Good day, ladies and gentlemen, and welcome to the Q4 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 for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Sean Kensil, Director of Finance. Sir, you may begin.

Thank you, Jimmy. Good morning, everyone, and welcome to DiamondRock's full year and fourth 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 laws and may not be historical fact. 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 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 2019 outlook; Jay Johnson, our Chief Financial Officer, will provide greater detail on our fourth quarter performance and discuss our balance sheet. With that, I am pleased to turn the call over to Mark.

Good morning, everyone, and thank you for joining us. Since we have previously announced preliminary 2018 results, we will focus today's call on more details related to the market trends, recent acquisitions, capital allocation and specifics within the DiamondRock portfolio. We will also offer additional details on our previously announced outlook for 2019. The overall economy and lodging fundamentals still look fine. The broader US economy remains healthy. GDP growth continues to be solid. And unemployment rates remain extraordinarily low. With that said, 2019 has already been affected by the Government shutdown and we anticipate positive, but moderating GDP growth for this year. Lodging industry metrics also remained solid. Fourth quarter 2018 RevPAR growth in the US was 2.4%. Industry growth in the quarter would have been even better, but was challenged with difficult year-over-year comps from the demand spike following hurricanes in 2017. It's worth noting that the top 25 markets were a little more impacted by supply and underperformed the broader US with RevPAR growth of less than 1%. For the full year 2018, lodging fundamentals were generally at their historic averages, with RevPAR growth at 2.9% and supply growing at 2%. The best growth was seen in the resort and lodging segments, which significantly outperformed with RevPAR growth of 4% and 3.7%, respectively. Now, I will touch on DiamondRock's 2018 results. Overall, we were pleased with our fourth quarter results, which came in better than our previously announced preliminary results with adjusted EBITDA $500,000 above the high-end of the range and FFO per share beating by $0.01. Fourth quarter comparable RevPAR increased 1.9% and total revenue grew 2.4%. F&B revenue shined in the quarter with 3.1% growth. We need to point out that one asset in particular did have a big impact on portfolio results. The Westin…

Thanks, Mark. Before I discuss details of our fourth quarter and full year results, I would like to remind everyone that Comparable RevPAR hotel adjusted EBITDA margins and other portfolio metrics are pro forma and include Cavallo Point, the Landing, Palomar Phoenix, Orchards Inn and L'Auberge de Sedona for the entire year. Additionally, comparable results exclude Frenchman's Reef and Havana Cabana Key West for all periods presented as well as the Hotel Emblem, formerly Hotel Rex, from September 1st through year-end as it was closed for renovation. Our fourth quarter results were in line with internal expectations. RevPAR grew 1.9% and was held back by -- and it was held back 40 basis points by disruption from the union strike at the Westin Boston. We are very pleased with strong performance in our Chicago and New York City hotels, which more than offset off-cycle citywide calendar impact at our Washington D.C. and Salt Lake City hotels. Food and beverage revenues were very strong in the quarter, up 3.1% and had excellent flow-through with F&B profits up 5.6%. Our F&B results were bolstered by strong group demand trends as well as the successful F&B repositioning at the Westin Fort Lauderdale. In the fourth quarter, excluding the Westin Boston, GOP margins were up 37 basis points and EBITDA margins were flat. For the full year, also excluding the Westin Boston, GOP margins were up 8 basis points, while EBITDA margins contracted by 8 basis points. While the asset management team did a great job in constraining controllable costs, property taxes and insurance premiums increased meaningfully this past year. Property taxes were up 7% in 2018, with the bulk of the increase resulting from reassessments at our two Chicago hotels, which occur once every three years. We're in the process of appealing and…

Thanks, Jay. I'd like to spend a little more time discussing our 2019 outlook in detail. Consistent with our previously provided outlook, we expect 2019 RevPAR growth for our portfolio to be in a range between 50 basis points and 2.5%. 2019 RevPAR growth will be led by our three recent acquisitions, including Cavallo Point as well as our two completed repositionings, Havana Cabana Key West and the Emblem Viceroy. We also have high expectations for several of our resorts, including the Vail Marriott and the Westin Fort Lauderdale Beach Resort. And hopefully, the above expectation performance in New York City continues in 2019 as well. This strong growth will be partially offset by off-cycle convention calendars in Boston, Chicago and DC. While we have recently had excellent short-term group pickup, we still have ground to make up with group pace now about 4% behind the same time last year. We are encouraged by the fourth quarter, in the quarter, for the quarter, pickup of 33%. Importantly, the group's story essentially reverses itself next year. 2020 is setting up really well for DiamondRock. Our portfolio group pace is up approximately 15% for 2020 with robust increases in our most important group markets, Chicago is up 30%, Boston is up almost 20% and DC is up nearly 30%. We also think New York City is likely to see better RevPAR growth in 2020 as supply growth really levels off. Turning to the full year outlook. Our guidance is for full year adjusted corporate EBITDA to range from $256 million to $268 million and full year adjusted FFO per share to range from $1 to a $1.04. Our guidance implies that our hotels are growing same-store EBITDA about 3.5% at the midpoint and over 5% at the high-end. As I mentioned earlier,…

Thank you. [Operator Instructions] Our first question comes from Rich Hightower with Evercore ISI. Your line is now open.

Mark, I wanted to ask about the BI proceed at Frenchman's. It sounds like given the level of sort of soft level of confidence regarding the remaining portion of what would be $16 million instead of the $8.8 million in 2019, it almost sounds like you're daring us to model that above and beyond guidance. So maybe walk us through what some of the gating factors are to getting the remainder to the extent you can in the discussions with the insurance company to this point?

So, Rich, I hope I didn't over imply something. So I would suggest that people only model the $8.8 million. We're in sensitive and I would say difficult conversations with the insurers, so we can't provide any implied or explicit kind of guidance on the balance of that $16 million plus for the year. Frankly, it's kind of the unique circumstance the way the insurance claims work. And they will depend on the kind of willingness to reach a reasonable agreement and we can't make any promises or commitments related to that. Essentially, the process, we will continue to engage with insurers and we have our experts, they have their experts. We'll sit down and we'll continue to negotiate and hopefully be able to resolve it later this year. We don't anticipate it resolving in the very near future, but we're optimistic we'll get there at some point this year. But again, no assurances on timing.

And then maybe just in terms of the acquisition landscape, obviously you guys have shifted focus to a pretty significant extent toward resort, leisure, independent branded hotels and that sort of thing, but what's the appetite conceptually for maybe another big box branded asset if something looks attractive? I mean, is it just sort of a deal-by-deal analysis and there is a price for anything or is there sort of sticking to your guns on the strategic shift that's taken place?

So, I'd say, our update for another big box, given our portfolio footprint right now, is relatively low. We have a couple big group hotels, we're about by the third group in business across the portfolio. We like that distribution. I think we are looking for hotels that resonate with customers over the next decade. We like the more experiential oriented hotels and we're trying to make sure we have that balance in our portfolio. So you're much more likely to see us do a hotel, one that's not huge. We're not going to make enormous bets at this stage of the cycle. Second, we're likely to see something that has more of a differentiated experience with that -- whether that's location or lifestyle or provide something that's different for the lodging customer.

Thank you. And our next question comes from Jeff Donnelly with Wells Fargo. Your line is now open.

Maybe just on Frenchman's Reef, I'm not sure if you can speak to it. But just as it pertains to the business interruption coverage, is it possible the insurers will, I guess, not provide full BI coverage until asset stabilization because they might argue that the rebuilding was extended by the desire to upgrade the property rather than just reopen it in its current form, so they don't feel like they're obligated to participate in the lengthened timeline?

It's a good question. I guess, I need to be a little careful on what we say, since we are in sensitive conversations, I'm sure you can...

Understood.

So I think it's -- they're going to have their position, we have our position. We think there's a lot of merit to our position. We think it's more of a timing issue on the number of -- on recognizing this since we can recognize it. But again, these things will take their own course and we can't provide any guarantees.

Understood. And just switching gears, I guess, over to Marriott. Obviously, I know you talked about some of the challenges you faced in Westin. I continue to hear from other owners that Westin's new guest revenue management system is, I guess, challenging, maybe diplomatic, and it's impacted some of their yield management. I guess, what's your take on it? And considering you have a handful of big Westins, do you think that's going to be a persistent headwind in 2019?

So, Marriott, I mean, just to kind of roll it out. Marriott rolled out a new revenue management system, which covers both Westins but also the existing Marriotts, full service Marriotts as well, as well as a lot of select services, called Yield 1, 2, and it has a lot of predictive technology built in. So a lot of analogues are artificial intelligence, if you refer to it that way. We like a lot of the attributes about it. It is still a tool that's learning. So both the hotels need to learn how to actually utilize it properly and Marriott will continue to refine it over time. But clearly, it's -- there has been some challenges as they rolled it out, as you would expect with any kind of massive new tool. We anticipate that it will get better and better as we move through 2019 and '20, as they kind of work the kinks out. And frankly, the hotels need to be better trained and do a good job of utilizing it, but we like the idea of utilizing technology and being smarter about revenue management.

I guess, sticking with that. I mean, I know the Marriott also kind of revamped some of it’s -- I guess, like classifications in their redemption program. Is that impacted redemption patterns for you guys in the portfolio in any material way or have you been relatively un-impacted by that?

No. I would say, nothing has been dramatic, but yes, there has been shifts within our portfolio, there are some that have won a little bit and some of that have lost a little bit as the programs have shifted and they changed redemption levels. We don't have any hotel that I would say we're going to say fundamentally is underperformed or overperformed just because the results of the way they've changed the program this year.

And just one last question, it was just on the 2018 acquisitions. You're talking about driving your growth. The Landings last year I think did $1.5 million of EBITDA, I think, when you bought it, you guys thought it'd do $3 million in the trailing 12 and the Palomar came in at, I think, at like $4.7 million and I think when you bought it, you thought it would do $6.3 million. So collectively, that's kind of well below underwriting, but I wasn't sure, is that a function of the work that you guys were doing to lay the groundwork for where you kind of see that asset going in '19 or is there something about underwriting or asset management that didn't hit the numbers you guys thought in the first year?

So, let's take one by one. So, there is three acquisitions that will play out in 2019. Obviously, the Sedona ones which we've kind of talked about every quarter have been home run for us, our 17 acquisitions. Cavallo Point, we expect to be a strong performer this year, we'll benefit certainly from the -- what's going on in San Francisco Bay market. So that one is pretty obvious to see. The Palomar, we take into account, with the Palomar Phoenix, we did hit with some asset management initiatives or some initial expenses, putting the labor systems in, putting the food consultants in the food procurement programs. Those expenses hit and we did move out the underperformers on the operating team and therefore some of that severance in 2018. So, 2019, right on track for underwriting. I think, you'll be really pleased with what you see in the results from the Palomar. The very small Landing is very sensitive to expenses because it's just a -- it's a small asset. It got hit with some of those expenses as well. That one, we're not going to know. I mean, it's going to a couple of years for that deal to play out. It's really all hinges on this expansion and the ability to add over 20 additional keys to the 77 room base. And so that one, we're going to have to judge after that's get completed. And so we're just ramping up for that, hopefully, that expansion in 2020.

Thank you. And our next question comes from Felicia Hendrix with Barclays. Your line is now open.

So, this is a question for either one of you. Just with -- you talked about some of your balance sheet actions and your buybacks since December with your stock having recovered a bit. Just wondering, if share repurchases remain a top priority or you're back to prioritizing new hotel acquisitions, how should we think about capital allocation in '19?

It's a great question. So I would say, share repurchases remain a consideration and we are going to be opportunistic as we go. We are looking at some acquisitions, but I'll tell you we're still trading at a meaningful discount to NAV, so we're still being pretty conservative on our underwriting on deals that we're looking at. So our expectation is that the stocks are going to be fairly volatile in 2019 and we're going to have to pick our spots on kind of both ends of the capital allocation spectrum.

And then just my follow up is just regarding what's happening in private equity, we've seen PE firms, even some REITs start to buy in New York again. You've talked about how you see New York recovery. So just wondering, can you update on your ideal mix in New York City and how you see each of your assets positioned there in the long-term?

So, we have four hotels in New York City, represents about 11% or 12% of our total EBITDA. We like to be no more than about 10%ish any one markets, so we're kind of at that allocation in New York City. Now, three of our four hotels are on the East side. We are particularly excited about Midtown East, since it's the best supply picture within Manhattan, especially what's going on with JPMorgan's new headquarters and the hike at Grand Central coming out creating kind of native supply near our hotel. So we like these dynamics a lot. We're happy to have the allocation, we're unlikely to add additional New York since we're already kind of at our target allocation, but we really like the setup over the next five years for New York City.

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

Maybe a longer-term question. As you look at the all-in costs of branding versus being independent or even so-called soft branding, how have the costs evolved from your standpoint over the past five years? And where do you see those moving over the next five and how might that dictate your decision whether to stick with brands versus look for alternatives?

Stephen, this is Mark. I think every hotel is its own business case. So expenses have generally been stable, right. The franchise fees or the management fees have generally been the same percentage of revenues. They have other program costs, but they, I would say, are in the same neighborhood, ticked up a little bit. I think really it has to be consideration of what is the market demand, is it group-centric and you need the brands to drive the group and is the particular market so constrained that the brand cost versus the incremental demand it puts into your hotel isn't the right ROI. I'd say, certainly, the big group boxes, it's kind of a no-brainer that you need the brand. So the less group you do, probably the -- more carefully you need to be about the proposition of putting a long time encumbers. But there's no doubt, a number of our hotels run much higher rates, are much more profitable having the brands. There are some -- we obviously have some independents like Cavallo Point that we don't think would make as much money with a brand even if it was a Four Seasons or a Ritz-Carlton. So we -- again, we -- I think you got to look at each one as individual business case.

And I guess, looking at the small resort strategy, are you seeing any change in the transaction environment for these types of properties either from a seller standpoint more coming on the market or a better standpoint more people looking at this?

So I guess, one of the things on the seller front that we really like about resorts is that they're less institutionally owned traditionally, so there's more ability like Cavallo Point to do off-market deals. And hopefully, we're getting better pricing by doing those off-market deals. So that's one of the things that we're very attracted to the, what I'll call the small mid-sized resort kind of generally that acquisition strategy. But we're not alone in recognizing that resorts are hot. I mean, if you look at Smith Travel, whether it's last year, this year, resorts continue to stand out, people are looking at similar data when we talk to our friends in PE, particularly resorts are the top of their acquisition wish-list as well. So we're going to have to continue to hustle a little faster and try to find a couple of unique deals here and there, but there is clearly much more interest in resorts than there was a couple of years ago because I think a lot of people are focused on the same data that's driving our acquisition strategy.

Thank you. Our next question comes from Bill Crow with Raymond James. Your line is now open.

Yes. Thanks. Good morning. Mark, question for you on capital allocation and sources and uses. You haven't sold an asset since 2016 and certainly your peers have been active on the sales front. And as I look to your portfolio, I think there's three or four hotels that just don't fit with where you're trying to get to. Can you talk about the prospects for maybe raising capital from asset sales?

So, we were a very active seller of assets early in the cycle, as you know. We do have, like any portfolio out there, by definition, there's about a 10% of things that are not as fast a grower or something that doesn't quite fit the box of what we -- our ideal asset is and we are looking at potentially monetizing an asset or two this year, but I think we need to be very, very cautious about our cost of capital on that relative trade. So I would say, yes, there are one or two assets, which we would consider for disposition, but we need to get the right pricing to transact.

But depending on how your stock is trading, buying your stock below NAV could be a pretty good trade, right?

Absolutely. The lower our stock price, the easier it is to sell the assets because the Vegas is there, no doubt.

Let's just go over the Cavallo Point asset. And I think I get it, but you're talking about it's pretty obvious how it's going to have a great year, given the San Francisco backdrop. But when I think of San Francisco, I think of really the CBD market benefiting from some Asian convention demand. And I'm just curious, I know there's going be compression throughout the city, but you are on the other side of the bridge, you're primarily targeting the resort or leisure travelers, I should say, and at pretty high price point that maybe convention goers wouldn't pay. So is it that obvious that, and I don't know how long the booking window is, but just kind of draw that bridge on why it's obvious that it's going to have a terrific year this year?

So, as you imagine, every weekend is overwhelmed with demand in Sausalito. And what really drives kind of terrific year-over-year RevPAR growth is the ability to put in high-end small groups midweek. And so as San Francisco is super hot, we're able to put in more high-tech groups, more incentive travel, more of everything that's getting kind of pushed into the San Francisco area and there is less other places for them to go and we provide a very unique experience. So that incremental demand on Tuesday, Wednesday, Thursday, with that -- particularly that small group is really what's going to drive the year-over-year RevPAR growth.

So, is there a concern, and then I'll get off the phone, but is there a concern that the pricing in the New York of -- excuse me, of the San Francisco market may shift demand away this year from leisure would be guess and maybe inbound international travelers as well might be a little bit weaker this year, so you're kind of battling that a little bit or no?

Tom, you'll answer that?

Hi, Bill. I don't believe so. But, I think there is significant demand, as Mark said, the leisure demand on the weekends is incredible, one, for rooms and two for just foot traffic into the resort as people come off the -- jump off the bridge, but there is a fair amount of activity in and around resort and the restaurants. So I think the weekend takes care of itself. And as Mark said, the demand, the compression in San Francisco and Palo Alto, the midweek group, we're seeing a tremendous amount of demand into the hotel with -- Monday through Thursday for group business and then the incremental spend on the group room night is pretty significant. So we feel pretty good that the demand on all -- at all pieces are -- is appropriate and we feel pretty confident that the resort will perform.

Thank you. Our next question comes from Thomas Allen with Morgan Stanley. Your line is now open.

What are you seeing in terms of international inbound in general and what are kind of your expectations there? Thanks.

Thomas, I would say the market that we're in that is most attune to international inbound travelers in New York City and New York City had record inbound international last year, so we continue to be actually a little surprised of how strong international has been for us throughout the portfolio. Our expectation, what's built into our budget is flat expectation for international inbound guests at our hotels in 2019.

And then just a little bit granular, but you gave incremental color on how you're thinking about first quarter, second quarter and third quarter next year. There's just a lot of moving parts on fourth quarter in terms of the comps, any commentary there.

Yes. We think, as we said, first quarter is going to be modestly positive RevPAR growth and then the second really through the fourth, the second and third quarter have a lot of unique things that are going to be positive as well as groups better in the second and third. Fourth quarter has a little -- is a little softer on the group side, but a little easier on some of the renovation comps. So we expect the fourth quarter to be decent, but not quite as robust as we're going to expect in the middle of the year.

Thank you. Our next question comes from Chris Woronka with Deutsche Bank. Your line is now open.

I wanted to ask you on the two potential rebrands, Sonoma and Vail, and I know you're still working in both places. But could you get something done before all of the renovations and capital spend are complete and what -- is this just kind of still going through the bake-off process in terms of brands and key money and things like that?

So let's kind of take them one at a time. So Vail, we still have two years. We wouldn't want to rebrand it unless we were done with the complete renovation because you kind of get one shot of reintroducing your property to the world. So we would complete everything ahead of that brand change. So no, we wouldn't rebrand it before close of the property two years from now. And we want to stage the capital, so it's not very disruptive. The good thing about Vail, as you have very short shoulder seasons, that you can do a lot of work in and so we want to stage it over the next two years to minimize disruption and then relaunch it as the fully renovated fantastic whatever it's going to be. The Renaissance, The Lodge at Sonoma is different. We have a long-term agreement with Marriott there, so our only option is to rebrand within that brand family and our discussion with them now is could we rebrand to a lifestyle brand within their portfolio and what would the capital be there. So we're repositioning, as I mentioned, the Michael Mina restaurants getting built this year, we're redoing the spa, bringing in the luxury spa operator that will get done this year. And then what else would we need to do to satisfy their brand requirements to switch the brand there probably next year. So that's the ongoing dialogue with Marriott.

Okay, that's helpful. And then I just wanted to ask, Mark, I know it's been said, you guys have got a little bit deeper into the resorts and little bit more boutique in different markets, which I think is differentiated. Do you think there's something secular in the industry? Everything you've sold has been kind of the four-star generally, I don't want to say commodity hotel, but commodity-like hotels. Is there something you're seeing in the -- do you think there's lasting customer shifts in where the growth is going to be in terms of going into these smaller resorts?

I think the shift is -- I think we're more sensitized as we kind of think about holding our assets for the next 10 years when we go into our assets. Sometimes we do, sometimes we don't, things change. But what we're trying to -- whether this resonates with the customer, clearly the big group boxes that are -- can't be duplicated and big groups need that kind of experience. So we're happy with that. I think the one that the customer is less distinguished, especially as these brands get very big and have multiple options within the same market, is kind of your standard hotel without any special features. So we're more and more sensitive to those kind of properties. And even with our existing portfolio, we are doing a number of capital projects and a lot of the upsides on figuring out how we can reposition those assets to capture that unique customer experience. So, yes, the assets, we would be -- we have been more likely to sell have been the ones that are less distinguished. They are good hotels in good markets, but there's nothing that's unique or special about them that would necessarily outperform over the next several years.

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

Just curious on the Vail Marriott, you've talked about the $3 million or $4 million of upside and just curious what base level of hotel EBITDA that that's off of and how much upside are you expecting to capture in 2019 or is that fully post the rebranding?

So we expect this to be a big year for Vail, partially due to the easy comp from doing the rooms renovation last year though. So I think here, we anticipate doing well north of $11 million of EBITDA at that hotels this year and so it's off of that level. Really, the whole question is going to be how much of that $175 rate gap to the luxury comps that can we close, and even if we can only close $50 or $70 of it, it would be enormously profitable to us.

So what -- how much of that rate gap is assumed in the $3 million to $4 million of upside?

None, I mean, basically, the numbers this year are mostly just recapture on what we lost last year and then we would anticipate outperformance in 2020 as people see the room, the renovated rooms and the renovated space.

I appreciate the thoughts there. And then I know we've talked a little bit about Frenchman's and ongoing negotiations with [indiscernible] But as we think about 2020 and sort of the combination of the ramping EBITDA as that hotel comes back online as well as any potential BI, what's sort of the thought process next year in terms of contribution from the hotel and in terms of your underwriting?

So, the way our insurance policy works is that we are entitled for all lost profits till it reopens plus for a period of up to 18 months after it reopens between what the stabilized number would be and what it actually does. Unfortunate for the modeling, the way the accounting rules work is we can't take it in income until we have agreement with the insurance company. So it's going to be a little lumpy next year.

And how much, I guess, contribution are you expecting just from reopening the hotel, aside from, I guess, the 18-month window of lost profits that you said that you can still recapture BI interest?

So, it's not going to reopen till the middle of next year, which means it's going to reopen into the softest period of the year. So the EBITDA contributions kind of really will be about how much the interruption insurance we can get into -- in 2020.

Got it. Understood. And then just last one from me. You've talked about New York City, the optimism in that market based on better than expected results in 2018. What are you assuming for RevPAR growth for New York City in 2019?

Our markets -- our budgets are between 1.5% and 2%.

I'm sorry. Can you repeat that?

Between 1.5% and 2% RevPAR growth.

Got it. Great. Thanks for the time, Mark.

Sure.

Thank you. And I’m showing no further remark -- questions at this time. I'd like to turn the call back over to Mark Brugger, CEO, for any closing remarks.

Thank you. We appreciate everyone joining us today and we look forward to updating you on our next quarterly call. Take care.

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