Good day, ladies and gentlemen, and welcome to the first quarter 2011 DiamondRock Hospitality Co. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed, sir.

Thanks, Grace Anne. Good morning, everyone, and welcome to DiamondRock's First Quarter 2011 Earnings Conference Call. Today I'm joined by John Williams, our President and Chief Operating Officer; as well as Sean Mahoney, our Chief Financial Officer. As usual, before we begin, I would just like to remind everyone, many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities laws and may not be updated in the future. These statements are subject to numerous risks and uncertainties described in our securities filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP in our earnings press release. In reviewing current trends and logic fundamentals in the macroeconomic outlook, we continue to believe that we are in the early stages of a strong and sustainable lodging recovery. The major indicators that correlate with logic demands, such as employment trends, GDP growth, corporate profits and corporate capital investment continue on their positive trajectory that started in 2010. We expect this momentum to accelerate as confidence in the economy continues to grow. Additionally, the lack of meaningful new supply remains a critical storyline to this current cycle. Consider the following 2 factors: First, the 4-year Compound Annual Growth Rate or CAGR of supply entering this downturn was less than 1/2%, much lower than the previous 2 lodging cycles, which respectably experienced do supply as 4-year compound annual growth rate of 3 1/2% and almost 4%. Second, although annual supply growth peaked above 3% during the most recent downturn, it is currently projected to be less than 1% during the next several years, dramatically lower than the historical average. Thus, we believe that normal cyclical demand growth, combined with limited supply environment, will result in a robust and long…

Thanks, Mark. Given the unique headwinds in the first quarter, we were pleased with the results for our portfolio, and remain confident that the balance of the year will be strong, particularly the second half. Some of those unique headwinds included severe weather in the Northeast that caused group cancellations in Boston, and impacted travel to New York City. And an ice storm in Atlanta in January, impacting both group and transient sales. Chicago also had an impactful snowstorm. However, the trends remained positive with period 4 RevPAR up over 7% and group pace for the balance of the year is showing strength, all of which give us confidence that the recovery remains on track. Additionally, as Mark mentioned, the first quarter is the least statistically meaningful, representing less than 12% of our annual EBITDA. As I discuss portfolio first quarter operating trends for the balance of my comments, in order to make it useful, I'll exclude Frenchman's Reef from all of the numbers because the extensive renovations distorts comparisons. Pro forma RevPAR increased 4.7% for the portfolio in fiscal Q1, as a result of a 4 1/2% increase in average daily rate and a small increase in occupancy. The increase in portfolio RevPAR was driven by improvements in several room segments. Group revenue increased 1.8% but business transient revenue, by far the highest-rated segment, was up an impressive 11.4%, displacing lower rated Leisure and Discount Transient revenue, which was up only 1.2%. We expect this profitable shift in mix to continue throughout the year. In the first quarter, corporate and premium demand was very strong. Room nights in these 2 categories increased 17.2% at a rate 6.7% higher than Q1 2010 resulting in a 25% increase in rooms revenue coming from the highest transient rate categories. In addition, special…

Thanks. As John noted, despite some headwinds in Q1, we remain bullish in lodging fundamentals as demand is improving and supply remains limited. Quarterly, our outlook continues to be for the hotel industry to deliver RevPAR growth of 6% to 8% in 2011. We are reaffirming our guidance for DiamondRock to deliver comparable 2011 RevPAR growth in the range of 6% to 8%. Based on our RevPAR outlook, we expect DiamondRock to generate adjusted EBITDA of $156 million to $160 million. Accordingly, adjusted FFO is expected to range from $98 million to $101 million, which assumes income tax expense of $7 million to $9 million. This translates into adjusted FFO per share of $0.59 million to $0.61. Adjusted FFO guidance was revised to reflect the impact of the recently announced $100 million financing on Minneapolis. Note that no additional acquisitions are assumed for purposes of providing guidance. In concluding the prepared remarks, let me say that we believe DiamondRock is extremely well positioned to deliver shareholder value. Our high-quality portfolio continues to reap the benefits of the lodging recovery. Here are a few interesting data points to ponder in terms of long-term growth potential. If our portfolio EBITDA margins return only to prior peak, they would still increase 490 basis points from 2010. Similarly, if hotel EBITDA returns just to prior peak, EBITDA of DiamondRock's comparable hotels would increase more than 45% over 2010 EBITDA. Additionally, we remain optimistic that thoughtful asset management initiatives like the Frenchman's Reef repositioning will enable our portfolio to outperform. For an external growth, we have already announced close to $500 million of acquisitions since early last year and our balance sheet and pipeline position us incredibly well to growth through additional opportunities. With that, we would now like to open up the call for any questions you might have.

[Operator Instructions] And your first question comes from line of Ian Wiseman of ISI Group.

A couple of questions. First on the decision to potentially terminate the contract with Hilton on the Conrad. It looks like there's been considerable momentum at that property. You did report 60% RevPAR growth, so how do you think about the termination and what other flag would you consider?

This is John. Where we are with Hilton is we're in the process of evaluating what our action is going to be. Their option to cure the termination failure comes up June 1. We talked to Hilton at length, we talked to some other brands as well. And we remain kind of open to various potential actions there. You're right, the first quarter of the Conrad was good. They earned occupancy by dropping the rates a little bit. The question we have to ask ourselves and analyze is the Conrad brand going to maximize the value of that hotel? And that's really what we are in the process of trying to understand.

And just moving to acquisitions. You said you're going to be active for the balance of this year. We've seen a lot of price discovery in the gateway cities. You do have exposure outside of those cities as well. Can you maybe describe what the activity looks like, or the potential pipeline looks like everywhere else in the U.S. outside of gateway cities? Or are you still in the same deals in the primary markets?

Ian, we're focused on the primary markets and our target markets. Thus far, I'd say in the last 6 months, we've looked at deals in New York City, Denver, Seattle, San Francisco, Miami Beach, Los Angeles. In some cases, we were reluctant to achieve the pricing that was ultimately achieved. In other cases, we've been successful. So it's really a function of our staying in the target markets and our feeling that it's not the right thing to do to stretch on price too far.

Right. But if you look at sort of outside gateway cities like New York, Boston, Chicago and the West Coast, is there deals coming to market in markets like Atlanta? Or, I mean you mentioned -- I know you did the financing on Minneapolis. I'm just trying to get an understanding that, are people willing to go a little bit further out on a risk curve for higher yield at this point in the cycle? Or is there still capital concentrated in the primary markets?

I think in general, capital is concentrated in the primary markets. We've demonstrated our acquisition of the Minneapolis property for $150-plus million. We're not stuck -- we're not coastal centered if you will. We see growth and opportunities in other markets like Denver, like Minneapolis, and we'll continue to do that. I thought what you meant was more kind of middle the -- middle of America type markets like Kansas City, St. Louis. We have not seen a fight [ph] coming there.

And now how would you describe the cap rate spread, let's say between the coastal cities and a market like Atlanta or Denver or Minneapolis?

So much goes into how you look at the cap rate, what the potential improvement in the hotel is. Currently, there is a premium paid for the coastal cities, whether it's 100, 200 basis points. In the case of San Francisco, it's even more dramatic, which some people don't understand, some people do. But in the fact of the matter is, the coastal cities do achieve a premium, but it depends in Minneapolis or Denver, how much potential improvement there is, what else is going for the deal?

Let me just put it -- ask it a little bit different then I'll end the questions. But if you look at them having IRRs in markets like New York City or the West Coast, how would that compare to a market like Denver or Atlanta? And what would that spread to? Would it be 200 basis points?

It is Mark. Yes, the IRR, there's different growth rates if you -- let's say, you take a 10-year period. So New York is going to grow faster than some of these other cities that you're mentioning. So the IRR on unlevered basis and you're playing a little bit with what you think the extra cap rate must be differential, but it's probably 100 to 150 basis points on an IRR basis.

The next question comes from the line of Smedes Rose of KBW. Smedes Rose - Keefe, Bruyette, & Woods, Inc.: I just wanted to ask you, I guess, 2 things. On the room count for your Times Square development. I know that you had been looking into a higher room count. I'm just wondering kind of what was the process was on getting the clearance for the 285 rooms. And is there a point where supply in New York starts to, I guess, concern you going forward? I mean, I know it's -- it's traditionally thought of as a high barrier market, but that's kind of proving not the case right now and just kind of maybe having your overall thoughts on supply in the market going forward. It just looks like there's lots and lots of new hotel announcements.

Yes, Smedes, this is John again. On your first question, we achieved the additional 35 rooms without much in the way of variances. The big jump we'd comment, if we were able to achieve one particular variance with regard to a loading dock. So I think we're probably at 285, which didn't require a lot of changes. So that's probably where we wind up. In terms of your question on supply in New York. You're right. A lot of rooms have come in to New York City, and I think they've been felt in this first quarter. Having said that, the first quarter is, from a volume standpoint, the lowest of the 4 quarters, and the thinking is that the depth of the demand in New York is such that the second, third and fourth quarters will remain strong. I think the jury's out. I think we have to wait and see. The phenomenon that's going on in New York that's caused this increase in supply is people have figured out the formula of taking mid-block locations, very small sites and building spikes on those small sites and so they are able to achieve 150 to 300 room hotels where previously people really didn't pursue them. A lot of the supply is on the West side and lower than mid-town, and even now lower than Chelsea. There are a couple more coming into Chelsea, but not many, so downtown. I would say that our feeling is that supply is a risk, but we think that the volume in New York, the depth of demand, particularly if the dollar stays where it is or continues to weaken, will be such that the higher volume quarters will be able to absorb the demand or the supply. Smedes Rose - Keefe, Bruyette, & Woods, Inc.: Do you have a sense of what the construction cost per key are on the hotel that you're -- on this Times Square development if you're acquiring it for $450,000, do you have a sense of what it's going to cost to build?

We have not been -- we agreed on a take-out price understanding there was a profit in it for the developer. In terms of overall, we're seeing $350,000 type per key costs in other areas. I think Times Square is going to be higher because of the land costs. But some of the other deals we've looked at in Chelsea and elsewhere are probably in the $300,000 to $350,000 cost range.

Yes, Smedes, this is Mark. Just on the 42nd Street deal that we're doing. It was to stress that deal that the current owner got in 2009. So they bought it -- they bought it down at a huge discount and that's what gave them a low cost basis in the land. And we think that's why we were able to achieve what we think is a very attractive price going in, because we're taking advantage of their low basis from that stretched out deal.

Your next question comes from line of Ryan Meliker of Morgan Stanley.

First, I was wondering it looked like you guys had some almost 100% of your RevPAR growth came from REIT, but margins were only up 48 bps. Can you give us some color on what you need to see at the property level to see margins? Or is it just more RevPAR growth? Is it more REIT growth? Or was 1Q more of an anomaly? I know Marriott had said during the first quarter call that 1Q margins were a little softer because of where expectations last year for 1Q 10, so bonuses acted [ph] things a little bit in margins in 1Q 11. And the second question was regarding Marriott. I was wondering if you can give us any color on how group sales are trending particularly with regards to sales force on whether you're seeing any concerns or not. I know we've heard from a lot of owners that there will be some properties aren't necessarily too pleased with the sales force. And I wanted to get some color on what you guys think.

Okay. On the first question. I think we mentioned what we view as, well, in some cases, what we view as anomalies in the first quarter. The other thing about the first quarter is that if you get a hit, it's on a low volume quarter. So it's an outsized impact on margin. And I'll give you an example. New Year's day holiday fell in our first quarter this year as opposed to 13th period or fourth quarter last year. That $212,000 hit was 20 basis points almost on our margins. So that just -- that tells you how a relatively small impact can have an outsized impact on our margins. I think that the bonus issue will go away. I think the unemployment tax will be spread across the year, but because the other quarters are higher volume, the impact will be less. I think the food and beverage this quarter was an anomaly, and it had a fairly measurable impact on our overall margins. We are working hard to make sure it is an anomaly I'll represent that. In terms of group sales, our pace is up. Sales force one is a relatively new program, it's been rolled out. I think the last market is being rolled out later this year, where it has been in place for an extended time period like Washington, D.C., I think, and we only have one small property here, we are seeing a fairly impressive increase in that property, whereas in the early years of sales force one, the property loss grew to group sales. So our view is that a, its too early to make adjustment on sales force one. I think a lot of what you're hearing out there is a bit of a snap reaction. I think also that sales force one will get better as it becomes more mature and in general, we are very confident that Marriott is going to do what they have to do to make sales force one a success whether it's tweaking the sales force offices or tweaking the resources on property. We're confident they'll get it right, and we're going to help them.

No, that make sense. I'd have to agree with that last statement. One other quick question for you guys, in terms of the share count, it looks like you're guiding for full year share count of $167 million shares, so I think the weighted average in the first quarter was $168.6 million. It's only about $1 million higher, but is that implying share buybacks? Or is there something else going on that might lower that share count throughout the year?

The $168.6 million, are you referring to the back pages of the press release?

Exactly.

That's the share count as of the end of the quarter, which on a weighted average basis was obviously less than that for the first quarter.

Okay. Do have the weighted average then, for the quarter?

We do. Bear with me.

Ryan, there is no share repurchase in our guidance or implied there.

It's $164 million for the first quarter.

Your next question comes from line of Enrique Torres of Green Street Advisors.

Its Nick Nickerson on behalf of Enrique. We were wondering -- you acquired a bunch of hotels last year, budgeted yields on '11 of 8%. We were wondering where those are coming out now, and what you're looking at on these more recent acquisitions for 2011 yields?

Nick, this is John. I think we mentioned that the acquisitions last year were averaging double-digit RevPAR increases. So in general, they are over our underwriting. I think Charleston is slightly down from our underwriting. But cumulatively, they're above it. And in terms of what we're seeing now, we've been fortunate we've been able to buy at basically 7, 7 1/2 caps. I think that number has come down and I think now we're looking at numbers in the 5 to 6 1/2 range. Whether we pull a trigger on those or not is another question.

[Operator Instructions] Your next question comes from the line of Shaun Kelley of Bank of America Merrill Lynch.

Just a quick question on first of all the group business comments. Obviously your group revenue pace up to 3%. Just could you give us a little bit more color on maybe kind of how you saw that trend in March and April? I think you said that there were some cancellations in some of the markets in January and February, which makes sense, but kind of wondering how much of a snapback you've seen in that business recently?

Well, I think, as you pointed out, January and February had some anomalies. We had cancellations and we had snowstorms and ice storms that really did impact the actualization of the groups. What we're seeing across the balance of the year is a relatively flat, slightly up second quarter, and then a relatively strong second half. We want to concentrate on the second quarter because the second and fourth quarters are the biggest group quarters, quarter of course being the highest volume quarters, so it's encouraging that that's up over 4%. But for the back half of the year, we're looking at a plus 4% and generally an acceleratingly positive trend.

Shaun, this is Mark, I'll just add for 2012, we're already seeing pace up well over 8%. And some markets like our Boston Westin, the pace for 2012 is already up over 20%. So we're very encouraged about the trends and we're very encouraged about next year.

That's helpful. And then I guess to go back to the F&B issue in the quarter, I mean, kind of any sense on how much of that is group-related. And I mean it makes sense that the Banquet business which is also high margin, relies a lot on that, on that Group business being in the hotel. So I mean, do you need to get the group mix up in order to get that business to fall back in or is there some more, I guess, like property level specific things that played into that shortfall?

I think what we need to do is, obviously group contributes to banquet, but local catering is the other key. And in the first quarter, local catering is just traditionally slow. So our pace on local catering for the balance of the year looks better. Margin is definitely driven by your level of banquet and catering sales. So that's a focus. On the outlet side, we spent a lot of time in the last year and a half working with our operators to reduce hours, to adjust menus, to adjust staffing levels, to make outlets profitable in the hotels. That was a major effort on our part and we achieved some great results. We just have to make sure that we preserve those results going forward.

And then I guess just one last one on the Allerton, I mean, I know the process is still working there. But just kind of wondering, I mean strategically if you guys were to take over -- well, first of all, I mean, do you have any more I guess in terms of timing about when you think that process will be resolved one way or the other? And then secondarily, if you guys take over the hotel, your thoughts on I guess getting a brand in that box.

Shaun, this is Mark. On the process, there's another hearing set for this Friday on our summary judgment motion. A lot of it depends on what the judge does. They can rule quickly. They could take their time in ruling. Once they rule, then you have to go through the auction process of doing notice and whatnot, and that probably takes another 2 or 3 months to wrap it all up. So that's the timeline, so we're a little bit at the whim of how the judge -- the judge's calendar system and his deliberation time. As far as brand options, the thought is once we actually have ownership of assets, that's probably the appropriate time to really engage a number of different brands on what makes sense. It would be a full-service hotel, and it could be everything from a well-known boutique operator to one of the major brands. We'll assess all our options at that time.

Your next question comes from the line of Michael Salinsky of RBC Capital markets.

I apologize I jumped on a little bit late. Just going back to the group bookings, did you give the rate for '11, as well as I think you mentioned some pretty attractive bookings for '12. I'm just curious to what you're seeing on the REIT versus the pace there?

Mike, this is John. The rate is the bulk of the growth going forward in both this year and next. Although the fourth quarter has a nice room night bump as well, but we're seeing some positive trends on rates.

Okay, you talked a little bit, I think, about Boston, I don't -- could you give us kind of a sense of what you're seeing in Chicago as well as Minneapolis, some of your larger group houses there?

In terms of citywide activity?

Yes. That'd be helpful.

Yes. We didn't mention Boston, but in the case of Boston, 2012 has more city-wides and more BCEC events, which is important to us because we're located adjacent to the BCEC as opposed to Heinz in the Back Bay. In Chicago, 2012 room nights are basically at 3/4 of pace and pace is scheduled to be above 2011 levels. So there's every possibility that they'll get up the pace, and 2012 will be a good convention year. New York City is probably down a little bit this year, and it's going to be probably flat next year. It doesn't impact us that much at our Courtyards and the Chelsea Hilton Garden Inn, so hosts, for example, would chart that a lot more closer than we do. In Austin, we're looking at strong market-wide group sales this year. Of course, in Worthington, we had the Super Bowl this year. And overall, I think, city-wides are flat to slightly up next year, those are up. And Atlanta is basically head paced for 2011 with '12 scheduled to be up.

That's helpful. Did you give the statistics on corporate negotiate year or corporate negotiate rate first quarter? Unless [indiscernible] on that and how much you saw in the special corporate [ph] as well.

Ours was up 10 1/2% in the first quarter. In general, I think, high single-digits would be a rough generalization. But it sort of depends on the market. Generally a rate of -- or, excuse me, a range of probably 7% to 12%.

Just finally, in terms of the acquisition pipeline. Should we generally tend to focus more so on abrupt schedule but we have seen a few select service, how would you characterize the pipeline at this point? A little bit more select service in urban markets or are you still primarily focused on the urban upper upscale?

We're primarily focused on upper upscale. We do have one limited service hotel in our pipeline, but that limited service hotel looks, acts and feels like a full-service hotel because there is a leased restaurant connected to it and it provides room service and catering, as well as providing three meals a day of breakfast, lunch and dinner. So it acts like a full-service hotel and achieve rates like a full-service hotel.

And then finally, Sean, not to leave you out. Can you just talk about what you're seeing in terms of -- I know you guys are -- you just did a new financing there on the Hilton, curious as to what you're hearing in terms of terms, rates, LTVs, things of that nature.

Sure Mike. We're still continuing to see positive momentum in the secured markets. We're seeing LTVs creep into the mid-60s for some high-quality assets. We're seeing -- as the hotels become more accepting of securitizations, we're seeing debt yields in the 10 to 12 range, which has obviously come in from where it would have been, 3 to 6 months or so ago. We were very happy with the terms that we got on the Minneapolis financing, which represents a mid-60% LTV at a very attractive all in rate for a 10-year fixed mortgage. So we think that's a strong representation of the strengthening of the secured market.

Your next question comes from the line of Don Malvans [ph] of KeyBanc.

I just had a quick question. I wonder if you could give more specifics on the acquisition environment, specifically where you're seeing the most opportunities, and what markets in particular are most attractive to you right now?

Sure. This is John again. I think the most activity is in the gateway cities. The pricing is most aggressive there, which is obviously attractive to potential sellers. I think I mentioned that we're pursuing in our target markets cities like New York City, Denver, Seattle, San Francisco, Miami Beach, L.A. There's not, I mean -- now I'm speaking only upper upscale because there's significant limited service activity in the middle of the country, but I think the bulk of the activity is on the coast.

Your next question comes from the line of Dan Donlan of Janney Capital Markets.

Mark, first question on the guidance, on the EBITDA guidance. Was decision not to move your guidance, was that just more of a function of first quarter kind of playing out how you guys thought it would? Or was first quarter a little bit weaker than you expected, but you expect third or second, third, and fourth quarters to be a little bit more robust than you previously expected?"

Yes, on our guidance. We maintained guidance. First quarter, there were some weather events and some other things -- a couple of properties were a little bit behind, but if we looked at the revised forecast for the full year, and we look at our group pace, we still feel confident with our prior guidance based on how the year is going to play out.

Okay. And then just going back to the Allerton, and if you could handicap it, do you think you're going to likely wind up with this hotel or do you still think there's a strong potential for you guys to just sell the debt piece as it is?

Yes, its hard to note. There is a very well known broker that's engaged by the, what is now the equity, and they're trying to call for offers in the next week or so. We're obviously in the dark on how that process is going. So if they're successful and they can pay us off, so be it. If not, we'll continue along the lines of foreclosure and try to get ownership of the hotel. We're okay either way.

Okay, understood. And then from a -- I guess, Sean, from a capacity standpoint, you guys have quite a bit of cash, now that you've erased this debt. Just kind of curious and you have your lines available to you, just kind of curious and you maintained a very low leverage, where do you think your kind of capacity is before you have to come back to the acquisition capacity, before you have to come back to the equity markets?

Dan, I think our capacity is right around $400 million is where we think we could comfortably deploy that capital. Obviously, capping equity markets is based on specific market conditions, the types of deals were looking at, et cetera. But we think we're very comfortable at $400 million as our dry powder today.

Okay. And then just lastly on the acquisition environment. Some of your peers have been fairly aggressive. Just kind of curious why haven't you guys been as aggressive? Is it more or less just pricing where you're seeing returns? Is it that some of these hotels are independently branded and you guys have historically been more associated with branded hotels? Any type of comments you could provide would be helpful.

This is Mark. Most of the deals we've taken a look at and taken a run at, it's been pricing. Obviously, if it's an auctioned deal, the highest bid won. But we pursued a number interesting opportunities but we are staying disciplined with our underwriting and with the price number of these opportunities.

Okay. And just curious, come independently branded, would you guys potentially pursue some of these independently branded hotels that are probably coming to market to in the next 2 to 3 months?

The answer is in the right markets, we would pursue it. If it was a D.C., New York, San Francisco-type markets where we think the independent names can... there is enough demand there that they make their own brand. So in markets like that, we would consider those opportunities.

The next question comes from the line of Sule Laypan of Barclays Capital.

I was wondering if you could clarify the comment you made on guidance. So is your outlook for second, third and fourth quarter today up or flat from what it was 3 months ago?

It's up slightly.

Okay. Thanks. And then did I hear correctly, you said on the 42nd Street development, there is not much chance that could be upsized now?

Yes, we're -- that's right. I think the probabilities are that it will be 286 rooms.

Okay. And then just lastly, the room renovations at the Courtyard and the Renaissance Waverly, have those started already or when will they start?

They're going to start in the back half of the year.

And you have no questions at this time. I will now turn the call back over to Mr. Mark Brugger for closing remarks.

Thank you, Grace Anne. To everyone on this call, we would like to express our continued appreciation for your interest in DiamondRock and look forward to updating you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect.