Diamondrock Hospitality Co (DRH) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter DiamondRock Hospitality Company earnings conference call. My name is Dimali and I will be your operator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Mark Brugger, Chief Executive Officer of the DiamondRock Hospitality Company. Please proceed, sir.

Thank you, Dimali. Good morning, everyone, and welcome to DiamondRock Hospitality's first-quarter 2009 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.

Before we begin, I would just like to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws, and they may not be updated in the future. These statements are subject to numerous risks and uncertainties described in our securities filings. Moreover, as we discuss certain non-GAAP financial measures, it may be helpful for you to review the reconciliation to GAAP in our earnings press release.

Now, not surprisingly, the global economic downturn has continued to materially impact the travel industry and our first-quarter results. On a macro basis we look to trends in GDP growth, corporate profits, and unemployment, as they tend to correlate with lodging fundamentals. We are obviously closely tracking group pace activities and transient rate trends for indications of changes in the velocity of decelerating lodging fundamentals. Overall, we believe that the data is too inconclusive at this point to provide clarity on operating trends and, thus, we are unable to provide our investors with meaningful guidance.

Turning to first-quarter results, RevPAR for all 20 of our hotels declined in aggregate 16.5%. The Chicago Marriott Downtown had a relatively easy comp due to its renovation last year and positively impacted the first-quarter RevPAR change by approximately 2.4 percentage points. The quarterly RevPAR decline was the result of a 10.4% decrease in average rate coupled with a 4.8 percentage point decrease in hotel occupancy. Our first-quarter results were the most dramatically impacted by the loss of business transient demand and, to a lesser extent, group and leisure demand declines.

Although our first-quarter revenue results were slightly better than our internal expectations, the significant positive news for the quarter was the relatively modest margin deterioration in an environment with high teens RevPAR declines. Our success in maximizing profit margins in this difficult operating environment is the result of the implementation of successful asset management initiatives with our operators to contain costs. These initiatives resulted in a moderate house profit margin decline of only 373 basis points. Hotel adjusted EBITDA margins decreased 438 basis points, as they were negatively impacted by the 21% increase in property taxes during the quarter.

On another positive note, we are pleased that our hotels overall gained market share in the first quarter, a testament to the quality of the hotels and the power of the right branding strategy. We reported first-quarter adjusted EBITDA of $20.3 million and adjusted FFO per share was $0.16, which includes the positive impact of $0.06 per share from income tax benefit.

DiamondRock has historically focused on maintaining a conservative balance sheet. Consistent with that focus we recently completed an oversubscribed common stock offering, which raised more than $82 million. We utilized the proceeds to completely pay off the outstanding balance on our corporate revolver. Consequently, the Company currently has over $60 million of cash, including approximately $28 million of restricted cash.

Today DiamondRock is in the enviable position of having no corporate debt, including no bonds, no convertible debt, no preferred equity. We also have nine high-quality, unencumbered hotels. Our net debt to EBITDA is 4.6 times, based on trailing four fiscal quarters. Our $820 million of debt consists almost entirely of 11 individual property-specific, limited-recourse mortgage loans. With the simplest capital structure of any lodging REIT, we believe that we have a unique ability to weather the downturn and are well positioned to grow at the appropriate time.

We have only two near-term debt maturities. The first is a loan on the Courtyard Midtown East that matures in December 2009, but can be prepaid without penalty in September, which is our targeted time for refinancing the hotel. I am pleased to report that we have recently agreed on loan terms with a major life insurance company to provide up to $43 million of limited recourse mortgage debt on the Courtyard Midtown East and locked the interest rate at 8.81%. The new loan, which is still subject to approval of the lender's credit committee, will have a five-year term.

The only other significant maturity over the next five years is the $28 million loan on the Griffin Gate Marriott Hotel due January 2010. Although we anticipate being able to address this maturity with corporate cash, the Company may opt to consider refinancing the loan, which has close to a 3 times fixed charge coverage. Again, apart from these two maturities we have no other material maturities until 2015.

As I mentioned earlier, the macroeconomic environment lacks sufficient clarity at this time to provide accurate guidance. However, we did want to update you on as much relevant information as possible to assist investors and analysts in deriving their own estimates for 2009. Here's what we can tell you. For the full year 2009 we project approximately $51 million of total debt service; $10 million of owner-funded capital projects; $10.5 of cash corporate G&A; and lastly, a weighted average share count for the full year to be approximately 103.3 million shares, which reflects our recent equity offering. We hope that this information is helpful.

And with that, I'll turn the call over to John.

Thanks, Mark. We continued to see operating trends worsen across the portfolio in the first quarter. But in the interest of viewing the glass as a quarter full, we were pleased to see the results of our operators' cost-containment efforts. In the teeth of a negative 16.5% RevPAR wind, our portfolio house profit margins declined just 373 basis points. On a comparable basis, total portfolio revenue for the quarter was off about 14.5%, resulting in a 32% drop in quarterly EBITDA. Results benefited from five extra days in the 2009 first quarter and a favorable comp at the Chicago Marriott, which was under renovation in Q1 2008. Excluding the Chicago Marriott, portfolio RevPAR for Q1 was down 18.9%, comp revenue was off 18%, and comparable EBITDA was off 34%.

As we said last quarter, DiamondRock's total organization is focused on improving our already strong balance sheet and intensifying our already aggressive asset management. For the quarter RevPAR was negative in all of our markets. Due to its favorable Q1 '08 comp, the Chicago Marriott RevPAR was up 6.7%. The New York market continued to see a precipitous drop in all segments. At our Courtyard Hotels, room revenue is off 28% in the quarter, with ADR off over 20%. The Atlanta and Salt Lake markets were off around 20% in RevPAR for the quarter and in Vail we effectively replaced business lost from our traditional source markets of the Northeast, Texas and international with regional demand, but at a heavy cost in rate, which was down 21% in the quarter. The Conrad Hotel in Chicago lost a relatively modest 7.4% in RevPAR. Frenchman's Reef, LAX, and Griffin Gate were off about 11% in RevPAR for the quarter.

Revenue deterioration in our portfolio market segments shows a clear and accelerating trend, with business transient hit the hardest. Business transient revenue was down 28% for the quarter, split roughly equally between rate and occupancy. The lost business transient room nights were partially replaced by opening discounted rate categories and increasing contract room nights, particularly at our airport hotels. Group revenue was down about 9.2% in the quarter, with the decline spread evenly between room nights and rate. Leisure and other discount demand was up slightly, but in average rate approximately 12% lower than Q1 2008.

With the reduced volume across the portfolio on a comparable day-count basis, food and beverage sales were off 12.6% for the quarter. Despite the significantly lower volume, margins were off only 12 basis points for the quarter.

On the cost front, we are carefully evaluating each of our hotels and their specific markets to make sure that we have the rest cost structure in place for the environment. In addition to the cost savings introduced in 2008, and the significant cost initiatives included in our 2009 budgets, we've worked with our operators to identify additional full-year 2009 savings of approximately $8 million across our portfolio.

For the quarter, sales, wages and benefits -- salaries, wages and benefits were down 8% from Q1 2008. Support costs, including property-level G&A, repairs and maintenance, sales and marketing, and utilities were down 8% per available room in the quarter, reflecting stringent cost controls in the hotels. For the quarter, hotel-level G&A costs per available room were down 11%. R&M costs PAR were down 6%; sales and marketing PAR were down 11%; and utilities were up slightly on a PAR basis. But those costs were impacted by the new meeting space in Boston. Without Boston the utility costs were 3.5% lower in the quarter.

As Mark indicated, we will not provide specific guidance this year due to the unprecedented lack of visibility on the economy. Clearly, the trends indicate a challenging year. Our group revenue pace for the portfolio at the end of Q1 is down about 14.4% versus the same time last year. We continued to see the pace drop off. The pace was down 6.9% at the end of 2008. The drop-off is primarily in room nights, as rate continues to be relatively flat. The Boston Westin continues to benefit from the meeting space we added at the hotel, with group revenue pace up 10.1% versus the same time last year. The group revenue on the books for the portfolio at this point represents about 75% of 2008 group revenue. The group revenue pace for 2010 is down 11% versus the same time last year, although it's not as meaningful because it represents only 40% of 2008 group revenue and booking windows are significantly shorter at this stage of the cycle.

We have and will continue to closely monitor capital expenses at the hotels as well. As I mentioned, our portfolio is generally renovated and we have minimized future CapEx spending. In addition, we have identified approximately $5 million of potential energy projects. Energy projects approved to date have had paybacks of under 18 months. CapEx expense, including delayed payment of some projects completed in 2008, will be approximately $35 million in 2009, including the energy projects. Approximately $10 million of that will be owner-funded, with the balance coming from property-level FF&E escrows. We anticipate no material disruption from 2009 capital projects.

In summary, our company and asset management is focused on preserving hotel profits through revenue management strategies, aggressive cost containment, and reduced capital spending.

With that, I'll turn it back over to Mark.

Thanks, John. Operator, at this time we'd like to open it up for questions.

Sure. (Operator instructions.) Susan Gutierrez; JMP Securities.

Hi. I was just wondering if you could discuss where you were in terms of leverage and fixed charge coverage at the end of the quarter relative to your covenants?

Sure. Thanks, Susan. This is Sean. At the end of the quarter our leverage is approximately 43% compared to the covenant of 65% and our fixed charge coverage is 2.7 times compared to the covenant of 1.6 times.

Okay. Thank you.

Guillermo [Garo]; RBC Capital Markets.

Good morning. With regards to operating trends you said that the data is a little bit inconclusive. Is there any way that you can give us a little bit of color of what happened in April with regards to the quarter?

This is John. In April the comps are difficult because you have holiday disruption. So they're not really comparable numbers. But I would have to say that we've seen a continued deterioration from January to February to March and probably interpolating into April.

Okay. Perfect. And then with regards to your progress in the disposition side, you said that basically you're the same way that you were at the end of the quarter. What about the interest that you're seeing from potential buyers? Are you seeing any increase bids that are closer to your expected values?

This is Mark Brugger. Yes, we started a process on asset sales several months ago and went through a bidding process. Received some bids, but none that we felt were attractive. At this point we still have some hotels if we got a compelling offer we would entertain, but I think since we're not going through an active bid process it's a little difficult to ascertain the difference in interest today than 30 days ago or 60 days ago.

Okay. Perfect. And then lastly, with regards to the debt markets, I know that you guys were working with Manhattan on Midtown properties. What are you seeing differently in terms of [coverage] on LTVs out there right now?

Sure. The current debt market has slightly loosened from the fourth quarter of 2008. That being said, capital is still currently very scarce. And lenders are being selective in choosing what projects to underwrite. Essentially, only the best assets with sort of the strongest sponsorship are receiving underwriting attention today.

With respect to the LTVs, we're seeing anywhere from 50% to 55%, maybe at the high of 60% LTVs available today, but albeit at rates that are approximately what we announced, which is in the [8%] and 9% range.

Okay. Perfect. That's great. Thank you.

(Operator instructions.) Ken [Ho]; KeyBanc.

Good morning. Just have a quick question -- it looks like you were able to negotiate the management fees down. Could you talk a little bit about how your relationship with Marriott's going right now?

This is Mark Brugger. On the management fees, yes, there's two major components to the way the fees are structured with the operators. One is a base fee, which is a percentage of revenue, generally 3% at most of our hotels. And obviously revenues have declined, so that base management fee has declined in relationship. The second piece is an incentive management fee, which is down considerably. Those are after a certain return to the owner. And we've seen a dramatic turndown in what we're paying in incentive management fees. Those are under the contracts we already have. Operators haven't made any special concessions in this environment. It's just the way the results play out under our current contracts.

But I think the question about our relationship with our operators is excellent. Our relationship with Marriott and Starwood and Hilton I think is very strong. I think we're generally pleased with the job they're doing on cost cutting. We're working very closely with them to make sure that we have the right contingency plans in place and we're taking the aggressive enough action to contain the costs at the hotels, given the revenue environment we're in.

Okay, good. That's good to hear. And just one question on the income statement. The "other" hotel expenses -- can you tell me what components make that up? Is it property taxes included in that?

This is Sean. Yes, those costs include things such as hotel sales and marketing, hotel other department costs, repairs and maintenance, utilities, property taxes. Essentially, it's the bulk of the non-departmental expenses of the hotel. But to answer your question, yes, property taxes is included within that number.

And that's -- is that going to be broken down in the K, or I mean the Q?

Yes. We include a footnote disclosure within the MD&A that breaks out that line item.

Okay. Perfect. All right. Thank you.

[Mikel Behala]; FBR.

Good morning, guys. I was just wondering. You seem to have had a huge tax benefit this quarter. I was just wondering what we should assume for the remaining three quarters of the year, in terms of tax run rate?

Thanks. I guess taxes are very difficult to model. The Company's tax is [a calculation] based on the pre-tax earnings of our taxable REIT subsidiaries. Our taxable REIT subsidiaries' pre-tax earnings includes most of the operations of our owned hotels, less real estate sort of expenses, such as property taxes, ground rents, property insurance, but also includes the deduction for the lease expense generated from the operating lease between our tenant [and the] operating partnership, which is the entity that actually owns the real estate. Rents under our operating leases are calculated in accordance with what our estimated revenues are at the inception of the lease, which is -- these are five-year leases and most of our leases are close to the tail end.

Unfortunately, since we're not providing 2009 guidance we really can't provide an estimate of our 2009 tax benefit, because it's so integral with our 2009 results.

Okay. Thank you.

Smedes Rose; KBW.

Hi. Good morning. My question is just could you just talk about the sustainability of the current cost-cutting efforts? And when RevPAR does level out and eventually turn around, what sort of levels of RevPAR growth would you need to see in order to see expanded operating margins?

Well, Smedes, we haven't gotten that far. I would say from a sustainability standpoint where we are now on costs -- we've cut pretty severely. If you think about beginning in the second quarter of '08 we instituted the initial contingency planning, followed up by 2009 budget process, which included substantial cost savings. Now we've identified another $8 million new to this quarter, or beginning next quarter.

So it's getting pretty deep, but at the same time it's sustainable for the duration of this downturn. Some of it has to come back in with volume. Some of it has to come back in in the form of wage adjustments for middle management, for example. And I think that from a percentage increase in RevPAR, we really haven't done that model. But clearly it's going to need to be -- there's going to be a period of where we're going to need significant growth to begin to recapture that acceleration in earnings that we had in 2006 and 2007. I'm sorry to be vague, but we really don't -- haven't run those numbers yet.

I would point out that, beginning in the next quarter, beginning -- because we instituted our initial contingency plans in the second quarter of '08, it's going to be harder and harder to maintain the margin control that we've seen in the last three or four quarters. So I would just point out that, although our efforts continue and in fact are accelerating, the comps are going to get a little more difficult, because some of the cost containment efforts began in the second quarter of '08.

Okay. So they start to anniversary?

Right.

The other thing I just wanted to ask you, in the markets -- in your markets, are you seeing any supply that you thought was coming on line that's maybe been delayed or cancelled? Or are there any markets where supply continues to come on line, because they got their financing well in advance of all this craziness, that will kind of impact certain markets more than others? Or any kind of updates on that?

Yes. This is John. We do see in New York, for example, a pause in the construction of some of the previously assumed new supply. We see it really across the country where projects are being delayed at least, if not postponed indefinitely. But we still see a fairly significant amount of supply coming into the markets, for example, Chicago. And there is additional supply coming in in New York. So I can't give you a percentage, but there's been a meaningful slowdown, if not postponement. But at the same time, we're seeing a substantial proportion of the anticipated supply coming into the market.

All right. Thank you.

Andrew Wittman; Robert W. Baird.

Good morning, guys. Just a question probably, I guess, for John. Looking out at acquisition opportunities with the equity offering and a number of unencumbered assets [aligned], clearly there could be potential on your balance sheet to maybe take down an asset or two, depending on how you want to manage the capital structure. Could you just talk about your willingness to put some capital out maybe this year, maybe towards the end of this year? And what you're seeing in terms of the acquisition market, and specifically for distressed opportunities?

Yes, Andrew, this is John. I think clearly it's too early for us to anticipate potential acquisition opportunities. Number one, we're not seeing attractive opportunities on the market. Number two, I think we've said in the past we want to be pretty confident we see the bottom in the rear-view mirror before we start playing offense with our balance sheet. And I think from our perspective seeing that bottom in the rear-view mirror means that we're consistently outperforming our forecasts and our forecasts are not deteriorating any further going forward. So we're seeing a little of that, but not enough to give us confidence to play offense with our balance sheet. But more importantly, probably, the opportunities out there are not compelling at this point. So it's clearly too early from our standpoint and probably from the market's standpoint.

Okay. Good. Thank you.

Follow-up from Guillermo Garo; RBC Capital Markets.

Thanks. I'm sorry, guys, but I missed this. Do you provide a preliminary April RevPAR figure?

We don't. And quite frankly, we get -- although we have sales flashes, we usually get the information on a delayed basis from our operators. So we don't have an update on April at this point.

Okay. Well, thank you again. Bye.

You have no further questions, so at this time I would now like to turn the call back over to Mark Brugger for closing remarks. Please proceed.

Thank you, everyone, for your continued interest in DiamondRock. That concludes our call.

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.