DiamondRock Hospitality Company (DRH) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 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 follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce our host for today's conference Sean Kensil, Director of Finance. Mr. Kensil, you may begin.

Thank you, Sarah. Good morning, everyone, and welcome to DiamondRock's first quarter 2018 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. 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 first quarter results as well as discuss the company's revised outlook for 2018. Jay Johnson our Chief Financial Officer will provide greater detail on our first quarter performance and discuss our balance. With that, I'm pleased to turn the call over to Mark.

Good morning, everyone, and thank you for joining us on DiamondRock's first quarter 2018 earnings call. I'm very pleased to introduce Jay Johnson as our new CFO. Jay brings with him a wealth of experience and knowledge about the hospitality and banking industries. He's a tremendous addition to the team. For those of you, who have not yet met him? I'm certain that you'll appreciate his thoughtfulness and insights. It's great that DiamondRock is able to start the year on a positive note. Loading fundamentals before modestly ahead of our internal expectations with industry RevPAR growth of 3.5% for the first quarter. Resorts outperformed and had another strong quarter with 6.4% RevPAR growth. This encouraging trend for loading demand along with the success of several of our asset management initiatives has allowed us to raise DiamondRock's full year outlook for RevPAR to 1.5% to 2.5%. A 100 basis points move at the midpoint compared to prior guidance. Adjusted EBITDA was raised to $254 million to $263 million, a $3.5 million increase at the midpoint and a $5 million increase at the bottom end as compared to prior guidance. Delving into DiamondRock's first quarter results, RevPAR and EBITDA came in ahead of our internal forecast. Comparable RevPAR growth was 1.8% as the portfolio gained 70 basis points of market share during the quarter. In fact, 23 of our 28 open hotels outperformed their budget in the quarter, an encouraging sign. The results were bolstered by strong results at resorts, which were up 7.4% in RevPAR and our New York City select service portfolio up 5.7% in RevPAR. Star performers in the quarter included our two hotels in Sedona, the Shorebreak California Resort. The Lodge at Sonoma, the Gwen Chicago and the Charleston Renaissance. Top line results were held back by the inaugural comp at our DC Hotels and the renovation impact at our Chicago Marriott. Excluding these hotels portfolio RevPAR increased 3.6% which is roughly in line with industry performance and well ahead of performance for upper upscale segment. Jay will discuss our first quarter results in more details a little later on this call. Let's spend a minute on DiamondRock' capital recycling program. In 2016, the company made the strategic decision to enhance its overall portfolio by selling three non-core hotels for $275 million at a 12.8 times EBITDA multiple of 6.6% NOI cap rate including deferred capital. The strategic plan was to reinvest that money into higher quality hotels with superior NAV growth potential. The sold hotels had an average RevPAR of just $120 as compared to current portfolio RevPAR that is about 50% higher than that. Since we executed on those dispositions, we required four hotels for approximately $220 million. These hotels have average RevPAR of $219 almost $100 higher than the sold hotels. The four new hotels collectively outperforming in the first quarter with RevPAR growth of 6.3%. Our first deployment was off market acquisition of the L'Auberge de Sedona and Orchards Inn, Sedona. These hotels are great examples of DiamondRock strategy of focusing on supply constraint markets late cycle to reduce risk and ride what we believe will be a sustained trend towards experiential resource outperformance. The two Sedona hotels both had double-digit RevPAR increases last year. In the first quarter of 2008 [ph], they delivered some impressive results with combined RevPAR growth of 21%, EBITDA growth of 41% and 420 basis points of margin improvement. In our first year of ownership alone, our team increased profit such as 12.6 times forward EBITDA multiple at acquisition is now only a 9.6 times multiple on our current investment. We estimate that NAV has increased over $10 million or approximately 11% since our acquisition just over a year ago. Continuing with our redeployment program, we recently executed two acquisitions during the first quarter. The Landing Resort & Spa at Lake Tahoe in California and the Hotel Palomar in Phoenix, Arizona. The Landing is a boutique luxury resort in one of the best locations in the Lake Tahoe market. It was recently ranked a top 20 hotel in the entire United States by TripAdvisor's Travelers' Choice awards. The Lake Tahoe market is primarily led by the San Francisco Bay Area just a few hours' drive away. The market is supply insulated and has grown at a 9% RevPAR CAGR over the last five years. This is one of the only resorts in the US that has a beach out its front door and a ski gondola short walk out its back door. Moreover the resort has a number of value add opportunities, including rare and valuable ride in Lake Tahoe to increase the key count by 20%. Based on our analysis, this deal should stabilize in a few years at 10.5 times EBITDA multiple along our total investment. The other acquisition in the first quarter was the hotel Palomar in Phoenix, Arizona. This is the best hotel and best location in Downtown, Phoenix. The hotel is rated top four on TripAdvisor among 174 hotels in Greater Phoenix. We're bullish on the Phoenix market. Phoenix is the 12th largest MSA in US and demand growth in the city has been among the fastest in America, with a 7% RevPAR CAGR since 2012. Lack of new supply has been another attractive part of the Phoenix story with less than 1% supply growth over that same period. The growth and revitalization downtown Phoenix has been remarkable. It now has over 23 million square feet of office space and is home to a diverse group of demand generators. The Palomar is the heart of Phoenix's city space development which six [ph] blocks from the convention center, Diamondbacks Baseball Stadium. The Phoenix Suns Basketball Arena and major office tenants in downtown Phoenix. This deal is off market and we believe we bought it at attractive pricing. The acquisition price represents a 12.6 times multiple a budgeted 2018 EBITDA. We've just begun implementing our value add program and we're making property level operational changes to enhance performance. After implementing our changes and benefiting from market growth, we expect performance to stabilize in a few years at 10.8 times multiple on our total investment. Before turning the call over to Jay, I do want to touch on the impact on our portfolio from last year's hurricanes. Two properties were closed for extended periods as a result of the hurricane impact, in the Key West as well as the Frenchman's Reef Resort in the US Virgin Islands. I'm pleased to let you know that in the Key West reopened in April as the Havana Cabana after substantially completing its renovation. The newly themed Cuban inspired resort is an imaginative and differed and we believe that a fresh product in concept will be able to drive $1 million in upside over pre-hurricane results, once stabilized. The Key West market continues to ramp back up from the hurricane, albeit a little slower than we would have hoped. There is positive momentum for bookings later in the year and we have strong conviction about this market long-term. More consequential, the Frenchman's Reef Resort sustained major hurricane damage and will remain closed through at least the end of 2019. This creates a unique opportunity for DiamondRock. We have comprehensive insurance with $361 million cap subject to certain limitations that covers DiamondRock for both property damage as well as lost profits from business interruptions. As we previously told investors, we anticipate recognized approximately $20 million in total business interruption insurance in 2018 for all our natural disaster claims. Any rebuild of the resort will result in a world class practically new resort with the best location in the US Virgin Islands. We've begun discussions within insurers on the property portion of the claim important in any rebuild scenario and hope to have a more definitive update on Frenchman's during our next earnings call. We remain confident though, that any likely outcome will create value for our shareholders. With that, I'll turn it over to Jay.

Thanks Mark. Before we begin, I'd like to say what an honor and privilege it is to DiamondRock as CFO. I look forward getting to know our investors and spending more time with analysts that cover the company. I was excited to join DiamondRock because of its great team, high quality portfolio and balance sheet capacity to be opportunistic. DiamondRock has a compelling story and I'm looking forward to hearing your feedback in the coming weeks. Before I discuss our first quarter results, I would like to remind everyone that comparable RevPAR hotel adjusted EBITDA margin and other portfolio metrics including L'Auberge de Sedona, Orchards Inn, The Landing Resort and Spa and Palomar Phoenix. While excluding Frenchman's Reef and Havana Cabana Key West for periods presented. As Mark noted, we had a good first quarter, our hotels performed well and gained market share during the period. Comparable RevPAR grew 1.8% through a combination of increases in both occupancy and room rate. While January was difficult with RevPAR contraction due to the inauguration comparison and having our meeting space Under the Knife at the Chicago Marriott. RevPAR growth for the balance of the quarter was strong with February and March increasing 4.6% and 2.2% respectively. Over 80% of our hotels beat budget in the first quarter. We began the second quarter strong with April RevPAR growth just over 4% and expect May and June to be essentially flat year-over-year. Food and beverage revenue was approximately flat and margins were down 192 basis points during the quarter. F&B results held back primarily because of renovation of the meeting space in Chicago Marriott which displaced group business. Excluding the Chicago Marriott food and beverage revenue was up 7.4% with margins down only 47 basis points. Now let me spend a couple of minutes discussing the quarter's results and trends in our three major segments. First, business transient was our strongest segment this quarter with 5.6% growth driven by 4.4% increase in occupancy. The Chicago Gwen significantly outperformed following a successful renovation where business transient revenue tripled year-over-year. Other top performance includes the Charleston Renaissance, Western Fort Lauderdale, Worthington Renaissance and the Chicago Marriott. Leisure contract and other was down 5.5%. However, this is a little misleading given leisure overall and resorts in particular did well in the first quarter. And significant driver to the decline in leisure was the inauguration comparison affecting our DC Hotels in our unusually weak snow season in Vail. Finally, the group segment performed ahead of our expectations in the first quarter growing 3.6%. This was based on 2.6% increase in rate and 90 basis points increase in occupancy. Short-term trends were encouraging with our in the quarter for the quarter bookings up nearly 50%. Our recent renovations were particularly effected in driving group business. The Lodge at Sonoma, Shorebreak, Charleston Renaissance and the Chicago Gwen grew at a combined rate of 68%. Group was most challenged at the Chicago Marriott as expected due to renovation of the meeting space. Excluding the Chicago Marriott group revenues were up 6.4%. Looking forward, we booked approximately $20 million in group business in the first quarter and we have approximately 80% of our group business on the books for the year. Our group pace has improved modestly since our last call, although it remains approximately flat for the year. We expect the third quarter to be the most challenging for our group segment and the fourth quarter to be the strongest due to convincing calendars in our major markets. I'd like to spend some time discussing results in a handful of our key markets. Our Chicago Hotels performed well this quarter with combined RevPAR growth of 15%, despite the final phase of the Chicago Marriott renovation being completed during the quarter. Group pace is up 13% combined for both hotels for the remainder of the year. We expect Chicago to significantly outperform in Q2 as well as the remainder of the year. In particular, the Gwen delivered some of the best results ever for the hotel and is truly benefiting from its conversion to the luxury collection. The future for the Gwen remains bright. Our New York City hotels performed ahead of internal expectations this quarter with our select service portfolio generating RevPAR growth of 5.7%. Although ahead of expectations, the Lexington's flat RevPAR growth was behind the market due primarily to loss of some non-repeat ccontract business that we are in the process of replacing. We continue to expect the New York market to be approximately flat for the year, but we're encouraged by the momentum thus far. Frankly, we're positive on New York City over the next several years as supply is speaking and should decline substantially in the back half of next year. This should position the market well over the next five years. The Boston market was a mixed bag for us. The Boston Hilton was a star as we implemented a sophisticated revenue strategy that led to 8% RevPAR growth. However, the Western Boston had a challenging quarter for few reasons. A weaker convincing calendar, modest rooms redo program at the hotel and some transitory issues related to the Marriott Starwood merger integration. As they reorganize the cluster sales organization. We expect the Boston market is slightly underperformed the national average this year although it still remains one of our favorite markets long-term, given the demand generated and the massive development occurring in the Seaport area. And finally, our resort markets. Resorts were bright spot with RevPAR increasing 7.4% collectively. Even more notable, excluding Vail which was hurt by lower snowfall this season. Resorts increasing impressive 14.3% in the quarter. Let me turn to our asset management initiatives on expense control and capital investment. Our entire team is focused intently on cost controls. Hotel EBITDA margins contracted by 132 basis points in the first quarter and there are few key drivers. First; margin growth was hurt by approximately 100 basis points from property tax increases and some non-repeating key money amortization. Second; having all the meeting space offline in our largest group asset, the Chicago Marriott meant that we missed all associated profits for banquets at the hotel resulting in a 20 basis point impact on portfolio margins. Going forward for the full year, we expect margins to be impacted negatively by approximately 75 basis points from a combination of property tax and insurance premium increases. The asset management team is implementing a number of creating programs around labor efficiencies, food cost and energy conservation. Assuming successful implementation of these asset management programs, our revised full year guidance assumes slightly negative margins at the midpoint of guidance. Although it does not impact margins, I would like to point out that we recognized $6 million of income from business interruption insurance associated with loss profit at Frenchman's Reef, Havana Cabana Key West and the Lodge and Sonoma. This figure came in $1 million ahead of guidance provided last quarter, but it does not impact our original full year expectations. DiamondRock is focused on maximizing value from its portfolio and driving value from creative ROI projects. The company plans to invest approximately $135 million in its hotels this year to enhance long-term performance. There are number of exciting projects planned. At the Western Fort Lauderdale Beach Resort we will complete rooms renovation in Q3 to drive market share increases and complement our recent F&B repositioning. At the Vail Marriott upon completion of the ski season, we commence the renovation of the resorts guest room and meeting space. We will renovate these spaces to a luxury level to help raise average daily rates and close the rate gap between our hotel and the luxury competitive set. At the Hotel Rex, San Francisco in connection with joining the Viceroy collection. We expect complete a comprehensive renovation of the hotel. The property will close during renovation for the final four months of 2018. With the newly renovated hotel and branding in place to take advantage of a strong 2019 expected in San Francisco. At the JW Marriott, Denver we expect to renovate the hotels guest rooms, public space and meeting rooms beginning in the fourth quarter. With the majority of the work carrying in 2019. This renovation will secure the hotel's position as the top luxury hotel in the high end Cherry Creek submarket. There are number of smaller projects planned as well including portfolio wise, ROI initiatives such as our energy conservation program. We remain dedicated to finding new opportunities to grow NAV at our existing hotels. Before turning the call back over to Mark, I would like to touch on our balance sheet. The company has conservative leverage and ended the quarter with pro forma net debt to EBITDA of only 3.4 times, cash of approximately $70 million and no outstanding on our $300 million revolving credit facility. In addition, we have a well [indiscernible] debt maturity schedule, weighted average interest rate of just under 4% and 22 of our 30 hotels are encumbered by mortgage debt. This conservative capital structure with significant embedded flexibility provides us with meaningful protection for potential downturn, while also allowing us to opportunistically pursue potential value creation opportunities. With that, I would now turn the call back over to Mark.

Thanks Jay. Before opening up the call for your questions. I did want to touch on our revised full year outlook. At the midpoint we raised our RevPAR guidance by 100 basis points and our adjusted EBITDA guidance by $3.5 million. As I said at the onset of this call, the raise reflects our increased confidence in lodging fundamentals. Business transient is trending above original expectations and grew 5% in the first quarter alone. Our group pick up is stronger than expected in the first quarter although pace for the remainder of the year remains approximately flat as few of our group centric markets have lower convention calendars. But the leisure segment is expected to remain strong and we like to set up for resorts generally. To wrap up the prepared remarks, DiamondRock had a solid quarter and continues to stay focused on executing it's capital allocation strategy, which includes creating value for both investing in its own portfolio as well as pursuing acquisitions that meet stringent criteria. We have a terrific balance sheet and the capacity to be opportunistic going forward. Our entire time is committed to working hard to create value for you, our shareholders. With that, we're now happy to open it up for any questions. Sarah?

[Operator Instructions] our first question comes from Jeff Donnelly with Wells Fargo. Your line is now open.

Question just on, I guess Chicago, the Gwen and Chicago Marriott posted negative margins in the quarter. I know Q1 is not Chicago's best season and one hotel is facing renovations, the other one is comping against them, but with just the weak environment expected for Chicago, maybe in the year ahead with some supply coming online. I'm curious how we should think about just the absolute dollars of EBITDA from these properties and maybe 2018 and 2019 as you kind of move through the renovations and realize the benefit of what you've done.

Sure, Jeff this is Mark. So Gwen there's couple of things going on, we're excited about what's going on there I'll say from onset. There is some comping of non-repeat key money amortization that's impacting the way margins look there, but actually if you backed that out, it's pretty good story. We think that hotel be up over $1 million in profits year-over-year in 2019 and still has a $1 million over the next coming years to get back to the stabilized number, with ramp up from the brink version and renovation. So it will be one of our strongest performers in Q2. I think it will be a good story throughout this year. Chicago obviously having all your meeting space Under the Knife as a group hotel is painful experience, work through that it's 100% back and net loss will be a very strong performer and I think you will - good margins as we move through Q2. So I think both of those were kind of bleak in Q1 and should be encourageous [ph]. We're actually pretty positive on what's going in Chicago. The crossover the 60% occupancy threshold basically the first time ever in Q1, leisure was updated the international inbound decreased substantially in Chicago which has been great, continues to be a positive trend. I think driver for some of the transient that's going on there. So I think we're little bit more constructive than others on Chicago right now.

And just to be clear, you were saying, you think the EBITDA will continue to grow in 2019 and maybe 2020, just to put in context. Does that bring it back to like where it was pre-renovation? How should we think about that?

I haven't done a quick comparison, so we think that from last year's number there's $3 million of upside to the stabilized number at The Gwen. Chicago will have a good year, this year. It will have an easy comp for Q1, January, February of 2019. Now city wise are down next year, so we obviously have to group up more internally as we go into 2019, but set up for the balance of 2018, it's very constructive.

Just one last question, I saw in your slide deck you guys have put up, presentation on DiamondRocks' valuation relative to some of your peers, one in particular. I was just curios, is there something about that portfolio in specific that made you choose the comparison and I guess given your superior metrics, is there - are there reasons that you think kind of hold you guys back or things that you need to change to kind of close that gap?

So we put together the investor deck, we try to be responsive to inbound inquiries and questions that we receive from analyst and/or investors. So one or two of these points particularly we're responding to kind of repeat question we got from a couple of investors, so we're trying to lay out the facts as clearly as we could for people to make their own decisions.

Okay, great. Thanks guys.

Thank you. Our next question comes from [indiscernible] Rose with Citi. Your line is now open.

I wanted to ask, so you just said something in your remarks about some issues on group bookings in Boston to do with the Marriott Starwood integration. Was that something that you're seeing across? Is it specific to Boston or could you just kind of maybe provide a little more detail around that just because I thought the integration was kind of behind us now in terms of the sales and group bookings?

So Boston's only market where we're seeing that transitory problem with integration. So the issue up there is, they've redone the cluster sales organization which they announce early in 2017, in November of 2017 they basically made most of the sales force repost for their jobs and interview for any new jobs, so obviously that's a very distracting event. They conducted interviews December, January and employment letters to the sales force go out till March and the new structure wasn't finalized and people end up seats [ph] really till April 2, 2018. So during that period, we experienced kind of loss of focus on booking our hotel and so lost a little bit market share now that everyone's in place as of April 2, transitory issue and it will be marching towards. We did not have that experience in Chicago to use another major market.

Okay and then just maybe sticking with group for a moment, as you now Marriott has announced reducing commissions to groups book through third parties. What percent of your group bookings come through intermediaries?

This is Tom. We received about 30% of the business that comes to the intermediaries. I think the we believe that, we're going to be just fine. We saw a big spike in first quarter group bookings because of that, we believe and assume that some of that was because people are trying to get in and book their rooms business [ph] before the April 1 change and when modern trying to see, how we continue before, obviously it's top in our priority to measure that and evaluate our booking place as we move forward.

So I mean do you as a team see this as a positive move, by Marriott, are you concerned about those folks being able to find alternatives spaces outside of the Marriott system?

And I think Hilton is going following suite. So we're very encouraged that it's the right thing to do to increase profit margins over the long-term. The thing that we have to cognizant that we pull some business forward in Q1 and to make sure that we double up some of the efforts to make sure that stuff doesn't share shift for a short period of time. But when you look at the size of the Marriott system I think it's more than 50% of the big box hotels in the United States. Obviously most in the premier locations, they're still going to come to those hotels. Right, I mean the size of the group system and the quality of the big boxes really means that a lot of these groups don't really have a choice, their clients want to be there, they need to book them into these hotels.

Great. Okay. Thank you.

Thank you. Our next question comes from Michael Bellisario with Baird. Your line is now open.

Just want to go back last question, Tom just to clarify, 30% of all of our group business is intermediary or just that the Marriott?

I think it varies based on big box and small box and independent versus brand. So it's - but on the Marriott side, it's roughly 30% comes through third party, lot of short-term. The big ones Helmsbriscoe come from, they will not - their percentages staying the same and then the - basically that represents one-third of the business and two-thirds of the business were the smaller third party group bookers and they are the ones that are going from 10 to seven. So we're monitoring it and certainly we'll report on this, when we move forward if there are any changes.

Yes, thanks for that. Mark on the union buyout. Process at the Lexington, maybe how do you think about your success here effecting the value of the property and then does this change make your sharpen the pencil thought maybe investing more dollars in New York City on a go forward basis.

Great question, good catch. So let me just back up for everyone's benefit. So DiamondRock we've worked out - working with our operator in the local union there. We think we reached a win-win kind of agreement to offer early retirement to hotel employees in a way that, will increase productivity at the Lexington. We booked about $2.8 million in severance cost related to this already and overall, this is part of the story. But overall we expect Lexington to be up $2 million to $3 million in profits in 2018 over the last year. So we think it's a good move for these employees, we think it's a good move for productivity. We're one of the first hotels in New York to rollout this particular kind of arrangement and so it still has several months to play out and we'll be happy to report back on the success and the economics as we kind of move forward, but it definitely makes us more constructive on the labor set up and the ability to drive profits over the next several years in New York City. On Lexington, I forgot to mention return of profits there kind of another nugget of good news there. We recently side a contract a lease with Crunch Fitness to take up almost all of the non-revenue basement space at the Lexington, so that's going to get build up this year, open up early 2019 and that will generate about $800,000 a year in rent from space it's currently earning nothing. So that will help 2019 as well.

That's helpful. And then just switching gears to the resort front. Maybe big picture, how are you guys thinking about and underwriting kind of longer term risks related to drive through properties that you've been acquiring in some smaller markets and then also how you think about the higher cyclicality of these assets as well.

So I'll say the data, you're going to be a little careful with the what some of the Starwood data and some of the other stuff historically because of the big - I'll call the big golfing maker resorts kind of skew some of that data historically, so our experience with resorts then they actually outperform that we put some of the information into our investor day, but they actually outperformed our urban portfolio last downturn. So we actually - giving the supply constraints and the supply forecast in our resort markets that they're probably less vulnerable as we go forward and that the lease was actually proven to be more resilient in these kind of resorts. We also mentioned in the prepared remarks have strong predictions experienced resorts in particular think about the Sedona assets or Sonoma that these kind of resorts and that kind of experience is going to outperform that demand is going to continue to outperform RevPAR increases generally in the United States over the next five to 10 years.

That's helpful. Thank you.

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

We remain cautiously optimistic.

Actually I'm about to ask, so I do want to its test of semantics here. So yes just I want to pair up the statements in the earnings release on that front. It appeared to be a lot of moving parts within DiamondRock's portfolio in the first quarter that maybe obscure the underlying momentum and trend and so I want to get your sense of what that underlying trend really is, at least from your perspective because I think the picture so far this quarter from other companies is been, we're seeing a bit of confirmatory numbers in place relative to maybe what we were hoping for last quarter and it's really finally here at least in some pockets. So just curios for little more detail, there if you don't mind.

Sure, I mean things that are building into kind of our increased optimism, 23 of the 28 hotels beat budget that's the most we've beat budget and certainly recent memory, so we should see several year. That's a really good sign in the quarter, business transient was up over 5% that's a very good sign. We had some revenue strategies, we talked a little bit about Hilton Boston where we push rate and it's stuck, so that's all good and in the quarter group was very good, now we had some availability so that helped the number piece, there was some space available. But you know those were all encouraging signs and give us a little bit more conviction about where we're going and then on the supply side, we continue to see no development in the resort markets. We continue to remain very constructive on how they're going to perform for the balance of the year. So I think the overall I'd say we're modestly more constructive than we were last time we talked on the earnings call.

Okay, that's helpful Mark. And then my next question here's on Frenchman's. I know you said that we probably get a more detailed update around the quarter from now. Just give us a little more detail, if you don't mind and where we are in the process, how you're thinking about the insurance proceeds, the cost to rebuild, the value of the asset pro forma and then if you were to try to sell that asset today or sometime this year, who would be a logical buyer and how does that factor into the calculation?

A lot there so, I'll start with the response by saying we're in sensitive discussions right now with the insurers, so we're little limited on what we can comment on the call. So we've submitted, so we've spent a lot of time, we've stabilized the site. We've spent a several millions with architects, engineers, designers, coming out with the cost to rebuild and the design and the plan, we've submitted that in the first quarter to the insurers, it took a while to get all that together. It's very complicated with codes and a lot ADA and a lot of other moving pieces. So that's been submitted. We've had several face-to-face meetings with the insurance syndicate and the representatives. They are currently taking that claim, they have their own set of expertise, experts and resources they're going through that, they're spending time with the - at the site coming out with their own cost estimates and they will sit down probably in the next 30 days with kind of where we are, where they are and talk about the path forward that makes sense for both of us. On the rebuild scenario, we've spent a lot of time on what the concept, brands would be. We anticipate that we get considerable financial support for both whatever brand it turns out to be, as well as from the USVI government which obviously has a message and we're seeing it rebuilt. So we have one, I'd say we have one avenue of rebuild that we're spending our resources in time doing and we think it would do right years better than it's ever done before. It was a profitable hotel before, but it is the A plus location in the US Virgin Islands. There are too kind of segue little bit to one of your other questions, there's a pretty active market for an asset like this. Right from PE firms, I could probably name 20 that might have an interest in doing something like this because of its location and they could take advantage of, this is what a PE firm does. Right. They come into a situation that has a lot of upside, they take advantage of this situation and it's a good story for them, bring their expertise. They're okay with the disruption if you will of getting that ramped up. So I think there will be an active market of people that would be interested in something like this.

Okay, perfect. That's great color. Thanks.

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

Just want to touch on guidance a little bit, curios how much of the 100 basis points increase in RevPAR guidance was driven by first quarter results versus what you're forecasting now for the back half of the year?

Yes and this is Mark. It's really a combination of the both. I mean the first quarter came in probably 30 basis points ahead of our budgets and so the balance of it's really coming in at the rest of year.

And was that, due to any particular markets as you look out, I mean you said 20 through 28 outperforming your expectations fairly broad based, but what about as you look forward, what markets are driving I guess that 70 basis points.

Yes the resorts look like they're strengthening Chicago second quarter and it's grew pace looks very strong. And then New York is probably going to be a little better than we originally budgeted for and that's offset some of the renovation disruption which we had anticipated before, which hasn't changed. So we feel little bit more confident about the renovation disruption downside risk if you will, getting through the first quarter, which assumed is little bit more confident than raising the EBITDA portion of the guidance.

So on New York City it sounded like you were still assuming flattish RevPAR growth for the full year which is what I thought was assumed in your original guidance, so does that imply there's potentially some additional upside from this point based on what you're seeing in New York.

Yes, so when I look at forecast they're about flat for Q2 through Q4. Obviously the first quarter is the least mathematically significant quarter in New York, but we'll see. As you know, that market goes by a lot of short-term transient trends and so trying to predict fourth quarter in New York is always a difficult task and that's obviously the meatiest quarter for us. So one encouraging sound we were just, actually yesterday going through some of the supply numbers and the supply on the east side concentration of our portfolio is basically zero. So it looks really positive from that side too, so that's encouraging.

And then maybe sticking with New York. One I'm curious what segments are you seeing the most strength in the market and then, also you mentioned you lost some non-repeat business at the lag. I'm curious what the timeframe is, that you'd expect to backfill that business.

Tom, you'll take that one.

Sure, this is Tom. We expect to backfill the contract to business in the next three months and we're far along in the contract negotiations and we hope to have final news here in the next few weeks. So that will be the backfill, but from a transient standpoint. New York City obviously for the first quarter and trends the leisure demand on the weekenders was stronger and certainly the last 10 days of the month. Thanks to the Easter holiday. So we believe that the BT is been very, very strong. We've seen very positive results with regards to business transient, when you look at your portfolio. Q2 of last year was up 5%, Q3 was up 8%, Q4 was up 11% and then the first quarter of this year 5.6%. So business transient continues to very active, very active in New York and then we're still seeing very positive trends from international travel because the value's gotten better to come here. International travel for example in New York City passionate lift in February was up 6.3%, about 330,000 new passengers were domestic and about 220,000 were international. So we're seeing more active international travel, which is very positive for New York City.

Great, that's helpful and then just last one for me. Your cash balances have kind of dwindled down, you have still $70 million roughly on the balance sheet at quarter end, but curious what the appetite is for additional acquisitions and how we should think about funding to the extent that you did find some attractive opportunities.

Sure, so let me back up but just on acquisitions little bit. So we're sensitive across capital and our cash balance and we've been very disciplined on what we're going to buy. As you know, we're going to focus more on smaller assets, as small as $42 million, so those are - those could be funded from cash. I'd say pipeline now, we're focused on off market deals. I'd say small to mid-size resorts makes the bulk of it and if we could find more deals like Sedona which are wildly accretive, we would definitely pursue those. But we're likely to do a deal that's not that big in size, maybe do a couple. For cash, would be obviously the first source we still have $300 million available on our line of credit and then we could obviously do more term loans or individual property loans if needed, but I think the cash is clearly the first line of use.

Great. Thanks for taking the questions.

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

Just follow-up on the last question. Given you deployed some capital in the deals, it doesn't make sense to go back and sub market it and sell more hotels right now.

It's a great question. It's a little bit of a seller's market right now. So we're evaluating where there's opportunities. I think the stronger and more conviction we have on finding good deals that create value for shareholders, we may look to do dispositions. As you know earlier we were sitting on $200 million of cash and it seems dilutive given that set up, but as we find more acquisitions that meet our criteria, we think add value for our shareholders that is one source would have to internal discussions with the board about tapping to fund future acquisitions.

Got it and thanks. Looking at the portfolio, you have a broad mix of assets, a lot of big group boxes, boutiques, resorts, some select service. When you look at those types of hotels, do you want to maybe exit or increase kind of any of those segments long-term what kind of mix do you see having?

Great question. We really like our portfolio, I mean one of the things we strive over the years just to make sure we have a diversified portfolio because we think that reduces risk for our shareholders over extended period of time. The area we want as you heard, we're bullish on resorts particularly mid-sized experiential resorts that scenario we'd like to increase. We're about 30% that segment right now, if we could increase that to 40% I think we would all be very happy internally.

All right, so 40% resorts. What would kind of go down? It will be kind of select service, would it be kind of standard upper upscale in the cities? What would you reduce?

I think we're reluctant more big boxes, just because it's a lot of until we got to a certain size, it's just a lot of concentration in one asset. So we would rather diversify with more small mid-size assets than to put too many eggs in basket, another big question center [ph] hotel.

Great. Thank you.

Thank you. Our next question comes from Stephen Grambling from Goldman Sachs. Your line is now open.

I was just wondering if you could discuss more the two new properties and maybe some of the challenges around the growth and development, if you look at targeted 10.8 times multiple.

So let me start and then I'll let Tom here jump in. so recently Sedona as you know which we bought last year about $650,000 above underwriting, that one's really kind of hit every metric and there's still a lot of meat on that bone. So that one's going to continue to outperform and we're super excited about it. The two first quarter acquisitions I'll start with the Landing, it's a fantastic hotel. We just got the new manager in place and I'll let Tom kind of jump in and talk about some of the value add opportunities there and how we're going to drive margins going forward and a little bit the same story on Palomar waiting switching Andrew [ph] we're focused, we have an action plan that focuses on making operational changes there and implementing a lot of our best practices. There's a difficult comp in Q1 and Q2 with the final four which was the end of Q1 and beginning of Q2, but the Phoenix market is very healthy because actually calendar looks very good for this year and the location really is A plus for that hotel, so with that Tom, I'll turn it over to you.

Yes on the Palomar, we're really excited. It's the best location downtown. We're 30 days into the hotel, so we're still put together our action plans critical path. But as we get started, we actually brought in a new GM, he's been there about a week and we're evaluating all the management team to get align with our goals. We're looking to add facility fees and bring in all the food costs, labor cost initiatives, energy initiatives that we'll be using throughout the portfolio and there are opportunities in other revenues as well. We look at parking fitness, food and beverage program and we think there are opportunities there. So Q1 and Q2 absolutely RevPAR were impacted obviously as Mark mentioned through the tough comps in the final four, that kind of hit beginning of - the end of March and beginning of April. But I figure after we get through the different comps in the first half of the year and we get our team in place and our plan in place. We expect much stronger results at the back half of 2018, particularly in Q4. And Landing, this one is a gem. I just have to say, I think Mark coined a phrase the other day. He says where else can you walk out the front door and be on the lake and go out the backdoor and have a small ski resort. It's spectacular. These rooms are probably my favorite rooms in our portfolio. It's a great comfortable room and the fact that we can expand this and is exciting. We have obviously two roles [ph] is in place here. We've used - we obviously two roles [ph] in Sedona and they're doing very good job for us. We have new GM in place, who is very strong is sales and marketing background and we think the transition is very solid. We're implementing our value add program, resort fee increases. We have additional five keys that we can add into the facilities shortly and we're working on fire pits and experiential programming around the space. We also have an opportunity to move the fitness center and add an ocean front suite. So there are a lot of little tricks that we have opportunities here. We're evaluating food and beverage opportunities as well and like I said, this is a very special place. When you look at this deal, look at the success we had in Sedona. We're $650,000 overall underwriting and we expect while Sedona is a unique asset and just a wonderful location. We think that Landing has a lot of these similar attributes. So really excited.

Great, that's it from me. Thank you.

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

Can you talk a little bit more about the $50 million increase in severance guidance, is that all related to the Lex?

50?

15.

Yes it is all related to the Lex. The number is difficult to predict because basically we offer the program to a wide variety of hotel employees. Frankly the more they take it, the better it is. But we'll know in the next 60 days what the ultimate number is. But there's a decent return on that number.

Great, that's it from me. Thanks.

Thank you. Our next question comes from Gregory Miller with ‎SunTrust Robinson Humphrey. Your line is now open.

Pitching along with the Palomar acquisition, it seems like there are a lot of positive attributes about the hotel and market and deal economics. However could you provide your thoughts about what made you confident about acquiring another Kimpton in light what some would call recent challenges with IHG's brand integration?

Yes I would say we have a very productive relationship with IHG. If you look at our Shorebreak numbers and we've been able to accomplish here and that's what - Kimpton we've owned we have pretty limit exposure but that's the one we've owned for a while. It's pretty impressive what they're doing there. So we're not experienced a lot of native transition as they kind of integrate that, so the Shorebreak which we've owned made us feel good about and you could see the numbers for Q1. Made us feel good about our ability to work with Kimpton in a very productive way to drive profits at the hotel. There's going to be small issues with any transition and we had a couple of hiccups, but we feel good based on our experience at Shorebreak that we'll be able to get it right and be able to drive profits, with the partnership. Now there is a termination right in two years at Phoenix, so there is a little bit of safety valve. But we like our Kimpton, we like our relationship and we feel good about our ability to work with them going forward.

Great and one of the questions, moving onto Fort Worth. The Renaissance Worthington had more moderating RevPAR growth last quarter and I'm sure if you're starting to see a little bit more of stabilization in that property post renovation.

4.7% is pretty good.

It's fine. Of course. Relative double digits, maybe it.

So we had renovation comps that were helping us. It continues to gain market share post our renovation. It sits on Sundance Square, it's a terrific hotel in Fort Worth market. We're going to enhance the meeting space this year which should while we'll hold meeting for disruptions as we anticipate that will help drive market share continually as we move in 2019 as well, so there's lot of opportunities this is one of the assets that Tom is probably excited about in our entire portfolio about things to do that can drive value over the coming years. So Tom, you want to add anything?

The meeting space, the bones of this hotel are fantastic and it's - everyone remembers my past from strategic. I had the intercom [indiscernible] for my entire tenure there and some of the things [indiscernible] where it added value Worthington certainly has the opportunity. This is a lot of group space. As Mark said we're renovating all the meeting space this year, the rooms are done. We have some opportunities to improve the sense of arrival, restaurant offering drive more out the revenues to - and then obviously to help close more group business, obviously there's a direct correlation between sense of arrival, room experience, meeting experience that helps your inquiries on group and also helps your closing percentage. So this hotel there's a lot of nuggets and some opportunities to expand meeting space and that - and have some very unique space that's not in the market and so we're evaluating it all, but this is one of the hotels in the portfolio. I'm very excited about, love the market. It's a great labor market and when you get the group business and the incremental spend it flows.

Thanks very much for the color. That's all from me.

Thank you. Our last question comes from Sean Kelly with Bank of America. Your line is now open. If your phone is on mute, please un-mute your phone.

So I just want to go back to the prepared remarks real briefly. I think I caught the spread but maybe I heard it wrong, but I think as you're walking through sort of portfolio performance statistics. Did I hear that April so far was up 4% but you expected May and June to be flat? Was that correct?

That's correct.

Could you give me any color around the [indiscernible] you're kind of seeing. I'm sure there is booking activity or calendar timing or something and that which is sort of - can you walk us through the cadence a little bit?

In terms of May and June?

Yes, exactly.

Yes, well May and June are really impacted by the renovations at Vail and then the weakness we're seeing in the Boston market.

And Boston remind specifically, is that city-wide?

Yes it's a city-wide group calendar as well as transitory issues that we're seeing the Marriott Starwood merger and it's really specific the Western Boston in particular.

Okay, got it. Thank you for that. And then the only thing I wanted to touch on was going back to the agreement you guys reached at the Lex. Was there a catalyst for that in terms of - did you have like either a union contract expiring or sort of like a timeline that you allows you reach kind of creative solution there, was that something or sort of one-off, were you able to come off with on your own?

So there is nothing particular in our agreements that open this up. This is the conversation we've had for well over a year. I would say our operator has been very helpful and partner with us in working with the union [indiscernible] win-win solution. So I would think it's partly our strategy, but also I have to credit our partner here, our manager really was instrumental on helping us design and get this effectuated. And so we think it's a good template, we wouldn't be surprised if other people try to follow behind this model because it's a good model for everyone, but there is no contract or anything other than just an open negotiation and kind of coming into conclusion of something worked for all sides.

Okay, great thanks for the color and that's all from me. Appreciated guys.

This concludes today's question-and-answer session. I would now like to turn the call back to Mark Brugger for any further remarks.

Thank you Sarah. Just conclude by saying thank you very much for participating in today's call and your interest in DiamondRock and we look forward to updating you next quarter.

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