Good day, ladies and gentlemen. And welcome to DiamondRock Hospitality Company’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Sean Kensil, Director of Finance. Sir, please begin.

Thank you, Norma. Good morning, everyone, and welcome to DiamondRock’s first quarter 2019 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 2019 outlook. Jay Johnson, our Chief Financial Officer, will then provide greater detail on our first quarter performance and discuss our balance sheet. Following 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. There are four key takeaways from our first quarter results. One, total revenues were modestly ahead of internal expectations, as the asset management team, in concert with operators, adjusted their market conditions and successfully traded a little average room rate for higher profit group business that led to 2% total RevPAR expansion with robust F&B growth of over 8%. Two, this strategy resulted in adjusted EBITDA and adjusted FFO coming in just ahead of our expectations for the quarter. Three, the company, as previously announced, repurchased 3.1 million shares in the quarter at an average price of $9.52 per share. That price represents a substantial discount to our current trading price and a 33% discount to the midpoint of our NAV estimates. And the fourth and final takeaway from today’s release – the company continues to execute on a number of exciting repositionings within the portfolio, including completing the Emblem Viceroy in San Francisco and ramping up Havana Cabana in Key West. There are several other high ROI repositionings in the pipeline as well, like the repositioning of the Lodge at Sonoma and the Vail Ski Resort. Let’s look at little closer at first quarter results. Pro forma portfolio RevPAR contracted 80 basis points. But total RevPAR increased 2%. Results are even better if we take out our two renovation hotels in the quarter. Without the JW Marriott Denver and the Marriott Salt Lake City, portfolio RevPAR was up 1%, and total RevPAR increased a very strong 4.2%. Profits margins. Profit margins were about 20 basis points better than our internal forecast, with adjusted EBITDA margins contracting 143 basis points. Again, if you take out the two under-renovation hotels, adjusted EBITDA margins in the quarter only contracted 53 basis points. Now…

Thanks, Mark. Before I discuss details of our first quarter results, I would like to remind everyone that comparable RevPAR, hotel adjusted EBITDA margins and other portfolio metrics are pro forma and include our recent acquisitions: Cavallo Point, The Landing and the Palomar Phoenix. Additionally, comparable results exclude Frenchman’s Reef and Havana Cabana Key West. First quarter results were in line to modestly ahead of our internal expectations from an adjusted EBITDA and adjusted FFO perspective. Total revenue growth of 2% for the portfolio was ahead of expectations. These results were positive despite being held back by performance at the JW Cherry Creek and the Salt Lake City Marriott, which both had ongoing renovation work. Portfolio RevPAR contracted 80 basis points, partially as a result of displacing transient for higher-profit group with better total spend. Total revenue was bolstered by food and beverage results this quarter, with F&B revenues up 8.1% and F&B profits up an impressive 16%; while F&B margins were up almost 240 basis points. The Chicago Marriott and Bethesda Suites Marriott had impressive F&B results, with revenue up 83% and 47% respectively, as these hotels were under renovation in Q1 of last year. Additionally, the Westin Fort Lauderdale’s new restaurant, Lona, has been a huge success for us. And its halo effect continues to drive business at the hotel. F&B revenue at the Westin was up $1.5 million or 30% quarter-over-quarter. Lona currently ranks among the top five restaurants in Fort Lauderdale and is number one among Mexican-inspired restaurants. Transformational concepts like Lona drive customer preference and have closed incremental group business with meeting planners. These types of initiatives are a core competency for us. Hotel adjusted EBITDA results exceeded operative budgets by over $0.5 million despite the federal government shutdown and off-cycle citywide patterns in some…

Thank you, Jay. Let’s turn to guidance and the outlook for the balance of the year. The company’s guidance remains unchanged, with full year RevPAR growth of 0.5% to 2.5%, adjusted EBITDA of $256 million and $268 million, and adjusted FFO per share $1 to $1.04. For the second quarter, we expect RevPAR to accelerate from strong performance within our resort portfolio and California hotels. We also expect to have much stronger group setup in the second quarter. Group pace is up 2.7% for the second quarter as compared to down 4% in the first quarter. Group pace has also significantly improved by 360 basis points for the second through fourth quarter of 2019, as the result of good bookings in the first quarter for the balance of the year. Additionally, our hotel in Phoenix, the Palomar, which was acquired last year, is expected to deliver our strongest urban results, with a high single-digit RevPAR increase. In the back half of the year, we will benefit from some easy comparisons, including a comparison to prior year renovation periods for the Vail Marriott and Westin Fort Lauderdale Beach Resort, as well as the union strike period at the Boston Westin. As we look forward into 2020, we are very encouraged by our group revenue booking pace, which is up a healthy 15%, as our two most important group markets, Boston and Chicago, are pacing up double digits. With that, we’re now open for any questions you might have.

Thank you. [Operator Instructions] Our first question comes from Michael Bellisario with Baird. Your line is open.

Good morning, everyone. Could you just a little bit about Cavallo Point and the 6% RevPAR during the quarter? I know it’s just one quarter, and it’s your first full quarter there. But how should we think about compression coming to that property, when there’s strength in San Francisco like there was in the first quarter? And just kind of help us understand the general dynamic of that property, what’s going on relative to the CBD in San Francisco?

Yes, so I’ll start, and then I’ll turn it over to Tom. So this is Mark. We closed in December on the property. The first quarter was really similar. I would do the analogy of the Palomar, where we took itself to get all of our systems, programs implemented. And now we’re seeing enormous increases at the Palomar. Cavallo Point is going to be a little bit the same, where we’ve gone in there and we’re working with the team to implement a lot of our best practices in the first quarter. We do expect Cavallo Point to experience compression from the city. It clearly did in the first quarter. Probably had we bought it six months earlier, you would’ve seen more dynamic RevPAR growth at the hotel. But we’re really just at the very tip of putting in all of our best practices. Tom, you want to add to that?

Hi, Mike. We’re still in the evaluation period, on especially the revenue management piece, looking at the tools, adding different technology on to maximize premium room sales, and looking at rate pricing and rate gaps between room types, weekend and midweek price points. So we’ve identified a fair amount of opportunity, and we’re pretty excited about it. And then, this hotel is the benefactor of compression in San Francisco and certainly in Palo Alto. The Palo Alto market is very compressed, as obviously, I’m familiar with it from my previous life, having the Four Seasons and the Ritz in Half Moon Bay. And the benefit of Palo Alto being compressed with limited room nights on the group side, a lot of it gets pushed out, and it doesn’t want to go into San Francisco. And so what we’ve found at Cavallo Point is we’re seeing a lot of midweek group into that market. And it really has to be evaluated, it has to be layered appropriately so you don’t spike up one day. And I think the team, we’ve identified a host of opportunities to really improve group revenues, group rates, and certainly transient ADR. The property, we’re still looking at labor efficiencies and looking at laundry and a host of other cost initiatives as well. So this is going to be a slow process, because just the nature of the property, the nature of the location, and certainly the tight labor market. So we have to be really thoughtful about this and do it methodically. But this asset is a homerun for – there’s so much opportunity here, long time to come.

And then, just sticking with revenue management, have you guys continued the rate tradeoff for higher rated group strategy into April and May? And any color you can provide there about recent trends?

Sure. So as we mentioned, in New York, which is really a transient strategy there, RevPAR was up 5% in April. So that’s not a group strategy, that’s a transient strategy in April and benefitting from the Easter shift, really in that particular city. In April, the real strength in our group, if you look month by month in the pace, is in May and June. So it really depends on what the citywide is. So Tom’s team looks at each market in evaluating the strategy per quarter and evaluates it. We would expect good group results and good F&B results in the second quarter as well.

Thank you.

Thank you. And our next question comes from Chris Woronka of Deutsche Bank. Your line is open.

Hey, good morning, guys. Wanted to ask you, on the insurance with St. Thomas, is there a reason why they’re combining the BI with the other proceeds? In other words, is that some kind of contractual situation where they’re not going to negotiate on the usual BI until the whole thing is settled? Can you just maybe give us a little bit more color on how those are combined?

Sure. So we have a big insurance policy with a $360 million limit. The way the syndicate works is that the first $100 million was held by a variety of different folks, mostly Lloyds of London participants. They pretty much have all paid out pretty readily. And then, primarily one excess carrier has the risk above the $100 million market, kind of between that $100 million and $360 million limit. And frankly, they were only paid a couple hundred thousand dollars for that risk. And they’re being very difficult in the process. We believe we’re clearly entitled to all these monies under our insurance policy. And they’re taking a difficult stance, and we’ll do what we need to do to make sure we recover for our shareholders what they’re entitled to. There’s nothing in the contact that says they shouldn’t pay us. It’s just they’re taking an unreasonable position at the moment. And it’s our job to get them to the right place.

And then, you mentioned potential repositionings of brandings in Sheraton Key West and Sonoma. Would those both stay within the Marriott brand family?

So a little different situation. Sonoma, we have a long-term management agreement currently with the Renaissance Brand. So looking at that situation, if you compare the rate that we’re getting versus the luxury comp set within that market, there’s $145 delta. So we think if we can get into some of the luxury channels that we can close some of that $145, and it would be a very strong return for us. So the conversations we’re having with Marriott is, given that fact that we’re putting in a Michael Mina restaurant and upgrading the spa, and it’s a beautiful little resort, are there other brands within the Marriott brand family that may be more appropriate for the resort and also allow us to capture more of that luxury rate? So that’s kind of the setup there. And we’re in active conversations about trying to figure out what the right solution is with them. The Sheraton is a franchise agreement which could be terminated. We at least have that option. But we’re in discussions with them, too, about – we think that given the quality and the size of those rooms, and the fact that it’s on the beach in Key West, that it would be better either as a lifestyle brand within Marriott family or even potentially independent. We just see a lot of upside at that particular property. So we’re trying to make sure we get the right brand or right strategy matched up with the quality of the asset.

Okay. Very good. Thanks, Mark.

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

Hey, good morning. One broad one. I guess, with the consolidation in the space, how do you assess any impact to the competitive environment from those actions? I guess, if you can think about the benefits or lack thereof, and you think about your own positioning going forward?

It’s a complicated question. This is Mark. I’ll take that one. So we’re a fan of activity within the space. We’re a fan of people making statements about valuation. We believe that activity within the space adds interest. And in some ways, having one less similar-sized peer out there is probably advantageous to us. And frankly, if someone has a higher multiple, it adds value for shareholders; we think that that’s the right thing to do. And people should be active on that front. I think that there’s probably – investors are going to make distinctions about very big lodging REITs and then what I’ll call midsize REITs. And there’s pros and cons to both of those strategies. Bigger, clearly, is harder to move the needle but probably has some advantages on cost of capital on the debt side and liquidity. And then, the advantage we have at our size, being $3.5 million in assets, is much easier to move the needle. So I think investors will have to make some decisions about which do they think will deliver better returns over the next several years. But I think stepping back, we like the activity. We think it’s good for our valuation. Like to see more of it.

And a follow-up to Chris’s question – do you find that the math in evaluating the benefits of being branded versus independent have evolved within your portfolio, whether that’s at a distribution cost, capital requirements or otherwise?

I think everyone is its own business case. So we’ve seen a case where we bought an independent hotel in New York with the courier brand, and literally the rate went up $50 the next week. And then, other markets like Key West, where the market runs over 80% occupancy, and it’s a resort destination, people are looking for a new experience; the brand proposition probably is not as strong. So I’m not sure it’s evolved or that it’s just more focused on the individual market and the individual assets to make sure you’re matching up with the right strategy.

And maybe one last quick one, if I can sneak it in. I know you talked about the impact from Starwood and Marriott, the integration there. I don’t think I caught anything on the Bonvoy launch specifically. Are you anticipating any revenue impact or other surprising changes, as that is being rolled out and marketed now?

So they’re rolling out a lot. I mean, you would hope that your brand partners are being proactive in thinking about the future. But they’re moving faster on, boy, probably a dozen different fronts. So on the Bonvoy and rewards program, they’ve made some changes. Like you would expect, when they were all new programs, for some of our hotels, it’s been really good, and some that we need to make adjustments with the a new program. So I would say our rewards costs with Bonvoy are down across our system, which has been good. Some of the contributions at some of the hotels are up, and frankly some are down. And so we’re working with them. And they’re agreeable to make adjustments where it’s fair to make adjustments. I’d say that one that we have been a little bit focused on is, under Bonvoy, they’ve given elites, or their premium folks, free breakfast at resorts. And they compensate us, I think, $7 a breakfast. But that’s one that in some markets makes sense and in some markets probably is too expensive. So that would be one that, under the Bonvoy program, we’re working with them on solutions to be equitable.

Great. Thanks very much for all the color.

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

Thanks. Hey, guys, I just have one. It sounds like the booking pace looks pretty good. I’m just curious what the prospects are for translating that into EBITDA growth.

Stepping back, I think we’re very encouraged about the – in the quarter for the balance of the year bookings. We’ve started giving our citywide footprint for this year, which flips next year. But we’re still slightly negative on booking pace for the full year. So we’re still implementing various strategies back to all the transient and really being careful about how we’re thinking about laying the new group in there. So it’s up 2.7 in the second quarter, which is good, and pace has picked up. But next year is really the group story for DiamondRock in 2020.

Right. I guess maybe my question is more directed to 2020 in terms of the EBITDA growth potential there.

So we’ll have a very strong setup in 2020 on the group side. So I think from that side, we would expect substantial F&B flow-through with the banquet business that’s associated with that. But that just represents a little over a third of our business. And it’ll still depend on the general economy, and the transient outlook will still play into our 2020 results. And frankly, sitting here today, it’s a little early to say what those trends will look like.

Great. Thank you.

Thank you. And our next question comes from Patrick Scholes of SunTrust. Your line is open.

Hi, good morning. Mark and Jay, I got a couple questions for you. First is, percentagewise, where do you stand at group as a percentage of your total business? And where would you ideally like to see that in the next one to two years?

We’re just over 30%, sort of between 30% and 33%, depending on how you measure it, in group. We kind of like where that is. We try to stay relatively balanced between business transient, group, and then leisure and other. We’ll probably increase leisure and other as we move more into resorts. But as you know, different segments perform differently, depending where you are in the cycle. So we want to be relatively balanced, just as kind of good capital allocators and making sure that we’re not going to have uneven results throughout the cycle by it being overemphasized in one versus the other. I think if we had to pick, we’d pick a little bit more on leisure for the full cycle. But we like where our group is. I think over time, we’ll probably – we’re unlikely to do another convention center hotel. I think we’ll continue to have a more diversified platform on that front.

And then, perhaps a modeling question here. I’m curious why adjusted FFO per share isn’t going up after you had some pretty significant share repurchases in 1Q but keeping the dollar amount of FFO unchanged.

So on a full year basis, Pat, when you think about it, it’s going to be the weighted average shares outstanding for the full year. So you’ll see that impact a little more as we flow throughout the full year. And that’s why you didn’t see that significant impact that you’re looking for.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Anthony Powell of Barclays. Your line is open.

Hi, good morning. And the question on Frenchman’s Reef, and sorry if you’ve gone over this already. Can you remind us what the total proceeds have gotten so far from insurer have been, what the current rebuild will cost? And let’s say you get a negative outcome in the negotiations. How does that change your underwriting or the scope of the project, or your expectations there?

So yes, there’s a lot there. So let me try to bake a little bit. So Frenchman’s Reef, we’re fully committed to rebuilding the resort. It’s underway. There’s 100 people probably onsite this week, and we’ll ramp up. By end of June, we’ll have 300 people onsite rebuilding that resort. So we’re going fast. We’re very excited about the design, we’re very excited about, I think, what that hotel – the potential is for that resort. We continue to get good news on that front as we reposition to get the F&B, et cetera, set up. So that’s going full bore. We have probably received – so the first $100 million to syndicate, we received almost all of that money. So $92, $93 million, at least, of that first $100 million. Above the 100 is mostly one excess carrier. And they’re the ones that we’re currently in dispute with. The total rebuild cost of the resort, including the owner electives, will be over $0.25 billion, including the money we’ve already spent on it. And we anticipate that it’ll reopen the middle of 2020. We don’t anticipate – I mean, inevitably, these things get negotiated. If we settle, or if we go to jury, there’ll be things that we dispute. But we feel fairly confident in our legal position and our interpretation of insurance policy.

And I think there was either some USVI guarantees and some, I guess, proposed brand investment. How much for those total?

So we did an RFP process on the brand, and we got several proposals with more than $20 million of key money. So that’s a reasonable anticipation by our investors. The expectation should be more than that. And then, we’re working with the USVI government, partly to rebuild the infrastructure to a hurricane-proof level and also to build on our site a hurricane shelter. And so they would help pay for the infrastructure and the shelter onsite, which we think is the right thing to do, not only for the resort but also for the people of the Virgin Islands. And that could be tens of millions of dollars. So that’s being finalized now.

Thanks, okay. And what’s your view on the Marriott Expedia deal? How did that turn out for owners? And I think there was some provision in that deal about transient bookings and short-term bookings? So if you talk about that opportunity, that’d be great.

Yes, I think we’re excited that they reached a deal, because we think that as long as they have control of the deal and we have more ability to yield out the OTEs when we want to yield them out, which was really the problem we had before – we think that’s a win for owners. Frankly, there’s many details of the agreement that they’ve not yet shared. So obviously, lower commission. But the control of the data, we’re still learning about exactly what that means. But clearly, having the ability to yield out the Expedia business when we don’t want it is irrelevant for us.

Great. Thank you.

Thank you. At this time, I have no other questions in the queue. I’d like to turn the call back over to Mark Brugger for closing comments.

Thank you, Norma. Well, everyone on the call today, thank you very much for your interest and support of DiamondRock. And we look forward to updating you next quarter. Take care.

Ladies and gentlemen, thank you for your participation in today’s conference. You may now disconnect.