Good day, ladies and gentlemen. Welcome to the Second Quarter 2019 DiamondRock Hospitality Company Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would like to introduce your host for today's call, Briony Quinn, Senior Vice President and Treasurer. Please go ahead.

Thank you, Jorinda. Good morning, everyone and welcome to DiamondRock's second quarter 2019 earnings call and webcast.Before we begin, I'd like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measures can be found in our earnings press release.This morning, Mark Brugger, our President and Chief Executive Officer, will provide commentary on our second quarter results, our revised outlook for 2019 and discuss our balance sheet. Following his remarks, we will open the line for questions.With that, I am pleased to turn the call over to Mark.

Good morning, everyone, and thank you for joining us. We appreciate your continued interest in the DiamondRock story. The overall lodge industry continued to modestly grow in the second quarter as industry demand and new hotel supply neared equilibrium.In the quarter, good group spend and a resilient consumer helped offset a more cautious business traveler. It is in this current temporary growth environment that we believe that the quality of our portfolio, the skills of our asset management team and the benefits of our capital allocation decisions come through.Overall, we were pleased with our second quarter results as adjusted EBITDA came in at $81.1 million, slightly ahead of internal expectations. And the portfolio grew market share by 220 basis points. Portfolio RevPAR increased 1.1%, which was in line with the national average and substantially outperformed the 50 basis points of RevPAR growth for the top 25 markets.Total RevPAR, which also includes other revenue streams outside of just rooms, was a bright spot as it grew by 3.4% in the second quarter. This continued the positive trend we saw in the prior quarter of customers buying more services once they were in our hotels.Our resorts outperformed with RevPAR up 3.6%. This strong growth in resorts supports our observation that the consumer remains healthy and that experience with travel trends are likely to outperform. Particularly impressive resort performance came from the Vail Marriott, L'Auberge de Sedona and Havana Cabana Key West, all of which had double-digit RevPAR increases.Boston was terrific in the quarter. With our hotels there generating combined RevPAR growth of 6.8%, our Boston hotels outperformed an already-robust market by 230 basis points. Our two hotels in the San Francisco market also delivered strong combined RevPAR growth of 5.3% in the second quarter. Phoenix was another good market for us.As the…

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

Hey, good morning, guys.

Good morning.

Mark, I want to dig in a little bit to maybe some of the out of room spend trends? And maybe trying to pair up the strength that we're seeing in that segment versus the softness that we're pretty consistently seeing across business transient demand trends. And would there be maybe a lag effect in the non-room side that we should expect to play out in future quarters? Or do you think the two are unrelated? Or what do you think is driving maybe the divergence between those two categories at the moment?

Yes. It's two different behaviors. The groups that we have coming to our hotel, and we're trying to pick the groups that are going to spend more. But whether it's KPMG or XL, the consulting group or pharma or some of the financials, what we've seen year-to-date is that when they get to our hotel, they are running more AV. They are spending more for the steak dinner versus the chicken dinner. We're seeing more spend at the bars.So that trend was and continued to be positive through the second quarter, different than what we're seeing with the business transient trend, which is it's growing, but it's growing at 1%. We'd hoped that it would grow a little stronger than that year-to-date. And so there is a divergence there. It's not unexpected that the business transient will be a little bit more cautious given what's going on with the headlines and the trade wars.And the corollary, we always watch on a macro basis is nonresidential investment spend, which was a little bit down recently. Now the hope is that we moved through the noise, and as we move into next year, things improve on that. But what we've built into the revised guidance is that the trends we saw, particularly in business transient, to kind of the more modest growth persist for the balance of the year.

Okay. I appreciate that, Mark. And then maybe my second question. Looking at the stock price here, $9.40 and change or so and comparing that to where repurchases were made in the year-to-date period. Just wondering where incremental repurchases from here would factor into your capital allocation grid?And also just thinking about the acquisition landscape out there in terms of hotel assets, it seems hard to believe that, that would be an attractive use of capital, barring an extraordinary circumstance today. And so just wondering what the appetite for maybe additional share repurchases would be in that context?

Sure. It's a great question. I'd say, first on NAV, we're still very, very confident about our NAV estimates that we published in January, early this year. The private market transactions remain robust. The cap rates that we've seen over the last three or four months continued to indicate great strength in the private markets. So we feel good. We go back, and we look at those fairly regularly to make sure we have a good handle on any changes in the marketplace, and feel good about private market transactions.On stock repurchases, as I said in the prepared remarks, we really do think that stock around these levels is a tremendous value. I mean there is no other way to look at it. We've already repurchased 7.8 million shares, and we've been in the market as recently as a couple of weeks ago. There is $175 million left on our board authorization for shares.However, the company generally and traditionally hasn't tipped it's hand as to future repurchases. But I can tell you that the board does see tremendous value where our stock is today, and they're focused on capital allocation opportunities.

Okay. Thanks, Mark.

Our next question comes from Smedes Rose from Citi. Your line is open.

Hi. This is Cameron Hughes on behalf of Smedes. In regards to insurance proceeds and dispute for Frenchman’s Reef, is it related entirely to business interruption? Or is it a portion related to construction as well?

Cameron, this is Mark. It's related to both. So we have a claim in, and they're not disputing the entire amount that they haven't paid. So they've paid us $100 million so far. We have a claim that includes both property as well as business interruption and ongoing expenses. And some of the topics in dispute are, what standard do you need to rebuild the hotel? What does current code call for?For instance, we believe that it calls and the right interpretation of the code is that it calls for a very hurricane-resistant building, and that's what's getting built and that's what we believe the law requires, and they're disputing facts like that. And that's ultimately what we'll have to come to agreement on or that jury will have to decide.

Great. And in your prepared remarks, you talked about group pace, particularly in Boston and Chicago. I was wondering if you could provide some detail on that group pace. And then, how the convention calendar is shaping up in those markets?

So group's tremendous for us in Boston and Chicago. We're going to outperform those – we expect to outperform those markets. While the citywides are good in both markets for next year, as you may recall, we underperformed with merger issues in 2018 in Boston. So we have more room to run. So our comp there is easy, fortunately or unfortunately, but it should allow us to outperform on the group side in Boston compared to the rest of the market in 2020.Chicago has got a good convention calendar going into next year. We also recently completed our $110 million renovation. The last piece was the lobby, which came online just a couple of months ago, and we redid all of the meeting space within last year. So we have a really nice set up, and we're gaining market share, as I mentioned earlier. We're gaining market share with that hotel, and we would expect to continue to gain market share, particularly on the group side as we move into next year.

Thank you.

Our next question comes from Thomas Allen from Morgan Stanley. Your line is open.

Hi, good morning. So first question on transactions. I mean what's your appetite to buy more hotels here? Thank you.

Good morning, Thomas. So I can say we're always – as a public company, we're always monitoring the markets and looking at things. I think given where the stock price is today, the relative value of an acquisition versus our stock, it's tough to justify. There may be an opportunity to do a small hotel that's synergistic, that may be located next to one of ours where we could back out most of the G&A and make it accretive. But it's tough to do deals now. It would really have to be a special opportunity. So I think there is a relatively high hurdle to new acquisitions would be the right way to look at it.

Helpful. And then second question, just around the demand environment. You highlight the business trends and demand is soft, but your group bookings are really strong. It seems to me like – and they're strong going out like for a long period of time, which seems to me counterintuitive why would corporates be booking out further when they're nervous about the economic environment. Can you – like, what do you think is going on basically?

Well, there is a lot of puts and takes to it. Part of it is, a lot of our markets were off citywide convention calendars this year, and they flip next year. So some of it is just the strength of the citywides. So if you think about Boston, Chicago and D.C., citywides are softer this year and you look at the convention calendars in 2020, those are three very important markets for us, and they're just much stronger the way they line up.As you know, a lot of these groups rotate kind of on three or four-year cycles, and it may be in Orlando, one year; Chicago, one year; San Diego, one year. And it just happens. They're syncing up in a more favorable pattern for us. So that's helping the overall numbers and the pace.

Do you think there is anything else going on beyond just the citywide calendars?

Tom, do you have anything to add?

I think that the group decisions are made further out. So you're layering more and more group on, and the mix of business is pretty consistent. The weekends have been strong and association drives some of that and corporate has been short term, but pretty consistent. I think on the corporate volume side, we're seeing room nights increase, which is obviously the indicator of demand.As Mark said, with less citywide group in the city, there is more room to take that transient demand, and I think that's part of the dynamic. The other part of it is there is more production going into our hotels. The challenge on the corporate side is just the increasing in the pricing and the rates, and how do you maximize that year-over-year. You're committing this year probably sometime in September, October for rates for 2020.So what decisions you make in September, October, set pricing for your corporate volume the following year. And so that's something we're heavily focused on and paying a lot of attention to for 2020 because we have – with such good group layered on the books, we really want to make sure we're maximizing pricing on all the other channels as well.

That’s really a helpful color. Thank you.

Thanks, Tom.

Our next question comes from Chris Woronka from Deutsche Bank. Your line is open.

Hey. Good morning, guys. Mark, thanks for all the helpful data points on the group. I want to drilldown into the out of room spend and maybe expand it to across the portfolio, not just in the groups. How much do you think resort fees and some of the other fees are maybe helping that out still this year? And then not always a fun topic to talk about, but what do you think happens to those fees when we – at some point, when we get a little bit softer?

So let me take kind of parse this out. So one of the things that's going on here is that pricing power is more difficult, particularly with the business transient. So Tom's group, the asset management group, and I really do think we've the best asset management team in the business, has really gone on a kind of a philosophical path to make sure we're getting every nickel and dime in everywhere we can.So not only are we trying to find more profitable groups. We have done things in the bars and lobbies to increase lobby sale. I mean we redid the lobby bar in Chicago. We're selling $1,000 more in F&B every night there, and we've done something similar at the Lexington, which is relaunched.So we're trying to maximize any profit we can. And the asset management team has gone through every contract, every concession agreement to try to find opportunities and that could be reauditing a leased restaurant we had, which we did in Denver and found over $100,000 in the way they were calculating their participating rent.It can be in auditing the food cost, how much water is in the chicken and making sure that we're not getting watery chicken with 5% water versus 3%. It's really a lot of the nickels and dimes. It's releting a parking lease. So we have our parking valet contract and going back out to RP and trying to renegotiate it, even though it's not up and due.There is a lot of those rents and concessions. There is a lot of those other categories where we're really pushing to try to find opportunities when it is a more difficult pricing environment. That's the asset management strategy. So you're seeing that play out.As to your question about amenity fees and resort fees, there's a real value proposition there. The big chains require 4:1 or 5:1 value. So if you had a $10 fee, you need to be able to prove that you're delivering $50 worth of value.And where we have well trained front desk and teams, we think our customers actually that it's a win – kind of a win-win for both sides. There have been a number of attorney general lawsuits. There was one in D.C., recently that got a lot of headline value.We think – and it's around disclosure, not whether they're legal or not, but we think the disclosure is good. And we of course, the big brands who are in charge of most of this, of course, they've had the best lawyers looking at this from day one. And of course, they are committed to good disclosure. So we feel good about disclosure. We feel good about the value proposition. And I think with the right training, we feel good about the customer experience.

Okay, helpful. And then on the transient side, would agree, a lot of this is just, right, kind of corporate uncertainty and travel decisions, things like that. But how much of it for you guys – do you think there is any of it that relates? And maybe this is on the leisure side to the Marriott some displeasure among some of their loyalists with some of the recent Bonvoy changes. Do you think that factors in at all? Or is it just kind of noise?

Yes. I mean I would say we're big believers in Marriott Hilton brand families that we're associated with. We think they do a great job. We think they have the best loyalty programs. There are changes, and clearly, it wasn't perfect. But it's still – when you think about the size of the system, the ability to redeem into the number of properties, it's still – they're the best in the world from that perspective. We don't see – our customers seem happy.Our contribution coming in from the brands has been consistent, so we haven't seen any fall off on the contribution from the brands. I will say, on a related point, we have had some growing pains as they've adjusted the rewards redemption rates and amount of points that you need to redeem into hotels. And I think that we're getting it right, but there were some growing pains in that process and that impacted us kind of in particular spots across the portfolio.

Okay, very good. Thanks, Mark.

Sure.

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

Thanks. Good morning. When DiamondRock is setting its internal plans for the next few years, I'm just curious how the Company thinks about the remaining length of the cycle, severity of a potential downturn those sorts of things?

Yes. I would say, we run a lot of sensitivities with the Board, and we do a lot of strategy planning. So it's hard to know. I think we planned the balance sheet for a downturn at all times. So we're always thinking about balance sheet capacity, how much dry powder we have on downside scenarios, but we manage our business kind of on a more typical slow growth environment for the next couple of years.

Great. Thank you.

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Your line is open.

Hi. Good morning, everybody. Mark, I guess with respect to your comments around the – having $175 million of availability under your share repurchase planned. And kind of keeping your powder dry late in the cycle, how much dry powder do you have available today to pursue share buybacks or acquisitions for that matter before you would consider needing to sell additional hotels?

Yes. So by our calculation, as I just mentioned in the last Q&A, we run kind of scenarios to stress test the balance sheet. We think we have about $300 million of investment capacity and still remaining in a strong balance sheet position. Now obviously, we're going to consider different capital allocation decisions to make sure we're maximizing value for shareholders. We feel like we have a fair amount of capacity where we are now.

So what is that $300 million if you were to deploy and ply in terms of, I guess the upper thresholds of your leverage target?

It depends a little bit on how we resolve the Frenchman’s Reef litigation, but assuming we're successful there, Jay?

Austin, this is Jay. Assuming – excluding Frenchman’s Reef, that's sort of in the 4.5x to 5x range. The way we like to think about it through the cycle is remaining below 5x at sort of the bottom of the cycle. So in that scenario, we're kind of around 4.5x.

Okay. Understood. Thank you for the detail there. And then any specific markets that you'd highlight that drove the reduction in RevPAR growth? Or was it more, I guess broad-based?

Well, in the second quarter, we had terrific growth in Boston, Phoenix, San Francisco area and resorts overall were over 3%. So those were our star markets. And then we were really happy with our relative performance both in New York City and Chicago while a little tougher markets. We did outperform in both of those markets. Salt Lake City and Washington, D.C. were our most difficult markets.

So is it fair to assume that those two – the latter two markets are what's driving the biggest percentage of the RevPAR reduction in terms of your guidance?

Well, for the balance of the year, it's really more about the business transient trend for the back half of the year than particular markets. So I'd say, throughout our portfolio, we had – at the beginning of the year, had kind of a more robust expectation of how the business transient traveler would perform. And now we're seeing it. It grew 1% in the second quarter, and we've kind of extrapolated that out for the balance of the year. And that's really the main driver to the adjusted guidance.

Okay. Appreciate the thoughts. Thank you.

Sure.

I'm showing no further questions at this time. I'll turn the call back to Mark Brugger for closing remarks.

Good. Thank you very much. To everyone on the call, we really appreciate your interest in DiamondRock, and we look forward to updating you on our next call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect, and have a wonderful day.