Diamondrock Hospitality Company (DRH)

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DiamondRock Hospitality Company (DRH)

Q4 2009 Earnings Call Transcript

February 26, 2010 10:00 am ET

Executives

Mark Brugger – CEO

John Williams – President & COO

Sean Mahoney – EVP, CFO & Treasurer

Analysts

Chris Woronka – Deutsche Bank

David Loeb – Baird

Will Marks – JMP Securities

David Katz – Oppenheimer

Bryan Maher – Collins Stewart

Joshua Attie – Citi

Ryan Meliker – Morgan Stanley

Michael Salinsky – RBC Capital Markets

Smedes Rose – KBW

Jeffrey Donnelly – Wells Fargo

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 DiamondRock Hospitality Company earnings conference call. My name is Louisa and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) I would like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Mark Brugger

Thanks, Louisa. Good morning, everyone, and welcome to DiamondRock Hospitality’s fourth quarter and full year 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 for you review the reconciliation to GAAP in our earnings press release.

The past year was the single most difficult year in the U.S. lodging industry since the Great Depression. As you know, beginning in late 2008, the prospect of a severe economic downturn and a concomitant negative outlook for fundamental resulted in a precipitous decline lodging companies’ share prices, including DiamondRock. The decisive actions of our management team and the forward-looking of the market contributed to the dramatic increase of our share price during 2009, resulting in a total return of more than 70%, albeit significantly below our peak share price in 2007.

Having weathered what we hope is the worst of the recent economic storm, DiamondRock is well-positioned for future growth. We expect to achieve our growth objectives with a cyclical recovery of our existing portfolio and growth fueled by acquisitions as we deploy our investment capacity from our conservative balance sheet.

As history has taught us, the lodging industry experience is a well documented cycle. Playing for the expected volatility during lodging downturns is an integral part of our fundamental business model. However, the breadth and depth of the recent recession was unprecedented in modern times as was its impact on 2009 lodging fundamentals. Demand for hotel rooms declined by a staggering 5.8 percentage points as supply peaked in this cycle at 3.2% well above its historical average.

This supply-demand imbalance resulted in industry RevPAR declining approximately 17%, almost double the decline experienced in 2001. Our portfolio performed better than its competition within the respective hotel markets, gaining approximately five percentage points of market share during 2009. Our gain in market share helped to validate our corporate strategy of owning [ph] hotels with global brands. Despite these gains, our hotels were certainly not immune to the downturn as our portfolio RevPAR declined 17.6%. In light of the decline we are pleased that our estimators who work in concert with our hotel operators put in place rigorous cost containment plans to minimize our profit margin declines to 520 basis points in 2009.

Our management team was early to recognize the severity of the economic downturn and formulated an aggressive action plan to mitigate the impact. We entered 2009 with a clear and focused plan to enhance (inaudible) balance sheet, which was critical to achieve our long term strategic objectives of not only surviving the economic downturn but position the company to thrive during the recovery periods. With the multi-pronged action plan, the Company sought to eliminate all corporate debt, address all near term debt maturities and create dry powder for acquisitions.

We executed our 2009 action plan by, one, demonstrating leadership among the lodging peers by being the first lodging REIT to issue equity with a highly over subscribed offering in April. This offering was followed by two successive controlled equity offering. In total, the Company raised approximately $205 million of net proceeds from the sale of equity.

Second, we were able to secure new debt on the Courtyard/Midtown of Mass Mutual during an incredibly difficult finance environment. It was the only hotel financing done by the select company during 2009.

Lastly, the Company took advantage of the IRS Revenue Process 2009-15, which allowed us to pay 90% of our $0.33 per share dividend in stock. Although we believe that paying a cash dividend is a very important component of our total return, the unique circumstances in 2009 warranted paying 90% of the dividend in stock. Our election allowed the Company to retain approximately $37 million of cash.

As a result of these proactive steps, the Company raised a $0.25 billion in new capital, achieved a 30% reduction in net debt, increased its unrestricted cash position to $177 million and addressed all of its debt maturities until late 2014.

With no corporate debt and half of our portfolio unencumbered by any form of debt, DiamondRock ended 2009 with (inaudible) durable balance sheets in the industry.

Read the rest of this transcript for free on seekingalpha.com