Diamondrock Hospitality (DRH) Q3 2011 Earnings Call October 19, 2011 10:00 am ET Executives Sean M. Mahoney - Chief Financial Officer, Executive Vice President and Treasurer John Williams - President, Chief Operating Officer and Director Mark W. Brugger - Chief Executive Officer and Director Analysts Daniel P. Donlan - Janney Montgomery Scott LLC, Research Division Enrique Torres - Green Street Advisors, Inc., Research Division Ryan Meliker - Morgan Stanley, Research Division William A. Crow - Raymond James & Associates, Inc., Research Division Smedes Rose - Keefe, Bruyette, & Woods, Inc., Research Division Joshua Attie - Citigroup Inc, Research Division Sule Laypan - Barclays Capital, Research Division Ian Weissman - ISI Group Inc., Research Division David B. Katz - Jefferies & Company, Inc., Research Division Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Eli Hackel - Goldman Sachs Group Inc., Research Division William C. Marks - JMP Securities LLC, Research Division Andrew G. Didora - BofA Merrill Lynch, Research Division Tim Wengerd - Deutsche Bank AG, Research Division Presentation Operator
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 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 we are pleased with the third quarter operating performance of our portfolio. We remain optimistic about the continued strength of lodging fundamentals. In particular, demand at our hotels is very good. In fact, even preliminary indications for 2012 are strong. With the recent volatility in the capital markets, slow employment growth and the ongoing concern about the European debt situation, we understand why investor sentiment has grown more cautious. However, even with a more tempered world view, the 2012 outlook for our portfolio is very positive for a number of reasons, some macro and some unique to DiamondRock. I will highlight just 5 for you. First, our portfolio of 2012 group booking pace is up 10% in revenue as a result of favorable convention calendars for our 2 most important group markets, Chicago and Boston, as well as strong forward group bookings at Frenchman's Reef. Our Marriott hotels are leading the way, up over 12%, and we expect to outperform the industry on the group side next year. Second, our portfolio will benefit from the reopening of the fully renovated Marriott Frenchman's Reef Resort in St. Thomas. Third, our portfolio quality will be even better after consummating the pending sale of the 3 non-core hotels to Inland American. Fourth, new hotel supply continues to grow at a rate significantly below historical averages. For example, during 2011, hotel supply grew at 0.07%, and 2012 supply growth is forecasted to fall at only 0.5%, which will provide our hotels with pricing power even with moderate demand growth.
And fifth, government per diems are up nationally 3% to 7% in 2012, which will be a tailwind for the industry next year versus a headwind this year.Overall, for the third quarter 2011, DiamondRock's portfolio of hotels generated an impressive RevPAR growth of 7.2%. Hotel adjusted EBITDA margins expanded 44 basis points. Our third quarter margins were held back by high property taxes implemented upon the recent expiration of the PILOT tax program at the Boston Westin and a difficult comp as a result of a successful tax appeal recorded during the third quarter of 2010. Excluding these 2 items, our margins would have grown 185 basis points. This RevPAR margin data is pro forma for our owned hotels as of the end of the quarter, but of course excludes the Frenchman's Reef Resort. Our third quarter results were led by double-digit RevPAR growth at half of our portfolio with particularly robust results achieved at our hotels in Boston, Atlanta, Los Angeles and Minneapolis. We had outstanding results from a number of other hotels, including an 11% increase in RevPAR at the Sonoma Renaissance and a 19% increase in RevPAR at the Worthington Renaissance in Dallas/Fort Worth. Results were more challenging at the Griffin Gate Marriott due to tough comps and the Vail Marriott due to new supply. Our single hotel in the D.C. market, the Marriott Bethesda Suites, underperformed in that soft market. However, based on overall strong revenue growth, DiamondRock generated third quarter adjusted EBITDA of $41.7 million and adjusted FFO of $0.16 per share. It is worth noting that the renovation disruption at Frenchman's Reef displaced approximately $7 million of revenues and $1.5 million of EBITDA during the third quarter alone. Turning to acquisitions. The company has been very active during 2011. We've committed more than $0.5 billion in forward transactions, over $450 million committed in New York City and approximately $120 million in Denver. We believe that both these markets have great long-term potential. In fact, our hotel acquisitions over the past 18 months are actually ahead of our underwriting.
On the disposition front, we stated on our last call that the company was evaluating the disposition of certain non-core hotels over the next year to create additional dry powder to invest in higher growth opportunities. I am pleased to announce the pending sale of 3 non-core hotels to Inland American for a purchase price of $262 million. The portfolio consist of the Griffin Gate Marriott located in Lexington, Kentucky; the Renaissance Waverly located in the northwest submarket of Atlanta; and the Austin Renaissance located in Arboretum submarket of Austin. The disposition will provide the company with several key benefits, including enhancing our portfolio quality and providing significant dry powder for future acquisitions. We expect the transaction to close at the end of the year contingent upon the lenders approving Inland American's assumption of their related property debt.Read the rest of this transcript for free on seekingalpha.com