DiamondRock Hospitality Company (DRH) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2017 DiamondRock Hospitality Company Earnings 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 be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Sean Kensal [ph].

Thank you, Michelle. Good morning, everyone, and welcome to DiamondRock's first quarter 2017 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; Tom Healy, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will provide a brief overview of our first quarter results as well as discuss the company's outlook for the balance of the year. Sean will then provide greater detail on our first quarter performance and discuss our 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.

Good morning, everyone, and thank you for joining us for DiamondRock's first quarter 2017 earnings call. Before beginning our discussion on the quarter, let me provide a brief review of fundamentals. The lodging cycle is [indiscernible] of the recovery and we are currently in a modest growth environment. The corollaries for demand remained mix. Gross domestic product came in light for the quarter at only 0.7%, the slowest pace in three years. That being said, the first quarter is certainly the weakest for GDP and other indicators remain positive. Unemployment continues to reach cycle lows as the economy approaches full employment. And in March, consumer confidence hit its highest level since 2000. Other economic indicators such as corporate profits and non-residential fixed investment are generally stable to positive. As we look out, future growth will likely be influenced by the success of lack of success in passing stimulative measures such as tax reform and an infrastructure spending bill. Focusing just on lodging fundamentals, demand growth continued to outpace supply in the first quarter by around 90 basis points. Industry RevPAR growth of 3.4% was solid. However, consistent with our expectations at the beginning of the year, RevPAR growth for the top 25 markets underperformed industry average by about 100 basis points in the first quarter, and that trend will likely continue for the entire year because of more elevated levels of new hotel supply in the prime urban markets. In particular, we would note a sudden RevPAR contraction from the top markets of Boston, San Francisco, LA, New York and Miami. Turning to DiamondRock’s performance. We were pleased with our first quarter results which were modestly ahead of internal expectations. Our comparable RevPAR grew 1.9% and EBITDA profit margins increased 5 basis points. The results are more impressive in light of the renovations in the quarter. Adjusting our results for renovations, our portfolio’s RevPAR grew 4% and margins increased 81 basis points in the quarter. It is worth noting that the first quarter performance was enhanced by the inauguration as well as the calendar shift of Easter moving into the second quarter. Top performing properties within our portfolio for the quarter included the Chicago Marriott Downtown, The Worthington Renaissance and the Salt Lake City Marriott. The management team and our operators were once again very effective in implementing tight cost controls. Total hotel operating cost increases were held to only 1% during the first quarter. These cost controls led to first quarter flow-through of approximately 47% and allowed us to grow hotel adjusted EBITDA profit margins with only modest revenue growth. The first quarter also marked the substantial completion of DiamondRock’s 2017 renovations. As at the end of April, we now have almost all of the renovation disruption behind us for the full year. It was a very active program in the first quarter, as we completed major room renovations at the Charleston Historic District Renaissance, Shorebreak Kimpton Hotel, the Luxury Collection Gwen, The Lodge at Sonoma and The Worthington Renaissance. Additionally, at the Chicago Marriott we were ahead of schedule in completing the third phase of our four-phase $100 million transformation. The final phase of the renovation is for the remaining 20% of the rooms as well as the 60,000 square feet meeting space, which will be completed during the seasonally slow winter season coming up. Turning to acquisitions. Our off-market acquisitions of L'Auberge de Sedona and Orchards Inn were completed in the quarter. The purchase price for the hotels represents an 8% yield and a 12.6 times multiple on the forecasted 2017 hotel adjusted EBITDA. The hotels are the best located hotels within the high barrier-to-entry Sedona market, and we remain very excited by the upside potential at the hotels from implementing our asset management best practices. In fact, we are already seeing significant traction at the properties in the short time that we have owned them. The hotels are currently tracking ahead of underwriting with combined RevPAR growth of over 25% in the first quarter. We look forward to continuing to update you on these properties. Before providing our outlook, let me turn the call over to Sean for more details on our first quarter results and recent financing activities. Sean?

Thanks, Mark, and good morning. Before discussing our first quarter results, please note that the comparable RevPAR, hotel adjusted EBITDA margin and other portfolio statistics include the Orchards Inn and L'Auberge de Sedona, and exclude the three hotels sold last year for all periods presented. In addition, the first quarter had one less day than the prior year which will impact some of the year-over-year comparisons. Our hotels performed ahead of expectations and gained market share during the first quarter. First quarter comparable RevPAR grew 1.9% due to a 1 percentage point increase in occupancy and a 0.6% increase in average rates. RevPAR growth was the strongest in March, which benefited from the shift in the timing of Easter into April. Our asset management initiatives drove a solid 47% profit flow-through in the quarter. Food and beverage margin growth was exceptional where we achieved 94 basis points of profit margin expansion on a modest 0.3% increase in revenue. Overall, it was the combined efforts of our asset managers and our operators in implementing tight cost controls that enabled the hotels to limit total hotel operating expense growth to 1% and grow hotel adjusted EBITDA margins by 5 basis points. First quarter operating results were impacted by the renovations at the Gwen Chicago, The Lodge at Sonoma, The Charleston Renaissance and the Shorebreak Hotel. These significant renovations held back comparable RevPAR growth and margin expansion by 210 and 76 basis points, respectively. Excluding these renovations, first quarter RevPAR grew 4% and hotel adjusted EBITDA margins expanded by 81 basis points. Let me spend a couple of minutes discussing the quarter’s results and trends in our three significant segments. Our business transient segment exceeded expectations during the first quarter. Business transient revenues increased 4.1%, which was primarily driven by a 7.5% increase in demand, partially offset by a 3.2% decline in rates. The growth in transient was led by the Chicago Marriott, the Lexington Hotel, the Salt Lake City Marriott and Bethesda Marriott Suites. Our first quarter leisure contract and other revenues decreased 1.5%, which was a little below expectations. However, the decline was largely attributable to the first quarter renovations. Excluding the hotels under renovation, first quarter leisure contract and other revenues were slightly positive. The group segment performed slightly ahead of expectations during the quarter, which is traditionally the lowest group quarter of the year. First quarter group revenue increased 1.2% as a result of a 1.5% increase in average rate, offset by a slight decrease in demand. Short-term pickup was encouraging with $4.3 million of in the quarter, for the quarter business booked, which represents a 17.5% increase from prior year. The solid group performance was led by the Chicago Marriott and Worthington Renaissance. Both of these hotels grew group revenues over 30% during the quarter. The Chicago market benefited from a much stronger convention calendar compared to an unusually weak one in 2016. The Worthington Renaissance benefited from strong citywide activity and the renovated rooms. The renovations during the quarter held back our group revenue growth by 280 basis points. Looking ahead, our second quarter results will be constrained by the shift of Easter into April, which will primarily impact group. In addition, the renovations of The Lodge at Sonoma, Charleston Renaissance and the Gwen Chicago wrapped up in April, so some renovation disruption will carry into the second quarter. Despite these headwinds, our April RevPAR grew 0.4% which was ahead of expectations. Our 2017 group pace remains encouraging with over 80% of the expected group business already booked. Our 2017 group pace is currently up 2.1% as a result of a combination of increased demand and rates. During the first quarter, we have booked over $21 million in 2017 group business. The layout for the balance of 2017, which is influenced by the timing of citywide in our markets, shows group revenue to be approximately flat during the second quarter and improving to low-to-mid single digit growth during the back half of the year. We expect the third quarter to be the strongest group quarter of the year. We will continue to monitor short-term group booking trends to access whether we need to modify the group pickup assumptions in our guidance. Looking forward, our 2018 group pace is encouraging with approximately 45% of the expected group business already booked. Our 2018 group pace is currently up over 10% led by both of our hotels in Chicago and the Frenchman's Reef Marriott. Turning back to the first quarter, I want to make a few comments on the New York and DC markets. RevPAR at our four New York City hotels declined 0.4%, which was above expectations as our hotels gained market share and did better than the market RevPAR contraction of 1.3%. As a reminder, our original full year earnings guidance assumes 3.5% to 4.5% RevPAR contraction at our New York hotels. We will continue to closely monitor New York City fundamentals to access with our guidance assumption should be modified. Our two hotels in the Washington DC market benefited from the Presidential Inauguration and Women’s March during the first quarter. The hotels combined first quarter RevPAR growth was an impressive 17.1%. For the full year, the Washington DC Westin is expected to benefit from a strong DC convention calendar and currently shows group pace up over 18%. We continue to expect that our hotels in the Washington DC market will be top performers for us this year. Before turning the call back over to Mark, I would like to touch on our balance sheet. We continue to position our capital structure to maintain liquidity to allow the company to be opportunistic. We recently addressed our only 2017 maturity by completing a new $200 million unsecured term loan. This loan further strengthened our balance sheet, reduced borrowing costs, extended our debt maturity schedule and provided additional investment capacity. The interest rate on the term loan is approximately 80 basis points lower than the repaid loan, which will result in annual interest savings over $1 million. In summary, our balance sheet is in great shape. The weighted average interest rate on our debt is only 3.7%. We have no near-term debt maturities with our next maturity in 2020, our average mortgage maturity is nearly six years, 20 of our 28 hotels are unencumbered, our 2017 net debt to EBITDA is approximately 3.1 times and we currently maintain $350 million of balance sheet capacity including an undrawn $300 million line of credit and approximately $120 million of corporate cash. I will now turn the call back over to Mark. Mark?

Thanks, Sean. I’ll now discuss our outlook for the remainder of the year. When we gave guidance in February, we noted that our guidance did not assume any reacceleration in growth from the prospect of lower taxes, reduced government regulation or infrastructure investments. Our current outlook remains consistent with that assumption. There were some encouraging signs in the first quarter such as modestly better transient rate growth and group pickup versus our expectations. However, it is too early to declare a trend. And the short-term nature of our business requires us to continue to take a moderate view on the year. In general, we currently see lodging fundamentals and business trends remaining stable and in line with how they have performed over the past several quarters. Accordingly, today we reaffirm guidance for full year RevPAR growth of plus 1% to minus 1%. We did adjust our full year adjusted EBITDA and adjusted FFO guidance shortly after our last earnings call for acquisitions in Sedona. Our guidance for the full year is for $238.5 million to $251.5 million of adjusted EBITDA and $0.96 to $1.01 per share of adjusted FFO. As Sean mentioned, we do expect our RevPAR growth to moderate a little in the second quarter but remain positive. We are encouraged that our preliminary April results for RevPAR are up a little less than 1% despite the Easter shift impact. We have pointed out that group pace for the portfolio is the lowest in the second quarter and then gets stronger in the back half of the year. Additionally, for the balance of the year, we are optimistic about the performance of our new Sedona assets and the recently renovated hotels such as the Luxury Collection Gwen and the Worthington Renaissance. Further, we believe that we will benefit from our portfolio having less than 1% combined exposure to the difficult markets of San Francisco, Houston and Miami. While we do have investments in New York City, that market has performed better than our very soft expectations. Looking out beyond this year, we are evaluating some exciting repositioning opportunities within our portfolio at hotels like the Vail Marriott and our Sheraton Key West Beach Resort. We will have more to report on those potential upside stories later this year. Lastly, before we open it up for questions, let me briefly address our capital allocation strategy. We continue to be particularly mindful of how we allocate capital at this point in the cycle. Based on our analysis, we believe this company has at least $350 million of remaining dry powder. In 2017, we are being measured and utilize our capacity and have targeted smaller acquisitions that improve the overall growth and quality of the portfolio. The management team would consider it a very successful year on the external growth front if we were able to find a few more small value ideals like those we recently bought in Sedona. However, if no deals make sense, we are perfectly content to maintain excess capacity at this stage of the lodging cycle. With low leverage, over $125 million of cash flow on hand and an untapped $300 million revolver, we believe that when the time is right, we will be able to effectively and efficiently allocate our capital to drive outperformance. To wrap up, we continue to position DiamondRock for success with a high-quality portfolio, a terrific asset management platform and a robust balance sheet to foster growth and profitability. With that, we would now be happy to answer any questions that you may have. Michelle?

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

Good morning, guys. Mark, I guess – you just touched on capital allocation but I’m just curious how you weigh the prospect of repurchasing shares at this point vis-à-vis that incremental investment in the market. Do you sort of see that as a tossup at this point or is the fact you’re kind of looking for deals sort of tell us that you’re leaning more heavily in favor of your transitions and get where you see incremental value?

Jeff, it’s a complicated question, one we spend a lot of time talking with our Board about. We’re kind of in that a little bit grey zone. We believe we’re trading below NAV, so it still seems like a decent opportunity to buy your stock. But usually we look for very significant discounts before we purchase stock. We would rather allocate our capital if it’s a push towards higher growth, higher quality assets thinking about the long-term positioning of the portfolio. We’ve bought stock back in the fourth quarter of last year, below $9 a share. We’re obviously significantly above that level right now. But we’re going to continue to evaluate both options and every time we look at an acquisition opportunity, obviously that’s alternative use of our cash.

And maybe to switch gears, on the expense controls, it looks like excluding the renovation in the quarter that Q1 margins are much better than maybe you guys expected. I’m just curious how sustainable do you feel that trend is or do you feel much of that was just stronger than expected market demand and maybe some timing on expenses?

Yes, Jeff, that’s a good question. I think for the full year we’re looking at expense growth in the 2% to 2.5% range. So the first quarter, the team did an excellent job. Second quarter, we’ll have little less group, so a little less F&B contribution from banquets which have been a really strong suit for us on the expense control and flow-through line. So I think the short answer is we had a good first quarter. We expect the full year to have good cost control. But 1% expense growth is probably not sustainable for the full year.

Okay. And one last question. I know not a lot of time has elapsed but I’m just curious if you guys have a sense of what the impact of the closure of the Waldorf has been on Lexington and maybe your other hotels on the East side? I guess I’m wondering if the closure has boosted demand there or maybe you’ve seen some loss of the overflow business that’s maybe negatively impacted you guys.

Yes, Jeff, I think it’s too early to tell. We’ll have to wait for a couple more – there’s big citywides that would have been at the Waldorf that come up in June. So far it’s been beneficial for us. We’ve picked up several small groups that have stayed there and some other business. So we’re picking up a little so far but I think it’s too early to call it.

Okay. Thanks, guys.

Our next question comes from Ryan Meliker of Canaccord Genuity. Your line is open.

Hi. Good morning, guys. Thanks for a lot of the really good color on group and even your April trends thus far. I had two questions. I guess the first one was, can you talk a little bit about how New York trended in April? We heard from, I think it was Park yesterday that said that New York was up 8% across their assets in April. I’m just wondering if you were experiencing some of the same benefits.

Hi, Ryan. Good morning. It’s Mark. I would say New York performed well and a lot of that’s due to the Easter shift. So the leisure was very good in New York for April and we had positive growth in New York as well.

Great, that’s helpful. And then the second question I had was can we talk a little bit about the Boston Westin and your guys thoughts surrounding the news that hit this quarter that there’s going to be a new convention center hotel basically across the street from yours in the Omni, and what you think that might mean to your investment at the Westin?

Sure, Ryan. So there was news about two weeks ago that there’s going to be a new 1,000-room convention center Omni built across the street from where we’re located. There’s pros and cons for us. Hopefully that still portends an expansion of BCEC convention center. The other positive for us is that site, as you know having been there, those are just vacant parcels right now and really disconnect our hotel from the Waterfront. And so to build out there with some retail I think really adds to connectivity in the Seaport area for our Westin, so that’s in that positive. It also provides an ability with over 100,000 square feet of meeting space that they’re going to add with that hotel to bring bigger groups and more conventions into Boston and the Seaport area. So those are positives. It’s four years away. I think there will be substantial corporate office construction within the Seaport market that will continue to help us. But I think all-in-all, it’s probably about a net neutral for us.

Got you. So it’s not going to trigger necessarily an investment decision at that Westin, correct?

No. We’re still very excited about our hotel there and about the future of Seaport.

Okay, great. And then one last one for me. You gave some good color, so I’m just looking for a little bit more if you anything. Talked about 1Q was a strong quarter for you guys, up 4% in RevPAR before the renovation disruption. 2Q is going to be softer but you said would still be positive. So the first half of the year it seems like it’s going to be trending towards the higher end of your guidance. And then you said your group pace is stronger in the back half of the year than in 2Q. I understand not raising your guidance this early in the year given all the uncertainty, but what’s it going to take to give you guys confidence that things are going to be better than your current outlook suggest?

Yes, we still have some holes that we’re trying to book for the back half of the year with some of the groups. So as those holes get filled, we’ll feel more confident. Obviously the more business transient positive trends continue that would be encouraging to make us feel better. Remember the first quarter is only 17%, 18% of our full year EBITDA, so there’s still a lot of the year left to play out. Obviously as more – we get this month under our belt, we’ll feel more confident about the upside potential in the guidance.

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

Thanks, Ryan.

Our next question comes from Michael Bellisario of Baird. Your line is open.

Good morning, everyone. Just wanted to circle back on the capital allocation comments. It sounds like it’s acquisitions or be patient currently, is that correct? And then where do dispositions fit into the mix given what seem to be improving the financing and transaction market out there today?

Mike, it’s a complicated question. So I would say a couple of things. The valuations are holding up very nicely in the private markets, which make us feel better about F&B. Right now on the disposition front, we’re sitting with excess capacity well over $100 million of cash. We think we’re really positioned. If a good opportunity comes up, we could seize on it without having to sell any additional assets. So I think it probably is a little bit [ph] opportunistic but it’s not priority one to try to build more capacity through sales at this point in time. On the acquisitions, the Sedona acquisitions through really the prototype are the kind of transactions that we’re looking for. So their off market deal with a value-add opportunity where we really think we can get outsized return even at a discounted NAV valuation of our stock, probably a better use of our capital. So if we could find those opportunities, we’re still inclined to do those kind of opportunities. They’re hard to do and hard to find in this market. But that’s what we’re working on right now. As far as share repurchases, I think we are patient. If there’s a pullback in the market, we certainly always have arrow in the quiver. But at these levels even though it’s a discount to NAV, it’s not nearly what we were – the discount we were buying in, in the fourth quarter.

Got it, thanks. I was just referring to patience on the acquisition front not necessarily specific to buybacks. And then just kind of one other housekeeping item relative to the pre-Sedona guidance that you gave last quarter, what do you think the positive impact on the full year for RevPAR growth and margin change will be from the inclusion of the Sedona assets?

Michael, it’s relatively small because their assets are only 177 keys. And so it’s in the 10 to 20 basis point impact. But kept us within the range, which is why we didn’t change the RevPAR range.

Thanks. That’s all from me.

Our next question comes from Shaun Kelley of Bank of America. Your line is open.

Hi. Good morning, guys. There have been a couple of different questions about New York but was curious if you could just comment specifically on international inbound and what you guys are seeing there, particularly at the Lex?

Sure. So across our portfolio, international was relatively flat but the mix shift in New York we did see a decline particularly in inbound travel from Great Britain probably as a reflection of the currency shift between the dollar. So I would say we lost a significant portion of the British inbound. We were able through the strength in the market to replace that with domestic travelers and actually a little bit higher rates. So it was fine in the first quarter. Other international travel seems relatively flat within New York City. Obviously Emirates – I don’t know if you looked across the country, Emirates pulling back some of their flights. We would expect some impact with some of those inbound demands from Middle East.

Perfect. Thanks. And then maybe just looking at – I know you had mentioned I think maybe at the last quarter a possible opportunity around kind of tweaking the brand on the Vail Marriott. Any kind of updated thoughts there or where does that sit on kind of capital internal growth kind of idea schedule?

Yes, the two opportunities we’ve talked about were the Vail Marriott and we think there’s enormous opportunity there given the rate differential between our property and really all the surrounding properties which are luxury hotels, the rate gaps over $200. We’re in the evaluation stage on that obviously making sure that we get the capital plan that were required and figure out the branding on the backside. So that’s something we’ll announce probably later in the year. The other opportunity we’ve talked about publicly is the Sheraton Key West Beach Resort, which made an opportunity to go to a lifestyle independent given the high occupancy in that market, and there might be upside by doing that. We’re still in the evaluation phase on both of those of projects but we plan to announce something before the end of the year.

Great. Thanks, Mark. And then last thing would just be on Frenchman's. It looked like the performance was actually fairly solid in the quarter at least on the RevPAR line. Are we sort of post any – as eager concerns or anything else in that market that would be dragging that property down and how do you feel about that market in particular?

Well, so I’d say we’ve experienced very little impact from Zika in the U.S. Virgin Islands, while Puerto Rico and Miami have been hit. But the public perception on the U.S.V.I. is much more positive. So we have had virtually no group cancellations related to Zika. And obviously our inbound leisure has been very strong as well. So we didn’t have any substantial impacts, so we don’t expect something to change or have a rebound there, if you will, because it kind of stays consistently strong. We still feel pretty good about the U.S. Virgin Islands. The supply picture is excellent. It’s one of the reasons we really like these resort markets. It’s very difficult and very expensive to build a new hotel. So I think we feel very comfortable in that. The employments look pretty good. So I think all of those are relatively favorable. We continue to evaluate our long-term hold on the asset given the seasonality and the fact that it is airplane accessible only. But so far things have been fairly solid.

Thank you very much.

Our next question comes from Anthony Powell of Barclays. Your line is open.

Hi. Good morning, guys. You mentioned that leisure was slightly positive in the quarter, excluding renovations. We’ve heard generally I think stronger comments around leisure from most of the companies. So was that due to the Easter shift or did you see anything else in your portfolio?

Anthony, this is Sean. I think for our portfolio, a lot of our leisure-centric hotels were the ones that were under the knife during the first quarter. And so we were more impacted by leisure in our portfolio for the first quarter. We still feel pretty good about where leisure trends should go for the year. I think our first quarter was a little bit of an anomaly relative to the peers on that one.

Got it, thanks. And maybe more on dispositions, given some of the green shoots to New York maybe, why wouldn’t you sell down more in New York and acquire more of the resort efforts you’ve been building up over the past few years?

Yes, I think there’s kind of two answers to that. One is, we have capacity now for good opportunities that may emerge without selling additional assets, so they’re not interconnected if you will. And then New York, I would say the level of interest that’s increased in New York in the last 90 days has been fairly substantial from a lot of capital sources. We’re always evaluating our allocation. We’re about 12% New York now. We would like to 10%. That’s probably our long-term goal. But we evaluate opportunities. I think if we had inbound inquiry that was an attractive pricing, we would definitely consider that. But given where the balance sheet is now, I’m not sure if makes sense to be proactive given that we are still long-term believers in that market, we can be patient on how we think about those assets.

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

Our next question comes from Smedes Rose of Citi. Your line is open.

Hi. Thanks. I just wanted to ask you on the Lexington specifically, I think there’s been some talk before that, maybe you would change the brand there potentially? And also – so any kind of updated thoughts on that and maybe just going as more of an independent hotel versus part of a larger system? And then also specifically there, are you still booking contract business into that property? You had talked about being a little more defensive there on your last call. I’m just wondering if you’re still pursuing that now.

Good morning, Smedes. So I guess to take the second question first. Yes, we’re still being defensive at that hotel. We are putting some contract in. It’s 725 keys. Obviously it’s a softer demand environment given the supply in New York. So we’re making sure that we can get some compression to make sure we hit the targets, the 95%, 96% to achieve the higher redemption rate through the brand. And so we are taking the defensive strategy. But with that said and you can see that occupancy has increased to the expense of rate in the first quarter. We do think that there will be a little bit more pricing power in New York, so we’re trying to be balanced as we think about the revenue management strategy for the balance of the year to not leave too much on the table on particularly Tuesday, Wednesday nights when it’s been very strong with demand within the city. On the brand side, I’m not sure we’ve made public comments. We’ve had questions about what the payoff of the conversion from an independent to the Marriott autograph has been. I would say we’ve gained the responsibly – we’ve gained a lot of share but it came with a lot of additional costs as well, so it’s probably a net neutral [indiscernible] is what we’re looking at right now. We’re still evaluating working with Marriott and what the best long-term positioning for this hotel would be and trying to understand the kind of cost benefits as we think through the market over the next couple of years, and the best way to kind of have a win-win situation on that asset. So I’d say we’re still evaluating our options. Marriott’s – we’ve had a lot of meetings. We’re working in partnership to try to figure out the best path forward there.

Okay, thanks. That was it for me. Thank you.

Our next question comes from Chris Woronka of Deutsche Bank. Your line is open.

Hi. Good morning, guys. I want to circle back on the data point about corporate transient – I think you said room nights were up but I think you said rates were down. Can you just give us a little bit more color if that was mix issue or something else?

Chris, a lot of it was a function of the fact that we had some significant renovation activity during the first quarter. But yes, business transient was up 4.1% which was more than – it was all driven by demand. Frankly, when we think through maintaining guidance in that decision, a big driver of that was that we’re not – during the first quarter we didn’t see a lot of pricing power within the business transient segment and so we maintained our assumptions for the full year there. That’s something that we’re going to continue to monitor as we look through the year. It could be a catalyst process as we think forward, a potential upside opportunity within both our portfolios as well as the industry but we didn’t see anything in the first quarter to get excited about the business transient to sign out of it and the fact that demand was very, very strong.

Okay, great. We heard from you guys and actually a couple other peers on some of the things you’re doing from a revenue management perspective regarding these redemption levels and the rate you get reimbursed on those. Is that something going forward? Are you worried all the brands kind of change the math on that? And does it negatively impact you at some point?

Chris, this is Mark. We are in discussions with the brand. I think they are evaluating going forward what is the right program both for their system and for their owners. My guess is that there are changes coming within the next 24 months. Clearly with Starwood and Marriott merging [indiscernible] different programs, it’s also an excellent time for them as they put those systems together to think about is there a better way to do the redemptions in a way we’ve done it before. And so I would say our understanding is options are on the table. We’re currently expressing our opinion on the best way forward on that is. I don’t think it’s going to negatively impact us. My guess is some hotels will be a little better and some will be a little worst under the program. But overall we’re optimistic given the markets that we’re in that net-net it’s probably a benefit for us.

Okay, great. And just kind of sticking with that Marriott-Starwood, you guys are pretty heavy now combined with those two outside a couple independents and Hiltons. Is it going to be a conscious effort to diversify a way in any acquisitions you do?

Chris, I would say we see – over 80% Marriott-Starwood aligned. Some of that’s managed by them. A lot of it is managed by third-party operators. I think we’re hooked up to the largest system, the most powerful travel company in the world. They have over 100 million members in their rewards program. They’re in 122 countries. I think we’re very happy with being aligned with something that powerful. We’ll be opportunistic as we look into acquisitions. I think whether it’s a Westin or a Hilton or a Kimpton, we’ll try to find the right opportunities kind of regardless of the brand. But I think being hooked up with Marriott is a great thing for us.

Okay, very good. Thanks, guys.

Our next question comes from Rich Hightower of Evercore. Your line is open.

Hi. Good morning, guys. Thanks for taking the question here.

Sure.

So I want to get back on the topic of expense for a second. So as I look at sort of the same-store lineup across the different categories, you had about 4% same-store increase on the rooms departmental expense side. I’m just wondering what’s driving that. It is labor – predominately labor but I guess more generically are you seeing a tightening on the labor side of the business and would that flow through to F&B and some of the other categories. Just kind of tell us what you’re seeing on that front and what we can expect going forward.

Sure, Rich. The two biggest drivers of the rooms department cost 4%. Our wage and benefits which were up a little over 3% during the quarter as well as travel agent commissions which were up about 8.5% for the quarter. And most of that was really group related and the Chicago Marriott really drove that during the quarter, because we had a tremendous amount of group business in the hotel during the quarter. When you look across the board at our operating expenses, our controls were very tight there. F&B was a great story for us in operating expenses. Rooms would have been the one where we had that 4% increase, but a lot of that was as I said specific to wages and benefits and commissions.

Okay. And then what do you kind of expect going forward on that?

So our full year guidance assumes around anywhere from 2.5% to 3% wages and benefits to increase and our total expenses for the year are expected to increase between 2% and 2.5%. Obviously, we did better than that during the first quarter. Tom and his team are working hard to replicate those results, but the assumptions embedded within our guidance assumes as I said the 2.5 to 3 on labor and benefits and total cost of 2 to 2.5.

Perfect. Thanks, Sean.

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

Hi. Good morning and thanks for taking the questions. First one, just on the better business transient trends that you guys talked about, I guess was this broad based or specific to certain markets? And then any specific industries that stood out as driving that better than expected performance.

Sure. The business transient was really driven by a handful of hotels during the quarter. The Chicago Marriott was a big driver of that because we were coming off renovation last year and there was better citywide, which created compression. The Salt Lake City Marriott had a great first quarter business transient as well once again. That was driven by production from a handful of the local special corporates in the market including General Dynamics and the LDS Church were big drivers there. As well as the Lexington was a strong business transient contributor during the quarter. And so I think a lot of that was volume related. You also had the ability during the quarter where group demand was not great particularly in January and February. It was obviously stronger in March. But you were able to replace some of that group demand into business transient demand.

Great. Thanks for the color, Sean. And then you guys have been a little bit more defensive on the revenue management side. I guess any changes in your tactics at this point and what would you need to see to get a little bit more aggressive on the revenue management front?

I would say we’re trying to be balanced in our approach. So, so far we’re not seeing a great reacceleration in demand. It’s been stable. But we’re trying to make sure that we’re being thoughtful while we’re defensive perhaps on Thursday, Friday and some of the weekends. I think on Tuesday, Wednesdays particularly, I know a lot of these high compression over the markets, we are trying to push rate a little bit more. So we’re trying to make sure that we balance being defensive with not taking all the upside opportunity off the table.

Would you say that’s a little bit different than what you’ve been previously doing?

I think we are evaluating particularly for the back half of the year and on the busiest nights of the week whether we should be getting a little bit more aggressive with some of the business transient. But overall, I’d say it’s still a defensive tone. We’re still trying to take a little bit more contract, a little bit more group and then we’re trying to have a little bit more pricing power with the business transient, the short-term business transient.

Great. Thanks for those thoughts there, Mark. And then just last one for me. I know you guys have been big believers in trends in the leisure business but can you remind us what your threshold really is for exposure to resort hotels for the overall portfolio and maybe where you are today?

So I think our overall exposure, probably we’d be comfortable going to about a third. We’re well below that --

We’re hanging out around – a quarter of our portfolio is resort-centric today.

Yes, it depends how you cut it a little bit. So we still have room to add more but we would never be over 50%. Probably a third is a good target.

Great. Thanks for taking the questions.

Our next question comes from Lukas Hartwich of Green Street Advisors. Your line is open.

Thanks. Hi, guys. Not to beat a dead horse here but can you talk a bit about the business transient pace and how that’s been trending?

Business transient pace is up. It continues to do well and obviously as Sean mentioned earlier – based on how much group is in-house and how much internal compression you have, that’s kind of when you open or close rates. What you’ll see is, as mentioned earlier, first quarter we had some holes and so there are a lot of – the way the business travel works you have lower rated accounts or LRA accounts, you kind of keep those accounts open and don’t close them out. So you saw some volume in Q1. In out quarters we will be more ridged in opening up those lower rated BT accounts to try to drive rate and remix the hotel. So all signs are positive on the BT side. The challenge is how you handle and mix those rooms and how that overall affects your RevPAR and your total rate. So I think it’s positive.

Great. That’s it for me. Thanks.

Thanks, Lukas.

There are no further questions. I’d like to turn the call back over to CEO, Mark Brugger, for any closing remarks.

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

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.