Ladies and gentlemen, thank you for standing by, and welcome to the Fourth quarter DiamondRock Hospitality Company Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President. Please go ahead, ma'am.

Thank you, Catherine. Good morning, everyone. Welcome to DiamondRock's fourth quarter 2019 earnings call. 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 measure can be found in our earnings press release.With that, I am pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning, and thank you for your interest in DiamondRock. We are pleased to report solid operating and financial results for the fourth quarter. Before I get into our 2019 review and 2020 outlook, I'd like to first provide an overview of the current operating environment. After which, I'll turn the call over to our Chief Financial Officer, Jeff Donnelly, who will provide additional color on our portfolio's performance as well as the balance sheet review. Finally, I'll conclude our prepared remarks with commentary on several areas of focus that will drive value for DiamondRock shareholders going forward.Looking back at the fourth quarter, the economy extended its record expansion, but there were signs that the ongoing trade war with China and commencement of future proceedings were taking their toll on several key drivers of corporate demand, including business fixed investment and corporate profits.The consumer, however, remained a source of strength. Employment rates edged to a 50-year high, fueling continued growth in disposable income, personal consumption and a resurgence in residential investment. In short, the leisure destination resort customer is doing better than the corporate traveler. This supports DiamondRock's strategic pivot over the last few years to grow its portfolio of unique destination resort hotels, which continue to drive our portfolio performance until the corporate demand reaccelerates.Lodging industry fundamentals overall remained muted in the fourth quarter. According to STR, overall U.S. RevPAR growth in the quarter was up 0.7%. So once again, outpaced the Top 25 markets. Demand continues to be healthy in the major markets, increasing 3.2% versus 1.4% growth in all other markets. While demand was superior in the Top 25 markets, RevPAR growth was not. RevPAR growth in Top 25 markets was just 0.3% in the fourth quarter, as compared to 0.8% in all other markets.The culprit remains…

Thanks, Mark. Before I walk through our fourth quarter results, I want to remind everyone that comparable RevPAR hotel adjusted EBITDA margins and other portfolio metrics are pro forma to include our 2018 acquisitions for all periods. Due to the renovation activity, comparable results exclude Frenchman's Reef for the entire year, Havana Cabana for the first quarter, and Hotel Emblem for the period of September 1st to December 31st.Fourth quarter financial results were ahead of 2018 on strong total revenue growth. On a comparable basis, RevPAR increased 1.5% in the fourth quarter, driven by a 1.1% percent increase in average daily rate and a 0.4% increase in occupancy. The PG&E power outages impacted Cavallo Point and the Renaissance Sonoma for six days and reduced total RevPAR growth by approximately 35 basis points. Despite this headwind, fourth quarter comparable 2019 room revenue was $167 million. This was $2.7 million ahead of 2018 on stronger-than-expected group pick-up in the quarter. Non-room revenue was $1.3 million ahead of 2018 as a result of the additional activity and the implementation of new revenue streams at the hotel.Our customer segments performed quite differently during the quarter, with leisure increasing a healthy 7.5%, while business transient increased only 1.3%. While several of our major markets had off citywide convention calendars, in the quarter, group pick-up was stronger than in the previous years and helped to offset some of the forecasted weakness in group.A standout in the portfolio in this regard was our Chicago Marriott Downtown hotel. As a result of the operating team's hard work and focus, the Chicago Marriott ranked Number 6 among all of Marriott's convention resort hotel network for intent to recommend, outpacing most of the major hotels in the Gaylord Marriott and Sheraton system.For 2020, group is a great story for DiamondRock.…

Thanks, Jeff. Last quarter, we highlighted initiatives that we are undertaking to drive value for our shareholders. I want to provide an update on these five focus areas. One, resort focus. Our performance continues to support our research that there are strong secular demand for experiential travel. We believe that destination resorts, particularly in geographically constrained areas, faced lower supply growth and lower expense pressures than in the Top 25 urban markets and overall lodge industry.Seven of our last eight acquisitions have been in this space, and we are working on avenues to increase our portfolio concentration in the lifestyle and resort segment in the years to come. The repositioning of the Key West Resort announced today is a prime example. There are likely to be more announcements later this year for other hotels within our portfolio.Two, ROI projects. We have identified, and are pursuing $87 million of value-add ROI projects that we believe will generate an incremental $16 million to $18 million of EBITDA. In total, that's about $0.74 per share of incremental value over the next few years. For instance, in 2020, we will begin work on converting underutilized meeting space at the Hilton Boston to an additional 29 guest rooms. Moreover, we are optimistic that our pipeline of ROI projects will continue to grow as we unearth new opportunities.Three, relaunching Frenchman's. We will reopen Frenchman's Reef as two distinct resorts, Frenchman's Reef Marriott Resort & Spa and the Noni Beach Autograph Collection lifestyle resort. Reconstruction is well under way, with the reopening targeted at the end of 2020. Reopening the Frenchman's resort complex will be a strong and differentiating driver to our earnings growth starting in 2021. We believe this connected resorts will grow from almost nothing in 2020 to over $25 million in EBITDA stabilization in…

Thank you. [Operator Instructions] And our first question comes from Anthony Powell with Barclays. Your line is open.

Hello, good morning, everyone. Question on leisure trends. There was some commentary from the cruise industry yesterday that domestic customers in the U.S. were avoiding travel in some sort of situations. Have you seen any of that impact your domestic resort bookings in February and March in places like Key West or Vail or Sedona?

So, our destination resort customer we sell, it was very strong in December. Appears to be very strong in January. And if I look at a market like Vail, continues to be strong. So, we have not yet seen any weakness in that segment.

Got it. Thanks. And just on supply growth in resorts. Obviously, there are structural issues in getting new resorts built in some of your markets, but given the strong kind of performance that you and others have seen, are you worried that more supply may be coming online in resorts over the next several years?

Not in the kind of markets that we are in generally. Sedona, Sonoma, Key West and these are markets that are virtually impossible to build in either some markets, it's actually a legal to add more rooms like U.S., and then some like Sedona are just geographically constrained. So, while there may be more golf resorts or something like that built, the kind of resorts that we have, we're unlikely to see a meaningful increase in supply.

And have you seen cap rates decline in the small resort markets where you've been pretty successful in buying at attractive cap rates?

I think that we're not alone in seeing the trends. So, the desirability of resorts in these type of markets continues to increase. So, cap rates are probably holding steady. And there's probably more buyers today for these assets than they were two years ago. So, we believe firmly based on the research and the trends that we're seeing that these kind of properties will outperform the industry average over the next several years. So, we would expect that there will be continued focus in increasing buyer demand for these assets, which will keep cap rates relatively competitive.

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc Capital. Your line is open.

Hi. Good morning. Thank you. Certainly, group is off to a strong start this year. I'm curious where you think that ultimately settles out or what you've assumed in your guidance for group for the year, and then what does that imply for leisure and transient segments with respect to the overall guidance.

Sure, Austin Wurschmidt. So, we're at about 14.1% group pace, as we entered the year. Always, as you progress through the year, the numbers kind of come in as you book and realize some of that business and the tougher periods are harder to book. So, we would imagine ending the year in the mid-to-high-single digits in total group pace. We also expect that our destination resorts will be above the -- the national average. And then I think it's -- every market -- every Top 25 market is a little bit different. That's where we see more of the risk.

Understood. And then, also touching on the resort segment, I mean, you've definitely highlighted the benefits for some time now, lower supply growth, you think lower expense growth in these smaller resort markets. But I guess, given we're in the thick of the elevated supply in urban markets and wage growth, it's certainly -- it's still a fairly big issue in these markets. How do you accelerate the expansion into the resort segment, given you are seeing more buyers today and expect that could continue to increase?

I'll recognize Troy Furbay has done a a terrific job of establishing a wealthy pipeline and being ahead of the curve in building a database of literally more than 100 of these type of resorts that we're monitoring and talking to owners and trying to secure and grow that. So, as you see us think about dispositions, there are unlikely to be resorts. And so as you think about acquisitions, we have a team of very talented people that literally they're spending 10 hours a day doing focused on these relationships and uncovering these opportunities.

Can you give us a sense of the number of opportunities or the depth of opportunities as it relates to resorts? And is it just a reluctance of sellers to let go of these assets that's limiting the ability for you to continue to move in that direction?

I think there's a couple of things going on here. If you look at just the volume of hotels for sale, they fell about 20% -- 21% last year in the U.S.. So, there is less hotels for sale. The financing markets for existing owners has never been better. So, the reason to sell versus refinance is less compelling in that kind of environment. [indiscernible] these, we have more unique type of owners in these resort markets with different kind of motivations for selling. It's not like we can go out and buy 100 of these in the next 30 days. Frankly, I think the bigger limited -- limiter on us right now is our cost of capital and our discount to NAV, which makes it more difficult to do external growth, unless you're trying really extraordinary opportunities, which we may. But a single isn't going to do it, it's going to have to be a double or triple certainly to overcome the cost of capital hurdle.

And then, as far as the depth of the pool that you're looking at today?

There's dozens of these kind of -- dozens and dozens of these kind of micro-market resorts. There is not dozens and dozens on the market, but we've been very successful over the last three to four years of uncovering off-market opportunities when they do come available. And that's what's so important about having a very high quality investment platform and group within your company that's monitoring these kind of opportunities because you need to be ahead of the curve and be there first and build these relationships, if you want to do these kind of deals.

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

Hi. I just wanted to ask you a little bit on the wage and benefits front, sort of specifically what you see those increasing this year at, and do you sort of agree with another company that said 2020 should be the peak in wages and benefits?

I'll give you some of our numbers. So, we are seeing wages -- they're very different at different hotels. Overall, we saw our portfolio wages and the budgets are about 5%. But at hotels, they range from up 1% to up 6%. So, there is a wide range in increases. But clearly, it's a challenging environment and benefits are probably up 5% to 6% in 2020, whether that's peak or not as a percentage year-over-year. Tom, do you have an opinion on that?

I don't, Mark. I think that we have to look at it is, when you look at the wage growth, we have to look at the mix of business. We project to do a significant increase in food and beverage. 50% of that increase is coming from outlets in our investment, in outlets from Lona to Michael Mina to Kostali and some of the outlets that we're doing. So, we're seeing growth there. And then, the other 50%, roughly $9 million of increase is from banquet revenues. And then on the banquet side, there is a larger payout with regards to service charges and gratuity that get paid out to the staff, which inflates your wage growth. So I think, we look at it case-by-case, property-by-property. And I think the big driver, when you look at our percentage this year, is just the amount of food and beverage growth.

So, I guess to answer your question, the mix will make -- will play a large role in it. I need to predict what future increases are going to be. I think we're extremely profitable. We're proud that we were able to grow same-store profits and that's really our focus at the end of the day. Can you grow same-store profits? And that will be our focus. We did it last year. We have to do it again this year.

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

Hey, good morning, guys. Maybe you could talk a little bit about how '19 unfold in terms of group performance versus contracts or your expectations. It seems like there is some pretty big pick-up both in terms of kind of attendance and also out-of-room spend. How much of that kind of flows through to your 2020 guidance?

So, I'd say 2019, just a couple of observation. The outside the room spend was ahead of our expectations and very healthy. We did go into 2019 with a weaker footprint, which is now reversed and it is a stronger footprint going in 2020. In the quarter -- for the quarter -- group pick-up in the fourth quarter was better than our expectation.Now, in fairness, we had a lot of rooms to sell because it wasn't strong citywide and couple of our markets, but the quarter for the quarter was ahead of our expectations. December overall, pretty much in all fronts, was ahead of our expectations and January is off to a very strong start. They're not always the most indicative bonds, but both of those months were very encouraging from that perspective.

Okay. That's helpful. And then just on the share repurchase front, you guys were very opportunistic I think both in December 2018 and then earlier in '19, I think you're buying a kind of $9.65 was the blended average. How do you look at things now? The stock closer to $11. Is it just a number that's out there that you where you buy stock, or is there something else that goes into it?

Yes, a couple of comments on share repurchases. We're believers in share repurchases. And you had right, since December of '18, we purchased 7.8 million shares at an average price of about $9.58. So we look at -- we do our internal NAV on a regular basis. We continue to believe that we're trading that at 25% plus discount to NAV. I think today, the trading price implies something like an 8.2% to 8.3% NOI cap rate, which is totally out of step with recent private market cap rates for quality hotels like ours. We still have about $170 million -- $175 million left under our share repurchase plan approved by the Board of Directors. We're going to be opportunistic. I think that's the bottom line. And it would be reasonable to assume that, if we have any asset sales that are successful, that would substantially increase our appetite for share repurchases going forward.

Thank you. Our next question comes from Michael Bellisario with Baird. Your line is open.

Good morning, everyone. And just on Frenchman's, what's the remaining out-of-pocket spend that you guys are going to incur in 2020?

Michael, I think in our last disclosure that we had given, we thought our owner's out-of-pocket cost would be in the range of about $50 million. And we think that those costs could increase slightly from here, but we don't have a specific estimate that we can give you today. That's why we are saying in our remarks that we thought our incremental return could still be in the mid-to-high teens when we're all set and done on our owner's investment.

Yeah, Michael, if you're trying to get the dollars out, there is probably about $150 million left on construction, and then some of that's going to be offset. We have key money coming in from the brand that will be due when we open the resort, and we still have a pending application with FEMA for some money as well.

Got it. Yeah. That's the number I was looking for. And then, if you fast forward to the end of the year assuming you're at the midpoint of your guidance, what does the 3.7 times net leverage at 12/31/19 look like versus 12/31/2020?

This is Jeff. I think if we continue to spend on Frenchman's, at that point, I think we're going to finish the year closer to about 4 times net debt to EBITDA.

Okay.

It's kind of an elevated number. So if you think about it, because at that point, we will spend all the money for Frenchman's, but we won't have any of the benefit of the EBITDA in the trailing 12.

Thank you. And our next question comes from Rich Hightower with Evercore. Your line is open.

Hey. Good morning, guys. Quickly on Frenchman's again. Just -- you guys have maintained a $25 million stabilized EBITDA target I think for some time now. So, just help us understand the margin of safety or the cushion that exist around that $25 million?

Listen, the Caribbean comps that we're looking at, and we reevaluate this on a regular basis, continue to do well. So nothing in the trend lines or the comps of the hotels that we think are the most competitive to this has changed. We still think it will be one of the top redemption hotels within the Marriott system. So, we still have confidence around all of those basic assumptions in our underwriting.

Okay. That's helpful. And then, Mark, maybe on a separate topic. If you care to riff on the relationship nowadays between brands and owners, and I'm sort of taking into context the decision to turn the Boston Westin into a franchise, and also thinking back to Alice and some of the conversations that we had around just the impact of supply on existing owners. And maybe for the first time in a while, I think in some of those conversations, the gloves came off, so to speak in certain pockets. And just tell us kind of where we are in that evolution from DiamondRock's perspective?

So I think every -- first of all, on the gloves coming off. So, I think there are clearly -- the brands are our partners. We believe in the value of brand and the power that they deliver at certain properties absolutely. Some properties in some markets, they probably don't deliver as much value as they do in other markets. So I think, we think about every hotel as its own individual business case. The Sheraton Key West being an example of that. That market just runs at such high RevPAR and delivers so much demand just pumped in the market, the cost of the brand versus independent. Probably, doesn't make as much sense as some other ones.Clearly, in convention center hotel, the brands deliver a ton of value. But again, we look at each one individually. The brands are our partners. We do value that, but there are times when there are points of conflicts, just given the nature of our business models. And we have to sit down and have conversations about the best way forward with their objectives and our objectives and come to some conclusions.

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

Hi. Excuse me. Good morning. I just want to follow-up on a previous question. I don't think the second part was answered. Concerning the math, what your expectations are for the transient customer? When I kind of do the math, you talked about mid-to-high-single digits for group, let's say that's 7% group, probably a third of your business. That sort of implies that the rest of business is doing negative 3%. Is that the right way to think about it?

Hey, Patrick. This is Jeff. I would say, Mark is correct, and number for group is mid-to-high-single digits. There's a couple of other categories. I would say, the outlook for transient overall is slightly positive, and we actually do have some growth in other areas too, contract for example. But I think you're correct. The outlook for transient in our budgeted expectations is very low-single digits, but not negative, I think.

Okay. Thank you. And then, how do you think about, given sort of the trajectory of RevPAR growth this year and next about the sustainability of your dividend?

We feel great about our balance sheet. I mean, I think we are committed to our dividend. We believe our coverage is excellent on dividend. So, we don't see -- I think [indiscernible] we don't see any risk to our dividend going forward.

Thank you. Our next question comes from Dori Kesten with Wells Fargo. Your line is open.

Thanks, guys. Recognizing that total RevPAR growth is expected to be relatively strong this year, what leads you to assume that RevPAR alone will be in line with the industry? Is that conservatism, or is that concern for certain markets?

Hey, Dori, this is Jeff. I think it's a combination of factors. You're correct that we said that our room RevPAR would be increasing in line with the U.S. overall. We expect the major markets, the Top 25 markets, will actually lag the U.S. overall. So on that basis, we do believe that our room revenue or, I would say, our RevPAR growth is going to lead the Top 25 markets. But I would say, that there is some conservatism in there around our outlook for 2020, just as Mark mentioned in his remarks about assumptions around group pick-up later in the year.

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

Thanks. Just one for me. The performance gap between your two hotels in Sedona continues to widen. Can you comment on the underlying trends there?

Sure. So, L'Auberge continues to beat all of our expectations. The other hotel we have is the Orchards Inn, which is on the main drag. In Sedona, they're doing a big upgrade to the road and they're building a big circle right in front of our hotel, which will be great when it's done. It's just wrapping up now, but it was very disruptive, both to F&B and to the transient guests. And so, it impacted our rate in the last couple of quarters there.

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

Hi. Good morning. Thanks. Just curious, looking at the total RevPAR growth which looks good certainly to us for this year, what percentage of your portfolio's receiving amenity resort fees at this point?

About a third.

And how do you think that trends over the next year? A little bit higher?

So, we have five hotels that we've identified that we would like to add that don't currently have and we would like to add guest amenity fees to. So, we're in discussions with the brands on each of those five hotels now. We may or may not be able to roll that depending on negotiation.

Is that built into your forecast?

That is not built and that would be upside to our current forecast.

Got you. And then, what sort of exposure do you have to the airline crew business? We've seen some real weakness there and certainly, anything coming in from Asia Pacific is getting hit pretty hard.

Bill, this is Tom. We do a fair amount of crew rooms in New York and the different major markets, most of our inbound or most of our crews are domestic. So, we don't anticipate any significant impact from that.

And then -- thanks, Tom. One final question from me. Any impact either currently or as you look out to FF&E coming in from Asia and kind of the disruption to the supply chain?

That's a great question. We've asked at each of our projects. So, we've advanced book that we have everything that we have is either here that we need to complete the projects in the next six to nine months or is on a boat on its way, including Frenchman's Reef and some others. So, we don't anticipate for us it's going to be a challenge. Will there be some lighting fixtures or something that we may have to order from Vietnam versus China? Yes. But we double checked everything in our current pipeline. And at the moment, we don't see any hiccups.

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

Thanks, guys. Just one quick follow up here. You mentioned the cost of capital is being a limiting factor as far as acceleration into the resort segment. Have you explored using OP units maybe for owners with tax basis issues that you could price at a more attractive price than where your shares are trading today?

So, we used some OP units when we did Cavallo Point transaction. We have had discussions and we are in discussions over a year ago -- about a year ago, with that kind of exact same thought of telling them where our NAV was and having them take the OP units essentially at a higher mark that was commensurate with our NAV. Is there early sense of negotiations? Yes, but we've had some of those conversations, but they're complicated.

Thank you. And I'm showing no further questions at this time. I would like to turn the call back to Mr. Mark Brugger for any closing remarks.

Thank you. To everyone in the call, we appreciate your interest in DiamondRock, and we look forward to updating you on our next earnings call. Take care.