Good day, ladies and gentlemen, and thank you for standing by. Welcome to DiamondRock Hospitality Company Q3 2016 Earnings Conference Call. 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, this conference is being recorded. I would now like to introduce your host for today's presentation, Mr. Brett Stewart. Sir, please begin.

Thank you, operator. Good morning, everyone, and welcome to DiamondRock's third 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 risks 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 and Troy Furbay, our Chief Investment Officer. This morning, Mark will discuss the company’s third 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 third 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 on the call today. I know this is a big Newsday with election results. So we appreciate you tuning in. The policy change that will rise from the election and impact our business will take some time to emerge. With that said is our sincerest hope that our newly elected leader will exercise wisdom and restraint in governing over our country. For DiamondRock I would like to begin by saying that we're pleased with our portfolio's results in the third quarter in light of moderating business transient demand. While the macroeconomic economic data remains mixed, we expect lodging fundamentals to continue to be softer in the near-term with business transient demand flowing and supply, while still low across the country creeping up in many of the top 25 markets. In fact in the third quarter, hotel demand and supply growth hit a point of equilibrium both at 1.6%. Turing to DiamondRock's performance in the third quarter our portfolio performed well given the overall operating environment. The portfolio gained 2.1 percentage points of market share in the quarter against a competitive set, demonstrating the success of our defensive revenue management strategies. As importantly the company achieved record third quarter profit margins as implementation of tight cost controls allowed us to grow EBITDA margins by 23 basis points on a less than 1% growth in RevPAR. Furthermore the biggest testament to the success of our cost control initiative is that year-to-date through the third quarter, our portfolio's total operating expense growth was essentially zero, a terrific result. Additionally F&B was clearly a bright spot for us in the third quarter. F&B revenues increased over 9% and F&B margins were up over 300 basis points. F&B profit flow-through was healthy and exceeded…

Thanks Mark. Before discussing our third-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 hotels sold earlier this year for all periods presented. Our hotels performed in line with expectations in the third quarter gaining 210 basis points of market share despite challenging business transient fundamentals, a difficult New York City market and renovation disruption at our Worthington Renaissance. The third quarter RevPAR growth of 0.8% was driven by a 0.6 percentage point increase in occupancy and a slight increase in average rates. It is worth noting that our total revenue growth of 2.8% exceeded our RevPAR growth as a result of the 9.2% growth in food and beverage revenues and a 7.8% increase in other revenues. Consistent with the overall industry our third quarter RevPAR was uneven with 1.5% contraction in July and 1.6% and 2.2% growth in August and September respectively. The month of September benefited from the shift of the Jewish holidays into October. Our asset management initiatives drove a solid 52.9% profit flow-through in the quarter. Our asset managers were able to work with our operators to limit the increase in third quarter operating cost to approximately 1.5%, which resulted in hotel adjusted EBITDA our margin expansion of 23 basis points. For the year-to-date period ended September 30, the company reported comparable RevPAR decline of 0.2%, which was a result of a 0.4% increase in average rate, offset by a 0.5 percentage point decline in occupancy. Despite the RevPAR contraction, margins continue to outperform expectations, with year-to-date hotel adjusted EBITDA margin expanding by 24 basis points. Let me spend a couple of minutes discussing current group trends. Our group segment improved this quarter…

Thanks Sean. Before we open up the call for questions, I would now like to spend a few minutes discussing our outlook for the remainder of 2016. The theme this year has been softer business transient demand, offset by better-than-expected execution of cost controls. As we look forward, we believe that this team will continue. Our team is intensely focused on defensive revenue management strategies and stringent cost controls and these strategies are working well. As a result DiamondRock is able to maintain adjusted EBITDA and adjusted FFO guidance originally provided on February 23 despite a more modest outlook for full year RevPAR growth that resulted from the softer business transient trends. Thus consistent with and unchanged from original guidance, we expect full-year adjusted EBITDA of $250 million to $263 million and adjusted FFO per share of $0.99 to $1.04. Finally before we turn to questions, I would like to touch on our capital allocation strategy. DiamondRock remains committed to creating shareholder value through opportunistic capital allocation. As previously discussed, we strategically disposed off three hotels earlier this year for $275 million in gross proceeds. As John mentioned we're on track to end the year with over $200 million in cash and undrawn corporate revolver and net debt to EBITDA ratio of just 2.7 times. Based on the way we calculate investment capacity this gives us more than $450 million of dry powder to drive future value. We view our balance sheet as a key strategic advantage. We started deploying that capacity in a modest way. As of yesterday we repurchased approximately $6.5 million of common stock at a weighted average price below $9 per share. There are still $143 million of remaining capacity under our current share repurchase program and we plan to be opportunistic about it. In closing while we remain cautious on fundamentals, we are confident that we have the ability to continue to mine value from our portfolio. Our team is focused on key estimates of initiatives to drive bottom line results and lastly, our balance sheet is one of the strongest in the industry and we have significant dry powder to take eventual market inefficiencies. With that we would now be happy to answer any questions that you might have.

[Operator Instructions] Our first question or comment comes from the line of Anthony Powell from Barclays. Your line is open.

Hi; good morning, everyone. A quick question on transactions. You mentioned that you're still slightly above your target EBITDA contribution from New York City. Are you looking to sell assets there or anywhere else in your portfolio?

Hey. Good morning, Anthony. It's Mark. I'll start. We set out the beginning of the year to sell $200 million $300 million of assets to get our balance sheet in the position we wanted to be headed into softer demand trends. We accomplished that goal. We were always opportunistic about selling assets. There always a price certainly we would sell any asset in our portfolio. Right now New York is a tricky market. There still is pretty good demand for hotels, but there is a lot of hotels on the market. We are believers in New York real estate over the extended period. So I think we would be very hesitant to sell for a price that we weren’t excited about. So the answer to question directly, we don't currently have anything actively on the market but we would certainly be opportunistic if we got a good offer in New York City assets.

Got it, thank you. Moving on to Chicago, this year was more difficult on a citywide calendar earlier in the year. How does that look next year for Chicago?

Yeah, the calendar year obviously this year was very difficult particularly the first half of it. 2017 is better with total rooms and city-wide is up about 4.8%, but 2018 is really the next great year in Chicago with citywide rooms tracking up about 20%. Our Chicago Marriott for 2017 is -- the group pace is up about 5% for next year.

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

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

Hey, good morning, guys.

Good morning.

Heck of a day for earnings. And so on that topic really quickly, not to be too casual about it, but now that the world and corporates have achieved some modicum of certainty about the outcome of the election, do you foresee that playing a helpful role in the way business transient demand evolves over the next -- however long?

Rich, that's a great question. I must have to be totally qualified answer it. Our expectation is that the election was causing some hesitancy with corporate investment, but there's going to be some hesitancy postelection until there is some clarity around exactly what policies are going to be pursued and what the priorities are as well as filling out some of the cabinet positions. So there may be a here over the next quarter or two where that becomes -- we gain clarity on that. We did eventually have the election behind us but I think there's still some uncertainty exactly the direction we're going to go on some major policy decisions.

All right, that's helpful, Mark. Then just on the topic of buybacks, there's been an evolution in the way, I think, DiamondRock has considered buybacks relative to the other tools in the toolkit for enhancing shareholder value and how you guys think about NAV and cycle and everything. Just curious for an updated view on the Board's view on where buybacks fit in. And also, more specifically, if you were to fully exhaust the $150 million current authorization, would that still keep you in line with your overall leverage and liquidity goals?

Right. So I guess just a couple parts to that question. The first is the Board is obviously very focused on the share buyback. We have a lot of robust conversations about valuations and often it's going to vary depending on how our outlook for the general economy and for fundamentals are for the next two or three years trying to make sure that we're being thoughtful about what we're going to leverage and what direction the stock might go and trying to make sure we have a good risk assessment on that. As far as the leverage what we've said publicly is that we have $450 million of investment capacity. So if we deployed -- the short answer, is we deployed the $150 million, we still would be very comfortable with our leverage and we think that we have several $100 million on top of that to deploy whether share repurchase or something else and still be comfortable with our leverage levels.

Great, thank you.

Thank you. Our next question or comment comes from the line of Jeff Donnelly from Wells Fargo Securities. Your line is open.

Good morning, guys. Sean, I'm just clarifying on the repurchases, and I might've missed this. Were the share repurchases you discussed only consummated during Q3? Or does that include subsequent to quarter-end, including up to current day.

Jeff, good question. That was -- most of the share repurchase was done subsequent to the quarter and we did very little actually in the third quarter. The vast majority were consummated between October 1 and through market close yesterday.

Okay. I guess just on dispositions, Mark, I think it was last quarter you had said that you guys weren't likely going to be selling additional assets. Just given where your stock is today -- and I know it makes around and you can't be as nimble with sales -- but I guess I'd ask: Why wouldn't you continue to push down the path of exploring sales to extend your balance sheet capacity, but also continue to arbitrage that difference in the stock price versus where your assets are.

Jeff, I think the answer to that is we have a lot of cash now. So I think we would want to start putting that in a fairly way before we built a much larger cash balance. We are actively -- we always look at our assets if we thought we could arbitrage, kind of what we think the value is. Future value and whatsoever we will be willing to pay we would certainly entertain that. But we really like their portfolio. We really like our assets. So I think we're going to be careful about building more cash capacity at this moment and we had a really opportunistic sale.

And just two other questions. One is the Bethesda Marriott Suites; just off-the-cuff, do you know how much of the business of that hotel comes from a better Marriott International.

Jeff, this is Sean, about a little over 10% of the business -- the special corporate business comes from Marriott.

Okay. And then I'm just curious, any ballot measures around the country that you guys were watching that could have a tangible impact on your portfolio? I know that in San Diego, like, Measures C and D failed. I'm just curious if there's others that you guys might've been watching.

Obviously the measures -- that we pay most attention to regarding the wage -- minimum wage loss in various markets, but when we actually dissect the employees at the hotel, very few are at that level or closed to that level. So we don't anticipate that that would be a material impact on our margins.

Okay. Thanks guys.

Thank you, Jeff.

Thank you. Our next question or comment comes from the line of Ryan Meliker from Canaccord Genuity

Hey, guys. I had a couple quick ones. First of all, G&A expense looked like it was a little bit lower this quarter. Anything driving that, that we expect to carry forward? I know on the full year you guys are largely in line with where you were last year, so not sure if that was just a timing issue. But any thoughts there

Sure Ryan. The majority of the variance to last year was the reversal of -- or the forfeiture of equity compensation related to the change out of Senior Management.

Got you. Okay. That's helpful. And then I guess the second question, I was hoping you guys -- and you talked a little bit about this, but maybe it makes sense to summarize or at least give us added color. As we look out to 2017, it seems like you guys might have some tailwinds across your portfolio. You obviously talked a lot about Worthington; you talked a little bit about Chicago. Can you just give us how you guys are looking at some of those tailwinds and what you think the impact to some of those tailwinds might be across your portfolio in 2017?

Sure Ryan, this Mark. I would say overall the outlook for '17 still remains very cloudy, but for DiamondRock specifically we do have -- we do have a number of positives going for us. The Worthington renovation certainly was down 25% RevPAR in a positive market that that comp and the benefit of the renovation should be should be very helpful next year. As we look forward, we have good group pace on a relative basis. It's up 4.3%. We have about 60% of our group business already under contract for next year. We have The Gwen which I spoke about in the prepared remarks, which is still ramping up and we expect to the ramp over the next two years on that assets. Obviously there are some offsets with some of the markets. I would say the other -- the other benefit we should have is that in Chicago which was very difficult in the first half it's a better calendar in Chicago first half of next year and we are doing about half the number of room renovations that we did in Chicago in 2017 versus 2016. So there should be a lot less disruption in that number.

That's helpful. I don't know if you can, but I'm going to ask it anyway. If we just like ballpark assume that RevPAR across all your markets and your comp sets was flat next year, how much do you think those tailwinds would lead you to outperform?

Ryan I think we're just in the -- we're just starting the budgeting process. I would hate to throw a number out there that we haven't really put a lot of thought behind.

Fair enough. I figured I'd ask. Thanks.

You got it.

Thank you. Our next question or comment comes from the line of Thomas Allen - Morgan Stanley

Hey, good morning. Can you just talk a little bit more about Rob leaving and the plans for the asset management team going forward? Thanks.

Good morning, Thomas. Would be happy to address that. So first I would say that operations are going really well at DiamondRock. The same Vice Presidents that were handling the day-to-day asset management remain as committed as ever to producing great results. Additionally the Senior Leadership team here particularly Sean and Troy have really stepped up and embraced the transition. They're doing a great job leading the asset management function on interim basis. As for the search, just to give you an update, we've previously announced we engaged Ferguson, which is a well-known recruiting firm in our field to conduct a nationwide search. And while we're still completing the process, I can say that the caliber of the candidates have surpassed my expectations and we're very confident that we'll find an actual professional to take that seat. But we don't have anything specific to report today, but I do hope to give you an update in the relatively near future.

Thanks. Then just following up on that, you guys have done a very good job maintaining margins this year. As you pointed out, you haven't -- you've maintained guidance throughout the year despite the fact that you've taken down RevPAR guidance by 3.4%, on my calculation, at the midpoint. How are you thinking about that for next year? Thanks.

Thomas I would say on we've we exceeded our expectations and our ability to control cost and there is kind of next year to play out a number of different ways. I think obviously if the market turns in demand accelerates and corporate profits accelerate, it's something led forecasted obviously that's the best scenario B12 revenues to handle -- to handle on the increasing cost. The general rule of thumb is that expenses -- total expenses grow 2% to 3% and you need to 2% to 3% RevPAR growth to maintain margins. If we're in a -- if we do have which I don't think is probably the case is significant downturn, obviously we have a lot of tools that we learn from the last recession that we could utilize to manage margins in a way that we're not yet implementing. The more difficult environment would be if we're just very muted growth it's a little harder to control expenses in that environment. Sean, do you have anything to add?

No Mark. I think you hit it. I think the key takeaway on the cost is that they've outperformed our expectations this year and we've maintained costs flat on a year-to-date basis. Food and beverage has been a big driver of our cost out performance this year where our costs are down about 2.5% in F&B. We would like that to continue into 2017 but that's certainly not our base case.

Helpful. Thank you.

Thank you. Our next question or comment comes from the line of David Loeb from Robert. Your line is open.

Good morning, gentlemen. You've talked about capital allocation from a couple of different perspectives. You got a question about buybacks and a question about dispositions. So let me turn that around and ask: What would get you to look seriously at acquisitions?

Yes David obviously our cost to capital is relatively expensive right now but I'll give you an example of a deal that would still make sense. If you look at the Westin Fort Lauderdale beachfront resort, our primary budget for next year has added in with a 12% un-levered yield on our investment, but that is still -- those kind of ideals would still be attractive in this environment, but they're very, very hard to find.

Okay. Further on the buyback, how do you decide at what price you are willing to execute that buyback?

That is the magic question. We have a lot of debate in the boardroom every time we get together the Board members we have a updated forecast of what we think that the fundamentals are going and probably scenarios as well as where we think the markets are going, but I can tell you it's a very fluid conversation. Everyone believes is consensus that it's a tremendous value at the current level that we've been purchasing the stock. As Sean mentioned the 9.6 times it's actually on the 9.5% NOI yield at the levels we've repurchased the stock. So everyone knows that the value, we're just trying to make sure that we're thoughtful with our liquidity as we reinvested here but everyone is confident this value, but it is a fluid conversation and I think the outlook will change quarter-to-quarter.

Okay. And on a different topic, again for you Mark, you talked at the very beginning of the prepared remarks about the strength at a number of the resorts. What's driving that? Is it leisure? Is it group? And is that coming from your particular outreach sales efforts? Or is it just really good demand for those locations?

The answer is yes. So I would say across the resorts, the resorts generally outperformed. One of the reasons we bought resort is that we really like the trend line. Obviously leisure is more tied to consumer sentiments, which has remained elevated. We like the trend of people who embrace experience with travel. We think that that generally will outperform the market averages over the next five or even 10 years because we think that's a very powerful trend. But in the quarter particularly there was very good group in Frenchman's Reef which helped that particular hotel. So we're seeing good group at the resorts as well as the leisure transient.

And David one quick look at that. The Vail Marriott was also a significant outperform from a quarter which really what across all segments and that hotel really benefited this quarter. One of its closest competitors was shut which was right across the street for the entire third quarter and so we picked up a tremendous amount of market share this quarter at Vail and so Vail and Frenchman's were the two resorts within our portfolio that really outperformed and ultimately drove our results.

Okay, great. That is absolutely it for me. Thank you.

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

Hey, good morning, guys. Thanks for taking my question. Just wanted to revisit the margin commentary quickly. Marriott I think on their call yesterday gave a little bit of view on house profit margins across their portfolio, and made a somewhat cryptic comment about possibly having pulled forward some expense controls at some of their hotels. So my question for you guys is obviously you have a decent amount of exposure to Marriott, now the combined company. Is there anything you know of that was either pulled forward in the expense run rate or anything that might be a headwind as we moved into next year? Or is it more like we've just done a great job this year and we'll just have to restart and find new things next year?

No Sean, there is nothing I could think of particularly that was a pull forward. Obviously everyone has been very conscious about expense growth this year and I would commend Marriott that they've done a tremendous job at our properties in controlling costs. Definitely we haven't done the things that we did in the 2009 downturn, which are not repeatable. Right now are doing things like labor management systems controlling F&B cost redoing the menus, still continued energy programs, rebidding parking contracts. There were a lot of small projects that all added up to help us contain cost, but that can't be of anything across the portfolio where we pull forward and wouldn't be able to continue to make headway in 2017.

Okay, great; appreciate that. And then the follow-up question, similar vein, was a few -- a number of years ago at this point, you guys were very clear on some of the integration challenges that happened around Marriott and their Sales Force One program. We're facing a fairly new but significant integration challenge now, and you guys are seeing both sides. So my question is, any views so far on just either the communication across the Marriott-Starwood merger and specifically any view on the group sales force and how that integration may be pacing?

I would say it's early days on the merger. They have done a great job in communicating with owners. Particularly they've done a great job with DiamondRock with regard to dialogue. We're happy with what we've seen so far about the approach to consolidating the sales and the approach they're going to take in 2017. But frankly there's a lot of detail that still need to be worked out. I'm certain there will be some disruption as they put things together, but net, net as we look forward over the next couple years, we think it's going to be a real powerful driver for our portfolio.

Great. Thank you very much.

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

Hey, good morning, guys. Mark, when you were discussing some of the tailwinds for next year, you didn't mention anything about taking 1,400 rooms out of the market up in New York in the Lex. Is it possible that maybe contrary to popular thinking that closing the Waldorf might have a negative overall impact on hotels in that market, given the loss of meeting space -- and maybe even a more permanent impairment?

It's interesting question. We've spent our operation, we've spent time. We're looking through the segmentation where the demand is coming. We don't think so. So based on the assets we've done, the lot of it is some way taking blocks of rooms on associate with its meeting space that we're holding down the Lexington hotel corridor rate. So we do think it's a net benefit. I would remind people that the Parkway which is a relatively big hotel, about 500 rooms came back on. So that's somewhat had offset as the Waldorf leads the market. We think it's net, net beneficial. We don't think that it's going to lead to enormous amounts of RevPAR change on the East side, but we do think it is incrementally better having the Waldorf out of the system than having it there even with its meeting space.

So you take all those large meetings and you shift them over to the Hilton, or to the Marquis, or to a different city, right? How much overflow did you get at the Lex from Waldorf, bigger meetings?

Yes based on the assets we're seeing, we're not in the Hilton system, we're in the Marriott system there. So we're a different brand. There was some -- there is obviously some compression, but we think we lost more on the low rated transient that we're losing the east side. Remember the East side is sitting there with millions and millions of square feet of office and that's really our primary bread-and-butter driving the Tuesday, Wednesday Thursday business at that hotel. And so we think that we can make up for the rates there for anything that we might have lost from a little bit of expression at the Waldorf.

Okay. That was it for me. Thanks.

Thank you. We have a follow-up question from the line of Anthony Powell from Barclays. Your line is open.

Hi, good morning. Just one obligatory question on some policy stuff. I think over the past few years there's been a lot of focus on streamlining visa applications and processes from Brazil and China and other countries. Do you foresee any change in that type of trajectory with the new administration?

For us, that's a tough question. Obviously with regard to China, the more we can get inbound travel, the better it is particularly for our New York City hotel. So from a demand perspective, we obviously want that visa process to be as short and efficient as possible for Chinese inbound particularly over the next decade. I don't know what the changes are going to be and I don't know how it's going to impact us. Obviously more liberal policy is better for us, but it's hard to know -- currency changes may be more impactful frankly than the Visa policy. So that's the one we've been most focused on.

Any hotel exposed to travel from Mexico on the inbound side?

No and basically when we look at our top 10 international inbound countries Mexico isn’t on there. The only hotel where we have a reasonable amount of inbound from Mexico is frankly our Vail resorts and Prime Season, but those families have been coming to Vail for 20-some years and I anticipate that will they’ll continue that trend over the next couple years.

All right, got it. Thanks

Thank you. Am showing no additional audio questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator. To everyone on the call, we appreciate your continued interest in DiamondRock and we look forward to updating you with our full-year results early next year.

Ladies and gentlemen thank you for participating on today's conference. This concludes the program you may now disconnect. Everyone have a wonderful day.