Diamondrock Hospitality Company (DRH)

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Diamondrock Hospitality (DRH)

Q1 2011 Earnings Call

May 03, 2011 10:00 am ET


John Williams - President, Chief Operating Officer and Director

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

Mark Brugger - Chief Executive Officer and Director


Shaun Kelley - BofA Merrill Lynch

Daniel Donlan - Janney Montgomery Scott LLC

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

Dennis Forst - KeyBanc Capital Markets Inc.

Michael Salinsky - RBC Capital Markets, LLC

Nicholas Nickerson

Ryan Meliker - Morgan Stanley

Unknown Analyst -

Sule Laypan - Barclays Capital



Good day, ladies and gentlemen, and welcome to the first quarter 2011 DiamondRock Hospitality Co. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed, sir.

Mark Brugger

Thanks, Grace Anne. Good morning, everyone, and welcome to DiamondRock's First Quarter 2011 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.

In reviewing current trends and logic fundamentals in the macroeconomic outlook, we continue to believe that we are in the early stages of a strong and sustainable lodging recovery. The major indicators that correlate with logic demands, such as employment trends, GDP growth, corporate profits and corporate capital investment continue on their positive trajectory that started in 2010. We expect this momentum to accelerate as confidence in the economy continues to grow.

Additionally, the lack of meaningful new supply remains a critical storyline to this current cycle. Consider the following 2 factors: First, the 4-year Compound Annual Growth Rate or CAGR of supply entering this downturn was less than 1/2%, much lower than the previous 2 lodging cycles, which respectably experienced do supply as 4-year compound annual growth rate of 3 1/2% and almost 4%.

Second, although annual supply growth peaked above 3% during the most recent downturn, it is currently projected to be less than 1% during the next several years, dramatically lower than the historical average. Thus, we believe that normal cyclical demand growth, combined with limited supply environment, will result in a robust and long lodging recovery.

We reported first quarter pro forma RevPAR growth of 4.7%, and Hotel adjusted EBITDA margins expanded 48 basis points. Our RevPAR and operating margins exclude Frenchman's Reef because it's undergoing a major renovation and related partial closure this year. Our RevPAR growth was driven almost entirely by higher room rates that resulted from increasing pricing power and the positive mix shift away from the Discounted Leisure segment into the higher rate of Business Transient segment.

It is important to reiterate that DiamondRock reports filing the unusual Marriott fiscal quarters due to our portfolio's concentration of Marriott hotels. Consequently, our first quarter excludes March results for 7 of our hotels. To provide a better comparison to first quarter results reported by our peers, if our first quarter included March results for the 7 monthly hotels, then first quarter RevPAR growth would have been 5.5% and profit margin growth would've been 73 basis points.

For the quarter, DiamondRock generated adjusted EBITDA of $18.9 million and adjusted FFO of $11.8 million or $0.07 per share. The first quarter results were solid despite some unique headwinds, such as unusually poor weather in several markets and short-term supply absorption in New York and Vail. It is worth noting that our first quarter is seasonally slow and represents less than 12% of our annual adjusted EBITDA. Looking forward, March and April results were on track and our outlook for the balance of this year remains very strong.

In the first quarter, more than ΒΌ of our portfolio enjoyed double-digit RevPAR growth led by the Sonoma Renaissance, Boston Renaissance, Orlando Airport Marriott, Charleston Renaissance and the Chicago Conrad. Although excluded from our comparable RevPAR, Renaissance REIT expectedly underperformed in the portfolio, as groups were hesitant to book the hotel immediately prior to the commencement of our large renovations.

It's also worth noting that the Boston Westin and Chicago Marriott, which are both significant drivers of our portfolio results, are seasonally slow in the first quarter. As John will discuss, both of these markets are expected to be strong in the back half of the year.

Turning to capital structure. DiamondRock continued to strengthen its already terrific balance sheet with $150 million equity offering in January and more recently, $100 million nonrecourse loan on the previously unencumbered Minneapolis Hilton.

Today, the company enjoys very conservative leverage, with projected net debt to 2011 EBITDA of approximately 3.6x. Importantly, the company's balance sheet remains straightforward, no preferred equity, no corporate debt and 12 unencumbered hotels. Moreover, we project to have over $300 million in excess cash this year, along with an undrawn $200 million corporate revolver. All of this is potentially available as dry powder to pursue hotel acquisition opportunities. With a solid pipeline, we plan to be active in 2011.

Before turning the call over to John, I want to provide a quick update on a few matters. First, the Allerton Chicago foreclosure. As many of you know, we took advantage of this distressed debt opportunity in early 2010 by buying a note at the substantial discount at prosecuting a foreclosure of the hotel. We had a favorable hearing on foreclosure last month, and the next step is summary judgment hearing in May.

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