The short-term outlook on New York City isn't promising, and one hotel real estate investment trust is unloading its biggest asset in the market as a result.

In March, Bethesda, Maryland-based DiamondRock Hospitality Company reached an agreement to sell The Lexington Hotel New York, Autograph Collection by Marriott for $185 million. An unnamed buyer has committed a non-refundable $5 million deposit on the 725-room property — which DiamondRock purchased in 2011 for $335 million — and the sale is expected to close before the end of the third quarter.

DiamondRock President, CEO and Director Mark Brugger said during an earnings conference call Friday that the pending sale of The Lexington "allows us to right-size our New York City exposure at an attractive price."

Following the sale, DiamondRock's New York City footprint will decrease from 1,517 rooms across four hotels to 792 rooms across three hotels. On May 3, DiamondRock reopened the 282-room Hilton Garden Inn New York Times Square Central and plans to reopen the 189-room Courtyard New York Manhattan Fifth Avenue in June.

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Despite the sale of The Lexington, Brugger said the company isn't fully retreating from the market and will instead focus on its select-service hotels in the city.

"It just seemed like the right time to pivot in the marketplace given a lack of clarity," he said. "We are maintaining an allocation to New York; it's just the lower allocation as we move forward."

When asked by analysts about DiamondRock's outlook on New York City, Brugger said there are still reasons for optimism, and new hotel supply will come online this year.

"New York City is still the No. 1 city in the United States; it's got a lot going for it," Brugger said. "We just think there's a lack of visibility right now. You can certainly argue the bull and bear case in New York City, we believe. There are about 20,000 hotel rooms under construction in the market right now. It's a top two supply market in the U.S."

Last month, New York City Mayor Bill de Blasio proposed new legislation that would restrict hotel development in the city, requiring City Council approval for any new hotel projects.

If the legislation is passed, Brugger said the impact on New York City's hotel supply would be "significant," but the long-term hotel outlook looks better.

"You're talking about 20,000 rooms under construction, plus there's a lot of other permits that could be pulled before the new law would go [into effect] so I think it means that the long-term prospects for New York look brighter because of the supply constraint from new legislation," he said. "But that's not going to impact the supply over the next 36 months, so they'll still need to pull through that.

"But I think it's very easy to build a more bullish case for New York over the next five- to 10-year horizon, and really the 10-year horizon. But they'll have to work through the existing supply that's under construction now."

DiamondRock announced as part of its earnings release that it had sold the 502-room Frenchman's Reef & Morning Star Marriott Beach Resort on St. Thomas on April 30 to an affiliate of Fortress Investment Group. The resort was heavily damaged in 2017 by Hurricane Irma and Hurricane Maria and received approximately $240 million in proceeds from insurance claims.

At the time of the sale, the renovation of Frenchman's Reef was less than 50% completed, but as part of the agreement, DiamondRock received $35 million in cash considerations along with a participation right in future profits of the resort.

Brugger said DiamondRock received about 10 serious offers for the resort once the company put it on the market.

"With the $240 million of insurance proceeds and $35 million we received on April 30, we get close to the value that we had in 2017," he said. And then the profit participation is all upside from there. And if things go right, that's likely to be worth some substantial amount of money. ... We think it's a good deal for the buyer, we think it's a very good deal strategically for us, and by freeing up that capital to reinvest now, we think it will really pay off for our shareholders."

DiamondRock ended the first quarter with $436.9 million of total liquidity. In March, the company had its first cash-flow positive month in over a year.

The U.S. hotel industry lost a significant amount of positions during the COVID-19 pandemic, and now the rush is on to rehire before the summer season. Brugger said DiamondRock's experience has varied across its portfolio's markets.

"I would say it's a mixed bag depending on the market and how tight the labor markets are there," he said. "We are having to incentivize in some markets to get employees to come back."

Jeff Donnelly, executive vice president and chief financial officer, said the pandemic has brought an opportunity to revisit how hotels can best operate.

"There's an opportunity to the extent that there are in some markets or in some situations shortages of labor," Donnelly said. "It does give rise to the opportunity to redo the labor model. In those situations, whether it's usage of digital check-in or again changing customer behavior around room cleaning and things of that nature. So I think we're encouraged on that front."

Thomas Healy, DiamondRock's chief operating officer and executive vice president of asset management, said the company is relying on incentives-based rewards instead of straight-up wage increases to attract new hires and retain employees.

"The goal is to create incentives that reward behavior and not just elevate everyone's wage. [We] try to create incentives for when the business is good, and when the business gets a little soft, that comes down. So we're looking at basically incentives across all those markets," Healy said.

In the first quarter, DiamondRock reported a net loss of $171.6 million, according to a company earnings release. Adjusted earnings before interest, taxes, depreciation and amortization was -$9.6 million.

The company's 26 hotels that were open in the first quarter achieved 35.8% occupancy, an average daily rate of $216.93 and revenue per available room of $77.68. Its 12 resort properties achieved 55.4% occupancy in the quarter, along with an ADR of $311.73 and RevPAR of $172.62.

On January 3, DiamondRock closed the Chicago Marriott Downtown Magnificent Mile due to lack of travel demand and government restrictions. The hotel was reopened on April 15. As of May 3, 28 of its 30 hotels had reopened.

As of press time, DiamondRock's stock was trading at $10.02 per share, up 21.2% year to date. The NASDAQ Composite was up 7% for the same period.