Q2 2020 Diamondrock Hospitality Co Earnings Call
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Good day, ladies and gentlemen, and welcome to Donnie Walsh Hospitality second quarter earnings Conference call.
At this time all participants are in listen only mode. Later, we'll have a question and answer session and instructions will be given at that time, if anyone should require assistance. During the conference. Please press star zero when you touched on telephone the reach an operator.
As a reminder, this conference call is being recorded.
I would like to introduce your host for todays conference Tiny Quinn Senior Vice President and Treasurer, Ronnie you may begin.
Thank you good morning, everyone welcome to Diamondrock second quarter 2020 earnings call before we begin I'd like to remind everyone that many of the comments made today are considered forward looking statements under federal Securities laws.
As described in our filings with the SEC. These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.
In addition on today's call, we will discuss certain non-GAAP financial information.
A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.
With that I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.
Good morning, and thank you for your interest in Diamondrock.
We made excellent progress in the quarter, reducing our cash burn rate, improving our total liquidity and reopening hotels for the eventual recovery.
The second quarter, However was unlike any in the history of the hotel industry.
When we last spoke in May we were in the midst of the largest contraction in GDP ever experienced in the US as government restrictions were opposed to curtail the spread of cobot 19 in order to protect the general public.
Well some communities were able to reduce the spread that the virus.
Other locations experienced sudden increases in the transmission of this terrible virus.
Contemporaneously.
The concerns over systematic bias in our society led to demonstrations across the United States involving an estimated 15 to 25 million people.
The overall environment experienced in 2020 is the very definition of unprecedented.
Before we go any further I want to recognize the hard work of our hotel operating teams and their dedication to the health and safety of our guest.
I want to recognize our corporate employees for their agility.
Creativity and perseverance to ensure the diamondrock is secure and well positioned for profitable future.
Many of the observations we made on the first quarter conference call still resonate with us today.
Let me recap those for you.
One.
The second quarter is expected to be the worst period in the year.
To.
The demand the demand recovery will come in stages with leisure demand from drive to resorts coming back first.
Followed slowly by emerging business transient customers.
And finally by the return of large group meetings likely in 2021.
Three supply supply is going to be constrained going forward as new construction starts evaporate and obsolete hotel shut their doors for good.
According to FW Dodge Rolling three month hotel construction starts were down 56% in June as compared to the prior year.
Moreover, last quarter, we suggest as much as 10% of the existing supply in Midtown East New York.
I may not reopened there's reason to believe that are early estimate may be conservative.
Fourth and finally.
This is an opportunity to reinvent the operating model by identifying lasting opportunities to increase efficiencies through new best practices.
Promoting technology adoption like digital check in and supporting emerging customer priorities, such as the Green room initiative.
We are optimistic that this could lead to increased profit margins. Once we returned to pre cobot 19 levels of demand.
All right, let's talk specifically about the second quarter.
In response to travel demand declining by over 90%.
We suspended operations at 20 of our 30 operating hotels.
Leaving just 10 hotels opened at one point in April.
The quick action taken by the team allowed us to realize a 72% reduction in hotel level expenses, excluding wage and benefit accruals.
Impressively compared to the prior year second quarter man hours decreased 83% at opened hotels and 99% at hotels was suspended operations.
The decision to reopen hotels has been and continues to be dynamic and data driven.
As we articulated in the past our plan is to reopen hotels, if we can lose less money doing so.
Accordingly.
Starting in May we prioritized our drive to resorts based on returning demand visible through various channels.
And ultimately we euro reopened a total of 12 additional hotels in the second quarter.
The 22 hotels, we had opened at the ended the quarter represent 58% of our hotel rooms.
But since the openings for staggered the math works such such as 43% of our rooms were available in the quarter.
Demand got a little better as the quarter progressed.
Weekly occupancy for our operating hotels, which had bottomed at 6.8% at end of March.
Rose steadily to 27.8% by the last week in June.
This trend has continued beyond Q2 with occupancy for operating hotels in July.
Over 200 basis points higher than the full month of June.
Over the course of the quarter, we saw a growing number of hotels achieved breakeven profitability and we expect that this trend continued in July.
In April.
Five hotels achieved breakeven profitability on a GLP basis and this figure grew to seven hotels in May and 10 hotels in June.
On a hotel EBITDA basis.
Two hotels generated profits in April and account increased to four hotels that may and six hotels in June.
The consistent theme is nearly is that nearly every one of these hotels is among our collection of derive to resorts.
Leisure leisure was clearly the brightest segment during the quarter and certainly source of strength, a dime rocks portfolio.
As highlighted in our most recent investor presentation.
Weekly occupancy in our opened resort increased from just 8% in early may.
To over 42% by the last week of June.
And HDR was higher year over year throughout June and much of May.
As you might the guest weekends, where the strongest.
From early May to the end of June weekend occupancy at our resorts increased from 11% to nearly 56%.
With healthy gains in HDR for the majority of the weeks.
For the second quarter.
Leisure transient HDR was 1.6% higher than in the second quarter of 2019.
The resilience of rate in the leisure category tells us that price is not a gating issue for those customers.
Trends at our resorts in July we're encouraging.
The Shorebreak conserve city Huntington Beach averaged nearly 50% occupancy in July.
Our low barriers to sedona.
Orchards in and Havana, Cabana Key_west, each ran occupancy over 60%.
Look there's actually had an average rate in July of $553, which was a 14% increase over the prior year.
But our little Star the month was the landing in Lake Tahoe, which had 80% occupancy in July with average rate up nearly $100 a night to over $519.
As for business transient.
We're not expecting a significant recovery after this summer.
In fact, we do not expect a true recovery of business transient demand until folks return to the office.
Which appears drifting towards early 2021 for many major employers.
Nevertheless, there are individuals traveler for business and we did see a gradual improvement in our room and total revenue activity each month over the course of the quarter.
In April the weakest month, the quarter, we sell less than $400000 of revenue from business transient channels.
But this grew to 1 million in May and two and half million dollars in June.
These are meager begins.
The longer term, we are optimistic that as a consequence of more office personnel working from home there may be an increase in hotel meeting activity to plan strategy conduct training and foster corporate culture.
The group segment has certainly experienced an enormous deferral of business.
Globally see then had 2 billion RFP pass through their system in the second quarter of 2020 as compared to 6 billion in the second quarter of 2019.
No question group trends are challenging and we expect this segment will be the final one to recover.
While diamondrock does not have the depth of exposure to group, particularly large group as some of our peers. We thought that the limited data points, we were seeing could be a value.
Since the start of the cobot impact and through the second quarter, our portfolio experienced approximately $117 million of canceled group revenue.
Over 80% of these cancellations occurred in March and April.
The pace of cancellations was initially as high as $20 million per week in March but.
But has since slowed to just two to 3 million per week.
We expect cancellations will persist as we move throughout the year.
However, it was encouraging to see 250000 to 350000 room nights of group leads generated each month during the second quarter.
Some of the early lead volume was rebooking activity.
Short term group bookings are increasingly weighted towards SMERF Association and wedding events.
We're seeing larger pieces of group business, which are typically corporate.
Look at dates in 2021 and 2022.
Overall rate expectations are consistent with pre cobot levels.
While there have been short term opportunistic groups booked in 2020.
Ray parameters for the 2021 and 2022 periods have been normal.
Instead, the main request is around terms for cancellations and re bookings.
Highlighting that groups do want to meet but desire flexibility until there is greater visibility.
I'll now turn the call over to our Chief Financial Officer, Jeff Donnelly, who will talk more about our balance sheet strength and liquidity Jeff.
Thanks, Mark I wanted to touch on a few financial items in Q2, I address our capital markets activity in the quarter and I'll conclude with an update on our liquidity and cash burn rate.
Total revenue decreased 92.1% in second quarter 2020, as a result of a 92.8% decline in revpar.
Total revenues were 3.3 million in April 10 hotels open 5.7 million in May was 12 hotels open and 10.9 million in June was 22 hotels open.
Excluding the Sonoma Renaissance, which opened July 1st the same 22 hotels are on pace for nearly $13 million of revenue in July.
As Mark mentioned, we decreased hotel level operating expenses, 72% from 170 million to approximately 48 million.
Excluding nearly $3 million of accrued benefits for furloughed employees.
We were able to slash variable expenses by 80% is critical to understand that we achieved this level of cost reduction despite over 70% of our hotels, partially open during the quarter.
Hotel adjusted EBITDA in the quarter was negative 30.4 million.
Corporate adjusted EBITDA in the quarter was negative 37 million.
Finally second quarter adjusted FFO per share was negative 20 cents.
For Capex, we've canceled or delayed over 65% of our original capital expenditure plans.
The second quarter, we restricted capex spending to only 20.7 million, including $8.5 million for Frenchmans reef to put the project in a position where we could pause work.
Our primary focus remains conserving capital. So we're prioritizing only those expenditures, where we have high confidence that they can produce in near term earnings benefit and high return on investment.
Minimal cost and complexity.
In this regard you spent four and a half million to complete the FNB repositioning initiatives at our Renaissance hotels in Sonoma Worthington in Charleston.
As well as the JW Marriott Cherry Creek.
We expect these investments will be earnings contributors in 2021, and the average IR is forecast to be over 30%.
We remain in a strong liquidity position at the end of the corridor, we had 364 million total liquidity between corporate and hotel level cash and Undrawn revolver availability.
I'm also pleased to report that through hard work, we are able to beat our initial expectations for our overall cash burn rate.
Hotel operating level, we averaged a 10.1 million.
Monthly loss in the quarter.
Surpassing our initial forecast by 16%.
Including corporate DNA. The average monthly loss was approximately 12 million or 12% ahead of our expectation.
Finally, our total burn rate, including debt service was approximately 17 million.
Compared to our average pace and second quarter 20.
We expect our burn rate room improved slightly in July mainly because we had 58% of our rooms open at the end of June as compared to only 43% during the quarter.
Our preliminary estimates for our hotel level cash burn in July is approximately $9 million to $10 million, which is potentially $1 million or 10% lower than the average monthly pay seen in the second quarter.
Including cash DNA in debt service. This works out to an overall burn rate $16 million to $17 million and provides a runway before capex of up to 23 months based upon our total liquidity of $364 million at the end of the quarter.
I want to make a few additional comments on the balance sheet.
Erosion in EBITDA obscures, the strong balance sheet diamondrock wielded before going into the pandemic.
For example, net debt to Undepreciated book value as the second quarter 20 was just 26%.
We ended the second quarter with net debt of only $106000 per key on a portfolio.
Well the replacement cost in the range $450000 perky.
This implies a net debt to replacement cost of less than 24%.
Importantly, diamondrock step as well structured it has diversified between nonrecourse CMBS and bank mortgage debt as well as unsecured bank debt.
At the end of the quarter, we had 605 million of nonrecourse mortgage debt at a weighted average interest rate of 4.1%.
We had $550 million of bank debt comprised of 400 million, an unsecured term loans and just under 149 million on our unsecured revolving credit facility.
We finalized an amendment to our credit facility in the quarter, we had several objectives in this process, but there are three I'd like to highlight.
First secure waivers through the end of the first quarter of 2021 and relax covenants through year end 2021 Covenant test restart in second quarter of 2021, using annualized results to wash out 2020 from our financial results.
Second flexibility for investment collectively we have 110 million for capital investment, which has proved to be one of the largest capital investment allowances relative to assets or pre cobot EBITDA.
Third flexibility for acquisition.
I have no limitation on our ability to pursue equity funded and unencumbered acquisitions, and our 300 million dollar limitation on encumbered acquisitions disproportionately larger than the limitation many peers have on total acquisitions.
I think a key competitive advantage that will come into sharper focus in the next year as our maturity schedule, we have no debt maturities for the balance of 2020, we have no maturities in 2021.
And we have only one loan for $48 million due in 2022, and even that can be extended to 2023 under certain conditions.
Our first significant maturity is our revolver, which matures in 2023, but this too can be extended one year into 2024.
The combination of a conservatively leveraged balance sheet diversified source of debt capital and one of the best maturity schedule in the sector to the measurable competitive advantage for Diamondrock.
In closing I want to point out we've expanded our disclosure to provide monthly detail on hotels opened the entire corner hotels, partially open during the quarter and who tells that remain closed and is here that you can see how the hotels progressed as we move through this most difficult period.
Moreover, we provided the number of days each hotel was open to give you context to revenue expense and EBITDA that each hotel produced.
Note ill hand, the call back to Mark for final comments.
Thanks, Jeff I.
I want to make a few comments about the future.
Although we saw improvement in the second quarter, we expect uncertainty will persist until there is an effective vaccine.
Improved patient outcomes.
Broad acceptance of safety protocols, such as social this and seen anywhere in mask.
Or some combination of the above.
Encouragingly there are already 30 vaccines in human trial.
Because of the wide array and variables related to the resolution of the healthcare crisis, we are not in a position today to provide you with company guidance.
We do expect the balance of 2020 to be difficult.
Let's drive to resorts doing best.
Only very modest increases in BT business.
And large group business not meaningfully returning until 2021.
We did.