Diamondrock Hospitality Company (DRH)

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Diamondrock Hospitality (DRH)

Q4 2010 Earnings Call

March 01, 2011 10:00 am ET

Executives

Sean Mahoney - Chief Financial Officer, Executive Vice President and Treasurer

Mark Brugger - Chief Executive Officer and Director

Analysts

Jeffrey Donnelly - Wells Fargo Securities, LLC

Bryan Maher - Citadel Securities, LLC

Chris Woronka - Deutsche Bank AG

Eli Hackel - Goldman Sachs Group Inc.

Joshua Attie - Citigroup Inc

Sule Laypan - Barclays Capital

William Marks - JMP Securities LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2010 DiamondRock Hospitality Company Earnings Conference Call. My name is Michael, and I will be your coordinator for today. [Operator Instructions] I will now turn the presentation over to your host for today's conference, Mr. Mark Brugger, Chief Executive Officer. You may proceed.

Mark Brugger

Thanks, Michael. Good morning, everyone, and welcome to DiamondRock's Fourth Quarter 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 law and may not be updated in the future. These statements are subject to 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.

We are pleased to report that 2010 was a very successful year for both lodging industry and for DiamondRock in particular. The company was able to achieve all of its major objectives including: impressive portfolio growth, completing accretive acquisitions, enhancing our already strong balance sheet and now returning to paying quarterly dividends.

Our internal growth was a result of increased demand in a number of segments, none more important than the return of the highly profitable business transient customer. In addition, group demand improved significantly during 2010. Our premium hotel portfolio was well positioned to capture this increase in demand. Fourth quarter RevPAR grew 8.3% with the majority of that growth coming from an increase in average rate. Importantly, we saw pricing power continue to return as 18 of our 23 hotels were able to increase average rates during the quarter. For the full year 2010, RevPAR improved 4.8%.

Profit margins in the quarter were excellent. Our aggressive asset management was able to drive hotel profitability as a result of vigilant cost-containment efforts. Fourth quarter EBITDA margins increased a robust 398 basis points. Even removing the positive impact of property tax reductions, profit margins in the quarter expanded by approximately 200 basis points. For the full year, profit margins were better by 153 basis points.

As a result of good top and bottom line growth, the company generated adjusted EBITDA of $51.2 million for the fourth quarter and $138.5 million for the full year. Adjusted FFO per share was $0.22 for the fourth quarter and $0.63 for the full year. It is worth noting that these results exceeded both guidance and consensus.

Turning to acquisitions. 2010 marked the return of an acquisition environment that favored well positioned public REITs. DiamondRock deployed $326 million in four major acquisitions, which ranged from taking advantage of distressed debt opportunity in downtown Chicago to acquiring a core holding in New York City at an attractive 8.5 cap rate.

These 2010 hotel acquisitions achieved excellent growth with combined RevPAR increasing 11.5%. Moreover, we continue to execute our acquisition strategy and subsequent to year end, we entered into a purchase and sale agreement to acquire hotel under development in Times Square. This acquisition will be our fourth hotel in New York City. John will provide more details on these acquisitions as well as our pipeline in a moment.

At this time, we would like to provide an update on our one distressed debt opportunity, the Allerton Chicago hotel. As we previously reported, the loan matured more than a year ago and is in default. We continue to prosecute these foreclosure with a next hearing schedule for later this month. In the meantime, we continue to collect interest on the loan. We ultimately anticipate one of two outcomes later this year, either completion of the foreclosure, giving us an attractive cost basis as owner of the hotel or alternatively, get a repaid [ph] the note in full at a substantial profit.

Now before turning the call over to John, I did want to touch on our terrific balance sheet. In 2010, we greatly enhanced our already strong balance sheet, and today have net debt to enterprise value of less than 25%. Moreover, the company's very liquid and has great financial flexibility with approximately $200 million of unrestricted cash, 13 unencumbered hotels, and undrawn $200 million corporate revolver. Our balance sheet will allow us to take advantage of this excellent acquisition market. And as John will discuss, we are looking at an exciting pipeline of opportunities. In addition, we will generate significant free cash flow in 2011. And appropriately, the board has reinstituted quarterly dividends by declaring $0.08 per share payable in cash to our shareholders of record as of March 25.

With that, I will turn the call over to John

John Arabia

Thanks, Mark. The fourth quarter continued the positive operating trends of 2010 with improving RevPAR led for the second consecutive quarter by average rate increases for the portfolio.

Pro forma RevPAR increased 8.3% for the portfolio in Q4 to $111.61 as a result of a 4.4% increase in average daily rate and a 2.5% increase in occupancy. For the year, RevPAR was up 4.8% comprised of 2.7% increase in occupancy and a 1% increase in rate. The increase in portfolio RevPAR in Q4 was driven by improvements in several room segments. Business Transient revenue, by far the highest rated segment, was up 14.4%. Group revenue was up 5.7%, and Leisure and Discount Transient revenue was up 3.9%. Lower rated contract and other revenue was up 12.4% in Q4, but represents only 3.8% of our total portfolio room revenue and the increases were concentrated at our three airport hotels. These positive trends and segmentation accelerated throughout the year.

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