Diamondrock Hospitality Co (DRH) 2006 Q1 法說會逐字稿

Welcome to the DiamondRock Hospitality's First Quarter 2006 Conference Call. The press release was distributed this morning as well as Form-8K to provide access to the widest possible audience.

In the press release the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Regulation G requirements. If you did not receive a copy these documents are available on the company's web site at www.drhc.com in the Investor Relations section.

Additionally, the company is hosting a live web cast of today's call which you can access in the same section.

At this time management would like me to inform you that certain statements made during this conference call which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although DiamondRock believes the expectations reflect that any forward-looking statements are made on reasonable assumptions it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied are forward-looking statements are detailed in today's press release and from time to time in the company's filings with the SEC.

The company does not undertake a duty to update any forward-looking statements. I would like to now welcome management. With us today are Bill McCarten, Chief Executive Officer, John Williams, Chief Operating Officer and Mark Brugger, Chief Financial Officer.

At this time I would like to turn the call over to Bill McCarten for his opening remarks.

Thanks [Antoine]. Good afternoon everyone and welcome to Diamnondrock Hospitality's First Quarter 2006 Earnings Conference Call.

The first quarter was terrific for DiamondRock. Our hotel portfolio turned in another solid performance. RevPAR and hotel profit margins increased 9.8% and 110 basis points respectively, despite ongoing renovation projects.

By quarter end we acquired the 1,192-room Chicago Marriott Downtown, which had a tremendous first quarter. And yesterday we acquired our first non-Marriott hotel, the 369-room Westin Atlanta North.

Including these two new acquisitions pro forma RevPAR and pro forma hotel profit margins increased a very impressive 13.1% and 240 basis points respectively.

Shortly after the end of the quarter we completed a very successful secondary offering issuing 19.3 million shares and raising net proceeds of $238 million.

With the proceeds of the offering and the closings of these two recent acquisitions we now have investment capacity of approximately $250 million for future acquisitions.

Our sourcing relationship with Marriott remains solid, both Marriott and DiamondRock have benefited significantly from this relationship and I am confident that it will continue to provide value for both of us in the future. However, Marriott does recognize our obligation to successfully grow with attractive hotel acquisitions regardless of brand affiliation.

Despite a very competitive acquisition environment we believe that we will continue to find attractive acquisition opportunities and successfully deploy our remaining investment capacity before the end of the year.

Now I would like to turn the call over to Mark Brugger who will review our first quarter operating results in detail and update guidance. Mark?

Thank you Bill. As Bill touched on, DiamondRock had an outstanding first quarter, let's jump into the numbers. For the quarter ending March 24, 2006 the company reported total revenue of $83.1 million, adjusted EBITDA of $20.9 million and adjusted FFO of $15.1 million or $0.29 per share.

For our period of ownership in the first quarter, which essentially is all of our hotels except for the two recent acquisitions, RevPAR increased 9.8%, exclusively in rate.

As a result of these RevPAR gains hotel adjusted EBITDA margins at our hotels increased 110 basis points over the same period in the prior year despite significant renovations, particularly at Courtyard Third Avenue, Bethesda Marriott Suites and the Torrance Marriott.

We estimate that these renovations reduced overall RevPAR in the first quarter by more than two full percentage points and constrained EBITDA margin growth by about 40 basis points.

Including our recent acquisitions, the Chicago Marriott and the Westin Atlanta North, pro forma RevPAR for all of our hotels increased 13.1% on a same store basis.

We are seeing very little pricing resistance as most of the gains in RevPAR continue to come from rate increases which is producing strong flow through. Pro Forma hotel adjusted EBITDA margins for all of our hotels on a same store basis increased 240 basis points from 23.2 to 25.6% over the same period in the prior year. As these numbers illustrate, the two recent acquisitions clearly benefit the overall portfolio.

Now turning to the balance sheet and financing activities. Since there were significant activity at the end of the quarter, or shortly thereafter, such as our recent acquisitions and the secondary offering we thought it would be most helpful to our investors to provide an updated look at the balance sheet.

Since the end of the first quarter we have utilized a portion of the proceeds from our recent secondary equity offering, to pay off all outstanding amounts under our corporate credit facility and the bridge loan utilized for the Chicago acquisition.

We have also completed the refinancing for the Chicago Marriott downtown by obtaining a $220 million long-term fixed rate loan, bearing interest at sub-6%. Additionally we are in the process of refinancing the Courtyard Fifth Avenue, pursuant to our loan commitment from Lehman Brothers. The loan proceeds will allow us to pull our 150% of our equity in the hotel and fix the interest rate for 10 years. The loan is expected to close next week.

Consequently after completing the refinancing of the Courtyard Fifth Avenue the company will have a total debt of $660 million. The debt will be 100% fixed rate with an average weighted interest rate of only 5.7% and an average weighted maturity of over nine years.

We will have about $90 million of cash on hand for CapEx needs and acquisitions. We think our balance sheet is in great shape and is among the best of any lodging REIT.

As Bill mentioned, our balance sheet today provides us the flexibility to acquire another $250 million of hotels. In arriving at our investment capacity we do not base it on a single factor, but instead take into account a number of factors such as fixed charge coverage, net debt to enterprise value and net debt to EBITDA. After looking at all of these metrics $250 million is the number that the company is very comfortable with.

Turning to dividends, during the first quarter the company increased it's dividend to $0.18 per share. The annualized dividend of $0.72 per share is well covered and represents a very competitive yield of about 5%. The level of future dividends will be determined by our operating results, expected capital expenditure requirements and the expected value of alternative uses of our capital. However, we generally intend to regularly increase our dividends.

Guidance, the company provides the following guidance for the full year and second quarter 2006. For the full year 2006 the company is updating guidance primarily for the two recent acquisitions. For our period of ownership RevPAR for all 70 hotels is expected to increase in the range of 8.5 to 10.5%. This is a 50 basis point higher than our prior guidance.

For our period of ownership hotel adjusted EBITDA margins are expected to increase approximately 160 to 210 basis points. This is the same as prior guidance as some gains in revenues are being offset by increased insurance and property tax costs that John will talk about that more later.

We expect adjusted EBITDA of 122 to $125 million and adjusted FFO of 82.5 to $85.5 million. We expect that the Chicago Marriott Downtown and the Westin Atlanta North hotels will add $23.7 million and $3.7 million of EBITDA respectively to our 2006 results.

We expect adjusted FFO per share of $1.26 to $1.30 per share based on a fully diluted weighted average share count of 66.1 million shares for the full year.

Total capital expenditures will approximate $89.5 million for the full year of 2006. More than 11.5 million was spent in the first quarter.

Now second quarter, second quarter will be impacted by renovations at several properties primarily LAX, Torrance, and Frenchman's Reef. Despite this impact we are expecting the following, RevPAR to increase approximately 9 to 10%, adjusted hotel EBITDA profit margins are expected to increase approximately 110 to 150 basis points, adjusted EBITDA is expected to be in the range of 33 to $35 million. Adjusted FFO is expected to be in the range of 22.5 to $24.5 million.

To sum up, we had a great first quarter and we continue to expect the balance of 2006 to be strong.

With that I would like to turn it over to John Williams, our Chief Operating Officer.

Thanks Mark. As Bill and Mark discussed our first quarter performance was very strong. Overall our RevPAR growth and margin expansion were excellent despite the impact of our ongoing renovation programs.

LAX, Salt Lake City, Vale, Worthington and the new Buckhead SpringHill Suites contributed most to our overall EBITDA growth in the quarter. All of these properties turned in great RevPAR growth ranging from 13 to 28% as well as excellent margin expansion ranging from 238 to 659 basis points.

We experienced planned disruption from renovation programs at the Third Avenue Courtyard, Bethesda Suites and Torrance. Overall these projects were completed on time and on or under budget. Disruption at Third Avenue was a little higher than anticipated. Disruption was on budget at Torrance and lower than anticipated at Bethesda.

Now we have several capital projects planned for the balance of 2006. The majority of them involve rooms and public space renovations and very little construction so we are comfortable with our cost and disruption estimates which have been incorporated into the guidance that Mark discussed earlier.

We estimate total EBITDA disruption of $3 million in 2006. IN total we forecast the following out of service room nights, 12,200 in Q1, 6,700 in Q2, 10,400 in Q3 and 18,000 in Q4. We planned the renovations around slower demand periods in an effort to minimize disruption.

The disruption we incurred in the first quarter was mostly related to Third Avenue because New York just doesn't have a downtime.

I would also like to cover some of our specific asset management activities and accomplishments. LAX is a great example of the value of asset management. The hotel has benefited from the recent conversion of a speciality restaurant to a junior ballroom as well as the recent renovation of the main ballroom and meeting space. All of which combined to help generate terrific group bookings.

The long-range plan at LAX is to replace contract business with more profitable group business and we're off to a very encouraging start with group revenue up 52% compared to first quarter of '05 and 2006 definite group revenue on the books, up 28% over the same time last year.

The strategy of shifting mix from contract to group at a rate premium of almost $60 per room night, combined with adding and modernizing meeting space and realigning the marketing approach has already yielded meaningful EBITDA growth at this very significant hotel in our portfolio. We've just begun the rooms and bathroom renovation and when we finish in the fourth quarter we will have a completely repositioned asset in this very important and competitive market.

At Third Avenue in Manhattan we were able to create five new keys by reconfiguring four suites and an executive office. Now that may seem like a small thing, but we expect these rooms to generate incremental EBITDA of almost $350,000 next year alone. The cost of creating these additional rooms is about $250,000.

At Bethesda Suites we were able to turn two essentially unsellable rooms into expanded meeting space. Meeting planners had received these rooms very well and have been booking them at great rates. We are very excited about the future of the Chicago Marriott Downtown. We acquired the hotel at an attractive 11.9 multiple of budgeted 2006 EBITDA or $257,000 a key.

The recently renovated hotel has 60,000 square feet of outstanding meeting space and is located in one of the very best locations in the city. It's situated on Michigan Avenue in the heart of the famed shopping district known as Magnificent Mile. Moreover, this acquisition rounds out our portfolio by providing us with a great convention hotel in one of the top convention markets in the country.

We think that the Chicago Market is in the early stages of the lodging recovery and has a long way to run. We also think there is the potential for some great ROI projects. For example, we are evaluating converting a former speciality restaurant into premium meeting space, with windows on Michigan Avenue. We're also planning the conversion of the former Concierge Lounge which we relocated to some under utilized public space, into six additional keys.

Some portfolio trends merit discussion. Overall, food and beverage trended stronger with an 8% increase in sales including an 18% increase in high margin banquet sales. This is a continuation of a shift we began seeing in the fourth quarter of last year.

Energy costs at our comparable hotels increased 14% in the quarter with a 20 basis point impact on margin. We expect only a 12% increase for the full year of 2006 with a minimal impact on EBITDA margins. We are now forecasting a significant increase in property insurance in 2006. Renewal negotiations were just completed in late April and we are forecasting a 75% increase in our property insurance costs for the balance of the year.

About $1 million of that was not budgeted. The largest increases are at the Caribbean, California and Florida properties.

I'll finish up with some further description of our most recent acquisition, the 369-room Westin Atlanta North. Total consideration was $61.5 million or $167,000 a key. The hotel's budgeted EBITDA for the forward 12-months is $6.3 million including $3 million of expected investment over the next year we acquired this property at an attractive multiple of 10.2 times forward 12 EBITDA. This is a very high quality asset with over 20,000 square feet of premium meeting space in a very good location in a strong Atlanta sub-market.

We expect our current pipeline will yield acquisition opportunities like Chicago and Atlanta as we continue to capitalize on our Marriott and industry relationships. We remain very confident we can utilize our investment capacity in the same disciplined manner as we have to date.

In summary, the portfolio we have assembled is performing well and should benefit from all of this year's repositioning projects. We will continue to work hard to maximize value through asset management and continue to look for more hotel acquisitions that can deliver similar results such as the Chicago Marriott Downtown and the Westin Atlanta North hotels.

And with that I will turn things back to our Chairman.

Thanks John. We delivered strong results for the first quarter and we feel very good about the balance of the year. Lodging fundamentals and the outlook remain very strong, and our portfolio is performing well.

With the strong industry environment our portfolio quality and our acquisition track record, we're very confident that we will continue to deliver not only strong returns, but also productively deploy our investment capacity.

And with that we would like to open up the line for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Amanda Bryant with Merrill Lynch. Please proceed.

Great, thank you. Just two quick questions, first, can you give us some background with respect to how the Westin acquisition came about?

And then secondly, are you targeting any specific markets for future acquisitions? Thanks.

Sure, Westin came through a source that was a person that we had done business with in the past, in our previous careers and we had been strategizing as to how we could work together. He was able to get under contract, three Westin properties one of which was the Westin Atlanta North. And we--he brought it to us and we made a deal with him on it, so it was sourced through sort of a former relationship.

In terms of properties or markets we're targeting, San Diego, Boston, San Francisco all continue to be markets that we would like to be in, but we haven't found the right opportunities to acquire it.

Okay, great. Thank you.

Your next question comes from the line of Will Marks with JMP Securities. Please proceed.

Great. Hello everyone. I had a question on, I guess first, Mark, in Atlanta are your two assets--with your [Operetta] and [inaudible]. I'm curious on specific RevPAR growth in those markets in 2006, how those are doing versus other large urban locations in and around the country?

Well generally I can tell you that '06 has been a great year so far and is projected to continue to be a good year. Atlanta is sort of early in the recovery cycle. Specifically [Alfaretta] on the transient side has been strong and on the group side has been, I would say average, and on leisure, weekends are constantly a struggle. Buckhead has been great story, it's ramping up so it's kind of hard to tell how much is ramp up and how much is market, but it has just about reached the RevPAR we had pro formaed for.

But when you look at our guidance of 8.5 to 10.5 for the full year the three again on a combined basis fall within that. In Atlanta I think as John said it's early in the recovery. It should have a solid '06. But that market long term is not going to have the same growth rates as say New York.

How about supply growth in the market? I gather that barriers to entry aren't quite as strong.

In Atlanta in general that's true. We were -- we were presently surprised in that in [perimeter] we in spite of many, many questions couldn't uncover any new supply, even planned, in the marketplace. In Alfaretta there is a story of a luxury hotel coming into the market. We find it hard to believe given the numbers and in Buckhead there are a couple of projects that are in the planning stage. The economics are tough given the construction costs and the land prices but one may happen.

Great and a couple of other quick questions. Can you give us any data on the March, the month of March at the Vail Marriott?

Well the month of March -- I can't give you detail. I don't have it in front of me but in general it was up. It was a great month particularly because of the way Easter fell and the snow conditions out there so from a revenue standpoint it was quite good. I don't remember the profit margins.

Okay and just one last question and I think it's restating what you said on the call. I just missed it but dry powder, I mean not necessarily underlying but just what you can invest before having to go back to the market?

Roughly 250.

Okay it was 250, great. Thank you very much.

Sure thing, Will.

Your next question comes from the line of David Loeb with Baird. Please proceed.

Hi, first off, Mark, thanks for the color on how you got to the 250. I appreciate you giving us that information about how you trending towards that. John, can you comment a little bit about the pipeline? I know that's kind of an obvious question but you didn't say anything about it. Just kind of what's it looking like -- what's the tenor of the market and has that changed? Do you feel like there's more out there or less and how are prices?

You know I think the market in general I would characterize as unchanged over the last 6 to 9 months. It tends to run in cycles. A bunch came on in the early part of the year and that is kind of working its way through the system. We have turned down several projects actually in the last -- in the last month or so, so they're reaching a climax.

There are a couple that we're actively working on and there are several that we're evaluating. We expect another traunch of properties to come beginning in June with the New York conference. They tend to bunch around those conferences, and we expect the fall will be active as well. But in general I would have to say the market is pricey and you have to be -- you have to be very disciplined when you're looking at these things. We tend to not do well in general auctions.

Okay so the stuff you're looking in now those are coming -- is it a combination of widely marketed and off-market deals?

Well yes, David. One is broadly marketed and we're in the finals and there are several that we are looking that are off-market.

Okay and any more color on brand?

On what David?

On brand. I don't expect you to tell me exactly which hotel you're going to acquire but are you continuing to evaluate opportunities away from Marriott? Bill you answered that generally but I wonder if you could talk about it in the pipeline?

Well the Marriott relationship has and it will continue to be important and value to both Marriott and DiamondRock I think. I mean if you look at our portfolio thus far all but one now are Marriott brands, and all but two are managed by Marriott so it's worked for both parties. It's been very productive for us and we certainly want to continue to leverage that.

Having said that and just reflecting on John's discussion of the pipeline and the environment out there it is pricey and we have to work hard, and we have had to work hard for the past year to find attractive transactions to do so we're looking at both Marriotts and non-Marriotts. We want them to be good real estate and good hotels.

That was a very good answer and not quite a dodge but I guess what I was asking was within the ones that John just enumerated does those include things that outside of the Marriott brand?

The answer is they do include some that are out -- they do include one or two that are outside the Marriott brand.

Okay that's very helpful. And finally the Weston deal, and I think the Street correctly evaluated that as kind of a landmark for you because you actually demonstrated your independence from Marriott. I'm wondering about the next step. Is the relationship with Marriott such that they are comfortable going forward with you in your relationship when you -- I say when, but if, when you buy something that is brand managed by another brand company?

We don't happen to have that kind of a specific discussion very frankly and I don't know that I can speak for Marriott in terms of when they may or may not be comfortable or uncomfortable. But they do well understand that we have capacity and we have to grow. We have our own shareholders. They understand that. David, I would look back and reflect on how valuable it's been for both parties here and there's no reason that it won't continue.

Okay so you have no -- you've no particular objection to hiring Hilton or Starwood of Hyatt to manage one of your hotels?

No I think when you -- when you look at the way we have explained our relationship Marriott is our preferred manager and we get a first look at transactions that they have some influence or control over certain of them. And that's the way it worked and that's the way it has worked, and it's been effective. If another party, another real estate investment trust approaches Marriott with a transaction they're certainly going to do the transaction with them.

And if we find a good transaction whether it be a Weston or a Hilton or a Hyatt we're going to carefully consider it. And as I've explained it in the past I think where the relationship could become troubled is that if we spent the majority of our capacity on non-Marriott hotels and at the same time weren't able to work with them on a transaction that they would like us to work on it made sense for us.

I think that's perfectly -- perfectly helpful clarification so thank you very much for that.

Sure.

Your next question comes from the line of Gustavo Sarago with FBR. Please proceed.

How are you guys doing this afternoon?

Great thanks.

All right, I was hoping maybe John you could provide some color on maybe Sonoma and more importantly Vale. Some of those assets I realize for Vail seasonally weighted in the first quarter but there are more of recovery plays on the group side of the business and I was wondering what the outlook looks like the in shoulder seasons for those two properties?

Okay I'll start with Sonoma. Sonoma just came through their slow period. Their group bookings look strong for the year. Their food and beverage track is pretty strong. Their [deficits] on the books are up just under 5% but the rate is up almost 15%. Vail as you point out had a problem in the summer last year when they had lost a tenth that they had historically had.

Now we've finished three, excuse me, four good-size meeting rooms that have replaced that so they're changing the nature of the group they're going after. They'll go after smaller groups. But at this point they're having -- they're having pretty good luck replacing the group. So obviously the first quarter they were fantastic both in group and transient. In the third quarter which is the summer period that will remain to be seen but the bookings are, I would say, pretty good at this point.

Okay and with regards to Torrance is there any concern with regards to pricing power on special corporate rates particularly as it relates to the auto accounts in that market given that -- who is it? Is it Nissan that's supposed to be exiting the market and that they contribute a substantial number of rooms? Have you've had some concerns or maybe not been able to push pricing on some of the other special corporate accounts?

Well ironically before Nissan left it was even tougher to push prices because they were the most price-sensitive and we didn't do many of their room nights. But taking that, I think it's about 10,000 room nights out of the marketplace will have a compression effect on the entire market. What we have done is we've upped the contract business and that's international crew contract which is about an $80 to $90 business, not as bad as LAX where it's a $40, $45 business.

And in the short term we've bulked up on that a bit. We also long term have--we're adding a meeting room at Torrance and we've renovated the existing meeting space and so we've put a new emphasis on group room nights there. And the second half of the year, as a matter of fact, they have twice the number of group rooms that they did in the first half of the year so it appears to be working. But that's the response to Nissan going out of the marketplace.

All right, thanks guys.

Sure.

[OPERATOR INSTRUCTIONS].

Your next question comes from the line of [Alan Seymour] with Columbia Management. Please proceed.

Yes it's kind of along those lines. In terms of -- when you contract with larger groups, I'm thinking of more business traveler groups, can you give me some sense as to what the room rate rise is this year over last year? In other words if last year I mean -- or whether, so for contracting in larger blocks of rooms are you getting a much better rate increase this year than last year?

It really varies by property whether there were lead long time groups booked. We're just working through the period of time when meeting players had all the leverage. I can tell you portfolio-wide on a comparable basis in the first quarter we were up about 8, just over 8% in our group rate. Transient was up 11% and contract was up much more but that's not a very significant part of our business.

Now in some markets, like Sonoma I mentioned, we're seeing big increases in group rates because it's shorter term bookings and the other thing we're seeing which is critical to groups is we're seeing a total yield increase which is fairly dramatic. In other words we're able to utilize meeting space and sell banquet business. And the groups are much higher yielding at this point than they were say a year ago. So yes the group trends in general are great.

Chicago has a lot of room to run because they were probably the longest lead time hotel in the portfolio. Griffin Gate and Salt Lake fall in somewhat the same category so we see a lot of upside in the group.

Great thank you.

[OPERATOR INSTRUCTIONS].

There are no additional questions at this time.

Great thanks, Antoine. Well thanks again to all of you for your continued interest in DiamondRock. We're certainly committed to consistent and open communications with all of you and we look forward to talking with you at our second quarter call if not before. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.