Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 DiamondRock Hospitality Earnings Conference Call. My name is Karissa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed.

Thanks, Karissa. Good morning, everyone, and welcome to DiamondRock's Fourth Quarter and Full Year 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 like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities law. It may not be updated in the future. These statements are subject to risks and uncertainties as described in our SEC 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. DiamondRock achieved great success in 2011. We executed on our strategic objectives. And as a result, DiamondRock continues to be a leading lodging REIT with exceptionally strong balance sheet and premium portfolio of high-quality hotels in top growth markets. Overall, we hold firm to our conviction that lodging fundamentals are in early stages of a recovery that will benefit the entire industry. However, we are particularly bullish on DiamondRock for several specific reasons. First, there's a lot of upside in our existing portfolio. To put our upside in perspective, if our portfolio only reaches prior peak levels of 2007, and we project much greater growth, that will mean that we will see $80 million in additional hotel EBITDA growth from last year's results, equivalent to 48% growth over 2011. Importantly, since our portfolio is forecasted to exceed prior peak occupancy in 2012, much of our future growth is coming from highly profitable increases in room rates. Second, after the disposition of the 3-pact hotels under contract Inland, which we expect to close very soon, the company will have completed over $1 billion of transformational hotel transactions…

Good morning, everyone, and thanks for joining us today. As Mark mentioned, the lodging industry in 2011 enjoyed continued improvement in operating trends. We believe that we're set up for a sustained recovery and an extended lodging upturn because of the absence of new supply, the indications of continued recovery in the U.S. economy and increasing international travel activity. The fourth quarter continued the positive trends of the year and even showed improvement in areas that had previously lagged, like banquet sales. In describing our results and to provide our investors with the clearest report on how our portfolio actually performed, I will exclude the 3 hotels held for sale and Frenchman's Reef, which had inventory out of service for several months from the renovation. In the fourth quarter, RevPAR for the DiamondRock portfolio increased 6.2%, driven by equal contributions from increases in rate and volume. Fourth quarter food and beverage revenue was up 7.1% and included a very encouraging 7.9% increase in high-profit margin banquet and AV. Our aggressive initiatives on food costs and menu refinements, along with higher banquet sales, enabled food and beverage margins to increase 64 basis points in the quarter. Cost controls remain a focus of management and house profit margin increased 113 basis points compared to Q4 2010. Demand was good in the fourth quarter with all segments showing growth, more evidence of continued demand recovery. Group revenue in the quarter was up 7.6%. Business transient was up 1.8%; leisure and other discount revenue was up 5.5%. And contract and other revenue was up 40%. The room segmentation for the portfolio by revenue in Q4 was 32% group, 33% business transient, 29% leisure and 6% contract and other, reflecting the very balanced revenue mix of our portfolio. We are encouraged by productivity gains and…

Thanks, John. With that, we would now like to open the call for any questions you might have.

[Operator Instructions] And your first question comes from the line of Will Marks of JMP Securities.

I think, my first question, I just wanted to ask about, Mark, the comment you made, I think, early on about was it $80 million of EBITDA that you had at the peak that you don't have now.

That's correct. So if we look at our hotels, the entire portfolio of what they earned in 2007 versus what they earned in 2011, it's an $80 million difference in hotels, adjusted EBITDA.

And what portfolio are you referring to? Would it be pro forma for the asset sales?

Yes, it's pro forma for the asset sales for the 23 hotels -- pro forma asset sales.

Next question on the acquisitions you're looking at. Who are the sellers these days?

Well, I would say the sellers are primarily private equity. You know the public company hotels sell for disposition, but the ones that we're seeing are primarily private equity that may have debt maturities coming up or anticipating a relatively early debt maturity. So, I think, that's going to be the bulk of the traffic. Having said that, in the first quarter, we have not seen a dramatic increase in inventory for sale, but we anticipate that it will come.

And the assets you're looking at, are they assets that maybe have some distressed issues or you'd have solid initial yields?

Yes, I think, given the level of capital activity that we've got going in the portfolio right now, I think our preference would be for relatively stabilized assets. We will obviously look at opportunistic turnarounds if we think there's enough upside. But we, I think, stable yielding assets would probably be our first choice at this point.

Will, this is Mark. Just to reemphasize that point, we're looking for assets in top growth markets that can outperform over the next 5 years so the distinction is with a 0 cash flow we need to put rooms in, vacant floors either half done with kind of building it or renovations. We're looking for assets in markets like Seattle, San Francisco, Miami, where maybe there is a rebranding opportunity or some light amount of capital for a reasonable amount of effort we can see all the upside in that market along with potentially a rebranding opportunity or repositioning effort on those assets.

And your next question comes from the line of Jeffrey Donnelly of Wells Fargo.

Mark, I'm just curious, I mean, how do you think about the prospects for consolidation in the sector now that some companies are trading at or above NAV and some below. And, I guess, maybe as a follow-up to that, do you guys think that your balance sheet is at a point where you're positioned to take advantage of any opportunities should they come to pass or do you think anything else needs to be done there?

Yes, I think, a couple of comments on consolidation. One is, I think, there is logic to a consolidator in the space and having alternative to host at some point, so I do see Marriott in that proposition. As far as a likely combination, I think we have a balance sheet to be an acquirer or one of the best balance sheets of the industry. But as far as the particular sellers, there's a lot of factors that go into that from companies that may be too small to survive over the long-term and efficiently. To other people where they may just have capital structures where they need a solution, which can only come through a combination of companies to solve their balance sheet challenges.

Do you want to name any of them? Maybe that's helpful. And if I could ask switch gears maybe with John, what's the term on the agreement with Marriott. Do they look for or -- or I should say Autograph, do they look for 3-year agreements? And maybe as a follow-up. How do fees compare with say a full-on Marriott branded hotel with any of the capital that you have to put in that hotel sort of influenced by Autograph or is that really kind of all driven by you guys?

Okay, Jeff, the agreement with Marriott for the Autograph is a franchise agreement. Those typically run for a 20-year term. The fees for Autograph and Renaissance are lower than the fees for Marriott. I think that was your question. And what we have for Marriott is a combination of key money, and a ramp in the fees for the early years to help compensate for the renovation work that needs to be done.

And Jeff, this is Mark. Just to add on, one of the things that's unique about Autograph is they'll let you franchise a large hotel, where the brand may not let you do that or with a Marriott brand, I don't know of any hotel that -- say would let you franchise, and we see a big advantage to franchise. We also really like the Autograph over some other brand alternatives because it allows you to appeal to that guest that wants a unique experience in New York, but also wants to be able to submit that to his company on expense account as a hotel that they're allowed to stay at and they can get their points and make the reservations through the reservation system. So we see a lot of efficiencies in going with the Autograph brand there.

And, I mean, thus far based on what maybe the folks at Marriott are telling you, do you guys think you get the full power of Marriott`s reservation system kind of on the cheap, going this route?

Yes. I wouldn't call it on the cheap. But I think we do feel you get the full value of the Marriott reservation system. We show up at the same time as Marriotts and Renaissance show up on the webpage, and I think, in general, the customer will be aware as they book that they're going to get the rewards points, they can make the reservations through the brand.com and when they get to the hotel they will have a certain level of expectation, which we hope to augment by driving the independent brand equity of the Lexington Hotel.

And I apologize if I missed this in your remarks, and I know Frenchman isn't in your same-store pool for 2012 but I just to be sure I am capturing it right in our model this year and for next year, can you give us a sense of maybe what the year-over-year change in EBITDA is looking like for '12 versus 2011? Just I know last year had the disruption in it, but I would imagine there should be a pretty substantial increase, and I guess maybe can you give us a sense how it is faring in the first 60 days of the year versus your expectations.

Jeff, this is Sean. Let me start with a top level sort of a bridge from 2011 to 2012 at the midpoint of our range. We reported $162 million of EBITDA. You have to back out 10 from the impact of on our dispositions as well as our acquisitions or dispositions for the full year and the acquisitions for the pre-period, the pre-acquisition period and back out 1 for the net Allerton, difference between 2012 when we are going to exclude that versus 2011. So that, to get the midpoint of our guidance, that gives us a little bit over $20.5 million of portfolio growth within DiamondRock. And of that $20.5 million about $10 million of that is disruption from Frenchman’s and the balance from the other portfolio. Now Frenchman’s, specifically, is going to have some year-over-year growth is also we are expecting approximately $14 million of growth in Frenchman’s from 2011 to 2012, which is assumed within that little over $20 portfolio growth.

That's very helpful. And just one last question actually on Vail. I'm just curious, what's happened in room demand overall in that market. It sounds like asset management plan to kind of change the cancellation policy, really helped during Q4 and you can see it in your EBITDA numbers but maybe I'm misreading your comment about how you expect Vail to be underperforming this year. Does that mean subsequent to quarter end, you guys have seen some falloff in demand in the market or is it really just more of a supply threat that kind of is triggering that comment?

Yes, Jeff, January started as a low snow month so to the extent we didn't have the reservations on the books, pickup was slower. It wasn't down dramatically, but it was slower. As word has gotten out of the snow conditions' dramatic improvement, we see great results coming in February and March. So overall, for the quarter, I think we will probably lose a little in January and hopefully not much in February or March and Easter is late this year, so we'll get a little bit of a pickup in early April assuming the snow keeps coming.

Your next question comes from the line of Sule Sauvigne of Barclays Capital.

You mentioned your group pace was up 10.5%. Is that for 2012?

It is for 2012 and it includes Frenchman's Reef. And excludes the disposition hotels.

Okay. It includes them?

Excludes the disposition hotels.

What would be the pricing that you're seeing for those bookings?

The 10.5% is about 70% rooms and 30% price. We expect that in the year -- for the year, pickup will be the reverse of that. We'll be higher price and lower room nights. So net, net we expect it to be a little bit different ratio.

Okay. And specifically your Frenchman's Reef, can you provide more details on kind of forward group bookings for the property post renovations?

Sure. Frenchman's Reef, the pace in 2012 is up about 43%.

How about pricing?

That 43% is about -- it's mostly room nights, but that again because we had rooms out of service. And 3% in rate.

Okay. Any early indications of 2013 bookings there?

Yes, we have -- well, not really there's not enough volume, but it's up about 6% so far, but it's pretty early -- that's a short-term booking house.

And the next question comes from the line of Eli Hackel with Goldman Sachs.

Just 2 questions. You just again mentioned Marriott group sales programs. What are some of the things that we've done there? I know you've added back staff where necessary, but are there other things you've done to improve the flow and the close rate there? Then, second, can you just give us an updated timeline on Times Square, when you think it should open and what kind of EBITDA you expect in stabilization of that asset and when do you think -- when do you expect it to be stabilized? Thank you.

Sure. On the Marriott sales programs, some of the changes we made specific to our portfolio is we added destination salespeople at the hotel and the purpose of that was to basically feel the leads, do site visits and help close the business. With respect to the sales offices themselves, in Chicago for example, we worked with Marriott to create a downtown sales office where the original organization called for Chicago land sales office covering 100 hotels. We created a downtown specific sales office, which obviously helps us with the largest Marriott presence in downtown Chicago. In some of the other markets it was really kind of refocusing of efforts and what Marriott concentrated on was 2 things in particular. And that was improving the closure ratio in other words, the leads are already well above, but the closing ratio was down, and they have done a really good job of improving that. And then the what they call pitching and catching -- the export of business, if you will, from one sales office to another area.

Have you seen real evidence of the pitching and catching working in effect?

Well yes, we - the numbers Marriott gives are our actual numbers. With respect to our individual hotels, we've not necessarily tracked it. In terms of 42nd Street, we anticipate that, that will -- has started construction, will take about 2 years to complete. So sometime in '14 it will open -- I'm sorry, sometime in the second quarter of '14 it will open, and we anticipate a $15 million EBITDA for the hotel.

And that $15 million, that's under stabilization or in '14?

That's stabilization.

Your next question comes from the line of Andrew Didora of Bank of America Merrill Lynch.

Just it seems like you had a nice acceleration in the New York market in January from 4Q. Can you give a little bit more color around what's driving this and then can you also give us a breakdown in terms of whether the strength is coming more from the Radisson property or from your more limited service properties?

Yes, A couple of things in that. First of all, the first quarter if you remember in '11 had a weather impact. So there were some snow events that caused a fairly easy comp. Number two, and this is specific to our portfolio obviously, because so much depends on where you are within the city. At the Lexington Hotel, we were able to put in a contract of airline room nights of $200 a night, which had a dramatic impact on the January results and fourth quarter results and will go going forward. And then at the Marriott hotels, it was on the Midtown hotel, we felt the impact of Citibank, which is a major producer out there and Fifth Avenue, I think -- a little bit of a supply but in January they both performed pretty well.

Got it. And then just a follow-up on the Marriott sales transformation process. Is there any way for you guys to quantify in terms of your current booking case how much might be attributable to the transformation?

Not really, but I can tell you the Marriott component of our pace report is up about 500 basis points more than the balance. That's not really meaningful because it's not a fair sample size, but it's encouraging to us because the 13% pace improvement in the Marriott portion of the portfolio is a very strong pace.

Your next question comes from the line of Smedes Rose of Keefe, Bruyette, & Woods. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask you said your group trends were up 10.5%. What are they if you exclude Frenchman's Reef?

If you exclude Frenchman’s, they're about 9 and change. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So I think that's kind of in line with what you guys had given on your last conference call. So is that what you would have expected, that the pace is kind of flat sequentially, or is that better or worse than you would have thought for now?

Yes, I think we saw last year a trend every quarter the pace improved. I think it flattened out a little bit in the fourth quarter, but it's still very positive. Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just another thing I wanted to ask you. Why is the G8 meeting in Chicago a negative at your hotel I tend to think of those big meetings as positives for the hotels.

The problem with the G8 is the amount of protest activity, if you will, that it generates. And so we've had one major group cancelation, about $1 million worth of State Farm business. They paid the cancellation fee and hopefully we'll be able to replace the business, but we're anticipating that other groups are going to be reluctant and transient travelers are going to be reluctant to show up coincidentally with the G8 just because of the protest activity.

Your next question comes from Dan Donlan with Janney Capital.

Just a question on the Allerton. So where should -- is the cash interest payments -- are they going to be coming in through interest income or how is that going to flow through the income statement now.

Again, this is Sean. The cash -- the accounting treatment is going to continue year-over-year. Any interest that we receive will be accounted for at the reduction of bases. The difference that we're doing this year versus 2011 is because of the uncertainty on the timing of the resolution of the bankruptcy, we thought it just made more sense to exclude both the expected cash interest payment coming out of the hotel as well as the legal fees that we plan on incurring during 2012 from our adjusted EBITDA and adjusted FFO guidance.

Okay, that's helpful. And then just curious on the asset management plan in Vail. Was it -- was a new policy to enact a 45-day non-cancellation policy?

This is the first time we've done it, yes, beginning this season.

Do you worry at all that those people that booked rooms that had to pay for them 45 days that they potentially may not ever come back to the hotel?

We work pretty hard to keep those people happy just for the reason that the skiing was limited, but there was skiing and there were other activities going on in Lions Head in particular and Vail, in general. So we didn't have a lot of dissatisfaction among the guests. We anticipated it and we've put in some programs to make sure that the guest service was exemplary, and we made sure that they understood exactly what parts of the mountain were open.

Okay. Just moving on to the Lexington Radisson. So is there going to be a point in time where you’re not going to have access to Radisson's reservation system and not have access to the Marriott's reservation system as well?

There may be a period when we run as an independent. We have analyzed that pretty carefully and we're still working with Radisson about timing of the termination of that relationship. We feel pretty comfortable that although there'll be a revenue hit, it won't be substantial because our operator Highgate operates several independent hotels in the city and has a pretty good handle on what we can generate as an independent from a revenue standpoint and of course we don't pay fees, and we have other costs we can scale back in the interim while we are operating as an independent.

Okay. So you're definitely going to keep Highgate in as the operator even when it does potentially or will potentially become a Autograph?

That's right.

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

Over the last 2 quarters, you gave us a segment break out of the transient and leisure segments. It seems like leisure has been keeping pace, you're doing better than your overall RevPAR growth and transient's been the opposite, kind of been lagging. Can you provide us a little bit more color on those 2 segments and your outlook for them in '12?

Yes, if you look at the numbers I gave you were for the quarter. If you look in the total year, excluding Frenchman's and Inland, it's about 4.5% group growth, 6.7% business transient growth and 5% leisure and discounts. The area where we have had a different increase, but it's kind of higher increase but kind of law of small numbers, is in the contract and other. And I just described an air line contract we put in the Lexington, which had an impact on that number. So what we're seeing in general though is we are able to shift demand within each segment to higher-rated categories and that trend has accelerated in the fourth quarter. We expect it to continue into '12. So it's both the increase within the segment itself but it's also the shift in the rate strategy within the segments. So if the numbers I gave for the comparison to peak show that we've got between room nights and rate in business transient, we've got a 13% cap to what we did in the same portfolio in 2007. And in leisure and other we've got 20% more room nights than we had at peak and it's at a significantly lower rate. And so there's obvious opportunity for revenue management within the segments and among the segments.

Your next question comes from the line of Wes Golladay of RBC.

Once you guys source new acquisitions, will you look to sell more assets?

So currently the Inland sales for $262 million, that will put our balance sheet if I think about that, the proceeds from that to pay down the debt and the new proceeds from the Lexington loan, after dividends that will leave us year-end cash balance of about $150 million in debt-to-EBITDA a little bit over 4x for the year, which probably gives us at least $0.25 billion of investment capacity. We're still being well within our target leverage -- what we think is a very conservative target leverage level. So the issue in equity will depend if we think that we're going to do more than $250 million of transaction during in the near term. So it will be a valuation of what the pipeline looks like at that time.

So there's no real assets in the portfolio right now that you guys might want to recycle.

There is always -- I think we said in the last call there is probably 2 -- everyone by definition has a bottom 20% of their portfolio. We're constantly striving to improve our portfolio. So there are 1 or 2 assets that we might consider for dispositions this year.

Okay. And what were your guys pro forma peak margins?

Our pro forma peak adjusted EBITDA margins were approximately -- a little under 32%.

[Operator Instructions] And your next question comes from the line of David Loeb of Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: I just have a simple clarification, Mark, I apologize if you went over this. But I believe you said with the Allerton note, the resolution is likely to be either you own the hotel or you have a new note. Can you just talk a little bit about what that now might look like? And, Sean, does that mean when you take over that new note, would you book again then from your now lower basis?

Okay, David, this is Mark. So it's currently in bankruptcy court now. They submit the plan. We may object to that plan or go through a couple of literations and one of the resolutions may be that the bankruptcy judge decides to let them stay in foreclosure and allows us to foreclose the asset and take ownership. So that's one possibility. The other is since we are a secured creditor that they need to give us something of equivalent value to the face amount of our note. The face amount today and there's a lot of moving pieces here, but it's significantly more than we pay for the note. So they would have to give us a new note at market terms, which is of equivalent value to the note we currently have now. So exactly what that looks like, we're not sure at the moment. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: So getting paid off is not really on the table anymore.

Well, getting paid off. We can't put ourselves in the shoes of the debtor here but my guess is that at some point they want to sell this asset and the potential new acquirer may decide that they don't want this debt on the hotel, so that's when we would most likely get paid off.

So David, with respective to the gain I wouldn't anticipate a significant gain on this transaction. What we will do is if, in fact, we get the new note, we would record that at fair value at that time, but I wouldn't anticipate a big significant gain from that note, because the face value of our note is already in excess of our carrying value, but we would mark that to fair value. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then I guess finally, on that point, this is, I guess, a 2 part question. The new note might that not be assumable so that the new owner, if the hotel was sold, would be in a position to keep that debt, that's number one. Number two, would have interest in keeping that note or would you likely look to sell it?

David, it's all part of the negotiation. What the bankruptcy judge decides ultimately is the market value about the transfer provisions. The current note that we have is a typical securitized debt, which has loan assumption, has misfeasance and has loan assumption provisions in it. So theoretically it could be transferred. As far as whether we'd want to sell the note or not would probably depend on the interest rate and the duration of the note at the conclusion of the process.

And there are no further questions at this time. I'd like to turn the call back to Mr. Brugger for closing remarks.

Thank you, Karissa. 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.

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