Diamondrock Hospitality Company (DRH)

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DiamondRock Hospitality Company (DRH)

Q2 2010 Earnings Call Transcript

July 27, 2010 2:00 pm ET

Executives

Mark Brugger – CEO

John Williams – President and COO

Sean Mahoney – EVP, CFO and Treasurer

Analysts

David Loeb – Baird

Chris Woronka – Deutsche Bank

Jeff Donnelly – Wells Fargo

Shaun Kelley – Bank of America

Will Marks – JMP Securities

Ryan Meliker – Morgan Stanley

Smedes Rose – KBW

Mike Salinsky – RBC Capital Markets

Dennis Forst – KeyBanc

Bill Crow – Raymond James

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the second quarter 2010 DiamondRock Hospitality earnings conference call. My name is Chandelle, and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today’s conference. (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, CEO. Please proceed, sir.

Mark Brugger

Thanks, Chandelle. Good afternoon, everyone. And welcome to DiamondRock’s second quarter 2010 earnings conference call. Today I’m joined by John Williams, our President and Chief Operating Officer, as well as, Sean Mahoney, Chief Financial Officer.

As usual, before we begin, I would just like to remind everyone 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.

DiamondRock second quarter results exceeded our original expectation as lodging industry benefited from positive demand trends. We believe that these demand trends couple with limited new supplier are the key ingredients for robust multi-year in lodging fundamental. Despite the recently release of mixed economic data, the positive momentum in lodging fundamentals appears to have a strong footing. The following data points are indicative of the early stages of the strong recovery.

First, year-to-date domestic demand for up rev scale hotels has increased to healthy 10%. Second hotel rate trends are improving as a result of positive business mixed shift, particularly the research for the most profitable customer, the business traveler who is displacing lower rates leisure and contract business. Third, group booking pace has continue to improve with relatively short booking windows and lastly, industry forecast show supply growth to be well below (inaudible) for the next several years.

The positive operating trends are evidence that our second quarter numbers. DiamondRock reported strong second quarter results with adjusted EBITDA of $35.8 and adjusted FFO of $21.6 million. These results are derived from RevPAR growth of 6.1%, a positive margin growth of 67 basis points as we continue to reach the benefit of cost containment efforts.

11 of the company’s hotels recorded double-digit RevPAR improvements during the second quarter and almost half were able to increase averaged daily rate. More significantly, Chicago's surpassed expectations with RevPAR Chicago Downtown Marriott and Oak Brook Hills Marriott increasing over 30% in the last year-to-date of the quarter and over 8% for the entire quarter.

In addition, RevPAR Conrad held in Chicago increased 28% in June, which will be reflecting in our third quarter results. We are also excited about the exceptionally strong trend in New York with our two hotels achieving RevPAR gains above 20% during the quarter. Our Courtyard Fifth Avenue alone experienced RevPAR growth up 31% in the last period of the quarter. Our hotel located just outside of San Francisco and Washington D.C. were also strong performers of the quarter.

DiamondRock continues to execute on its business plan, the company work diligently during the last two years to navigate with economic downturn. We focused on operating efficiencies and creating a conservative balance sheet that will give us the ability to seize upon acquisition opportunities that would not only rise from financial stress or simply for well-time deals at the start of the recovery.

Earlier this year we begin recovering these type of opportunities and during the second quarter acquires Hilton Minneapolis hotel and senior notes from Allerton Chicago hotel. Additionally, our Marriott sourcing relationship, and recently entered into a binding contract to acquire the Renaissance hotel in Charleston Historic District. It is worth noting that two of these three transactions were sources to off market.

We're excited about the growth prospects of our announced acquisition. In 2010 RevPAR growth of three hotels was up 10%. Moreover we believe that the pricing was attracted by the all three transactions, but the Hilton Minneapolis and the Renaissance Charleston hotel acquired for than 11 times projected for EBITDA and Allerton that acquired at $8.5 million discount to par or stated alternatively less than $140,000 for key.

In total, DiamondRock was able deploy over $0.25 billion through investment in these three hotels. Consequentially, in keeping with our business strategy and maintaining adorable balance sheet with the competitive level of investment capacity, company has successfully completed an overnight equity offering in the second quarter raising approximately $185 million.

Today, DiamondRock has one of the balance sheet in the industry. By the end of 2010, even after closing on the Renaissance Charleston we expect to have unrestricted cash of approximate $160 million, pro forma net debt to EBITDA of only 4.4 times with accordingly no preferred equity outstanding and no corporate debt and lastly, unsecured $200 million corporate revolver that was completely untapped.

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