Diamondrock Hospitality Company (DRH)

DRH 
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Diamondrock Hospitality (DRH)

Q2 2011 Earnings Call

July 25, 2011 5:00 pm ET

Executives

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

Analysts

Shaun Kelley - BofA Merrill Lynch

William Crow - Raymond James & Associates, Inc.

Dennis Forst - KeyBanc Capital Markets Inc.

David Katz - Jefferies & Company, Inc.

Enrique Torres - Green Street Advisors, Inc.

Michael Salinsky - RBC Capital Markets, LLC

Eli Hackel - Goldman Sachs Group Inc.

Ryan Meliker - Morgan Stanley

Joshua Attie - Citigroup Inc

Sule Laypan - Barclays Capital

William Marks - JMP Securities LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 DiamondRock Hospitality Company Earnings Conference Call. My name is Stacy, and I'll be your conference moderator for today. [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, to Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Mark Brugger

Thanks, Stacy. Good afternoon, everyone, and welcome to DiamondRock Second 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 law. They 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.

Let me start the call today by saying that the lodging recovery is going well. As the industry is coming off six consecutive quarters of demand growth, we continue to be very optimistic about the future of the travel business. With recent mix, macroeconomic indicators and headline news is understandable that some investors have grown more cautious. However, based on the trends we are seeing in our portfolio and the industry, comparison to trough results and constrained new hotel supply, it is our strong belief that we are setting up for a significant multi-year recovery in lodging.

In particular, we are very optimistic about DiamondRock during this cycle. Despite some unevenness in the first half of the year, working pace and transient trends support a stronger second half of 2011. More importantly, we expect our portfolio to perform very well in 2012 due to several factors including: One, strong city-wide calendars in Chicago and Boston, our 2 largest group markets; two, a renovated and repositioned Frenchman's Reef back online; three, increased exposure to New York City; and four, strong growth from Salt Lake City Marriott due to the opening of $1 billion City Creek development surrounding the hotel.

For the second quarter 2011, DiamondRock's portfolio of hotels generated RevPAR growth of 6.4% and hotel adjusted EBITDA margin improvement of over 100 basis points. This RevPAR margin data is for our 25 owned hotels as of the end of the quarter and excludes Frenchman’s Reef. For the quarter, DiamondRock generated Adjusted EBITDA of $41.1 million and adjusted FFO of $0.15 per share. It is worth noting that the renovation disruption of Frenchman's Reef displaced approximately $5 million of revenues and $3.5 million of EBITDA during the second quarter alone, which was modestly more than we originally estimated.

Our second quarter results were led by outstanding performance at the Chicago Conrad and the Marriott Atlanta Alpharetta, both of which grew RevPAR over 20%. We also experienced double-digit RevPAR growth at 5 additional hotels, including our hotels in Charleston, Sonoma, Chelsea New York City, Oak Brook Hills Chicago and Salt Lake City. Our single hotel in the Washington, D.C. market gained market share, with RevPAR increasing a respectable 6.1%.

With all that said, year-to-date group revenues and in particular, group spend in the portfolio has been behind our expectations, particularly at 2 of our largest hotels, the Westin Boston and Chicago Marriott. Despite strong overall transient demand in both Boston and Chicago, the softness in second quarter citywide resulted at least 2 convention hotels being down 7% to last year in group room nights and 9% in highly profitable banquet and AV business. Fortunately, both hotels expect stronger group business for the back half of 2011, with group revenue fees being up almost 8% to last year. Even better, for 2012, the Chicago Marriott and Westin Boston are collectively showing group fees up over 14%. We remain committed to and excited about the Chicago and Boston markets going forward.

Turning to acquisitions. The company has been very active during 2010 and 2011. It's been a great time to buy. Since early last year, DiamondRock has completed almost $900 million of hotel-related investments in 8 separate transactions. Since the start of second quarter alone, the company acquired the Lexington Hotel in Midtown New York, the JW Marriott Denver, and the Courtyard by Marriott downtown Denver. In addition, early this year, we agreed to acquire a hotel under development in Times Square. Each deal represents excellent value, provides significant upside over the next few years and enhances the overall DiamondRock portfolio.

Although John will discuss our recent deals in more detail, I do want to provide a few data points from the hotel's acquired since early last year. First, the hotels were purchased at attractive valuations, averaging an 11.8x multiple projected 2012 hotel EBITDA. Second, the hotels increased our portfolio quality, raising portfolio RevPAR by $7 and increased margins by 225 basis points. And third, we increased our exposure to markets with excellent long-term growth prospects, including increasing our profits derived from New York City from 9% in 2010 to over 25% beginning in 2013. On a related note, we continue to evaluate selling certain non-core hotels over the next 18 months to create additional investment capacity to invest in high-growth opportunities.

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