Diamondrock Hospitality Company (DRH)

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Diamondrock Hospitality (DRH)

Q3 2012 Earnings Call

October 12, 2012 10:00 am ET


Mark W. Brugger - Chief Executive Officer and Director

John L. Williams - President, Chief Operating Officer and Director

Sean M. Mahoney - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer


Shaun C. Kelley - BofA Merrill Lynch, Research Division

Eli Hackel - Goldman Sachs Group Inc., Research Division

William C. Marks - JMP Securities LLC, Research Division

David Loeb - Robert W. Baird & Co. Incorporated, Research Division

Timothy Wengerd - Deutsche Bank AG, Research Division

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division



Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 DiamondRock Hospitality Earnings Conference Call. My name is Latacia, and I will be your coordinator for today. [Operator Instructions] I would now like to turn the call over to Mr. Mark Brugger, Chief Executive Officer. Please proceed.

Mark W. Brugger

Thanks,Latacia. Good morning, everyone, and welcome to DiamondRock's Third Quarter 2012 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 like to remind everyone that 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 risks and uncertainties, as described in our SEC filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP set forth in our earnings press release.

Before jumping into the numbers, we would like to point out that we continue to see good strength in lodging fundamentals and the macro trends indicate longevity and endurance to the cycle. We take the most confidence in the constrained new hotel supply, which is allowing incremental demand to be harnessed more fully at existing hotels. With hotels trading at significant discounts to replacement costs and the long lead time for the development of major full-service hotels, we believe that the industry is in the early stages of a multiyear run, where annual supply growth is one or more percentage points below the long-term average.

On the demand side of things, despite some mixed macroeconomic signals, hotel demand in many of our markets has returned to prior peak. Our portfolio ran an impressive 81.7% occupancy in the third quarter, with 7 of the hotels running over 90% occupancy. This is the highest third quarter occupancy level in the history of DiamondRock. Leisure was a particularly strong segment for us in the third quarter, with standout results at our 3 resort-focused hotels in Vail, Sonoma and St. Thomas.

Turning to the third quarter numbers. We were pleased with our third quarter results, which were consistent with our expectations. The company's third quarter RevPAR growth number of 3.4% is somewhat distorted by comparisons at Frenchman's Reef with rooms out of service last year. The more indicative number that we will draw your attention to is rooms revenue growth, which increased 6.3% in the third quarter. Profit flow-through was relatively good in the quarter, with hotel EBITDA adjusted profit margin growth of about 59 basis points. As a result, third quarter adjusted EBITDA was $46 million, an increase of the 10% from the comparable period in 2011. FFO per share was $0.18.

Several of the recently acquired assets from Blackstone were particularly strong during the third quarter. RevPAR growth at the Boston Hilton, Burlington Hilton and San Diego Westin was 9.7%, 16.3% and 9.8%, respectively, very strong numbers. We also saw strong growth in the quarter at a number of our other hotels. The Salt Lake City Marriott's RevPAR increased over 10% as it continues to benefit from the recently opened City Creek Project by Taubman. The Sonoma Renaissance's RevPAR was up above 10%, as well as a result of the continued strength in the San Francisco market. And the Bethesda Marriott Suites benefited in the quarter from demand created by the AT&T National PGA Tournament and unexpected major storms that knocked out power in the greater Washington D.C. area for several days.

As we highlighted in our last earnings call, our large group hotels in Chicago, Boston and Minneapolis were negatively impacted by soft third quarter convention calendars. Despite these headwinds, the Westin Boston and Chicago Marriott Downtown each delivered solid RevPAR growth of around 4%.

Group pace for the fourth quarter is up over 9%, with each of our big group hotels benefiting from strong fourth quarter convention calendars. Specifically, group booking pace is up 10% at the Westin Boston, 6% at the Chicago Marriott and up 5% at the Hilton Minneapolis. Additionally, we expect strong group performance from the LAX Marriott and the Chicago Conrad with fourth quarter group pace up 42% and 29%, respectively.

Our New York City hotels had varying levels of success in the third quarter. The Courtyard Fifth Avenue had RevPAR growth in excess of 12%, whereas the Lexington Hotel's RevPAR growth was only 1%, partially due to reduced European traveler demand over the summer. The Washington, D.C. market, which has been one of the best long-term hotel markets in the United States, remains a growth challenge market during 2012. The Washington D.C. Westin City Center Hotel experienced RevPAR contraction due to the local market challenges, as well as being in need of capital investment. The company has accelerated the timing of the comprehensive capital renovation in order to allow the hotel to regain its rightful market position. We are currently planning the scope and timing of that renovation, which will most likely take place in mid-2013. We remain confident in the upside opportunity at this well-located hotel, which is one of only 2 Westins in D.C., and its ability post-renovation to regain significant market share.

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