Diamondrock Hospitality Company (DRH)
Q3 2009 Earnings Call Transcript
October 20, 2009 11:00 am ET
Mark Brugger – CEO
John Williams – President and COO
Sean Mahoney – EVP, CFO and Treasurer
Jeffrey Donnelly – Wells Fargo
Will Marks – JMP Securities
Bryan Maher – Collins Stewart
Guillermo Garau – RBC Capital Markets
Smedes Rose – Keefe, Bruyette & Woods
Dennis Forst – KeyBanc
Justin Maurer – Lord Abbett
Nikhil Bhalla – FBR
Josh Attie – Citi
Dan Donlan – Janney Montgomery Scott
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Thanks, Latrice. Good morning, everyone, and welcome to DiamondRock Hospitality’s third 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’d just like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities laws and 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 to review the reconciliation to GAAP in our earnings press release.
Overall, US lodging fundamentals continue to be very difficult. Our quarterly results albeit staggering from a historical perspective exceeded our expectations, particularly with respect to profit margins. There are some signs in the quarter that demand is beginning to stabilize, a subject that we will touch on more during this call.
For the third quarter, our portfolio RevPAR contracted by 16.9%, led by approximately a 13% decline average rate and a 3 percentage point loss of occupancy. It’s worth noting, more than a third of our hotels actually gained occupancy during the quarter versus the comparable period. This is an improvement over the second quarter where only a single hotel had occupancy growth greater than 1%. We are encouraged by this trend. Occupancy will need to recover first in order for rates to eventually increase.
On another positive note, our portfolio of hotels continued to gain market share. During 2009, our hotels have increased the RevPAR market share by more than 7 percentage points. Margins were also a very good story in the quarter. Even with the significant loss in revenue, house profit margins declined only 342 basis points and adjusted EBITDA margins by only 421 basis points. The cost containment efforts of our asset managers and our hotel operators are continuing to maximize hotel profits despite the difficult operating environment. John will discuss these efforts in more detail in a moment.
Driven by our portfolio’s performance, the company generated third quarter revenue of $137.8 million, adjusted EBITDA of $27.5 million, and adjusted FFO per share of $0.19. Turning to the balance sheet, DiamondRock continued its efforts to build a durable balance sheet and to position the company to take advantage of future acquisition opportunities.
With these twin goals in mind, the company pursued several capital initiatives during the year, including one, raising over $150 million through the sale of common equity; two, paying of $90 million of debt, including all outstanding borrowings under our corporate revolver and the mortgage debt Griffin Gate and Bethesda Suites; three, completing the refinancing of the quarter Courtyard Midtown East; and four, paying up to 90% of this year’s dividend in stock.
After completing these capital initiatives, the company’s simple capital structure enjoys the following positives. A 20-hotel portfolio with no debt on 10 hotels and the other 10 encumbered only by long-term limited recourse mortgage debt; no debentures for five years; no corporate debt, including no draws under the corporate revolver, and unrestricted corporate cash of over $100 million.
We believe that DiamondRock is well positioned to create value for our shareholders. In particular, our management team is becoming more constructive on the coming acquisition environment. The lethal combination of dramatic declines in hotel cash flows and the use of excessive leverage during the last peak will inevitably lead to good acquisition opportunities. Just looking at hotel CMBS debt alone, nearly $30 billion of hotel CMBS debt is maturing through 2012 and about $8 billion in total is already unable to meet debt service. The open question remains, just when will these opportunities ripen?
As for the outlook, our visibility continues to be very limited. Based on our current trends, we expect 2010 to be another negative year for RevPAR with difficult profit margin comparisons. However, this lodging cycle, although more amplified and perhaps attractive, will likely play out similar to prior cycles where hotel room rates remain under pressure until occupancy recovers to a threshold level that allows operators to regain pricing power.
As the general economy improves, we anticipate that demand will follow its traditional path, tracking GDP growth, employment growth, and corporate profits. Another side of the supply/demand equation, supply, while not favorable short-term, is projected to be below historical averages beginning in 2011 and remain at constrained levels for several years. The positive supply future should lay the groundwork for solid RevPAR growth as demand recovers. DiamondRock, with its portfolio of high-quality hotels concentrated in gateway cities and desirable destination resorts, is well situated to benefit from the next growth cycle.