts and drive two markets is another area that we think is good to expand into. So I would say that’s the short list.

Thanks for the detail. So the Fort Lauderdale Westin has really been a strong hotel performer for you. As you start to lapse some of the initial cost reductions and more difficult top line growth in just comps in general, what’s the opportunity moving forward there? And to the extent that you do see transient business start to soften from some of the headlines, what would be sort of the strategy for locking in future business?

Sure. So opportunity at the Fort Lauderdale Westin, so we’re going to soon embark on a restaurant renovation there and a complete repositioning of lobby in the restaurant space. So we think that we could further enhance our penetration in our food and beverage operation. And from a sales and marketing perspective, we really are focusing in on appropriately pricing our asset, which we’ve done well. This year we had 10% ADR growth both in Q1 and Q2. We’ve been able to move the occupancy up quite a bit. And as Sean spoke about earlier, looking from our learnings in 2015 we’ve been able to further penetrate the market and just discuss what opportunities are out there. So we believe there’s more to be had in this hotel. Our operator has done a phenomenon job and just really pleased with the outcome.

And then I guess last one for me, I don’t know if you touched on it, where did you see a lot of the uptick in cancellations this quarter for – you mentioned an uptick I think in your prepared remarks?

Sure, Austin. We saw it at the Boston Westin, Salt Lake City, San Diego and Worthington, so our sort of big group hotels is where the majority of the uptick in the cancellation activity was, which was not frankly a surprising trend for us. That started last quarter and continued into this quarter, but that’s the hotels where it was most impactful.

And Austin, one of the items in Boston was the fact that the Boston Grand Prix that was supposed to occur over Labor Day Weekend was cancelled.

Great. Thanks for taking the questions.

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

Hi. I just wanted to follow up on – you mentioned the uptick in group cancellations. So also any kind of particular sub-factors of the economy that you’re seeing more cancellations and is it finance related or et cetera, if you’re able to tell?

Yes. Smedes, this is Mark. So we have anecdotal data. We’re looking obviously across the portfolios. Financials are obviously under – they’ve been under stress and continue to be under stress. But it’s pretty broad based across the industries and associations. And again, while the percentages are increasing it’s not an enormous amount of absolute dollars in these cancellations. But I would say the hesitancy is pretty much broad based among corporate America.

And Smedes, interestingly, the offset to that is even thought cancellations are up, our group spend is also up within the portfolio which seems to go count it about a little bit. To Rob’s point, I think the Grand Prix segment, cancellation is up but that was a unique event in Boston but there’s no one segment that we are more nervous about than others.

Okay, great.

The other fact, sorry, it’s probably worth mentioning is our 17 group paces I mentioned in my prepared remarks is very strong. It’s up over 5%, particularly our hotels and the Chicago Marriott and the Boston Westin are both up dramatically. Chicago is up 6%, Boston’s up 11% in pace for next year with over 50% of the business on the books. And so our overall group outlook is strong. And even in 2018, which I know is very forward looking in our Chicago Marriott, our pace is up over 40%. And so we feel good about group segment within our portfolio and the industry.

Okay. Thank you. And I just wanted to ask you specifically a little more color just on the Times Square submarket in New York, how is the Hilton Garden Inn there sort of holding up relative to competitors, and if you maybe have the RevPAR index? And just maybe your thoughts on that submarket in general, as new supply continues to open there.

So, Smedes, the Times Square market track was down 2.8% for the quarter, we were down 7.7% at Times Square. As you know, it’s an overall very challenging market. We’ve seen the softening in our international demand. There we’re down about 100 basis points in the international business. But it’s really a focus on how we price on Tuesday, Wednesday for corporate business and then on the weekends, we’ve just been challenged in how we’re pricing on the weekends given the amount of new supply coming in.

All right. That’s it for me. Thank you, guys.

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

Good morning. How is July RevPAR tracking and how are you thinking about the cadence of 3Q and 4Q? Thank you.

Sure. Thanks, Thomas. Our July RevPAR was slightly negative which was not surprising to us and consistent with the industry. We expect from a cadence perspective August and September to both get better, September being stronger than August but both in low single digit range.

And so the expectation is 4Q is going to be better than 3Q or pretty even?

Pretty even but not one dramatic shift between quarters.

Okay, great. And then can you just give us an update on your views on kind of the hotel brands direct booking push, and if you’re seeing any shift in OTA? Thanks.

Sure, Thomas. We have – it’s just a little too early to tell but we have seen a shift in our TA commissions. They were down 4%, which really equates to the fact that we’re seeing a little bit less OTA in our portfolio.

Thomas, this is Mark. I would just say we were very supportive of the brands initiatives in these efforts to channel shift. We think long term that’s absolutely the right way to go.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Your line is now open.

Hi. Good morning, guys. Two main questions. The first is I guess just big picture as you guys think about the cost control initiatives you’ve been very successfully able to put into place. There’s sort of kind of different levels of contingency based on probably what you guys are seeing on the top line and I’m curious to get a sense, and this is probably a theoretical question more than an actual kind of hard answer you can give, but what inning or what level of alert are you guys on at the hotel level to try and gain some of these – put into place some of the larger initiatives? Are you kind of starting to reach into the playbook that you had back from prior downturns or are these more things that you would consider efficiencies at this point?

Good morning. This is Mark. We’re defcon [ph] level in that. We’re putting in mostly efficiencies and opportunities and trying to be innovative. We haven’t gone to what I’d call the break the glass scenario Rob referred to earlier where we’re holding open positions and we’re trying to fundamentally shift the labor models or things that impact the guest experience. Those kind of cost initiatives which we did implement the last downturn we haven’t approached this yet, we don’t think it’s appropriate yet. But clearly we have those plans here and we can enact them if things got softer than where we are.

Okay, that’s helpful, Mark. And then the other question I have is a little bit more specific and I appreciate the color reading too much into a single quarter of margin performance is dangerous. But as we see the magnitude of margins declined in a couple of the New York City hotels, is that indicative of just how tough that market is when it comes to cost rising on the weak RevPAR, or are these things that you could probably begin to [indiscernible] that again for some of the initiatives as the year goes on?

Yes, I would say there are opportunities and we’re working on a number of opportunities but in New York, particularly with the union hotels, there are significant fixed costs that you need to deal with that in a weak environment create more pressure on the profit margins. So in New York if you look at the fixed cost, like property tax, they’re relatively high as a percentage. Obviously those can be tough to reduce in the short term because they’re viewed on kind of a rolling average the way they’re calculated. So it’s a challenging market to reduce costs but we do see opportunity and we are working on a number of initiatives at those hotels.

Great. Thank you very much.

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

Good morning, guys. I just wanted to circle back on a few items. Just concerning group business, I wanted Rob’s perspective about how do you reconcile the strength and the group pace that we’re seeing for 2017 and beyond, not just with you guys but other folk versus that weakness that we’re seeing in the shorter-term numbers for both group and transient on the corporate side? I’m just curious, does your experience tell you that the short-term trends are sort of the canary in the coal mine for perhaps a more frankly bleak future or does it tell you that maybe to take a more opportunistic view that the longer term bookings are more indicative of the environment and the shorter term weakness is simply a response maybe to like current events and election uncertainties and things like that?

So, Jeff, I agree with you on your latter point there. As we look at 2017 bookings, the fact that they increased in the quarter for 2017 is a very good sign for us and we believe that there’s more to be had. Our Boston Westin is pacing up double digits for 2017, Chicago Marriott in high single digits, San Diego Westin’s high single digits, DC Westin’s high double digits and JW Cherry Creek is high double digits as well. So we believe that there’s a positive outlook on that side of it for '17 and just the short term as companies are holding back even corporate profits.

Okay. Thanks. And then I guess for Mark, how specifically are you determining when the right movement is to use liquidity to buy assets or buy stock? Is it multiple, is it price per key? I ask this because it’s my impression that a lot of hotel executives out there are – they sort of look at the last one or two cycles and people just want to avoid or I should say they try to aim for sort of bottom picking the stocks on repurchases or trying to buy at a very low price per key. I’m just curious how much maybe sort of those past cycles are influencing you or kind of how you’re looking at when you decide to strike?

Jeff, it’s a great question. It’s the number one strategic question in conversation we’re having in the boardroom. I think it’s a complement of a lot of different factors in trying to make the decision. The stuff today we believe is cheap. It’s just trying to make sure that we’re being – I think liquidity too is probably more precious than it has been in the last few years. So I think we view our liquidity as very valuable and we just want to be very thoughtful about deploying it. It’s not that we don’t think the stock is inexpensive right now, because we do. It’s just trying to make sure with all the macro things that are going on right now that we’re being very deliberate in putting out that dry powder. There’s no magic. We haven’t said there’s a magic – obviously we have views on where we buy the stock but I’ll tell you it’s flexible because things are moving so quickly in the overall environment.

So when you say you’re not looking to build more cash or liquidity than you currently have, does that imply that you’re also content with your leverage metrics where they’re at now as well I guess? And if that’s the case, should we conclude that excess cash flow I guess from operations would like go to share repurchases?

I guess there’s a couple of ways to look at that, Jeff. So where we said that we think we’ll end the year about 2.7 times debt to EBITDA, that’s below our target range and we think we have $450 million of capacity to still be within our targeted debt leverage range. So we feel like we’re in very good shape and certainly don’t need to go lower than that to be very comfortable in any environment. So I think we’re sitting there. On dispositions, I’m not sure it’s an ideal time to sell more unless we get special pricing and that could happen. But we are sitting on what we think is very significant capacity right now. Does that make sense?

Yes. I guess I’m just thinking a little bit, come 2017 if you already have a lot of capacity within your leverage targets and just thinking you are ideally going to be producing some cash flow in 2017? I’m not sure if that’s earmarked for more renovations or if that’s money albeit somewhat small relative to the portfolio could potentially be sort of tricked into the stock. I’m just curious how you’re thinking about that?

Jeff, when we look at our leverage targets, we obviously look at it over an extended period of time which also factors in future CapEx and future operating cash and flows. And so the $450 million of capacity that we talk about on the call really is inclusive of an assumed operating environment for the next five years. And so it’s kind of already baked in.

Okay. Thank you.

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

Great. Thanks. I got to go deep into my list of questions here. I just found it interesting that management fees were down for the quarter but franchise fees were up 10%. It just seems like going in different directions and maybe it’s just a one quarter, maybe it’s the asset sales, anything that explains that.

Bill, this is Sean. The big driver there is our Chicago Marriott incentive management fees where the contract was amended in conjunction with agreeing to do the capital expenditure project there, and so that has a pretty material impact on our overall fees for the portfolio. There are a couple unique items as well going into the franchise fees as well. We had a couple $100,000 credit that was booked last year at the Vail Marriott, which impacts the year-over-year comparability of those hotels, as well as the fact that we have franchise hotels today than we would have had last year. And so it’s a bunch of moving pieces.

Yes. Thanks, Sean. One follow-up question on the direct bookings. Your occupancy was up and rate was down, which is a little contrary to what we’re seeing with the industry and other peers. Does that reflect more the direct booking business or is that just a compilation of 26 hotels doing different things?

No, I don’t think the direct bookings have any material impact. We make conclusions probably more about the markets and it’s more about our defensive revenue strategies that we’re initiating in a number of our hotels.

All right. That’s it for me. Thanks.

Thanks, Bill.

Thank you. Our last question comes from the line of Lukas Hartwich with Green Street Advisors. Your line is now open.

Thank you. Hi, guys. Can you just give us an update on the environment for take-private activity?

That’s a loaded question. Sure, Lukas. There are – for the take-private, obviously the debt markets have improved. We don’t comment on marketing in own company or activity that we’re exploring in the M&A space, but clearly the debt markets have improved. But on the activity, there’s not a lot of activity that we’ve heard about in the marketplace that’s occurring right now.

Fair enough. And can you remind us what the renovation impact is on the second quarter and for the full year?

There’s very little renovation activity for the second quarter, Lukas. We have – renovations that we do have planned for the back half of the year, which is mostly Worthington is the most significant one. There’s enough seasonality in that market where we don’t see a huge amount of impact.

Great. That’s it for me. Thanks.

Thanks, Lukas.

Thank you. I’m showing no further questions at this time. I would now like to turn the call back to Mr. Mark Brugger for closing remarks.

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

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.