Diamondrock Hospitality Management Discusses Q2 2012 Results - Earnings Call Transcript

Diamondrock Hospitality (DRH)

Q2 2012 Earnings Call

July 25, 2012 10:00 am ET

Executives

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

Analysts

Joshua Attie - Citigroup Inc, Research Division

Eli Hackel - Goldman Sachs Group Inc., Research Division

Ian C. Weissman - ISI Group Inc., Research Division

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

Wes Golladay - RBC Capital Markets, LLC, Research Division

William C. Marks - JMP Securities LLC, Research Division

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

William A. Crow - Raymond James & Associates, Inc., Research Division

Enrique Torres - Green Street Advisors, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 DiamondRock Hospitality Co. Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, to Mr. Mark Brugger, Chief Executive Officer. You may proceed.

Mark W. Brugger

Thanks, Jasmine. Good morning, everyone, and welcome to DiamondRock's Second 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.

As you know, we have been very busy since our last earnings call. We have acquired a portfolio of 4 high-quality city center hotels for $0.5 billion, issued $200 million of stock and benefited from a $75-million strategic investment from Blackstone. These efforts are the latest examples of us -- of executing our strategy of improving portfolio quality, owning urban assets in target markets, increasing brand and operator diversity and actively recycling capital.

Today, we are on a terrific portfolio of 27 hotels concentrated in strong gateway markets such as New York City, Chicago and Boston. Moreover, we maintain one of the strongest balance sheets in the industry, and the company continues to be one of the most active players in the space, having completed over $750 million in deals year to date. The company is well positioned for growth, as our portfolio continues to benefit from the ongoing U.S. lodging recovery and the implementation of our best practice asset management initiatives.

Furthermore, with our solid balance sheet, we are well positioned to take advantage of opportunistic acquisitions, while selectively recycling capital through the disposition of non-core assets.

I'd like to now spend a couple of minutes discussing the impact of the recent Blackstone portfolio acquisition. As part of our capital recycling strategy, we created investment capacity through the disposition of 3 non-core suburban hotels earlier this year and redeployed that capital into 4 higher growth hotels in more attractive markets. Consider these 6 consolidated facts about the transaction: One, almost 90% of the entire portfolio's EBIT comes from hotels in city center locations of Boston, Washington, D.C. and San Diego; Two, these hotels increased our overall portfolio RevPAR and profit margins; Three, each of the hotels has owned in fee simple; Four, the hotels are unencumbered by brand management, thereby increasing our ability to influence operations and increase potential exit value; Five, we have uncovered numerous asset management opportunities to create outsized growth; and six, we are making capital investment as an upside opportunity to reposition each hotel in order to gain market share over the next several years.

I would also note that as part of acquisition, Blackstone made a significant strategic investment in the company. We are pleased to welcome Blackstone as a shareholder and look forward to exploring opportunities for us to partner with them going forward.

Now let's turn to the second quarter results. Our portfolio's operating performance were strong and consistent with our expectation. We achieved second quarter RevPAR growth of 6.5%, with the majority of our hotels gaining market share during the quarter. The company's second quarter adjusted EBITDA improved 17% from 2011. Including Frenchman's Reef, our hotel's debt-to-EBITDA margins expanded 90 basis points. Even more impressively, the year-to-date performance of our portfolio reflects RevPAR growth of 7.6%, hotel adjusted EBITDA margin expansion of 115 basis points and improved market share.

Turning to the balance sheet. We funded only 25% of the Blackstone portfolio acquisition with debt, a move consistent with our strategy of maintaining a low levered balance sheet. We expect to end 2012 with a debt-to-EBITDA ratio of just 4.5x. Remarkably, 16 of our 27 hotels are unencumbered by debt. To give you an idea of how much borrowing power that provides the company, our cost basis in those 16 unencumbered hotels is $1.7 billion. We feel very good about the balance sheet and fundamentally believe that conservative leverage is crucial for a lodging REIT to create exceptional shareholder value over the cycle. This conservative leverage strategy, along with strong operating results, allows DiamondRock to pay well covered and competitive dividend yield of over 3%. I would like to add that being an income company is another core tenant in our strategy to deliver outstanding shareholder returns.

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