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Diamondrock Hospitality (DRH)

Q4 2011 Earnings Call

February 29, 2012 10:00 am ET


Mark W. Brugger - Chief Executive Officer and Director

John Williams - President, Chief Operating Officer and Director

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


William C. Marks - JMP Securities LLC, Research Division

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Sule Sauvigne - Barclays Capital, Research Division

Eli Hackel - Goldman Sachs Group Inc., Research Division

Andrew G. Didora - BofA Merrill Lynch, Research Division

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

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Daniel P. Donlan - Janney Montgomery Scott LLC, Research Division

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



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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 DiamondRock Hospitality Earnings Conference Call. My name is Karissa, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the presentation over to your host for today's conference, Mr. Mark Brugger, CEO. Please proceed.

Mark W. Brugger

Thanks, Karissa. Good morning, everyone, and welcome to DiamondRock's Fourth Quarter and Full Year 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 like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities law. It 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 in our earnings press release.

DiamondRock achieved great success in 2011. We executed on our strategic objectives. And as a result, DiamondRock continues to be a leading lodging REIT with exceptionally strong balance sheet and premium portfolio of high-quality hotels in top growth markets. Overall, we hold firm to our conviction that lodging fundamentals are in early stages of a recovery that will benefit the entire industry. However, we are particularly bullish on DiamondRock for several specific reasons. First, there's a lot of upside in our existing portfolio. To put our upside in perspective, if our portfolio only reaches prior peak levels of 2007, and we project much greater growth, that will mean that we will see $80 million in additional hotel EBITDA growth from last year's results, equivalent to 48% growth over 2011. Importantly, since our portfolio is forecasted to exceed prior peak occupancy in 2012, much of our future growth is coming from highly profitable increases in room rates. Second, after the disposition of the 3-pact hotels under contract Inland, which we expect to close very soon, the company will have completed over $1 billion of transformational hotel transactions since early 2010. After these transactions, the portfolio quality is even higher with 95% of our hotel profits coming from hotels located at gateway cities and destination resort locations. By all accounts, these urban resort markets will outperform the rest of the lodging industry over the next decade. We expect our portfolio weighted in New York City, Chicago and Boston to lead the way for the company going forward.

Third, our $45 million repositioning effort at Frenchman's Reef resort is substantially complete. We expect to exceed our original 2012 pro forma underwriting, our 2012 budget for Frenchman's reflects over $14 million in EBITDA growth from 2011 and the hotel's future funnel of booking continues to indicate that these coming years will be very successful. Fourth, we signed a term sheet with Marriott to convert one of our largest hotels, the Lexington Hotel in midtown Manhattan, from a Radisson to a member of the Marriott Autograph Collection. In connection with this rebranding effort, we plan to invest $30 million of incremental capital to upgrade the hotel. We anticipate significant rate potential arising out of this repositioning. Finally, with the completion of the sale to Inland and our Lexington Hotel financing, we will continue to maintain one of the most enviable balance sheets among our lodging peers, with 2012 debt to EBITDA of just over 4x, an undrawn corporate revolver, no corporate debt and significant cash. Our balance sheet strength gives us ample dry powder to be opportunistic in the acquisition market.

Turning to operating results. Today, we are pleased to report strong results for the fourth quarter and full year 2011, a continued evidence of substantial recovery in lodging fundamentals. For the full year, pro forma RevPAR increased 6.3%, and adjusted EBITDA was $162.1 million, which resulted in adjusted FFO per share of $0.62. Results would have been even higher except for the impact of 2 one-time items, the $10 million in total renovation disruption at our Caribbean resort, and we recorded an unexpected write-off of approximately $1 million in receivables related to the American Airlines bankruptcy. We saw exceptional performance from a number of our hotels in 2011. Particularly noteworthy, we experienced double-digit RevPAR growth at the Chicago Conrad, the Sonoma Renaissance, the Alpharetta Marriott and the Chicago Oak Brook Hills Marriott.

Additionally, the Hilton Minneapolis, a 2010 acquisition, turned in a RevPAR gain of almost 9%. Results were more challenged at the Griffin Gate Marriott due to a difficult comp and the Austin Renaissance. Both of these hotels are included in the 3-pact sales transaction, which is expected to close in short order. We wanted to quickly touch on the much publicized snowfall out west and its impact in our Vail Resort. We're happy to report that the snowfall has been considerable better over the last 7 weeks. In addition, one of our asset management initiatives last year was to implement a 45-day cancellation policy at the hotel. This policy allowed us to preserve our December reservations and report a 6% RevPAR increase for December at our Vail resort. We'd also like to take this opportunity to update on some particular events in the company. First, the Lexington Hotel in New York City. As John will discuss in more detail, we are planning to rebrand the Lexington Hotel and invest capital to allow this asset to reach its full potential. While the hotel already runs over 90% occupancy, we're convinced that implementing a strategy of rebranding the hotel will result in significant rate upside. We are also close to finalizing a $170 million loan on this hotel at an attractive rate. This loan allows us to completely pay off our corporate revolver and further positions us to be opportunistic on acquisitions.

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