DiamondRock Hospitality Company (DRH) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 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, today’s conference is being recorded. I’d now like to turn the call over to Mr. Sean Kensil, Director of Finance. Sir, you may begin.

Thank you, Victor. Good morning, everyone, and welcome to DiamondRock’s full-year and fourth 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. This morning, Mark Brugger, our President and Chief Executive Officer, will provide a brief overview of our fourth quarter results, recent acquisition activity, as well as discuss the company’s 2018 outlook. Following the 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 on DiamondRock’s fourth quarter earnings call. Let me begin by saying that, we are pleased to be able to announce fourth quarter and full-year results that exceeded management’s expectations and were at the high-end of revised guidance. In addition to covering details on the fourth quarter results today, we will provide you with color on our pending acquisitions, as well as on our program to mine value from internal investment opportunities. At the conclusion of the prepared remarks, we’ll provide our outlook for 2018. The general economy exhibited solid performance in the fourth quarter. Last year’s GDP growth of 2.3% showed good acceleration from the anemic 1.5% growth in the prior year. While I won’t get into review all the economic indicators, the overall picture is that of a growing global and U.S. economy. In fact, I’d say, our company is incrementally more positive on the U.S. economy than on our last earnings call as enactment of tax reform should provide a little more momentum to an already healthy economy. Turning to lodging. Fourth quarter RevPAR growth was 4.2% for the industry. This was well ahead of most of the industry’s expectations and a clear acceleration from third quarter growth of 1.9%. However, the quarter did benefit from the Jewish holiday shift and hurricane recovery tailwinds in the Texas and Florida markets. Without the benefit in those two markets, industry RevPAR growth is estimated by experts to have been more modest at 2.3%. Importantly, we continue to see a trend of higher supplying gateway markets impacting results there. RevPAR growth for urban and upper upscale hotels was about 100 basis points below the national average. Let’s turn specifically to DiamondRock’s 2017 results. Please note that all portfolio stats such as RevPAR and hotel adjusted EBITDA margins are presented on a comparable basis as defined in our press release. Overall, we’re happy with the fourth quarter results. The portfolio performed well and beat the benchmark RevPAR growth for the urban and upper upscale hotels during the quarter, as the portfolio gained 260 basis points of market share. Comparable RevPAR for our hotels in the quarter grew 3.8%, which exceeded our internal expectations at the last call, as 18 of our 26 hotels outperformed their forecast. In addition to better than anticipated demand, particularly in New York and Boston, the portfolio benefited from DiamondRock’s capital investment program, as recently completed renovations continued to payoff at the Worthington Renaissance, Historic District Charleston Renaissance, Chicago Gwen and our Huntington Beach Kimpton Shorebreak. In the quarter, food and beverage was a bright spot for the company, as those revenues grew $1.5 million, or 3.7%. The strong F&B revenue growth is primarily attributable to good performance from our outlet restaurants and room service operations. In total, F&B margins increased a respectable 108 basis points with profit flow-through at a solid 65% for the quarter. For the full-year, our portfolio delivered comparable RevPAR growth at the high-end of our guidance range with growth of 2.5%, a number we are proud of in light of the overall operating environment. The revenue enhancement strategies put in place by our COO, Tom Healy, and our entire asset management team really gained traction with the portfolio, gaining 1.9 percentage points of market share for the full-year 2017. The team was also focused on tight cost controls and worked diligently to limit hotel adjusted EBITDA margin contraction to 74 basis points, despite rising labor cost and a 14% increase in property taxes. To better understand the portfolio’s top line performance, we want to provide you with details on each of our three major segments of demand. We should start with the business transient segment, since that was the primary driver of our outperformance in the quarter, business transient revenues, which represented a little over a third of our total revenues increased 11.2%, or $5.6 million. Our team had a focused revenue strategy to drive business transient in the quarter. Our two biggest success stories for this strategy during the quarter were the Chicago Gwen and the Westin Fort Lauderdale Beach Resort. We also enjoyed strong business transient revenue growth during the quarter at the Worthington Renaissance, Boston Westin, Historic District Charleston Renaissance and the Salt Lake City Marriott. The group segment, which was approximately 25% of our business last quarter had solid revenue growth of 6.8% and had its best quarter in the year. In particular, the Boston Westin, San Diego Westin and the Worthington Renaissance significantly increased their group business during the quarter-over-quarter. Short-term bookings remained robust, within the quarter, for the quarter bookings increasing double digits from the prior year. For the full-year 2017, we are pleased with our group business ending the year up 2.5%. Looking forward, our 2018 group pace is approximately flat to 2017 and we entered the year with 70% of budgeted group business already on the books. Lastly, leisure contract and other revenues, which were approximately 30% of our business in the fourth quarter were actually down about 5%, partially by design as our revenue strategy in the quarter was a shift out of lower-rated contract business and into higher-rated segments. There was also some negative impact on this segment with our loss business attributable to natural disasters and a slow start to the snow season in Vail. Of course, results in the fourth quarter were generally influenced by our market allocation. I’ll take a minute to comment on a few of our key markets. One market that was certainly better than we expected was New York City, as our hotels there were able to increase RevPAR 1.9% in the fourth quarter outperforming the Manhattan market. We have been pleasantly surprised by the impressive strength of demand in New York City and the market’s ability to absorb the outsized new hotels supply additions. Our New York hotels are well-positioned within the market as they’re transients-focused and concentrated in the more insulated submarket of Midtown East. For the full-year, our New York RevPAR was up 20 basis points outperforming the Manhattan market by 70 basis points. Boston, Boston was another market that outperformed for us. Both of our Boston hotels exceeded internal expectations this quarter and they collectively grew RevPAR as strong 5.7% outperforming the Boston CBD by 200 basis points. For the year, our Boston hotels grew RevPAR combined 2.3%. In Chicago, we knew going into the year that 2017 had some challenges from a weaker citywide calendar and the comparison to the World Series last year. Despite this backdrop, our hotels outperformed. The Chicago Gwen, which we had converted to a luxury collection hotel is starting to hit its stride with RevPAR growth of 16% in the fourth quarter and market share increasing 17 points. The Gwen is getting great reviews from guest. When I checked this morning, we moved up to the number eight out of 191 hotels in Chicago on TripAdvisor. In Chicago, we also owned the 1,200-room Chicago Marriott, which is more leverage to the fortunes of the citywide calendar and experienced a RevPAR contraction of 4.2% in the quarter. The good news is that our renovation program is paying dividends as the hotel gained 5.6 percentage points of market share in 2017. We expect this hotel to continue to beat its competitive set and steal share after we substantially complete our $110 million renovation in early 2018. Our resort markets also outperformed in the fourth quarter with 8.4% RevPAR growth for our portfolio of leisure hotels that were not directly impacted by natural disasters. Resort markets continue to be one of our best performing areas. Transitioning from talking about markets, we’d like to touch on our fortress balance sheet, which is a cornerstone of our strategy. As of year-end, the company had conservative leverage with a net debt to EBITDA ratio of only three times, cash of $184 million and nothing drawn on our $300 million corporate revolver. We estimate that this flexible balance sheet provides us safety for unexpected events, facilitates our ability to do smart renovation projects, and allows us to be opportunistic as capital allocators when we uncover compelling deals. Also, given pending acquisitions, we opportunistically issued a small amount of equity earlier this year. That’s a nice transition to our next topic, acquisitions. In 2017, we purchased two hotels in Sedona, Arizona for $97 million. The L’Auberge de Sedona and Orchards Inn have been home run thus far. In our first year, the Sedona properties grew RevPAR over 19%, exceeding underwriting by $1.2 million and generating over a 9% EBITDA yield on our total investments. These impressive results have occurred even before we have commenced the numerous value-add opportunities that we identified at acquisition. Last night, we announced the pending acquisition of the Landing Resort & Spa located on Lake Tahoe, in California. This boutique luxury resort is ranked top 20 hotel in the United States by TripAdvisor’s Travelers’ Choice awards, while Condé Nast ranked the Landing the #1 resort in Northern California recently. We really like the Lake Tahoe market, which is primarily led by the San Francisco Bay Area. The resort has a prime summer location on a private beach and a prime winter location within easy walking distance, because their resorts Heavenly Ski Mountain, shopping and casinos. The purchase price represents a 7% yield on 2018 EBITDA with a number of opportunities to increase our returns going forward. There are many parallels in this deal to our recent Sedona acquisitions. The Landing has been owner operated since it opened five years ago, and we see significant value-add opportunities. As we deal with the Sedona properties, we’re planning to install Two Roads Hospitality to implement professional hotel management systems and strategies. Additionally, the deal comes with valuable rights to add keys in our market where there are unlikely to be any meaningful increases in supply, given strict development restrictions. Our underwriting has its resorts stabilized in north of a 9% EBITDA yield on our total investment after adding the new rooms into 2020. The Landing and the Sedona deals are good examples of DiamondRock executing out the strategy and favoring investments in experienced resorts in high barrier-to-entry markets that are better insulated from supply at this part of the cycle. These deals also expand our footprint in the West and West Coast markets. I would add that the acquisition environment remains challenging. As you may have noted, it took us more than a year to find the compelling follow-up deal after the early 2017 acquisitions. We remain extremely picky with our capital deployment. With that said, we do have another high-quality lifestyle hotel under contract that we hope to be able to share with you shortly. Now I’d like to discuss our 2018 outlook in some detail. While we’re little more positive on the general economy and the fourth quarter did exceed internal expectations, we do not think it is prudent to build into guidance in assumption that demand will reaccelerate until we see more sustained evidence of that trend at the hotel level. For 2017, the professional forecasters are calling for industry RevPAR growth to be in a similar range as last year. However, like last year, the more elevated supply growth in top 25 markets, where we and many of our peers have significant investments, is likely to impact growth. Consequently, we expect the gateway markets will underperform the national averages by about 100 basis points again this year. Based on that backdrop, we expect our portfolio to generate 2018 RevPAR growth that will range from zero to positive 2%. January had a respectable start with 20 of our 26 hotels modestly beating operator prepared budgets. RevPAR did contract 1.4% in January, but it is important to note that without the impact from lapping the inauguration in DC, as well as from the meeting space renovation of Chicago Marriott, our portfolio actually grew RevPAR by 2.5% last month. We do expect the balance of the quarter to pick up and for the portfolio to generate positive RevPAR growth for the first quarter of about 1%. In total, first quarter EBITDA is expected to represent 14% to 15% of the full-year total even with approximately $2 million in renovation disruption during the quarter, primarily attributable to the Chicago Marriott renovation. Turning to the full-year outlook for DiamondRock’s EBITDA and FFO, our guidance is for full-year adjusted corporate EBITDA to range from $244 million to $256 million, and adjusted full-year – and full-year adjusted FFO per share to range from $0.96 to $1.01. There are a few notes to our full-year guidance. One, our guidance includes business interruption income of approximately $20 million for the full-year. This reflects lost profits from Frenchman’s Reef, the Inn at Key West and the Sonoma Renaissance. While we are working towards what we believe is a fair resolution that covers – that fully covers all of our losses, the outcome and timing is not guaranteed. The company is currently engaged in sensitive discussions with insurance companies. For modeling purposes, we suggest spreading the $20 million evenly over the four quarters even though the size and timing will inevitably vary based on resolution with insurers. The second of the landing acquisition is included in guidance and contributes $2.5 million in EBITDA for partial year 2018, and only about 100,000 of EBITDA during the first quarter. No other acquisitions are built into guidance. The third note we have budgeted for property insurance cost to increase by approximately $2 million over the last year. And finally, the company is focused on internal investment opportunities within the portfolio. We expect to invest about $135 million of capital this year. Total EBITDA disruption is expected to be about $6 million, which is $2 million more than in 2017. It’s worth spending a few more moments on our internal investment strategy to grow net asset value at our hotels. Given our current cost of capital, we are often finding that the best use of our capital is through investments in the existing portfolio. Our 2017 renovation program was robust and we expect to continue to see benefits in 2018 at the Charleston Renaissance, Sonoma Renaissance, Chicago Gwen and Shorebreak hotel. Their success underscores the value of making internal investments. In 2018, we have identified and are executing on a number of projects. At the Chicago Marriott Downtown, we commenced the final phase of the hotels $110 million multiyear innovation, which includes all of the hotels 60,000 square feet of prime meeting space. This will create some displacement in the first quarter. But once complete, we will have on the finest big box hotels in Chicago. Already the renovation has increased demand from business transient customers. Meeting players have also responded well to the renovation with post renovation booking pace up 12.7% from the second through fourth quarters in 2018. At Inn at Key West, there are gains, which closed the hotel since September provided us with opportunity to remediate and reinvent the hotel. The hotel reopened in April under a new concept as the Havana Cabana Key West. This fresh boutique lifestyle hotel is expected to drive 5 points of incremental market share over the pre-hurricane product. At the Vail Mountain Marriott Resort, we will undertake a comprehensive renovation of the hotels guest rooms and meeting space in 2018 after the ski season. The renovation is being done to a luxury standard in order to position the hotel to gain share against the luxury comp set, which is currently more than $175 above the Marriott in rate. While we don’t expect ever to fully close that gap, it is exciting to know that every dollar of incremental rate that we do get creates $30,000 of annualized EBITDA profit. Additionally, the Vail Marriott becomes fully unencumbered by brand and management in just three years, which creates operating optionality to further enhance net asset value. At the Westin Fort Lauderdale Beach Resort, we plan to upgrade the resorts guest rooms this year to follow-up on the recent opening of the popular new Lona restaurant. This resort has consistently exceeded the underwriting, and our total investment now represents a 9.8 multiple of this year’s budgeted EBITDA. Lastly, at the Hotel Rex we see enormous untapped upside at this small boutique located in the heart of San Francisco’s Union Square. To realize its potential, we have engaged Viceroy Hotels And Resorts to work with us to fundamentally renovate and reposition this hotel. During the renovation, the hotel be closed for most of the fourth quarter in order to re-launch it in time for a strong 2019 in San Francisco. Stabilized after the renovation, we expect the hotel to generate an incremental $1.2 million of EBITDA. To put it another way, this $9 million renovation is expected to provide an annual cash on cash return of over 13%. Before closing, I would like to provide an update on Frenchman’s Reef. This resort has been a strong performer for us and the 2018 budgeted EBITDA was over $19 million, which represents a double-digit yield on our total investments. But as you know, last fall, the resort sustained catastrophic damage, mainly from Hurricane Irma and to a degree Hurricane Maria. Frenchman’s has remained closed since out of that. The company continues to work closely with insurers and the USVI government to ensure a good outcome for our shareholders. If we move forward to rebuild, the hotel will likely reopen in the early part of 2020 as a world-class resort and one of the best locations in the Caribbean. Please note that our insurance policy is available to us for up to $361 million per named windstorm subject to various conditions. Moreover, DiamondRock is entitled under its policy to be paid for business interruption losses, including lost profits until the resort is reopened and stabilized. So in summary, DiamondRock had a good quarter and continues to execute on a strategy to thoughtfully allocate capital to create value through both internal and external opportunities. Our fortress balance sheet allows us significant flexibility. Our asset management team continues to deliver. Headed in 2018, we stick to our strategy and continue to work hard to create value for our shareholders. And with that, we would now be happy to answer any of your questions.

[Operator Instructions] And our first question comes from the line of Austin Wurschmidt from KeyBanc. You may begin.

Hi, good morning. Mark, I was wondering if you could just give some additional detail about the lifestyle hotel you mentioned you have under contract some ranges in terms of the size of the hotel. Is it a new or existing market, brand managed, et cetera, anything you could provide would be appreciated?

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Yes, I appreciate the color there. And then how did you arrive at the $20 million of business interruption insurance that you’ve assumed in your guidance? And is it possible that you could exceed that amount?

Well, let me start by saying, we’re in sensitively discussions with our insurers right now. The buildup of the $20 million really relates to the profits that we would expect to receive at Frenchman’s Reef primarily. I talked a little bit about what we budget to do in 2018. It also will include some monies for the Sonoma – the – we have a claim in on Sonoma, that was closed for nine days due to the wildfires in Northern California from last year, and the Inn at Key West is closed from the beginning of this year – both from the hurricane last year, but we’re anticipating is the monies for the closure from January 1 of this year till we reopen in early April of 2018.

Thanks for that. And then you mentioned you’ve been impressed with some of the demand trends in New York City. I was hoping you can provide some additional thoughts around that comment in terms of what segments are you seeing the most pick up in strength? And then could you also give some detail as to what you assume for RevPAR growth in that market in 2018?

Sure. So as indicated, we exceeded our expectations in New York City. We’re seeing pretty broad-based demand. International is down, but it seems like that’s hopefully bottomed a little bit on the impact to our hotels. The U&G [ph] was decent this year. We’re seeing the financials come back. We’re seeing pretty broad-based on domestic tourism increasing with the New York City. It exceeded our expectations of demand by couple of hundred basis points frankly in Europe. So that’s all good. For 2018 expectations, we are budgeting about flat for our New York City hotels.

Great. Thanks for taking the questions.

And our next question comes from the line of Michael Bellisario from Baird. You may begin.

Good morning, guys.

Good morning, Mike.

Just kind of on the resort side and your appetite for doing more resort deals. Does that cause you to think about maybe selling more of your urban focus properties? And I’m kind of on the same topic, what are you seeing on the disposition front relative to 90 days ago when you last give us an update?

Yes. So well, obviously, we announced one acquisition and another pending acquisition, so we feel better about it. But it did take us over a year from the Sedona deals and we’ve been looking for year that – four deals that are compelling in the marketplace. But given where our cost of capital is today, it’s hard to find deals that create value for us. It is still a seller’s market overall. There are more deals that are coming to market right now, which is encouraging. But you continue to have to look – work really hard to find these deals. We are finding some block in our pipeline of owner-operated smaller resorts in what we think are very high barrier to entry in desirable markets. So that is a focus of our acquisition efforts in 2018.

And I guess, maybe on the sell-side too, as you think about recycling capital from your portfolio just on the urban focused property and what you’re seeing on that side as well?

Yes. So, again, it’s a – I think the market’s very good for selling assets right now. We have had some reverse inquiries on a number of our urban assets over the last six months. But really until we feel better about our ability to redeploy those funds unless we got a number that was just incredibly compelling. We’re likely to add to the pipeline before we start disposing our leases to other existing assets.

Got it. That make sense. Thanks.

And our next question comes from the line of Anthony Powell from Barclays. You may begin.

HI, good morning, guys. Could you talk more about maybe the group pace for the entire portfolio for next year? I joined the call late, so sorry if I missed it.

No problem. So our comments on the group was, we had very good in the quarter for the group for the quarter pickup in the fourth quarter, which was encouraging. We’re currently pacing about flat for 2018 and about 70% of our budgeted group business is already under contract as we entered 2018. So that’s all encouraging. It would have been better. Unfortunately, our strongest group hotel for 2018 would have been Frenchman’s Reef. Our group pace there was up over 70% for 2018. So we would have been even more impressive, but we’re feeling decent about overall group trends. I would have the one caveat, I would say in Boston, there is some transition issues in our view with the Starwood Marriott integration of the sales offices in that market. So we’re watching that very closely and work with Marriott to make sure that the disruption doesn’t impact our numbers significantly in 2018.

Yes, thanks. And on the urban lifestyle acquisition, obviously, your deals have focused mainly on resorts in recent years. Is this deal could change in thought on kind of the overall urban RevPAR growth environment, or this is purely opportunistic?

So, we like experiential hotels, that’s been a more recent focus for us. This particular hotel is in a market that we think will have better than national average growth. It has relatively constrained supply and it’s a new market for DiamondRock. So we think it does a lot of good things for us.

All right. Great. Thank you.

Our next question comes from the line of Shaun Kelley from Bank of America. You may begin.

Hey, good morning, Mark. Could you just give us a quick – your latest thoughts on Chicago. Obviously, you guys have – you did a fairly big renovation and conversion with the Gwen and then you’ve got a big investment going on with the Chicago Marriot. I think as we talk to kind of bigger picture other guys in the industry, Chicago comes up as a little bit more controversial maybe like New York did a few years back just given what’s going on in property taxes in that market and maybe a little bit about just kind of overall real estate value there? So just your big picture strategic thinking about Chicago?

Sure. It’s – I mean, obviously, Chicago is a top five MSA, it’s hard to discount it. We’re excited about the potential expansion of $8.5 billion expansion of the airport over the next five to seven years, that’s good recent news. Property taxes have been a issue, continue to be an issue within the city of Chicago for real estate holders there. There has been a number of new additions within the city that have helped that pricing power over the last two years. Hopefully, that gets a little better over the next two years. But we expect Chicago to have a good citywide year this year, it’s up about five events. We think our Gwen hotel has several million dollars of upside from the brand conversion from where it was last year. So we’re feeling good about how that hotel particularly sets up. And then Chicago Marriot, we just – we’re finishing up $110 million renovation. So we hope to gain share in the market as we move forward. But I would say on the real estate property tax in particular, yes, that’s an area of concern and it’s really had an impact on us over the last couple of years.

And the second question would just be as you think big picture about couple of the – your larger exposure markets maybe Chicago, New York and Boston, just what kind of cost inflation are you seeing in those major markets? I mean, I think, when we hear about it, I think we’re seeing the West Coast is probably the worst, but just kind of how are you seeing those three cities on a blended basis right now in terms of labor and what are some of your offsets you’re able to achieve if you are?

Yes, I think on the cost side in union focused markets, which had included San Francisco and some of the other West Coast markets. But you’re seeing labor rise 3% to 4% and you’re seeing property taxes on the East Coast markets and Chicago market rise considerably higher than that. So the offsets that we’ve been focused on primarily since labor is our largest cost category RevPAR 30% of our cost structure, that’s got to be your number one focus. So that’s really a productivity. And if you looked at our numbers in the fourth quarter, we had very good success in increasing productivity and holding down labor and wage total growth through increased productivity. One of things that Tom Healy brings to our organization is all his learning to success in the strategic hotels to layer on top of what we think was already a strong program. And there’s new labor management systems. There’s new things that we didn’t have before frankly, that we’re bolting on to what we think was a good base. So we would expect continued productivity gains to help us offset on the labor wage increases there. The other areas of focus our food cost procurement. We think that has real opportunity and we lay a little bit of that out in our investor presentation. And that’s a third major category is energy cost, where we try to offset the cost by reducing our energy costs with a variety of efficiency programs.

Thank you very much.

Thanks, Shaun.

Our next question comes from the line of Patrick Scholes from SunTrust. You may begin.

Hi, good morning. Two questions. First one, I wonder if you could give a little bit more color or sort of a walk across in the year-over-year EBITDA decline for 1Q? It looks like it’s falling from if I’m calculating correctly from $47 million to about $36 million, what are the components that are taking that down 10 or 11, I know you have DC in there and hotels out of service, but it seems like a pretty steep drop?

Sure. That’s actually a great question, you already asked, Patrick. So on the Q1, the biggest delta is going to be the Business Interruption Insurance versus the Frenchman’s comp of last year. So a more comparable number of probably about $9 million business interruption, but we’ve modeled in that are 14%, 15%, this implies about 5. So we just took the $20 million that we expect to get on a full-year basis and spread it evenly across the quarters. Now the way that works as we negotiate, we basically have a model and they have a model. And we said and we negotiate what is a fair resolution hopefully by quarter to build into our earnings as we go. So we have a model there. We have a model in Q1 of 2018. We’re currently in discussions with them. We’ve asked more than $5 million, because we think that’s a fair number certainly for the first quarter. But in your model looking at our estimates versus what probably is in your model, that’s going to be the biggest driver of the delta.

Okay, all right. Thank you for the clarification. And then second question, how much is the Vail Marriott have been impacted by the weak snow season?

This December was – December and January had fairly significant impacts. You see in our fourth quarter numbers, you’ll see a negative RevPAR number there for the fourth – that’s really has to do with the Christmas week. So we had some higher rate of business, but we had some holes that normally would have filled up with very high rates on those rooms that we had to sell at a lower rate as we hit the weeks now. And then as we go through January, it was difficult. The news is now snows have been pretty good for the last several weeks, and the hotels did – had a great presence weekend and so the rest of the season should be strong. I don’t have exact numbers for you what the impact was in the slower season, but it’s only had an impact.

Okay That’s all my questions. Thank you.

Thank you, Patrick.

Our next question comes from the line of Jeff Donnelly from Wells Fargo. You may begin.

Good morning, guys. Just following-up I guess on the earlier questions concerning acquisitions. I’m just curious are you guys open at taking bigger bites on acquisitions, for example, assets like the ones increasingly disposed off, or do you feel it maybe we’re not at the right point in the cycle for chasing those types of properties?

It’s a great question, Jeff. So I think, we have about $3.5 million portfolio. They weren’t less concerned buying a couple of big boxes is that, when you have very concentrated bets on a few hotels, those hotels can disproportionately impact your quarterly and full-year earnings. So we’re unlikely to do, I’ll call it, make a deal of $300 million north kind of acquisitions because of that volatility that it adds to the overall portfolio. I would also say in looking at our pipeline and deals that we found that are more interesting and that frankly, we can accomplish a great value with, given our cost of capital, they tend to be more unique opportunities or either we can get into an off-market deal, which is true for the one that’s pending that we haven’t announced name of, or where we think we have a little bit of special sauce, which is the Landing Resort on Lake Tahoe. So those hotels tend to be smaller deals. So I’d say, you’re going to see us focus our efforts on deals between $50 million and $125 million and unlikely to do a deal that’s big.

Okay, that’s helpful. At the outset you mentioned being, I think, a little more positive on the environment in your – in the quarter for the quarter short-term grew bookings in Q4 picked up quite a bit. Have you seen demand in booking trends persist subsequent to year-end that lead you to feel that maybe demand is accelerating as we move from Q4 into Q1, or is it sort of too subtle to discern?

January is never a great month to read too much of the tea leaves and from January to extrapolate for the full-year. So while – and the way the budgets work since are set relatively in the year. The fact that most of our hotels outperformed their January budgets. You can’t read too much into that for the full-year. So we’d like to see kind of get through the next couple of months before we had real conviction about green shoots and demand reaccelerating versus to date a couple of good months that were ahead of forecast for us.

Understood. And just one last question, I’m just curious, I’m not – I can’t remember the date at which you guys would rebid your insurance coverages, but I’m just curious how, I mean apples-to-apples comparison looks like and the cost of insurance going into 2018 versus 2017 considering the losses the industry took?

Yes, so the good things is there is a lot of capacity in the insurance market and there is a lot of entrants that are playing, so the increase is probably aren’t as big as people would think. Now our portfolio had particularly Frenchman’s Reef had a pretty dramatic damage, so we’ll expect significant increases. Overall, our total insurance would be up about 30%, so a couple million bucks, so that’s our expectation that we laid that out in the guidance section as well.

Okay, thank you guys.

And our next question comes from the line of Chris Woronka from Deutsche Bank. You may begin.

Hey, good morning guys. I want to ask you Mark on Key West kind of, see how you guys are thinking about the year. I know you have a renovation project opening up in a couple months. And we heard from some others that the re-ramp in the market has been a little bit slower and I’m just curious as to whether you guys agree with that and whether you are confident that it will change as the year progresses?

Since our long-term outlook hasn’t changed for Key West, we are bullish, we like the dynamics down there. I would say first is our expectation in late 2017. The market ramp-up has been slower for the first half of the year than we would’ve anticipated because of the overhang perception that it looks more impacted down there. If you went down there today, you’d be hard-pressed about that hurricane ever came anywhere near that Island, it looks, it looks terrific generally. So yes, it has an image overhang that will probably persist for the first half of this year, obviously as we move to the back half of the year that image starts lifting and we get easy comps from the storm related periods in the late part of 2018. So overall I think it will be okay, but yes, we would confirm the comments you are hearing from others that the, it’s a slow start and there is a perception overhang at the moment in Key West.

Okay great and then just on Frenchman’s, I know there are different options, potentially different options available to you. You have been talking about potentially redeveloping the hotel, but is there any kind of timing as to, you have – do you guys have a specific goal in mind for when you kind of make a hard decision on renovation or something else?

Yes, we are in active dialogue right now, it’s hard to get into details given the sensitive nature of all this, but we’re working hard on the claim right now. We will need to make decision in coming months, we see there, we’ll need to proceed with full speed on the redevelopment to make sure that we maintain our business interruption insurance or we’ll need to reach some kind of agreement, but there’s a lot of dialogue going on, there’s a lot of participants and stakeholders in the conversation that will help ultimately get to solution of that decision.

Great and just on Vail, after the renovation you’ve talked about how this will move the rates up pretty significantly, I know it’s one of your, I think it’s one of your top 10 EBITDA assets now, assuming there is more margin flow-through with the higher rates, does that kind of move it into the, maybe into the top five or six asset for you guys on EBITDA?

Yes, so let me backtrack a little bit on that, so we are putting over $25 million into the asset in 2018 and doing the meeting space all the rooms and they are going to be terrific and we’ll get some lift from that. But the real big lift that we expect to see would be on a rebranding and repositioning of the lobby, the spa, the bar, the outside pool experience, all those are upside opportunities and that’s really going to be the bigger mover. As you know within three years we – that hotel becomes totally unencumbered, so we could either negotiate something with the current, with Marriott on a different up brand within the next three years or we could position the hotel in three years to be a different brand, which would allow us to capture more of that rate differential. So we’ll see some incremental benefit from this year’s renovation, but really the big move will be if we change the brand and implement the rest of the value add strategy.

Okay, very good, thanks Mark.

Sure.

And our next question comes from the line of [indiscernible] from Boeing. You may begin.

Great, thanks for taking my question. A question on your latest acquisition at the landing, you said there is our zoning in place to add more rooms, it’s only got, I think, 77 rooms, I think you – that press release said. How many more rooms can you add in? How much more investment will that require?

So great question. Troy, why don’t you handle it.

Sure. So we expect to be able to add about 20 more rooms – 20 or 22 more rooms that at a cost about 250,000, 260,000 a key to build those incremental new rooms. So figure about $5.5 million to $6 million of investment for the expansion.

Okay, great. So the second question I have for you is, obviously, I’m curious to hear about the impact of your new COO, Tom Healey. And it seems like you’ve had a fair number of management changes. Any different philosophy that you have when you look at your third-party managers?

So we are now about half third-party operators and half rent within the portfolio. We have numerous third-party operators, so that we can bring those best practices. I don’t think there’s a shift. I mean, we – what we try to do is, we would look at each individual asset and trying to figure out who the optimal operator will be for that hotel. So to give you two divergent types for the landing, it’s clearly better as independent with a third-party operator that specializes in those kind of small boutique resorts and throughout Northern California. For hotel like the Chicago Marriott 1,200 rooms big meeting – big meeting space group hotel, we don’t think there’s a finer operator that Marriott for a hotel like that. So it’s really asset by asset versus trying to have a general philosophy about – we’re always going to use third parties no matter what, because that’s our strategy. We try to be more thoughtful on an individual asset basis to try to make sure, we’re maximizing value on that particular asset.

And so any particular sort of the Viceroy is going to be taking over the Rex. Did they take any sort of expertise in your opinion and trying to reposition that hotel or?

Sure. I mean, they have three successful projects already within that city, as well as numerous successful projects in California. So, we’re leveraging them as much as we possibly can to work with our team and our outside designers and consultants to make sure that that hotel really is something special within the San Francisco market and can drive the incremental market penetration that we think it deserves.

Great. Thanks.

And I’m showing no further questions at this time. I’d now like to turn the call back to Mr. Mark Brugger, CEO and President for closing remarks.

Thank you, everyone. We appreciate you participating today, and we look forward to updating you on our next earnings call.

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