Diamondrock Hospitality Company (DRH)

DRH 
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DiamondRock Hospitality Co. (DRH)

Q2 2009 Earnings Call

July 28, 2009 10:00 am ET

Executives

Mark W. Brugger – Chief Executive Officer

John Williams – President and Chief Operating Officer

Sean M. Mahoney – Chief Financial Officer

Analysts

David Loeb - Robert W. Baird & Co., Inc.

William Marks - JMP Securities

Dennis Forst - KeyBanc Capital Markets

Jeffrey Donnelly - Wells Fargo Securities, LLC

Ryan Meliker - Morgan Stanley

Mike Salinsky - RBC Capital Markets

Smedes Rose - Keefe, Bruyette & Woods

Ken Ho – Keybanc

[Andrew Whitman] – Robert W. Baird

David Katz - Oppenheimer & Co.

Presentation

Operator

Good day ladies and gentlemen. Welcome to the second quarter 2009 DiamondRock Hospitality Company earnings conference call. My name is [Deanna] and I’ll be your coordinator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Mark W. Brugger

Good morning everyone and welcome to DiamondRock Hospitality’s second quarter 2009 earnings conference call. Today I’m joined by John Williams, our President and Chief Operating Officer, as well as Sean Mahoney, our Chief Financial Officer.

Before we begin, I would just like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities Law, and they may not be updated in the future. These statements are subject to numerous risks and uncertainties described in our Securities filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful for you to review the reconciliation to GAAP in our earnings press release.

As you already know, the U.S. travel industry continues to face significant challenges from sharp reductions in demand caused by the current recession. Many of the macroeconomic indicators that correlate with hotel demand remain negative, although some are showing signs of moderating.

The second quarterly totals for our portfolio of 20 hotels reflect a continuing negative operating environment for lodging. RevPAR declined 22.2% in the quarter and 19.9% year-to-date. The year-to-date RevPAR decline was led by a 12.8% decrease in rates and a 5.9 percentage point reduction in occupancy.

However, as a testament to our portfolio and branding strategy, our portfolio of hotels continued to gain market share. Year-to-date our hotels have increased their market share measured by RevPAR penetration over 7 percentage points. Margins have been a relatively solid story. Even with the significant loss in revenue, the house profit margin decline in the second quarter was limited to 499 basis points, and adjusted EBITDA margins to 604 basis points. The cost containment efforts of our asset managers and hotel operators are working. John will discuss those efforts in more detail in a moment.

For the company, in the second quarter we generated revenue of $143.6 million, adjusted EBITDA of $32.6 million and adjusted FFO per share of $0.24. Turning to the balance sheet, DiamondRock has historically focused on maintaining a conservative balance sheet and a straightforward capital structure. As of the end of the second quarter, the company’s ratio of net debt to trailing four quarters of adjusted EBITDA was 5.2 times. The company currently maintains more than $80 million of cash including $30 million of restricted cash.

Somewhat unique in our space, we have no joint ventures or corporate debt outstanding, including no preferred equity, no convertible debt and no outstanding borrowings on our corporate revolver. After the completion of the Courtyard Midtown East refinancing later this year and potentially satisfying the Griffin Gate maturity with cash on hand, we will have no material maturities until late 2014, and practically half of our hotels will be unencumbered. Moreover, all of our debt is comprised of non-recourse, subject to certain limited exceptions, property specific mortgage debt.

In these credit constrained times we remain focused on our balance sheet strength and liquidity to both weather the storm and, at the appropriate time, position DiamondRock to create shareholder value by buying hotels in what inevitably is going to be a buyers market for the disciplined few with the balance sheets to take advantage of it. Our liquidity is enhanced through our positive free cash flow, our ability to pay a portion of our dividends in stock, our unencumbered full hotels, our untapped $200 million corporate revolver, and by having the ability to raise cash for future equity offerings. We believe that DiamondRock is well positioned, but we remain vigilant about our balance sheet and will continue to focus on ways to utilize the balance sheet’s great value for our shareholders.

As for the outlook, the lack of visibility remains too high to provide meaningful guidance at this time. However, we want to continue to provide as much relevant information as possible to assist investors and analysts in deriving their own estimates. Here is what we can tell you. For the full year 2009, we project approximately $51 million of total debt service, $10 million of owner funded capital projects, $10.5 million of cash corporate G&A, and REIT taxable income of $35 to $45 million which will be the basis for determining the amount of our 2009 dividends. We hope that this information is helpful.

With that, I’ll turn the call over to John.

John Williams

Thanks Mark. We continued to see negative operating trends across the portfolio in the second quarter. With hotels in several of our major markets losing RevPAR at accelerating rates, we’re still playing defense, implementing creative and unprecedented cost saving measures across the portfolio. At the same time, we’re working with our operators to uncover additional revenue sources, and new market segment opportunities in order to enhance market share and maximize profits.

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