Diamondrock Hospitality Company (DRH)

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DiamondRock Hospitality Company, (DRH)

Q3 2010 Earnings Call

October 19, 2010 10:00 a.m. ET

Executives

Mark Brugger – Chief Executive Officer, Director

John L. Williams – President, Chief Operating Officer, Director

Sean M. Mahoney – Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Jeffrey Donnelly – Wells Fargo

Joshua Attie – Citi

Ryan Meliker – Morgan Stanley

David Loeb – Baird

Andrew Andora – B of A/Merrill Lynch

Dennis Forst – Keybanc

Daniel Donian – Janney Capital

Tim Wingard – Deutsche Bank

Gene Bedsell – RBC Capital Markets

Su Oy Pan – Capital

Will Marks – JMP Securities

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Q3 DiamondRock Hospitality Company Earnings Conference Call. My name is Marisa, and I’ll be your operator for today. (Operator instructions.) I would now like to turn the conference over to your host for today’s call, Mr. Mark Brugger, the Chief Executive Officer. Please go ahead.

Mark Brugger

Thanks, Marisa. Good morning, everyone, and welcome to DiamondRock’s Q3, 2010, 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.

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’s positive Q3 results met our internal expectations, and reaffirmed our conviction that a sustainable lodging recovery continues to build momentum. Importantly, RevPAR gains in the quarter were led by improvements in average rates, which increased at over two-thirds of our hotels. With favorable demand trends, we continue to benefit from the ability to shift the mix at the hotels away from lower rated segments, into higher rated segments. Particularly our most profitable segment of business transient. In the quarter, business transient RevPAR was up 16%, while lower rated leisure RevPAR was actually down 2%.

To understand the power of mix shift, you only need to know that the average rate differential is over $30 in these two segments last quarter. This all leads to the question of how to improve demand trends and mix shift specifically impacted DiamondRock’s portfolio. Well, performer for acquisitions, RevPAR increased 5% from the comparable period, and even our profit margins extended 33 basis points.

As we discussed in our prior earning conference call, the Westin Boston faced difficult comparison after gaining 15% market share in Q3 ’09. Excluding the Westin Boston, our RevPAR would have increased 6.8% and profit margins would have been about 100 basis points better. The company also reported adjusted EBITDA increased over $2.3 million from the comparable period, and adjusted FFL per share was $0.15.

In the quarter, the company continued executing its business plan to aggressively pursue attractive investment opportunities. Our DL flow came from diverse sources, including financial distress, such as the Allerton deal, our Marriott sourcing relationship, such as the Renaissance Charleston acquisition, or attractively priced opportunities from our relationships, such as the Hilton Minneapolis, or Hilton Garden in Chelsea acquisitions.

In total, during 2010, we’ve invested $325 million in four separate transactions. Our three hotel acquisitions are performing exceptionally well, and all experienced above market growth during the Q3. The Hilton Minneapolis and the Hilton Garden in New York City both grew RevPAR more than 20%, and the Renaissance Charleston’s RevPAR increased a strong 13%. The Allerton Chicago debt deal continues to go as expected, with our foreclosure of equity working its way through the courts.

Additionally, we are exercising our other rights under the law to establish a cash lock box, and collecting close to $2 million in cash interest payments. We continue to be optimistic about our prospects for the well located Allerton Hotel, and are particularly pleased with our basis in the hotel, which we believe is at a 50% discount to replacement costs.

Overall, DiamondRock has terrific liquidity, and remains well-positioned to actively pursue acquisition opportunities as a result of our low leverage, our undrawn $200 million corporate evolver, 13 unencumbered hotels, and over $90 million of unrestricted corporate cash at year end.

Additionally, we expect strong internal growth from our existing portfolio, and through asset management initiatives. The largest opportunity is the renovation and repositioning of the Marriott Frenchman’s Reef Resort in the U.S. Virgin Islands. John will talk more about this $45 million investment in a minute, and there’s a detailed presentation available to you on our website. Moreover, our active management team continues to uncover discreet ROI capital projects at our existing hotels, that range from energy projects to meeting space expansions.

As always, we remain focused on mining value creation opportunities, wherever they may lie. With that, I will turn the call over to John for a more detailed discussion on fundamentals and acquisitions.

John Williams

Thank you, Mark. The Q3 continued the operating trends of 2010, with improving RevPAR led for the first time since Q2 of 2008 by average rate increases for the portfolio. Performer RevPAR increased 5% for the portfolio for Q3, to approximately $112 as result of a 2.8% increase in average daily rate, and 170 basis point increase in occupancy. Overall, occupancy was relatively strong at 75.5%.

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