DiamondRock Hospitality's (DRH) CEO Mark Brugger on Q4 2015 Results - Earnings Call Transcript

| About: DiamondRock Hospitality (DRH)

DiamondRock Hospitality Company (NYSE:DRH)

Q4 2015 Earnings Conference Call

February 23, 2016 10:00 am ET

Executives

Brett Stewart - VP, Strategy & Capital Markets

Mark Brugger - CEO

Rob Tanenbaum - EVP, COO

Sean Mahoney - EVP, CFO, Treasurer

Analysts

Ryan Meliker - Canaccord Genuity

Rich Hightower - Evercore

Dany Asad - Bank of America

Jeff Donnelly - Wells Fargo

Patrick Scholes - SunTrust

Lukas Hartwich - Green Street Advisors

Mark Savino - Morgan Stanley

Michael Bellisario - Baird

Anthony Powell - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2015 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 is being recorded.

I'd now like to introduce your host for today's conference Mr. Brett Stewart, Vice President of Strategy and Capital Markets. Sir, you may begin.

Brett Stewart

Thank you, operator. Good morning, everyone, and welcome to DiamondRock's fourth quarter 2015 earnings call and webcast.

Before we begin, I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities law and may not be historical fact. They may not be updated in the future. These statements are subject to risk and uncertainties as described in the company's SEC filings. In addition, as management discusses certain non-GAAP financial measures, it may be helpful to review the reconciliations to GAAP set forth in our earnings press release.

With me on today's call is Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; Rob Tanenbaum, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will provide a brief overview of our fourth quarter results as well as discuss the company's outlook for 2016. Sean will then provide greater detail on our fourth quarter performance and discuss our recent capital markets activities. Following their remarks, we will open the line for questions.

With that, I will now turn the call over to Mark.

Mark Brugger

Thanks, Brett.

Let me start by thanking everyone on this call for joining us today. We note that this is a time of market dislocation and there are questions about the outlook generally for the industry. That said, based on a careful review of the data, our current outlook on lodging fundamentals remains constructive, despite recent moderation in transient demand. The fourth quarter numbers for the industry remain solid by any historical standard with industry RevPAR growth at 4.8%, bringing full year 2015 RevPAR growth to 6.3%, which is well above the long-term average growth rate of just over 3%.

On the supply side of the equation, new hotel supply last year registered only 1.1% growth, which is about half the long-term average. While different markets certainly diverged in results last year, the overall lodge industry had a good year. So where are our fundamentals going now?

As we look forward, we closely monitor several key economic indicators that traditionally correlate with hotel demand. In particular, we're watching trends in employment, consumer confidence, [employments] [ph], GDP and corporate profits. The first three of those indicators are positive and the last two are less encouraging.

Overall, the most likely case in our view is for moderating industry RevPAR growth in 2016, probably with a baseline change around 3% to 5%. However, we do expect the top 25 markets collectively to underperform the national average in 2016 because they have a little more supply to contend with.

Now let's turn to DiamondRock. Our portfolio performed very much in line with our expectations for the fourth quarter. Pro forma RevPAR increased 3.1%, bringing our full year portfolio RevPAR growth to 4.7%, excluding The Gwen, which experienced rebranding disruption, our full year portfolio RevPAR was 5.3%, in line with the 5% RevPAR growth for upper upscale hotels in the top 25 markets.

Moreover, in 2015, we were able to increase adjusted EBITDA by almost 13% to $265.4 million, which was within our original guidance provided to you one year ago today.

For the fourth quarter, group demand rebounded and led the portfolio's performance. The strong group revenue growth of 6.3% helped to offset a slowdown in business transient revenue. Leisure demand, the proverbial third leg of the lodging demand stool was solid with leisure revenues growing almost 4%.

The true highlight for the company in the fourth quarter was the continued successful implementation of DiamondRock's asset management best practices. Our team was very efficient in driving bottom-line profitability as we achieved impressive house profit flow through of 73% and profit margin growth of 114 basis points during the quarter. The quarter's profit margin results capped off a strong year for profitability with portfolio pro forma hotel adjusted EBITDA margins of 31.2%, a record for DiamondRock and a 113-basis-point increase from the prior year. We are very pleased with these results, as well as the company's overall execution on cost controls.

Now, let me turn it over to Sean to discuss our fourth quarter results and our capital markets activities in more details. Sean?

Sean Mahoney

Thanks Mark.

Before discussing our fourth quarter results, please note that our reported RevPAR and margin data are presented on a pro forma basis to include the Shorebreak Hotel and Sheraton Suites Key West as if they were owed for all periods presented.

Our hotels performed as we expected in the fourth quarter. Despite a difficult New York market and choppy business transient demand, our hotels outperformed their markets during the quarter, gaining 80 basis points of market share on 3.1% RevPAR growth. The RevPAR growth was driven by increases in both average rate and occupancies, up 1% and 1.6% percentage points, respectively.

It is important to note that the 4.3% total revenue growth exceeded our RevPAR growth, powered by the success of the new rooms at the Boston Hilton and successful strategies to drive food and beverage and other revenues.

Our profit flow through in the fourth quarter was excellent as our asset management initiatives drove our 73% flow through. Consequently, hotel adjusted EBITDA margin expanded 114 basis points. For the full year, the company reported pro forma RevPAR growth of 4.7%, driven by a 3.5% increase in the average rate and 0.9 percentage point increase in occupancy. Full year hotel adjusted EBITDA margins expanded by 113 basis points.

Fourth quarter demand was strong for both group and leisure. Group revenue growth led all segments in the portfolio with 6.3% growth. This represents a big turnaround from the 7.2% third quarter decline. Group was led by the Boston Westin, the Minneapolis Hilton and the San Diego Westin with group revenue growth of 28%, 50% and 41% respectively.

The recent trend of strong short-term booking activity continued with $3 million of in the quarter for the quarter group revenues, a 10% increase compared to the same time last year. In addition, during the fourth quarter, we booked $22.7 million in 2016 group revenues, which was over 15% more than was booked last year.

Moreover, we experienced strong growth in the leisure transient and contract segments with combined revenues growing approximately 6%, consistent with our expectations. The growth was primarily driven by approximately 7% higher demand. The segment growth was driven by our Boston hotels, the San Diego Westin and the Washington DC Westin.

Finally, as expected, our business segment was the only challenging segment during the fourth quarter with revenue declining 1.6%, which was the result of a soft corporate demand environment as evidenced by the anemic fourth quarter GDP growth.

Fourth quarter food and beverage results exceeded our expectations once again, achieving 6.3% top-line growth. Coupled with tight cost controls, this resulted in 270 basis points of margin expansion and 77% profit flow through. Banquet outperformance was the primary driver in F&B. Banquet and catering revenues increased more than 10% and margins grew over 200 basis points.

In addition, group spend on F&B and audiovisual increased over 11% during the quarter. We believe this elevated spending by meeting planners is a sign of growing group confidence. Other bright spots for DiamondRock in the quarter are the results from our recent ROI projects. I will mention just two.

The new rooms at the Boston Hilton generated a $66 rate premium in the quarter, which continue to exceed our expectations. At the Chicago Marriott, the first phase of renovated rooms from last winter commanded a $30 rate premium, which exceeded expectations and bodes well for the additional 460 rooms being upgraded this winter. However, our fourth quarter results were held back by a rebranding disruption at The Gwen Chicago and our New York City hotels. Excluding these hotels, our fourth quarter portfolio RevPAR growth would have been 6% and hotel adjusted EBITDA margins would have expanded 376 basis points.

Let me provide a little more detail on those two areas. First, as expected, the brand transition disruption at The Gwen negatively impacted the fourth quarter. The hotel is starting to gain traction with corporate accounts and we feel good about the stabilized prospects for the hotel. The renovation will be transformative and position the hotel among the best in Chicago. The arrival area, lobby and restaurant are being renovated this winter and are scheduled to reopen in May.

Second, while demand in New York City was solid, increasing supply led to 2.8% RevPAR contraction in the upper upscale luxury segment. We are proud that our New York hotels outperformed in the fourth quarter by approximately 130 basis points.

Before turning the call back over to Mark, I would like to touch on our balance sheet. Prudent balance sheet management and conservative leverage have been a cornerstone of DiamondRock's strategy for over a decade. In 2015, we were able to further bolster our balance sheet by reducing borrowing costs, extending and staggering our maturity schedule and expanding our pool of unencumbered hotels.

During 2015, we successfully completed $355 million of new financings, which contributed to three big advantages for DiamondRock.

First, the interest rates on the new loans are approximately 150 basis points below the maturing rates. With this, we have opportunistically lowered our average borrowing costs from 5.6% in 2011 to 4.1% today, which has reduced our annual interest expense by over $14 million or $0.07 per share.

Second, we have carefully constructed one of the best maturity profiles among our lodging REIT peers with an average maturity of approximately seven years and only one small debt maturity in 2016.

Third, we were able to move financings among hotels to increase the number of unencumbered hotels. Our unencumbered pool now stands at 18 of our 29 hotels. These unencumbered hotels alone generated $157.6 million of hotel adjusted EBITDA during 2015. These free and clear hotels form a strong backbone of the company's valuation. Even with this strong capital structure, we plan to further improve our balance sheet in 2016 by, one, addressing our one maturity, two, potentially recasting and increasing our corporate revolver and three, evaluating dispositions of non-core assets. We will provide an update on the progress of these initiatives on our next call.

I will now turn the call back over to Mark.

Mark Brugger

Thanks, Sean.

Now, I will turn to a more detailed discussion of our outlook for 2016. As I mentioned at the top of this call, we expect industry to have RevPAR growth of 3% to 5% with the top 25 markets underperforming those numbers. For DiamondRock, we expect our portfolio to generate full year 2016 RevPAR growth in the range of 2% to 4%. We expect our RevPAR growth to be below the industry average because of our concentration in top 25 markets, particularly the New York and Chicago markets.

Let me talk about those markets. New York; New York is expected to be challenging in 2016 because of new hotel supply, probably around 6.5% growth. Our guidance supplies New York market RevPAR as flat to marginally negative in 2016. We do expect our hotels to continue to outperform the market by approximately 100 basis points in 2016.

Chicago; Chicago will be challenged during the first half of 2016 because of the citywide group calendar, which is down mid teens in room nights and particularly weak early in the year. However, our Chicago Marriott is likely to outperform the market in 2016. 2016 group pace at the Chicago Marriott is up close to 3% with over 75% of the rooms already booked. After getting through the soft first quarter, group pace for the last three quarters of the year is up 8.6%, which should significantly outperform the market.

Our Chicago results will also be impacted by the transition disruption at The Gwen Chicago, which will continue through the first half of 2016, as a result of the hotel ramping up during a period with low citywide activity. We do expect strong growth at The Gwen in the back half of the year.

While our full year RevPAR guidance is for 2% to 4% growth, we do expect our first quarter RevPAR to be modestly negative, driven by a holiday shift and the spread of citywide events in our markets. Easter comes into the first quarter this year and is expected to negatively impact our March results but benefit our April results.

Group activity for the first quarter is weak in our three largest group markets of Chicago, Boston and Minneapolis. Accordingly, first quarter group revenues are expected to be down in the mid-single digits. However, group is expected to significantly improve after the first quarter. Our group pace is up 4.5% for the second through fourth quarters.

Now, based on our full year RevPAR growth expectations, we are guiding as follows. Full year adjusted corporate EBITDA is expected to range from $265 million to $270 million and full year adjusted FFO per share is expected to range from $1.04 to $1.09.

Lastly, before we open up for questions, let me address our capital allocation strategy as we navigate the current capital markets. Since the beginning of the year, we have continued to see a further disconnect between hotel values and lodging stock valuations. We firmly believe that we are currently trading a significant discount to NAV into replacement costs.

As a result, we are carefully evaluating opportunities to create shareholder value by strategically selling non-core assets and redeploying those proceeds into accretive share repurchases. As you may recall, our Board of Directors authorized a $150 million share repurchase program last quarter. Note that we have been in a blackout period since the end of our last fiscal quarter on December 31 and have not yet repurchased any shares under this program to date

As I mentioned, our preferred source of funding share repurchases will be from proceeds of asset sales. The transaction market stay is still active, and we are exploring several potential candidates. As you know, it is our policy not to comment on deals until they have closed.

So to sum up, in 2016, you should expect DiamondRock to remain laser focused on operations and to actively explore value creation opportunities through capital allocation.

With that, we would now be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ryan Meliker from Canaccord Genuity. Your line is now open.

Ryan Meliker

Hey, good morning, guys. Thanks for the color. I appreciate it. I wanted to talk a little bit about margins for 2016. You guys obviously had a great 2015 in terms of margin growth. I am wondering how many more levers you guys have to pull especially looking at 2% to 4% RevPAR growth. What are your underlying expectations for margins and I guess where could you be right or wrong to the upside or downside there?

Sean Mahoney

Thanks, Ryan. This is Sean. I think we, as you know, didn't give specific margin guidance for 2016 because of the sensitivity of those numbers relative to where the relative RevPAR is. I will give you some color on 2016 operating costs where we expect to increase anywhere from 3% to slightly over 3% in 2016, which compares to about, call it, 3.5% in 2015. And so within those numbers, we believe our operating costs will continue to come in below that at both food and beverage, as well as rooms and support costs, offset by slightly higher property taxes, as well as ramping franchise fees, as well as management fees within the portfolio.

But, overall, we expect our costs to go up roughly, call it, 3% to slightly more than 3% in 2016. When you look at how we performed in 2015, we were able to get strong margin expansion in a relatively moderate RevPAR growth environment. We would hope that we would be able to continue to do that, but we just -- as we look into 2016, we weren't able to provide specific numbers around that guidance.

Ryan Meliker

Okay. That's helpful. And then, as we look at the game plan for 2016, which you guys along with others, seems to be sell assets and buy back stock, with the proceeds, obviously, the stocks, including yours, are trading at a pretty big discount to what most of us believe the net asset values are. How willing are you to fund those repurchases with your balance sheet in advance of selling assets?

Mark Brugger

Hey, Ryan. This is Mark. That's a great question. Obviously, we're looking at a number of dispositions right now. I think once the dispositions we have greater certainty that we think they are going to close, we are going to be more apt, obviously, to buy. I think to lever up the company to repurchase the share price has to be even lower than it would be if we were just recycling the capital from dispositions.

Ryan Meliker

Okay. That's what I wanted to know. Thanks. Appreciate the color.

Mark Brugger

Thank you, Ryan.

Operator

And our next question comes from the line of Rich Hightower with Evercore. Your line is now open.

Rich Hightower

Hey, good morning, guys.

Mark Brugger

Good morning.

Rich Hightower

So just to circle back on the non-core dispositions comments from earlier, I know that you're probably not going to give us much color on the individual cap rates or the individual assets that you are penciling in for this, but could you give us a sense of where you think the spread might be between private market cap rates and then what the public markets are implicitly valuing the portfolio at today?

Mark Brugger

Yes, Rich, it really depends on the assets. So if you look at, San Francisco and New York probably have the lowest cap rates and the most amount of capital still chasing those markets. So we would expect the largest disconnect in those markets compared to where the stock is trading today.

So our strategy is a little bit of a barbell strategy, which is to look at sometimes where the largest gap is, but also it provides an opportunity to accretively potentially recycle some of what we call our non-core assets, our lowest RevPAR assets and upgrade the quality of the company and redeploy those into share repurchases and come out on the other side as the better company. So we are looking at it, we kind of think about the barbell, both sides of that equation create value for our shareholders.

Rich Hightower

Okay. Thanks Mark. And then, second question, back to the margin expansion and expense control topic, it does sound like a lot of the success on that front came on the F&B side in 2015, if I am not mistaken in saying that. And I am just wondering if there were any sort of one-time factors contributing to that last year, such as leasing out restaurant space, things like that, that might be more one-time in nature than what might be considered a sort of sustainable ongoing cost control strategy?

Rob Tanenbaum

Rich. This is Rob Tanenbaum. Good morning. We looked at several -- several of our hotels we looked at leasing out our restaurants. More specifically, at our Westin Fort Lauderdale, we terminated a franchise agreement with Shula's and brought that operation in-house. We saved over $400,000 in franchise fees alone. At our Charleston Renaissance, we leased out a restaurant. We had about 400 basis points of margin improvement through that as well. At our Chicago Marriott, we added a grab-and-go concept, which has saved several hundred basis points as well. And we see that continuing because that started -- we haven't hit the full ramp-up there. But as we look at the portfolio throughout 2016, we are going to look at other grab-and-go opportunities with our operating partners. So we believe there is additional upside there.

Rich Hightower

That's helpful, Rob. Thank you. So I mean I guess it is fair to say that a lot of that is still in ramp-up, as you say, but maybe by 2017 or a year or two from now, that effect would start to normalize in terms of what gets flow through FFO, for instance.

Rob Tanenbaum

That would be correct.

Rich Hightower

Okay. Thanks guys.

Operator

And our next question comes from the line of Shaun Kelley with Bank of America. Your line is now open.

DanyAsad

Hey, guys. This is actually Dany Asad on for Shaun. I really appreciate the extra color you gave us on the pro forma numbers, ex-New York and The Gwen for the fourth quarter. So I guess my question would be, are you able to give us a comparable pro forma number for 2016 or like basically, what's your outlook outside of those assets that have had a negative impact in the fourth quarter?

Mark Brugger

In simplest terms, we expect our Chicago assets to outperform the Chicago market, which -- and, again, we expect the Chicago market to be a little bit below the industry average. But we will probably come within the industry average in Chicago. So it's really New York that will hold us back a little bit, although we expect to outperform by about 100 basis points there. In simplest terms, figure New York is holding back our overall RevPAR guidance in 2016 by about 100 basis points.

DanyAsad

Great. Okay. That's it for me. Thanks a lot.

Operator

And our next question comes from the line of Jeff Donnelly with Wells Fargo. Your line is now open.

Jeff Donnelly

Good morning. Mark, on dispositions, how do you think about selling off maybe a joint venture interest in some of your, I guess I will call them, core hotels, either those in New York or Boston, just to reduce market exposure, but bringing the capital partner, too?

Mark Brugger

Yes. It is a great question. It's one we have had a lot of internal dialogue on. One of the things DiamondRock has always prided itself is having the simplest capital structure and simplest balance sheet in the industry. And so while joint ventures may be interesting, I think our bias is towards simplicity for our investors and to understand the company. It's certainly an option. If the cost of capital is better for our shareholders, it's something we are going to look at. I think our preference -- and not exclusionary, but our preference would be a wholesale and to redeploy those capital -- that capital back into the shares.

Jeff Donnelly

Maybe it's a different form of sort of slicing the onion or whatever. But, what ability do you have maybe to sell non-hotel assets that might be overlooking your portfolio or even interest such as ground leases in your hotels or maybe a condominium interest in -- like ground-floor retail, particularly in your New York assets? I know it's a form of maybe, call it, bringing in a partner or complexifying your assets, but are those options available to you guys?

Mark Brugger

Yes. So I consider those different than joint ventures that are relatively simple to execute, simple for our investors to understand. We are looking at some retail potentially and we are looking at some ground lease options, although it does come with complexity. So we are evaluating that versus kind of wholesale dispositions of the assets and trying to figure out the best way to create value.

Jeff Donnelly

And on -- just, I'm thinking about your share repurchases. When the size of the $150 million authorization was made in November of 2015, did that, at the time, contemplate future asset sales? I guess I'm just trying to figure out if any incremental sales from this point somewhat translate directly to incremental repurchase capacity.

Mark Brugger

The way we talked about with the Board, one, the $150 million -- we meet with our Board quarterly, so we can always change it or change it in between the quarter if that's appropriate, given the change in circumstance. But the way we think about the share repurchases, there is a price we want to buy back our stock if we sell an asset and there is a lower price we would buy back our stock if we were just using incremental leverage. So we always want to be prepared for both of those, but we have kind of a different target number depending on how we are funding the repurchase.

Jeff Donnelly

And is it fair to say that your 2016 guidance does not contemplate any specific asset sales or share repurchases?

Mark Brugger

That's absolutely correct.

Jeff Donnelly

And maybe, I don't want to leave Rob out, so I will ask one last question. Concerning cancellations it's been a bigger topic. How close do you think the brands are to doing something more comprehensive on changing pricing strategies out there? We've heard that they have all sort of tested and explored it and I have heard rumblings that one particular brand family that's tied up with buying another might be a little less inclined to do something this year. Just curious what you're hearing and thinking on that.

Rob Tanenbaum

We're working on with our hotel operators to further push this opportunity. We think it needs to be further examined and they are listening. It's just taking a little bit of time, but, as you mentioned, one of our partners who is tied up really isn't focused on that particular case right now. But, overall, Hilton has implemented a $50 cancellation fee. They are beta testing that, which is great to see. We haven't heard what the results are of yet, but throughout the ownership community, there is support for adding cancellation fees. So I think this will be further expanded upon in 2016 and into 2017.

Jeff Donnelly

Okay. Thanks.

Operator

And our next question comes from the line of Patrick Scholes with SunTrust. Your line is now open.

Patrick Scholes

Hi. Good morning. I maybe have missed this. Did you say what you expect the dollar amount of CapEx disruption to be in 2016 and what was that for 2015?

Mark Brugger

Patrick, this is Mark. There is always some level of disruption when you have a portfolio of 11,000 rooms, but we don't have any material disruption that's different than last year in the 2016 numbers.

Patrick Scholes

I guess I ask because it does appear your guidance for CapEx is materially higher than what your actual results was for 2015.

Mark Brugger

Yes. So a lot of the work -- the advantage of having some seasonal properties, a lot of our work is happening in markets like Chicago where it's very easy to do CapEx work in January, February, without having any disruption at all. Another example would be the Vail Marriott where we plan to do rooms redo. You can do that in the shoulder season, again, with very little disruption. We probably run 10% in November, for instance, at the Vail Marriott.

So we are able to manage it. The properties that always cause us the most problems with disruption on CapEx is the ones that run 85% or 90% 12 months of the year, like the New York assets. So we don't have any of those under the knife this year.

Patrick Scholes

Got it. Thank you.

Mark Brugger

Thank you, Patrick.

Operator

And our next question comes from the line of Lukas Hartwich with Green Street Advisors. Your line is now open.

Lukas Hartwich

Thank you. Hey, guys. I just have a quick one. Sorry if I missed this, but can you talk about group production trends and maybe group pace for 2016?

Rob Tanenbaum

Sure. Lukas, this is Rob. Good morning. Group has continually to impress us with the short-term nature of it. In the fourth quarter, our production went from --

Sean Mahoney

We produced during the fourth quarter -- sorry, I will hop in. We produced 10% more in the quarter for the quarter bookings in the fourth quarter and we produced 15% more 2016 bookings during the fourth quarter, which were all a continuation of recent trends. I think, when you step back and look at our 2016 pace, our pace has actually continued to accelerate throughout 2015 into 2016. And that's despite, frankly, having some difficult citywide activity in our three big group markets, which is Minneapolis, Chicago and Boston.

And so going through each of those markets, Minneapolis -- our pace for that hotel is roughly flat year-over-year in a city that, frankly, we expect to have a challenge citywide activity mostly because there is -- on the surface, there is stuff that comes out of the CBD would indicate stronger citywide activity, but a lot of that is related to the Ryder Cup, which is in the suburbs, which we don't believe is going to impact the city and our hotel. And so flat group pace for the Minneapolis. Hilton is actually pretty strong.

The most powerful story for us in 2016 is the Chicago Marriott that Mark mentioned on the prepared remarks, where the first quarter is going to be very challenging in Chicago, but our pace is up 3% for the entire year and over 8.5% for the quarters two through four. And so that's powerful. And then the third is the Boston Westin where our pace is negative because the citywide activity in Boston has shifted to Hines versus the BCEC. However, we still feel comfortable with our outlook for the Boston Westin because we believe, with that submarket continuing to prosper, that we will be able to replace a lot of that group with higher rated transient business.

Lukas Hartwich

Great. That's really helpful. Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Mark Savino with Morgan Stanley. Your line is now open.

Mark Savino

Hey, good morning, guys. It looks like there was some RevPAR deceleration at your Key West properties in the fourth quarter. So I was just wondering if maybe you could talk a little bit about some of the drivers behind that and if there was anything maybe property specific that may have had an impact?

Rob Tanenbaum

Mark, this is Rob. At the end of Key West, we had a management transition and our new leadership has corrected the sales efforts, which is proving very effective in Q1. So we feel very, very good about that. There was a softness in the market in October, especially during Fantasy Fest, but overall, we continue to see strong results. I was looking at the numbers this morning and feel very good about where the market is heading now.

Mark Savino

Great. Thank you very much.

Operator

And our next question comes from the line of Michael Bellisario with Baird. Your line is now open.

Michael Bellisario

Good morning, guys.

Mark Brugger

Good morning.

Michael Bellisario

On dispositions, what sort of change in buyer expectations have you witnessed in recent months during the conversations that you been having with buyers? And then, also, how have your expectations for pricing changed, if at all, on assets you would consider selling?

Mark Brugger

Michael, this is Mark. I guess we are in discussions with some assets now, so we don't want to provide too much color, perhaps, on some of that. I would say on the things that we have looked at, the activity in CBD topped top five markets remains incredibly active with a lot of different types of capital chasing it, kind of replacing some people that have been sidelined with kind of new entrants. What we are seeing and what I will call a non-core or non-top five CBDs is that there is still demand, but where we might have expected eight to 12 bids, there is four or five bids. So that has been the more shift in the marketplace there.

Michael Bellisario

And then, I guess as a follow-up to that, how would you characterize your motivation to sell an asset or assets today versus just 90 days ago?

Mark Brugger

It has increased. I mean, I think if we looked at the fourth quarter, the stock started trading -- the whole sector started trading down. We are relatively constructive on fundamentals and at the beginning of the year, I think we were uncertain whether there would be a rebound in a kind of appetite or whether there was going to be a continued kind of risk-off perspective from the investment community. And what we clearly experienced year-to-date is a risk-off kind of environment where the stocks have traded lower. So, obviously, the arbitrage is greater and that strategically makes it easier for us to probably create value by selling some assets and repurchasing stock given the trends in the stock prices year-to-date.

Michael Bellisario

Got it. Thank you.

Mark Brugger

Thank you, Michael.

Operator

And our next question comes from the line of Anthony Powell with Barclays. Your line is now open.

Anthony Powell

Hi. Good morning, guys. Sorry, if you touched on this already, but I wanted to get your thoughts on cancellations that we have heard a lot about this quarter and how you expect the industry to change the policies regarding near-term cancellations.

Rob Tanenbaum

Sure, Anthony. It is Rob. We are not seeing an overly large increase in cancellations quarter-over-quarter, but, again, as the owner community is heavily involved working with their operators, we do see this changing. Our New York assets, we have a 48-hour cancellation and Marriott is coming out with a 24-hour cancellation throughout their whole portfolio. So we see this as an increasing opportunity for us.

In terms of group, a lot of our groups -- if there is a group cancellation, the group cancellation clauses are in place. So we are able to get attrition revenue. We saw a slight increase in attrition revenue during Q4, but overall nothing of overly concern to us.

Anthony Powell

Got it. And in New York, I know last quarter there was a management change or management change strategy at the Courtyards in New York. How has that process been and kind of [by a local] [ph] Marriott in getting back to kind of some better management strategies there?

Rob Tanenbaum

Sure, Anthony. That was a revenue management change at our two Courtyards and we have really been working in partnership with Marriott on these two hotels. We have a great revenue manager leader that has now started as of the middle of January. We expect to see the benefits of that coming in March.

Anthony Powell

Okay. Great. That's it for me. Thank you.

Operator

And I'm showing no further questions at this time. I'd now like to turn it back over to Mr. Mark Brugger, Chief of Executive Office, for any closing remarks.

Mark Brugger

Thank you. To everyone on this call, we appreciate your continued interest in DiamondRock and look forward to updating you with our first quarter results.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.

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