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…

[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.