Q3 2022 Diamondrock Hospitality Co Earnings Call

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Good morning, everyone welcome to Diamond rocks third quarter 2022 earnings call and webcast before we get started let me remind everyone that many of our comments today are not historical fact and are considered to be forward looking statements under federal.

<unk> 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 expressed or 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 Mark.

Thank you for joining us today for <unk> third quarter earnings call.

Tire executive team joins me today to answer your questions.

The third quarter was a record quarter for <unk> demand in leisure business travel and group business all exceeded our expectations.

Consumers continue to spend on experiences like travel and we see this continuing into 2023.

We believe we are in a golden age of travel distinguished by societal shift and the necessity of travel that has been created by the rapid adoption of hybrid work environments changes in mobility preferences for experience over things and the wonder lost of boomers and millennials alike. The.

The future of travel is very bright.

The direct portfolio continues to separate itself from our peers with over 60% of our hotels falling into the luxury resort lifestyle resort urban lifestyle categories.

Of our last nine acquisitions over two thirds of our waterfront resorts all our lifestyle and all are unencumbered by long term management agreements.

In fact, among the full service lodging Reits, we have the lowest exposure to long term brand management encumbrances and among the lowest exposure to ground leases.

These qualities enhance operational control and increased exit value.

A distinguishing factor that should drive a premium valuation.

It is our strategy to curate a portfolio of experiential resorts and urban lifestyle hotels that deeply resonate with what todays travelers want.

<unk> experienced hotel focus is paying off.

Our performance through the pandemic has been strong stronger than our peers. In fact, the portfolio took another 180 basis points of market share from the competitive set in the third quarter alone.

This focus does not mean, we sacrifice diversification.

We remain well balanced with corporate demand contributing over one third of stabilized earnings and group demand exceeding 25%.

Our focus puts us in the enviable position to capitalize on the strongest demand trends.

And this translated into record performance for the third quarter for Revpar total revenues and hotel EBITDA.

We soared past 2019 comparable revenues.

Total revenues were up 11, 7% versus 2019.

Hotel adjusted EBITDA margins increased 125 basis points compared to 2019.

Best in class SMA management and tight cost controls.

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Average daily rates for the portfolio increased 17, 5% over 2019 and 12, 5% over 2021.

Importantly, there is still room to run on occupancy despite.

Despite a nine 8% percentage point improvement over last year.

Occupancy is still behind 2019 levels by six one percentage points.

The ability to close that occupancy gap is a real opportunity in 2023.

Let's take a closer look at our resort in lifestyle performance.

We continue to see incredible demand at our resort and lifestyle hotels, even as we move to beyond summer.

Revpar at total revenue growth at our resorts was actually up more in September versus 2019 than in August .

Looking ahead to the fourth quarter, our seasonally slower leisure quarter, we still expect a resort and lifestyle hotels to deliver over 20% revenue growth compared to 2019.

Our urban Gateway hotels also exceeded expectations for the third quarter.

I am proud to say that September marked the first month since the onset of the pandemic that revenues and profits for urban gateway portfolio exceeded comparable 2019 results.

There are some powerful trends at several of our urban markets that are worth highlighting.

Our three New York City hotels saw robust demand and pricing power in the quarter collectively increasing revenues by over 17% compared to 2019.

The Worthington in Dallas Fort worth.

<unk> 2019 revenues by nearly 17% and profit margins expanded over 600 basis points.

Our Westin in Boston Seaport, and downtown San Diego, both exceeded third quarter 2019 revenues and profits.

Year to date through September EBITDA at our largest hotel the Chicago Marriott magnificent mile is at 99% of year to date 2019, EBITDA one of our most pleasant surprises of the year.

Even our small representation in San Francisco.

By Viceroy was a star in the quarter with 172% market share.

The emblem is ranked number three by travel by travelers on Tripadvisor. The highest ranked hotel owned by any public company in San Francisco.

In short, we believe our carefully assembled and focused urban gateway portfolio remains a competitive advantage as our outperformance continues.

I did want to recognize the achievements of our stellar asset managers.

Asset management has been delivering for us all year.

Cost controls appetite, but as exciting we have been seeing big returns from the three game changing repositioning that were completed last year.

Year to date statistics tell a great story.

The lodge at Sonoma converted to an autograph collection is up 62, 3% and total revpar as compared to 2021.

The veil high resort converted to a luxury collection is up 78, 9% and total revpar as compared to 2021.

And the Margaritaville key West is up 21, 4% and total revpar as compared to 2021.

And up a breathtaking 95, 6% as compared to 2019, when the resort was flagged as a sheraton.

These numbers showcase and are a testament to the value creation capabilities of our talented asset management team.

On external growth our recent acquisitions of shrink quality Bay Henderson Park in Henderson Beach Resort Bourbon Orleans, and short break for larger beach are collectively performing more than $3 million ahead of underwriting for 2022.

Total revpar this year for these hotels is projected to be up 39% over 2019, excluding non comp short rate.

These hotels all have the key traits that we're looking for visa.

<unk> simple lifestyle hotels.

Kate in desirable high barrier entry markets with.

With opportunities for our team to quickly grow NAV through asset management initiatives.

Going forward, while it's hyper competitive for broadly marketed leisure oriented hotels out there.

We have been able to find better opportunities by focusing on smaller owner operated properties.

It is here, where we have developed an early mover advantage by forging years long relationships with these potential sellers and becoming experts on highly desirable micro markets like Sausalito Destin Beach in Sedona.

We continue to track approximately 50 of these unique micro markets.

Before I turn the call over to Jeff to talk more about our results I want to highlight the key attributes of <unk> fortress balance sheet.

Our recent $1 2 billion financing addressed all all near term debt maturities.

Eliminated half of our mortgages and doubled our weighted average debt maturity.

Today, we have over $600 million of total liquidity.

<unk> figure for a company our size.

Our liquidity and low financial leverage gave us the confidence and flexibility to commence a share repurchase program subsequent to quarter end at an average purchase price in the high Sevens.

While we are mindful to maintain.

That fortress balance sheet.

Measure share repurchases of our stock at deeply discounted values remains another arrow in our quiver for opportunistic capital allocation.

Let me now hand, the call over to Jeff Jeff.

Thanks, Mark let's look at the results and note that throughout our prepared remarks, when we give comparable stats to 2019 and excludes the kimpton Fort Lauderdale, because that hotel is new it was not open in 2019, you'll find the detailed table of our quarterly comparable data on page 15 of this morning's press release.

Total comparable revenues for the company were $267 million in the quarter, an increase of $28 million over the comparable period in 2019.

Comparable revpar for the portfolio in the third quarter was 211 or.

Or eight 7% higher than 2019.

This growth was driven by room rates nearly 18% above 2019 occupancy is down over 600 basis points to 2019 and closing this gap remains one of our several sources of future growth.

Other revenue, which speaks directly to our asset management team's creativity and identifying and expanding new income streams was up over 20%, 27% or $4 5 million over 2019.

F&B revenue was over $8 million above 2019, double the $4 million positive variance in the second quarter.

Similarly, total banquet and group contribution was up nearly $3 million an increase of over 9% versus 2019, Despite group room nights being down over 7% to 2019.

With fewer groups in house, we're generating more ancillary revenue by up selling the groups through creative sales strategies.

Outlet performance was the strongest of any third quarter in the company history as many of the celebrity chef venues, we created and opened just prior to or during the pandemic drove dramatically more business to many of our hotels.

And there is more to come.

We will share with you soon several new or upgraded outlets. We are working on for 2023 and beyond that we'll continue to drive profits to new levels.

Hotel adjusted EBITDA was $84 2 million, which beat third quarter 2019 by nearly $12 million.

Comparable hotel adjusted EBITDA margins were 31, 6% exceeding 2019 by 125 basis points.

Adjusted EBITDA was $76 3 million or $8 8 million over third COVID-19, and finally <unk> <unk> per share was 28 or nearly 4% above third quarter 2019.

Let me talk a little about performance in our major segments and provide some insight to what we're seeing in the remainder of the year.

Each of the three major segments performed well for us in the third quarter.

Of course resorts with our most robust portfolio segment with many resort setting new highs.

Rates for our luxury and lifestyle resorts were up 36% over 2019 leaders in the quarter included Tranquility Bay and Margaritaville in the Florida keys, and the landing and Lake Tahoe.

Each of these hotels delivered rate growth up over 70% from 2019.

Occupancy in the resort portfolio was five percentage points behind 2019, and remains a real opportunity for us going forward.

Urban hotels extended the strengths that emerged last quarter average rates were up five 2% over 2019 in the quarter a sequential improvement over the 2% growth seen in the second quarter.

Occupancy increased to 76, 9%.

This is six six percentage points behind 2019, which was a sequential improvement as compared to a nine percentage point deficit in the second quarter.

Midweek occupancy a key indicator of the return of the business traveler increased sequentially to 79, 1% in the third quarter as compared to 77, 4% in the second quarter.

In fact midweek occupancy at our urban hotels ramped steadily from 77, 7% in July to over 81% in September .

The snapback in business travel this quarter exceeded our expectations.

As a testament to the strength of our urban footprint most of our urban hotels had total revpar that exceeded 2019 levels, including all three of our hotels in New York City, our two hotels in Denver, the Westin Boston Seaport, the Westin San Diego, the Worthington and our luxury collection hotel in Chicago.

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Two big hotels, the Chicago, Marriott and Hilton, Boston, where over 96% of 2019 total revpar.

Group demand has been robust the booking window remains short, but we are seeing significant pieces of business book on short notice.

For example, <unk>.

<unk> revenue in the third quarter was $45 5 million as compared to $47 million on the books at the end of the second quarter.

$5 million upside was double our expectation for in the quarter pickup.

I also want to highlight the $45 million of group rooms revenue exceeded third quarter 2019 by three 5% on nearly 12% higher rates.

We expect group rooms revenue in the fourth quarter to also edged past 2019.

On a full year basis group rooms revenue should surpass 90% of the 2019 production.

Looking ahead.

Group room revenue on the books for 2023 increased 34% from the second quarter to over $90 million at rates that are nearly 13% ahead of 2019.

In our largest convention markets, Boston, Chicago, San Diego, Washington, DC, and Phoenix, There are $3 1 million room nights on the books for 2023, and $3 2 million room nights in 2024.

The next two years surpassed the $2 9 million room nights in 2019, and there is still time to extend the game.

Concerning hurricane and we had no material damage to our buildings and only minor damage to landscaping business.

Interruption was a little more than $500000 in September .

Turning to the balance sheet as Mark mentioned, we recast and expanded our credit facility during the third quarter.

The $1 $2 billion facility includes $800 million of term loans and a $400 million revolver.

As detailed in the press release announcing the transaction proceeds from the facility were or will be utilized to pay off the $750 million facility or <unk>.

$50 million term loan.

For mortgages totaling approximately $180 million that were scheduled to mature in 2023 and.

And are eligible for repayment without penalty in 2022.

And to pay off our revolving credit facility.

As of this call our $400 million revolver is fully available and Undrawn and we have unencumbered Sonoma the Westin D C and the Salt Lake City Marriott.

The fourth and last mortgage on the Westin San Diego will be paid off before year end.

We have $225 million of fixed rate swaps against the $800 million of term loans and including our remaining fixed rate mortgages approximately 52% of our total debt is fixed rate.

We have over $600 million of liquidity for continued opportunistic share repurchases or external investment.

We will.

We will opportunistically allocate capital to take advantage of any market dislocation, but we are committed to maintaining a conservative balance sheet.

Turning the call back to Marc I did want to address the common dividend.

Call reinstated we reinstated a <unk> <unk> per share quarterly dividend last quarter.

Based upon our current internal forecast for taxable income we expect our total common dividends paid in the fourth quarter will exceed three <unk>.

We are finalizing our taxable income forecast and we'll make a declaration prior to year end.

Okay, now I will turn it back to mark to discuss our outlook.

Thanks, Jeff.

Our outlook remains positive for travel obviously, it was a successful quarter and we expect the fourth quarter will be good as well.

Hotels have raised our full year forecast since our last call. Accordingly, our outlook for 2022 has increased based on continued robust travel demand.

We expect full year total hotel revenues and hotel adjusted EBITDA will both exceed 2019.

Help you model our expected results, let me provide a few more pieces of information.

In the fourth quarter of 2019, our resort lifestyle Hotel segment contributed 45% of comparable total hotel revenues, which is shown in the table on page 15 of our press release.

We expect total hotel revenues in the fourth quarter of 2022 from this segment will increase better than 20% compared to 2019 with hotel adjusted EBITDA margins better than the 25% achieved in 2019.

Our urban Gateway hotels contributed the remaining 55% of the fourth quarter 2019 comparable total hotel revenues.

We currently expect fourth quarter 2022, total hotel revenues from our urban gateway hotels to be about 85% of fourth quarter 2019.

O&M part to the seasonal patterns and differences in the spread of citywide events over the two time periods.

A few other data points.

We now expect full year G&A to be in the range of 30% to $31 million below our original guidance of $31 million to $33 million.

Income tax expense is now forecast to be $1 billion in half to $2 million.

Modestly from our prior estimate of a half to $1 $5 million buffer the best kind of reason increased hotel earnings.

Interest expense, including the benefit of the swaps is expected to be approximately $52 million to $53 million.

As we look out to 2023, we are encouraged that the positive demand trends will continue and.