Feb 25, 2014
Executives
Mark W. Brugger – President and CEO Sean M.
Mahoney – CFO, EVP & Treasurer Robert Tanenbaum – COO & EVP
Analysts
David Loeb – Robert W. Baird & Co.
Jordan Sadler – KeyBanc Capital Markets Anthony Powell – Barclays Capital Austin Wurschmidt – KeyBanc Capital Markets Jordan Sadler – KeyBanc Capital Markets Thomas Allen – Morgan Stanley Chris Woronka – Deutsche Bank Andrew Didora – Bank of America Merrill Lynch Ryan Meliker – MLV & Co. Ian Weissman – ISI Group Wes Golladay – RBC Capital Markets Lukas Hartwich – Green Street Advisors William Crow – Raymond James & Associates Anto Savarirajan - Goldman Sachs
Operator
Welcome to the Q4 2013 DiamondRock Hospitality Co earnings conference call hosted by DiamondRock Hospitality. During the presentation your lines will remain on listen-only.
(Operator Instructions) I would like to advise all parties that this conference is being recorded for replay purposes. Now I would like to hand the call over to Mark Brugger, President and Chief Executive Officer.
Mark W. Brugger
Welcome to DiamonRock’s fourth quarter 2013 earnings call. Today I’m joined by Sean Mahoney, our Chief Financial Officer and Rob Tanenbaum our Chief Operating Officer.
As usual, we are required to give the prescribed legal preamble that many of our comments today are not historical facts and are considered forward-looking statements under federal securities law. They 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 set forth in our earnings press release.
Let me start today’s prepared remarks with a few general observations about industry fundamentals. We are currently in the middle of a solid lodging recovery driven by steady demand growth and limited new supply.
We are always monitoring trends and focus on tracking five key corollaries to hotel demand growth. These corollaries are tracking well.
With employments trending up, corporate profits at record levels, unemployment declining, consumer sentiment at a five year high, and GDP forecasted to accelerate in 2014. Interestingly, current cycle GDP growth is tracking at a CAGR around 2.7% which is more than 30% below a normal recovery.
The silver lining of the slower than normal GDP growth is the delay of new hotel supply and potentially a more elongated lodging cycle. Our own analysis gives us strong conviction in the continued strength of lodging fundamentals over the next several years and a firm belief that 2014 is a great time to invest in lodging.
Looking back at 2013 industry RevPar grew a healthy 5.4% as the supply/demand imbalance continued to favor lodging fundamentals. Supply ran well below the historical average remaining muted in 2013 with growth under 1%.
Demand grew a solid 2% and set a new record for room nights sold. Now, against this positive industry backdrop let’s drill down into how we position DiamondRock to maximize long term value.
I would like to emphasize three strategic accomplishments during 2013. First, we made significant capital investments during 2013 that we expect to unlock tremendous upside potential at the renovated hotels.
The best example of this initiative is the Lexington Hotel which we transformed through a comprehensive renovation and rebranding that we expect to be a major growth catalyst in 2014 and 2015. In addition to the Lexington we renovated seven other hotels.
Companywide our $140 million capital investment program is now substantially complete and has positioned DiamondRock for growth over the next several years. The second strategic accomplishment I would point out is the enhancement of our asset management function which began last year with the hiring of Rob Tanenbaum as our chief operating officer.
Sean will provide an update on our progress in asset management in a few moments. The third and final strategic accomplishment revolves around capital recycling.
We remain committed to creating value by selling non-core hotels and redeploying those proceeds into higher quality and higher growth hotels. Specifically, in 2013 we sold the Torrance Marriott a non-core hotel with an average RevPar below $100 at a 5.8% cap rate.
We will redeploy those proceeds into the Hilton Garden Inn Times Square which is expected to generate RevPar above $250 and be almost immediately accretive with a projected EBITDA yield of 9% in 2015. Most importantly, all of these strategic initiatives in 2013 were taken with one overarching goal, position DiamondRock for outperformance going forward.
For 2013 we were pleased with our portfolio operating results. Portfolio RevPar grew 5.3% excluding the three New York City hotels under renovation and the sold Torrance Marriott.
The RevPar increase was driven by the ability of our hotels to push rate which was up 3.5% as the majority of our hotels exceeded prior peak occupancy levels. The RevPar growth led to hotel profit margin expansion of 45 basis points which would have been even better but for some onetime items that Sean will cover.
Turning to specific hotel results, let me highlight several hotels that outperformed during 2013. The Vail Marriott Mountain Resort was a top performer with RevPar growth of 15% and solid margin expansion.
The hotel implemented new revenue strategies and achieved record room rates during the holiday season. We have identified new opportunities for this hotel including adding a resort fee and potentially adding valuable new keys.
The JW Marriott Denver had another strong year with RevPar growth of over 10%. The hotel continues to be a market leader with market penetration index of over 130%.
The Lodge at Sonoma Resort was another top performer with RevPar increasing over 10%. We instituted a new resort fee at the hotel in September which will contribute over $375,000 of EBITDA annually and boost margins.
In 2013 profit margins evidenced already strong growth of over 500 basis points at this hotel. The Hilton Boston gained momentum during 2013 with the completion of a $7 million renovation and the implementation of our new sales strategy.
The hotel grew annual RevPar by 8.7% with growth accelerating each quarter culminating in 22% RevPar growth this past quarter. The hotel gained over four percentage points of market share for the year.
Even more exciting we’ve identified a high ROI opportunity to create over 40 incremental rooms at this hotel by splitting underutilized suites. The Westin San Diego was another success story in 2013 with RevPar growth of over 7% as our new revenue strategies allowed the hotel to gain more than 11 points of market share in the year.
As importantly, just this month we completed a comprehensive renovation that’s fundamentally repositioned the hotel. The renovation includes several ROI initiatives including the creation of two legal war rooms to capitalize on the new $300 million federal courthouse just across the street.
The hotel is really set up to succeed. Before moving to our outlook, let me provide an update on the renovation and rebranding of the Lexington Hotel which was completed late 2013.
This is one of the most exciting projects that DiamondRock has ever undertaken. Our investment thesis was straightforward, buy an under branded and undercapitalized hotel in an A+ location and then make capital investments to reposition and up brand the hotel from a Radisson to Marriott’s autograph collection.
We are already seeing early signs of success with post renovation rate growth of approximately $40 and more than 60% of the business now coming from Marriott reward members. As significant, the mix shift to higher paying segments is ahead of schedule with 80% of our revenues generated from premium business transient customers.
A powerful change from the pre-conversion mix that had 80% of its revenue come from the lower rated leisure discount segment. Part of this early success is attributable to the great reception for premier special corporate accounts such as Accenture, JP Morgan, General Dynamics, and PWC.
We expect the hotel to continue to ramp in 2014 and 2015. Our outlook for DiamondRock reflects those positive industry dynamics and our unique drivers.
Today, we announced a dividend increase of 21% and introduced 2014 guidance of RevPar growth of 9% to 11%, adjusted EBITDA of $230 million to $240 million representing an almost 20% increase from 2013 at the midpoint of the range, and adjusted FFO per share of $0.86 to $0.90. The midpoint of our guidance range implies hotel adjusted EBTIDA margin expansion of over 250 basis points which is probably 100 to 150 basis points above industry average.
Our 2014 margin expansion is expected to recover more than half of the 200 basis point margin shortfall to our peers that occurred over the past few years. This progress in closing the gap is a testament to the effectiveness of our new asset manage initiative led by Rob.
In addition, we expect our margin expansion will likely exceed the industry average next year as well. Our guidance reflects the fruits of our hard work in 2013.
During 2014 we expect to benefit from several company specific growth catalysts including above market growth at our renovated hotels, traction from new asset management initiatives, strong group pace, and the acquisition of the Hilton Garden Inn Times Square. Group pace, group pace for 2014 is up a robust 9% which will add compression and allow our hotels to push rates across all segments in 2014.
There are a number of specific group drivers within our portfolio. Our two Boston hotels the Westin Boston Waterfront and the Hilton Boston Downtown Faneuil Hall are collectively pacing up 20% benefitting by Boston record city wides up over 40% in room nights from last year.
Also, group will exceed prior peak levels at the Frenchman’s Reef and Morning Star Resorts up over 50%. Other standouts on the group front include the Worthington Renaissance and the JW Marriott Denver.
One final update, the Hilton Garden Inn Times Square Central is currently completing development, is progressing well and we expect it to open later this summer. This will arguably be the best located urban select service hotel in Manhattan.
It is worth noting that we put the hotel under contract at a fixed price over three years ago. Hence, we are paying 2011 prices for a 2014 hotel.
At $450,000 per key, we believe this extraordinarily well located hotel will immediately create real shareholder value. Our guidance implies roughly $5 million EBITDA from the hotel this year.
Now, I’ll turn the call over to Sean Mahoney, our CFO who will provide additional detail on our operating results and balance sheet.
Sean M. Mahoney
Before discussing our fourth quarter results, I want to emphasis that fourth quarter prior year comparisons are slightly impacted by Marriott’s reporting calendar change. The Marriott Hotel fourth quarter includes five more days than last year which results in approximately 3% additional room nights this quarter.
Please note that this is the last time that our quarterly comparisons will be impacted. In addition, on another housekeeping item, the pro forma RevPar and margin data excludes the Torrance Marriott which was sold during the fourth quarter.
Now, let’s turn to the fourth quarter numbers. Overall, it was another solid quarter.
The company reported hotel adjusted EBITDA of $52.8 million, corporate adjusted EBITDA of $49.3 million, and adjusted FFO per share of $0.17. While overall results were in line with our expectations, the portfolio results were negatively impacted by softness in the New York City lodging market and lower than expected group and transient pickup in Chicago.
Fortunately, the impact of these markets was mostly offset by a strong quarter at the Vail Marriott and outperformance at our Boston hotels, Frenchman’s Reef and Alpharetta Marriott. The fourth quarter reflected some exceptionally strong results as many of our hotels with six hotels reporting double digit RevPar growth.
Our portfolio generated pro forma Rev Par growth of 3.3% which was the result of a 3.8% increase in rates slightly offset by a small decline in occupancy primarily in our New York City hotels. Our fourth quarter pro forma hotel adjusted EBITDA margins contracted 188 basis points.
Our margins were negatively impacted by approximately 115 basis points from several onetime drivers including: transitions costs incurred in conjunction with the rebranding of the Lexington Hotel; manager and brand changes at the Oak Brook Hills Resort; the addition of franchise fees at the Lexington Hotel as compared to the fourth quarter of 2012 when the property was independent and paid no franchise fees; property tax increases at our hotels in Chicago, and ramping union costs at the Boston Hilton. Overall, we were pleased with the portfolio’s performance during the quarter and full year.
Excluding the three renovated New York City hotels we achieved 2013 RevPar growth of 5.3%. The year-to-date RevPar growth led to house profit margin expansion of 68 basis points and hotel adjusted EBITDA margin expansion of 45 basis points.
Similar to the fourth quarter, full year margin expansion was held back by approximately 90 basis points due to a few specific items such as: the onetime Lexington Hotel relaunch costs; increase in property taxes; and the Hilton Boston union costs. Now, let me spend a few minutes highlighting some individual hotel achievements.
The Vail Marriott had a tremendous quarter achieving nearly 30% RevPar growth and approximately 1,300 basis points of house profit margin expansion. Hotel revenues increased over 32% as a result of several factors including: our record Christmas week, a 63% increase in group revenues; and the implementation of a resort fee which generated approximately $200,000 of incremental revenue during the quarter.
The Charleston Renaissance achieved impressive RevPar growth of 17.9% and 567 basis points of hotel adjusted EBITDA margin expansion. The hotel benefitted from the successful implementation of an aggressive strategy to drive incremental rates.
The Alpharetta Marriott was another bright spot for the company with 13.8% RevPar growth and an impressive 946 basis points of margin expansion. The hotel has benefitted from the recent moves by General Motors and Ernest & Young into Alpharetta.
Frenchman’s Reef hit its stride during the fourth quarter with RevPar growth of 12.8% and 286 basis points of hotel adjusted EBITDA margin expansion. The Boston Hilton grew fourth quarter RevPar 22% and picked up 9.5 percentage points of market share, both great data points that reinforce our decision to introduce a new revenue management strategy at that hotel.
Partially offset these performances was the New York market which faced difficult hurricane Sandy comparisons. Additionally, the historically predictable special event generators of the New York City Marathon and the Thanksgiving Day Parade were less robust than usual.
Despite the challenging market the Lexington Hotel gained 6.8 percentage points of market share during the fourth quarter as a result of the successful repositioning and rebranding of the hotel. In addition, our Chicago hotel finished modestly behind expectations due to a challenging Chicago market where city wide activity was down 30%.
This contributed to group slippage at the Chicago Marriott and part of our ability to push transient rate at the Conrad Chicago. Shifting gears to our group business, our in the quarter group pick up increased 35% compared to what we picked up in the fourth quarter of 2012.
Our group business is well positioned to outperform in 2014 with group revenue pace up 9%. Our 2014 group pace is being driven by a 5% increase in rooms and approximately 4% increase in average daily rates.
We enter the year with 71% with the forecasted group business on the books. Before discussing the balance sheet, let me provide an update on the asset management initiatives that Rob and his team have put in place to create value in 2014 and beyond.
Our asset management team has spent significant time identifying opportunities to improve sales strategies and implement cost containment initiatives. We are pleased with the progress the portfolio has achieved to date and we see a number of additional significant opportunities.
Let’s start with a summary of our revenue management achievement. First, we identified opportunities to add resort fees at Sonoma and Veil.
This initiative resulted in $300,000 of incremental revenues during the fourth quarter and we expect to earn approximately $800,000 during 2014. Second, we identified a number of hotels with basic revenue enhancement opportunities such as reclassifying rooms to premium tier rooms which has enabled us to increase rates.
We estimate that these initiatives resulted in approximately $100,000 of incremental revenues during the fourth quarter. Third, we took advantage of favorable demand trends in certain markets to aggressively drive rates.
Specific successes included the restricting last room availability at the Charleston Renaissance which contributed to a 13.7% rate growth. We also took advantage of a strong Christmas week at Vail Marriott.
The hotel achieved a record average rate of over $1,400 which contributed to over 18% rate growth during the fourth quarter. Rob and our asset management team are working diligently to identify additional revenue opportunities in 2014 and we’re confident in our ability to do so.
We expect our renovated hotels, including the Westin Washington DC, the San Diego Westin and the Lexington Hotel to leverage their 2013 renovation and deliver double digit rate growth in 2014. In addition, we expect the recent implementation of a new revenue management strategy at the Conrad Chicago to take hold in 2014 and to contribute to double digit rate growth at the hotel.
We are also working to identify cost containment opportunities across the portfolio. Examples include the opportunity to eliminate redundant positions at several hotels as well as consolidate operations with expected annual savings close to $1 million, implementing energy conservation projects throughout the portfolio including lighting retrofits and installing low flow plumping fixtures at certain hotels.
In total the average payback of these projects is two to three years. An example was the installation of low flow toilets at the Boston Westin that resulted in an immediate 24% reduction in water consumption.
We restructured outdoor maintenance contracts at 17 of our hotels resulting in over $170,000 of cost savings. Finally, we restructured the parking contract at five hotels which are expected to result in $500,000 of annual savings.
Another asset management focus has been the evaluation of value creation ROI opportunities within our existing real estate. We have uncovered many and the most significant prospects of successes are as follows: we added 15 incremental rooms to the Lexington Hotel during the 2013 renovation.
We added five new rooms to the Courtyard Midtown East during the 2013 renovation and are evaluating adding two more rooms through splitting two existing suites. We expect to add over 40 additional rooms to the Boston Hilton through splitting existing suites.
We expect to add 13 new rooms at the Vail Marriott through splitting four underutilized suites and reconfiguring a corridor to allow for nine additional rooms. We expect to add four new rooms at the Westin Washington DC through the elimination of an outdated presidential suite and conversion of an underutilized meeting room.
We expect to add three new rooms at the Lodge at Sonoma by moving an existing meeting room and fitness center to space that is currently vacant. We plan to convert unfinished space at the Boston Westin into 6,500 square feet of valuable meeting space with an estimated IOR over 2%.
I also wanted to touch on steps we are taking at the Oak Hill Brook Resort formerly the Oak Hill Brook Marriott. During the fourth quarter we exercised our rights under the management contract to terminate Marriott as both brand and manager to enhance exit value and to provide operating flexibility.
The hotel is now known as the Oak Hill Brook Resort an independent conference facility and is operated by Destination Hotels & Resorts, a leader in that segment. We believe we have only begun to maximize opportunities in our portfolio.
As we look ahead we remain confident that our asset management team will continue to identify more opportunities as we delve deeper into the hotels with new ideas. Lastly, I would like to touch on our balance sheet and capital allocation.
We believe that Diamond Rock’s balance sheet is among the best of any lodging REIT. We have consistently maintained a straightforward and low risk balance sheet that has essentially no corporate debt.
We adhere to a disciplined capital structure philosophy that rests on five principles. First, we believe that maintaining low leverage is the most prudent strategy for a public lodging REIT.
Based on our base case long range projections, which assume no new equity issuance we expect net debt to EBITDA of less than three times by 2016. Second, we believe that our capital structure acts as a defensive tool to mitigate the risk of lodging cycle volatility.
Third, we continue to believe in the value of a simple capital structure and have a bias against preferred and converts. Fourth, we preserve significant borrowing capacity by maintaining approximately half of our portfolio unencumbered by mortgage debt.
Fifth, we have a bias against corporate debt and currently have nothing drawn on our line of credit. Our conservative balance sheet is a key element of our strategy that we believe will enable DiamondRock to deliver superior shareholder returns across the lodging cycle with less risk.
Another benefit of our long standing conservative balance sheet is the ability to pay a meaningful and sustainable dividend. Since our IPO we’ve returned approximately $450 million to our shareholders through dividends.
Today, we are proud to announce a 21% increase in our 2014 dividend which reflects our confidence in DiamondRock’s ability to fire on all cylinders during 2014. The current dividend yield is very competitive at approximately 3.3%.
This past year we took several actions to position ourselves for the coming year with the refinancing of the Salt Lake City Marriott and the disposition of the Torrance Marriott. As a result of these actions and excess cash flow we ended 2013 with approximately $145 million of corporate cash which provides us with the option to fund the Time Square acquisition with existing cash on hand.
We will continue to focus on prudent capital allocation and be thoughtful in positioning the balance sheet for upcoming capital needs. I will now turn the call back over to Mark.
Mark W. Brugger
To sum up, our team is energized about the momentum at DiamondRock and our ability to create shareholder value in 2014. The lodging market dynamics are positive and the execution of our strategic plan over the past few years will start to pay off in 2014.
Consider that the midpoint of our guidance, what we believe to be the most likely case, translates into double digit RevPar growth, EBITDA margin growth of over 250 basis points, adjusted EBITDA growth of almost 20% and a 21% dividend increase. Moreover, we enter 2014 with low leverage, $145 million of cash on hand, and an already lined up acquisition of a brand new hotel in a world class location.
We have worked hard to put ourselves into the position to deliver strong shareholder returns and we remain excited about the future of DiamondRock. On that note, we would now like to open up the call for your questions.
Operator
(Operator Instructions) Your first question comes from the line of David Loeb from Baird.
David Loeb – Robert W. Baird & Co.
Mark, I appreciate your comment about the upcoming acquisition of the New York asset and particularly Sean’s comments about using the cash on hand to fund that. But I wonder if you could talk a little bit more about your interest in additional acquisitions?
What’s your appetite, what are you seeing in the market, what are your expectations in terms of your ability to find attractively priced acquisitions in this environment?
Mark W. Brugger
On future acquisitions we are seeing some deal flow out there but not a tremendous volume, probably something similar to last year’s pace. As you know, in 2013 we just focused on executing the value add opportunities of the stuff we bought.
Going forward we’re going to remain disciplined. I think you’ll see us be opportunistic but measured as deals surface and as we track down deals in the marketplace.
That may mean we do deals this year or may not depending on what the pricing is in the marketplace. But our expectation is to actively look but only pursue deals if that makes sense for our shareholders.
Operator
Next question is from the line of Jordan Sadler from KeyBanc Capital Markets.
Austin Wurschmidt – KeyBanc Capital Markets
Thanks, it’s Austin Wurschmidt here with Jordan. You guys have talked over the past several quarters about public hotel REITs trading at discounts to NAVs, and I was just wondering if you could give us your updated thoughts on public valuations today and then sort of how you stack that up against potential dispositions going forward?
Mark W. Brugger
Our perspective is that although the lodging stocks have moved up they’re still generally trading in at some discount to NAV. Certainly, we think our stock is trading at a discount to NAV currently.
If you look at the recent transactions in the marketplace it looks like in the desirable markets there’s even been some cap rate compression I think because there’s been a supply demand imbalance of high quality acquisition in the marketplace. So that does bode well for selling non-core assets, although the compression hasn’t been the same in the non-core markets.
But as you know, we sold the Torrance Marriott for what we call a very attractive price last quarter and we’ll continue to look at the few non-core hotels that we have and potentially monetizing those over the next 24 months.
Austin Wurschmidt – KeyBanc Capital Markets
Are you currently marketing any hotels today?
Mark W. Brugger
We don’t comment on our disposition efforts until we have something under a binding contract.
Austin Wurschmidt – KeyBanc Capital Markets
Then another one is the resorts segment, as you guys mentioned, outperformed pretty handedly in 4Q and I’m just curious what your expectation was for this group of hotels in 2014? If you could sort of stack that up versus the non-New York City RevPar growth of 5.5% to 7.5%?
Robert Tanenbaum
We feel we’ve made strategic moves in our resort properties over the past year and we feel we’re positioning the assets appropriately so we’re looking for upsize growth in both Frenchman’s Reef, Sonoma, and Vail.
Jordan Sadler – KeyBanc Capital Markets
Sean, it’s Jordan here with Austin, just a quick one following up on your five principles surrounding sort of the balance sheet, I’m curious on the aversion to preferred, any thoughts on that?
Sean M. Mahoney
That’s something we’ve held near and dear to our hearts since we formed the company. Our view on preferred is that it is more of a debt type instrument than an equity instrument.
That’s our bias and with that in mind when we compare the cost of preferred relative to what we can borrow 10 year fixed at, the spread is significantly lower for the 10 year fixed so we’ve made those decisions to go with 10 year fixed over the last number of years.
Jordan Sadler – KeyBanc Capital Markets
It is more a function of cost as opposed to the structure of the instrument?
Sean M. Mahoney
Correct. We view it as more of a debt instrument so if we would issue preferred we would view that as increasing our leverage.
Operator
Next question comes from Anthony Powell from Barclays.
Anthony Powell – Barclays Capital
Just a quick question on your RevPar guidance of 9% to 11% including the New York hotels [inaudible] gotten off to a strong start and I understand that our renovations can drive some outsized RevPar growth in ’14 but the market has been kind of weak there both in the fourth quarter and so far this year, what gives you confidence that you’ll be able to generate some share gains in New York given the kind of overall supply growth and softness so far this year?
Mark W. Brugger
Our expectation for New York obviously there’s a number of things going on in the New York market including tough comparisons with Sandy in the first quarter as well as new supply entering the market in 2014. Our assumption for our hotels, a lot of that is based on recovering the renovation disruption from 2013 from rooms that were out of service during those renovations and then the market share gains that we expect at the Lexington.
We’re not expecting a robust market in New York for 2014, but we are expecting to recover the renovation disruption from last year and then make market share gains based on the renovation and brand change at the Lexington hotel.
Sean M. Mahoney
To sort of further that point, during the fourth quarter which was soft in New York, the Lexington gained 6.8 percentage points of market share during the quarter despite a very difficult fourth quarter environment for New York so we feel confident in the ability of that hotel which is really the lion’s share of our New York City portfolio. There were 86,000 room nights that were out of service in that hotel in 2013 which is very dramatic relative to total available rooms within our New York City portfolio.
Anthony Powell – Barclays Capital
Just a follow up on the last question, given some of the discounts we’re seeing to NAV in the lodging REIT space, have you considered share buybacks? I think some of your competitors are looking at that more closely.
Mark W. Brugger
That’s a great question. We actually put in a share buyback program late last year.
Our stock rallied about 25% shortly thereafter, but it is something we have a constant dialog with our Board about evaluating that option but we certainly have that tool in our tool chest and evaluate it on a regular basis.
Operator
Moving onto our next question is from the line of Thomas Allen from Morgan Stanley.
Thomas Allen – Morgan Stanley
I may have missed this but what was group RevPar up in 2013? I believe it was tracking up in the high single digits as of last quarter.
Then you’re guiding to group pace of 9% to 14% versus a lot of the C-Corps have been discussing kind of low to mid single digit growth. How long do you think you can continue to outperform on the group front?
Sean M. Mahoney
Our group revenue was up about 2.8% during the year and that was - the fourth quarter was a difficult group quarter for the portfolio specifically, our Chicago market which really dominates our portfolio on the group side so that did come down from what we reported from the third quarter. We tried to telegraph that in our commentary on prior earnings calls that our group was front end loaded for 2013.
On ’14 we have a high degree of confidence in our group. We’re at 9% is our pace which is roughly 5% rooms and 4% rate.
Boston really dominates our 2014 group pace which is up about 20% for those two hotels. In addition, we had our Worthington assets and Frenchman’s Reef both had very strong 2014 group outlook.
In addition, the Minneapolis Hilton which actually doesn’t have a great city wide activity in 2014 for groups has been making great strides in picking up group business in the fourth quarter. They picked up over $2 million in group business and ended the year positive in group pace for ’14 where two quarters ago we were down about 15%.
So they’ve made great strides in picking up group business for ’14 over the last couple of quarters and we hope that that momentum continues into 2014.
Thomas Allen – Morgan Stanley
Would your view be that the 2014 group pace is probably a balance between one off things like strong city wides and then just improvement in attracting business and so you can kind of continue that performance in 2015/2016?
Sean M. Mahoney
We feel very good about our pace for ’14. I think when you look at the momentum the second quarter, third quarter, and fourth quarter all had significant additional group revenues booked at the same time in the prior year so the momentum continues to bode well for group into ’14.
It’s too early really to comment much on 2015 because we’re a year out but our ’14 picture is a combination of momentum as well as clearly our market concentration in a market like Boston which has got tremendous city wide activity in 2014.
Robert Tanenbaum
To further support what Sean was saying, in Q4 for 2014 we picked up 6.4% [inaudible] in our revenue group revenues, that’s $2 million more than last year and the majority of that was in room nights but there was also some growth in rate as well.
Operator
Your next question comes from Chris Woronka – Deutsche Bank.
Chris Woronka – Deutsche Bank
I wondered if you could maybe share with us kind of the ramp up of Lexington by month in the fourth quarter and maybe where you are in the first quarter so we can get an idea of the trajectory?
Robert Tanenbaum
Yes. Lexington in the fourth quarter, the renovation was completed in October of 2013.
November started out quite nicely. October was a strong month as well and then November was a little bit challenging with the New York City marathon and softness from the Macy’s Day Parade.
The third week of Thanksgiving being delayed certainly impacted the market more than what was previously thought. December, the first two weeks came in strong, we had a nice year end as well so we were really pleased with our growth as Sean stated and Mark had stated.
60% of our business is coming from Marriott Rewards Members and 80% of our revenue is being driven by the special, corporate, and business transient accounts. In January we had 23% growth in our RevPar there.
We feel very confident where we’re moving. We had a very strong Super Bowl weekend and we like what’s being received.
What we’re hearing back from our clients especially from special corporate accounts is very encouraging as we sign up new accounts, it feels like on a daily basis, which is very much encouraging that the response is very well received as well as the press that we’re getting is really positioning this hotel to be in the forefront.
Chris Woronka – Deutsche Bank
I think you guys had mentioned that the total full year 2013 renovation disruption was $17 million of EBITDA. Can you just break that down for us between Lex and the Courtyards and also, how confident you are in getting the rates up at Courtyard this year in New York?
Sean M. Mahoney
The majority of the disruption was the Lex. The Lex, of the $17 million, the disruption was about $15 million to $15.5 million of the disruption and then the Courtyard each had call it about $1 million of disruption between those two hotels.
Chris Woronka – Deutsche Bank
Then just on the group pace, you guys mentioned you’re 71% booked for the year. If you get to 100 of what you’re budgeting is that kind of in the middle of your RevPar, how do you guys correlate your RevPar growth guidance to where you are on groups right now?
Mark W. Brugger
We’re [inaudible] to reach 100%. That won’t be the sole determinate on how we come out on our guidance.
We’re about 30%, 32%, 33% groups depending on how the numbers play out. The business transient is probably the bigger variable in where we come out for the full year guidance so we expect to have a good group year.
Certainly we have over 70% under contract on the books today. The new period books is very obtainable so I would expect we’re going to succeed on the group side.
I think again, the bigger variable is going to be on the business transient and how the back half of the year ends up.
Operator
Your next question comes from Andrew Didora – Bank of America Merrill Lynch.
Andrew Didora – Bank of America Merrill Lynch
Mark, I think you noted in your prepared remarks that the Hilton Boston gained some momentum after the renovation and then as well as implementing your new sales strategy. I know the change in the sales strategy was one of the key points when you bought the portfolio of assets from Blackstone.
Can you talk about some of the changes that you made and if all these have been rolled out to the three other hotels you bought from them?
Robert Tanenbaum
Yes, we’ve been consistent in focusing our teams on a revenue management strategy so that has gone out to all the hotels. We’ve also looked at enhancing all of our food and beverage as well so revenue management goes beyond just rooms, but also in food and beverage.
So all those strategies are being implemented on all those four properties. Some of the examples of what we’re doing is we’re look at for example, advance purchasing, increasing our average length of stay, doing our standard room type restrictions, managing discounts, and strategically overbooking to create the perfect sell.
A really great example that we had recently was at the Denver Courtyard where we changed our room type category so our rooms facing 16th Street would have a higher premium and in December alone we generated over $18,000 in incremental revenue. Pretty amazing for a hotel that size.
But we’re also focused not beyond that but in looking at all our assets in terms of the GDS advertising and our eCommerce as well. From a cost containment perspective again, we’re looking at as Sean mentioned, our labor consolidation, energy management, and our telephone maintenance and our parking restructuring our contracts.
Mark W. Brugger
I would just add clearly it helped in Boston, we saw a lot of upside, that was part of the real investment thesis there and you saw the momentum building to 22% RevPar in the last quarter and the hotel continues to gain market share gains, four points of market share for the full year and really building market share gains as it moves through the year. The San Diego Westin which was another large asset in that portfolio, that one really outperformed the market in 2013 gaining 11 points of market share.
RevPar was up over 7% there in a market that was relatively weak. We stole a lot of market share and really now with the renovations just completed in the last two weeks we would expect to gain even more so that one is fully kicking in with the strategies that Rob is helping employ at that hotel.
DC Westin I would say it just finished a massive renovation about seven days ago and that was a very intrusive renovation so that one I expect to gain traction as we move forward from the first quarter on. Both in ’14 and ’15 we expect to be in a lot of the market share at that hotel not only with the new revenue strategies but we basically have a new hotel which is really the DC Westin which was taking an entire box, putting the right capital into it and capturing a lot of pent up demand for those premium Starwood customers that want to be in DC.
Robert Tanenbaum
Just to add on to what Mark was saying, an example of the impact of our renovation in DC, we just booked a $100,000 piece of business in July and while the hotel was under renovation our sales manager was extremely creative and took his iPad and gave a tour through Facetime. The client couldn’t make it down because of the snowstorm which resulted in after having the tour and speaking with our sales manager, booked sight unseen essentially.
He just loved what we were doing in terms of renovation and the new product that was being presented.
Andrew Didora – Bank of America Merrill Lynch
I had one other for Sean, it’s a little bit more of a housekeeping question, what was the change in the restricted cash balance in 4Q?
Mark W. Brugger
The change in restricted cash is escrow as well as cap ex funds. We used some of the cap ex funds during the fourth quarter for the renovations.
When you look at the renovation dollars – so what we did for financing is we had to set aside escrows for the year-over-year change for both San Diego as well as Washington DC renovations and then we had restricted cash also being set aside at a percentage of revenues. So primarily it’s the restricted cash held for renovations or escrow going up.
Operator
Your next question comes from Ryan Meliker – MLV & Co.
Ryan Meliker – MLV & Co.
I was hoping you could help me understand some of the math behind your guidance. Help me to understand what I’m missing or if things are just relatively conservative but if you had total hotel revenue of $800 million on a pro forma basis in 2013 and the midpoint of your guidance is 10% RevPar growth and you’ve got property margins of 25.8% in 2013 and the midpoint of your guidance is 2.5 percentage points of market expansion to 28.3% that gets me to hotel EBITDA of around $246 million.
You add in the Hilton Garden in Times Square which I’m assuming you’re still expecting about $5 million incrementally and that’s $250 million in property EBITDA. What am I missing here?
Obviously, maybe some of it is that non-room revenue isn’t going to grow by that 10% level but it seems like there’s got to be something bigger than that to get back to the midpoint of $235 million in adjusted EBITDA.
Sean M. Mahoney
That’s exactly it, we expect our F&B revenue to grow a little under 5% for the year which is non-rooms revenue is about 35% of our total revenue and so with that half of the growth, that’s going to impact obviously you’re 10% growth there is $7 or $8 million doing quick math in my head so that’s the primary driver.
Ryan Meliker – MLV & Co.
That’s the primary driver so it’s not corporate G&A or anything like that going higher it’s just your other revenue that’s not going to grow quite as robustly?
Sean M. Mahoney
Correct. Embedded within our guidance is actually a slight decline in corporate G&A year-over-year.
The [inaudible] which is the other driver which is not an hotel adjusted EBITDA is going to be roughly this year to last year, it will be up a few $100,000 of adjusted EBITDA and FFO year-over-year but the primary driver of both our margins and RevPar is going to be hotel op.
Ryan Meliker – MLV & Co.
Another question I wanted to ask you guys about was between your guidance for the Lexington I think you guys had talked about, if I recall, a $40 ADR premium with what you had been underwriting. Is that what’s in your guidance for 2014 or is that something that’s going to play out through 2016 as you had talked about kind of the longer timeline in terms of getting to that 22% revenue growth CAGR?
Mark W. Brugger
Let me go back and kind of parse it. There are two things going on one, we’re going to recover renovation disruptions from last year which will help obviously the RevPar year-over-year as the occupancy rebuilds from that comparison.
The investment thesis was looking at the rate differential between our hotel and the closest competitor, the ADR gap was about $90 to $100. We underwrote closing about half that gap that hit our underwriting.
We think we’ll be there by the end of 2015. It takes generally two years to get the juice out of a brand conversion, to get the reidentity launched, to get all the special corporate accounts in, to get the first time trials so we expect to gain a lot of traction this year but almost have more growth in ’15 on the rate side compared to the competitive hotel in 2015 as ’14.
Operator
Your next question comes from Ian Weissman – ISI Group.
Ian Weissman – ISI Group
Maybe if you could give a little more details on this additional $50 million of new capital investment in 2014? Are there other major projects that you’re targeting for renovation this year?
Mark W. Brugger
The $50 million is generally a pretty cyclical run rate for a portfolio our size. That includes everything from boilers and chillers to some ROI projects that are in there as well.
There’s nothing that we think will be materially disruptive in the 2014 numbers. There aren’t any enormous projects that we’re going to announce.
As Sean mentioned there are a number of ROI things like some incremental keys. Some of that is in there yet, some is not approved but we do have the moving space conversion of unused space at the Boston Westin, and there’s a number of smaller initiatives kind of sprinkled throughout the portfolio to kind of help margin growth this year.
But $50 million isn’t far off from what you should think of as the long term average investment in our portfolio annually.
Ian Weissman – ISI Group
Just quickly, you just came off of ALIS you talked briefly about deals and maybe being a buyer this year. Maybe you could just comment about which property types you’re seeing the best opportunities for deals over the next six months?
Mark W. Brugger
What our comment was earlier on the Q&A is that we are going to actively look in 2014. We’re going to be very disciplined.
Obviously I think pricing given the supply/demand imbalance of high quality deals is difficult. We like the markets we’re in, we would double exposure in a number of those markets.
In New York we’re probably at our limit just from a diversification standpoint but certainly a market like Boston, Miami, Seattle, LA are the markets that we want to add exposure to over time. But in addition to markets it’s a matter of finding good opportunities that meeting our underwriting.
So some of the markets have gotten quite heated and it’s probably difficult to create shareholder value by entering those markets right now. We’ll also look for other trend lines that we can catch.
For instance, our resort portfolio although 15% of our EBITDA has been tremendously successful and we think some of these smaller resorts in very high barrier to entry markets is a good place to play so that will be a place that we’ll be looking where there is probably not as much competition and we can probably create some value there.
Operator
Your next question comes from Wes Golladay – RBC Capital Markets.
Wes Golladay – RBC Capital Markets
Going back to the Hilton Boston downtown, it looks like you had pretty impressive RevPar growth but the margins were only about 120 basis points in the quarter. Is there anything one time holding that back?
Robert Tanenbaum
What was holding back is the ramping up of the unionization of the property so union dues impacted Q4 for us.
Mark W. Brugger
Just to add on to that, when we bought the hotel it had signed a union contract which was ramping up which is part of our underwriting so we expect to make our money on that hotel both in the revenue growth and in splitting the suites and creating 40 incremental keys. That’s really going to be unlocking the value there.
We get to the lapping effect on the union contract as we move into 2014 and then we should expect kind of standard margin growth with RevPar growth there going forward.
Sean M. Mahoney
We expect approximately about $360,000 of additional ramp this year for that hotel for the union ramp up compared to 2013 just as you think through the modeling. That compares to about between $1.2 million and $1.3 million this year so the lapping effect is pretty significant in 2014.
Wes Golladay – RBC Capital Markets
So probably one more quarter of it and we’ll be done with it?
Sean M. Mahoney
A quarter or quarter and a half.
Wes Golladay – RBC Capital Markets
Going back to the question about the F&B growth, what are you seeing with that for this year and maybe next year with the group pace is up pretty strong and it looks like looking at your yearly results room revenue and food and beverage revenue growth were about the same? Are you expecting a material slowdown in the growth rate there or are you just being conservative on that point?
Robert Tanenbaum
We are expecting moderate growth on food and beverage. Again, as hotels fill in event periods, for example, Father’s Day, or Labor Day, or Fourth of July, particularly groups that are not only rated but don’t have much F&B contribution associated with it.
Sean M. Mahoney
2013 we had some tremendous end of year pick up on group F&B. Particularly Chicago Marriott was a huge contributor of that this year for us which our guidance does not assume that repeats in 2014.
We’d obviously be thrilled if it did but our guidance does not assume that that history repeats itself.
Operator
Your next question comes from Lukas Hartwich – Green Street Advisors.
Lukas Hartwich – Green Street Advisors
Most of my questions have been answered already. I was just looking at page 20 of the press release and the hotel [recs] it looks like margins were down 600 basis points last year.
I’m just curious what drove that?
Robert Tanenbaum
What drove that was property taxes. It was a larger driver of that as well as we had some higher A&G costs with the transition.
Lukas Hartwich – Green Street Advisors
Then the RevPar growth of that asset was about 5% last year and I forget off the he top of my head what San Francisco the market did but it seems like that asset is lagging a little bit in the revenue level, is there any reason for that?
Robert Tanenbaum
We’ve changed out the revenue manager for that. We just had some challenges in the way the pricing was occurring, how they were analyzing the market, so we figure we have that moving in the right direction.
Mark W. Brugger
For ’14 that’s an upside story, the revenue manager kind of missed it a little bit in ’13 so as we changed out the revenue manager and have kind of the right system in there as we move into ’14 hopefully we’ll be able to recover some lost market share at that hotel and really perform well this year.
Operator
Your next question comes from William Crow – Raymond James & Associates.
William Crow – Raymond James & Associates
On the deflagging and contract management removal on the Marriott property, can you just kind of tell us what caused that decision, whether any money changed hands, does that change or signal any sort of relationship with Marriott going forward, or was that more of an attempt to sell the asset unencumbered eventually?
Mark W. Brugger
You shouldn’t view it as a statement of our relationship with Marriott which remains strong. As we talked about on prior calls that’s a non-core asset for us, it’s our lowest rated by RevPar and it’s an asset we would like – it’s on our disposition list and over the next two years we will monetize that asset, that’s our intent.
We had an opportunity under the contract because of the underperformance of the hotel to unencumber it by branded management which in that market increases your exit value and the number and players you can get on an asset like that so we took advantage of that opportunity to unencumber the asset. We’re repositioning it, we brought Destination in to reposition it.
That’s there power alley, assets like this so they are actively working on that and they will position it and try to sell it as we move forward.
William Crow – Raymond James & Associates
No compensation paid to Marriott I take it then?
Mark W. Brugger
They gave us several million of key money and yield support since we bought the hotel and so that yield support and key money amortized over a period of about 10 years so there was a little unamortized money that we returned to them. I think it was less than $1 million.
Sean M. Mahoney
It was about $700,000 that we repaid to them under the contract.
Operator
Your next question comes from Steven Kent from Goldman Sachs.
Anto Savarirajan – Goldman Sachs
Good morning. This is Anto Savarirajan on for Steve Kent.
Looking at the last two tables of your press release, how are we to think about what you would consider non-core or non-strategic? Some of the properties have margins that are lower than what you’d consider your target level EBITDA margins so can you help us frame what would be considered non-core or non-strategic?
Also, how many assets do you have in these buckets and slated for sale over the next 24 to 36 months.
Mark W. Brugger
If you look at what we’ve done this cycle on our disposition effort, we’ve sold five hotels for about $400 million and then if you go back and look at the characteristics of those hotels, all those hotels were in the bottom cortile of our portfolio measured both by average RevPar and by EBITDA per key or profit per key. That’s clearly a metric that we’re looking at.
One of the things we’re trying to accomplish as active capital recyclers is always upgrading the quality and growth prospects of our company so when you look at our portfolio if you kind of rank what we have now by average RevPar or by profit per key, the stuff that is in the bottom cortile is the stuff that is mostly likely to be considered non-core for us and active on our disposition list. We’re not going to do another $400 million over the next couples of years.
We have a couple smaller to medium sized assets that might be on that list but generally our portfolio today is 26 hotels, 27 with Times Square, is a portfolio that we really like so you’ll see a measured disposition program over the next year or two but we really like our portfolio as it is today.
Anto Savarirajan – Goldman Sachs
With regard to the Hilton Garden Inn Times Square, do you have a sense of timing of openings of other new hotels in the same Times Square track this year? Is your thought process of opening it in August in part dependent on how and when these other assets or other hotels open?
Mark W. Brugger
No, we’re going to open it as soon as we possibly can. I mean, every day we’re not open will be a day of lost opportunity.
We think in this location obviously the demand is incredibly deep and we want to get open and start making money there as soon as possible. Obviously, we want to make sure we finish it in a quality fashion and have a smooth opening but I think in a market like that in Times Square the sooner you get it open the better.
Anto Savarirajan – Goldman Sachs
One last one for me, with regard to the goal of having a 50/50 split on brand versus third-party managers, where do you now stand and where do you expect to exit 2014?
Mark W. Brugger
With the acquisition of Times Square which will be a third-party manager we’re about 60/40 as a portfolio so we’re pretty close to our objective. Then as we move forward that’s a goal but the number one goal on any acquisition is to create shareholder value whether it’s brand managed or third-party managed so that’s our magnetic north on deciding to do an acquisition.
But we think when we look at our portfolio, especially with the bigger hotels which makes more sense to be brand managed and then some of the smaller to medium ones which make more sense we think to be third-party operated, we have generally the optimal operator on each of our kind of asset within the portfolio. So, as we grow and with our five and six most recent acquisitions, they are generally third-party managed.
But again, we’re looking to create shareholder value and be opportunistic so we’re not going to not do a good deal because it’s brand managed.
Operator
We have no further questions in the queue.
Mark W. Brugger
To everyone on this call we appreciate your continued interest in DiamondRock and look forward to next updating you with our first quarter results. Thank you again.
Operator
Ladies and gentlemen that concludes your call for today. Thank you for joining us.