Q2 2019 Earnings Call
Good day, ladies and gentlemen.
Welcome to the second quarter 2019, Diamondrock Hospitality Company earnings Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time. If you don't wish it requires assistance during the call. Please press Star then zero on your Touchtone telephone as in my conference call is being recorded I will now introduce your host for today's call Brownie Quinn Senior Vice President and Treasurer. Please go ahead.
Thank you Brenda good morning, everyone and welcome to Diamondrock second quarter 2019 earnings call and webcast.
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.
This morning, Mark Brugger, our President and Chief Executive Officer will provide commentary on our second quarter results, our revised outlook for 2019.
And discuss our balance sheet.
Following his remarks, we will open the line for questions.
With that I'm pleased to turn the call over to Mark.
Good morning, everyone and thank you for joining us.
We appreciate your continued interest in the domestic story.
The overall lodge industry continue to modestly grow in the second quarter as industry demand New hotel supply near to equilibrium.
In the quarter, good group spend and a resilient consumer helped offset a more cautious business traveler.
It is in this current tempered growth environment that we believe that the quality of our portfolio the skills of our asset management team.
And the benefits of our capital allocation decisions come through.
Overall, we were pleased with our second quarter results as adjusted EBITDA came in at $81.1 million.
Slightly ahead of internal expectations.
And the portfolio grew market share by 220 basis points.
Portfolio Revpar increased 1.1%.
Which was in line with the National average and substantially outperformed the 50 basis points of Revpar growth for the top 25 markets.
Total revpar.
Which also includes other revenue streams outside of just rooms.
It was a bright spot as it grew by 3.4% in the second quarter.
This continued the positive trend we saw in the prior quarter of customers buying more services once they were in our hotels.
Our resorts outperformed with Revpar up 3.6%.
This strong growth in resorts supports our observation that the consumer remains healthy and that experience will travel trends are likely to outperform.
Particularly impressive resort performance.
Came from the Vail Marriott.
The bears to Sedona.
And Havana Cabana key west.
All of which had double digit revpar increases.
Boston was terrific in the quarter.
With our hotels, they're generating combined revpar growth of 6.8%.
Our Boston hotels outperformed an already robust market by 230 basis points.
Our two hotels in the San Francisco market also delivered strong combined revpar growth of 5.3% in the second quarter.
Phoenix was another good market for us.
As the Kimpton Palomar hotel.
Turned in 9.4% Revpar growth.
As a result of positive market conditions.
Combined with the fruits of the asset management initiatives, we implemented there last year.
We also saw good relative Revpar performance.
From our hotels in New York City and Chicago.
As they outperformed their markets by 100 basis points.
And 190 basis points.
Respectively.
As expected Salt Lake City was our most difficult market in the quarter with Revpar declining 8.1% from an off citywide convention calendar.
Our hotel there is essentially a headquarters hotel for the Convention Center.
And its performance often correlates with convention bookings.
At the Salt Palace.
Similarly.
DC was a difficult market.
And our Westin City Center hotel experienced 5.1% Revpar contraction.
As a result of less citywide activity in the quarter.
Finally.
The JW Marriott Denver underperformed as a result of new supply in the high end Cherry Creek Submarket.
We expect this hotel to perform better when the new supply is absorbed as absorbed over the next few quarters.
In looking at portfolio segmentation.
The transient segment increased by 1% in the quarter and the group segment was up just 20 basis points.
But what is interesting about the group in the quarter.
Is that it was the right type of group.
The kind of groups that generated 14.6% growth in outside the room spend.
Let's delve a little deeper into this strong growth in non rooms revenue for the portfolio.
Which continues to be a great story for Diamondrock.
This was powerfully illustrated at three of our largest hotels.
The west in Boston waterfront.
The Chicago downtown Marriott and the Worthington.
Which collectively had outsized total total revenue growth of 7.1%.
Despite.
Combined rooms, revpar growth of just 1.2%.
These positive results.
Represent continued successful execution of our asset management revenue strategies.
Of course, it is ultimately about profits.
Portfolio EBITDA profit margins impressively expanded 35 basis points in the quarter.
To a healthy 34.26%.
Profit growth enabled same store hotel adjusted EBITDA growth.
4.9%.
As you can imagine.
We are extremely proud to grow profits and NPV, even in a modest revpar environment.
I think it is a real testament to our asset management teams ability to work closely with our operators.
To deliver profit driven results.
Turning to our capital program.
We invested $25.9 million into our hotels in the quarter.
And are pleased with the success of our recent renovations.
We are executing on many of the projects that were identified at our Investor day earlier this year.
Let me touch on just a few.
Customers Love this repositioning and just last month. It was named the number three resort in Florida by travel and leisure.
The emblem Viceroy repositioning was completed earlier this year.
And now ranks number three of 242 hotels.
In the San Francisco market on trip advisor.
Higher than any other viceroy hotels in San Francisco.
The Sheraton suites key west is currently being renovated and repositioned to a lifestyle hotel.
And we expect a similar great outcome.
The Vail Marriott is underway with the construction of its new 4 million dollar Spa and fitness center.
A key component to ultimately up branding that resort.
These are just a few examples among numerous ROI projects.
Underway within the Diamondrock portfolio that can help drive and AB expansion.
As most of you are aware our largest capital undertaking is the rebuilding of the Frenchmans reef resort in the U.S Virgin Islands.
The design looks fantastic.
And the construction is well underway.
We expect to resort to reopen in 2020.
While we have already received $100 million in insurance proceeds.
We are in litigation with the insurance company to collect the full amount of our claim and expect to go to trial in the US Virgin Islands in January 2020.
Let me just add that the entire team is very excited about this project and its ability to ultimately generate $25 million of EBITDA upon stabilization.
Turning to the balance sheet.
The company ended the quarter with a trailing 12 month debt to EBITDA ratio of 3.9 times.
Subsequent to the end of the quarter the company completed $750 million in financings, including a new and expanded $400 million credit facility.
As well as $350 million in term loans.
Proceeds of which were used primarily to pay off our existing term loans.
What did this financing activity accomplish for us.
Well.
It reduced our interest expense.
And extended our maturities for another five years, including extensions.
And it increased our dry powder for opportunistic investments.
We think that these moves position diamondrock well for the future.
Speaking of investment capacity.
We use some of that capacity to be opportunistic and take advantage of the pullback in the stock market.
Since the start of the second quarter of 2019.
The company has repurchased 1.3 million shares of its common stock.
In total.
Since last December .
The company has repurchased.
7.8 million shares of its common stock at an average price of $9.58 per share.
A tremendous value, which we believe is well over a 30% plus discount.
To the midpoint of our end of our internal and AB estimates.
It is worth noting that we still have $175 million of capacity remaining on our board authorization.
As we look forward.
We now expect that the modest business transient growth trends experienced in the second quarter, we will persist for the balance of the year.
Accordingly, we have adjusted guidance.
Reducing full year comparable revpar expectations by 75 basis points at the midpoint.
And full year, adjusted EBITDA guidance by a million and half dollars at the midpoint.
Fortunately, we were able to raise expectations for full year adjusted FFO per share.
Updated adjusted FFO per share guidance.
Was increased.
By one penny per share.
To reflect the more than offsetting benefits.
Of our capital allocation decisions.
To repurchase shares.
As well as to reduce interest expense through financing activities.
The company now expects full year 2019 results to be as follows.
Revpar growth of flat.
Two up 1.5%.
Total revpar.
Growth of 1.5% to 2.5%.
Adjusted EBITDA of $256 million.
To $265 million.
And.
Adjusted FFO per share of one dollar one.
Two one dollar <unk> five.
The back half of 2019 will benefit from $2 million less in profit displacement from renovations.
And an easy comp at the Boston Westin to last year's Union strike impact.
Before wrapping up.
I do want to spend a minute on group trends.
The momentum has been good with the group booking pace in the second quarter, increasing 423 basis points since Q1 for the back half of 2019.
Albeit we still have some work to do for the fourth quarter.
Even more impressively.
The bookings for 2020 were excellent.
Increasing 640 basis points from our last call.
Now 2020 group revenue is pacing up over 20%.
Our two most important group markets.
Boston and Chicago.
Have strong 2020 convention calendars.
In fact, our combined Boston hotels.
Our pacing up over 40% for next year.
And our Chicago hotels.
While they are pacing up over 27% for next year.
And on that note, we'd be glad now to take any questions you might have operator.
Thanks.
Ladies and gentlemen.
And at this time, please press star one on your Touchtone telephone.
If your question has been answered.
Okay.
Our first question comes from Rich Hightower from Evercore ISI. Your line is open.
Hey, good morning, guys good morning.
Mark I want to I want to dig in a little bit too maybe somebody out of room spend trends and.
Maybe trying to pair up the strength that we're seeing in that segment versus the softness that were you know pretty consistently seeing across business transient demand trends and would there be maybe a lag effect in a in the non room side that we should expect to play out in future quarters, where do you think the two are unrelated or what do you think's driving maybe the divergence between those two categories at the moment.
Yes, it's it's to give her a behaviors the groups that we have coming to our hotel and were trying to pick the groups that are going to spend more but whether its KPMG or excel at the consulting group.
Or pharma or some of the financials.
Well, we've seen seen year to date is that when they get to our hotel. They are running more a b. They are spending more for the steak dinner versus the chicken dinner.
We're seeing more spend at the bars.
So that trend what was and continues to be positive through the second quarter.
Different than what we're seeing and what the business transient trend, which is its growing but its growing at 1%. We had hoped it would grow a little a little stronger in that year to date.
And so theres a divergence there it's not unexpected that the business transient would be a little bit more cautious given what's going on with the headlines and the trade wars and and the corollary, we always watch on a macro basis is non residential.
Investment spend which was.
Yes, a little bit down recently now the hope is that we move through the noise and as we move into next year things improve on that but what we built into the revised guidance is that they are the trends, we saw particularly in business transient kind of the more modest growth persist for the balance of the year.
Okay I appreciate that Mark and then maybe my second question.
Looking at the stock price here, 940, and change or so and comparing that to where.
Purchases were made in the year to date period, just wondering where were incremental repurchases from here would factor into your capital allocation grid and also just thinking about the acquisition landscape out there in terms of hotel assets.
Seems hard to believe that.
You know that would be an attractive use of capital barring an extraordinary circumstance.
Today, and so just wondering what the appetite for maybe a additional share repurchases would be in that context.
Sure Great question, Let's say first on any of you we still very very confident about our energy estimates that we put that we published in January early this year. The private market transactions remained robust the cap rates that we've seen over the last three or four months continued to indicate great strength in the in the private markets.
So we feel good when we go back and we look at those fairly regularly to make sure. We have a good handle on any changes in the marketplace and feel good about private market transactions.
On stock repurchases as I said in the prepared remarks, we really do think that stock around these levels is a tremendous value and there is no other way to look at it.
We've already repurchased 7.8 million shares.
And we've been in the market as recently as a couple of weeks ago.
There is 175 million left on our board authorization for shares.
However, the company generally and traditionally hasnt tipped its hand as to future repurchases, but I can tell you that the board.
Does see tremendous value, where our stock is today.
And they're focused on capital allocation opportunities.
Okay. Thanks.
<unk>.
Citi Your line.
Hi, This is Cameron use Omniab that's me.
In regards to insurance proceeds into skewed for Frenchmans reef is it related entirely to business interruption or is the portion related to construction as well.
No its carrying this mark it's related to both so are we have a claim and they're not being in the entire amount that they havent paid so they paid us a 100 million. So far we have a claim that includes both property as well as business interruption and ongoing expenses.
And some of the some of the talk the topics in in dispute are what standard do you need to rebuild the hotel what is current code call for.
For instance, we believe that it calls and the right interpretation of the code is that it calls for a very hurt resistant.
Building and Thats whats getting built in that's what really the bill all requires and they're disputing facts like that and that's ultimately what will have to come to agreement on or the jury will have to tap to decide.
Great. Thank you and in your prepared remarks, you talked about group pace.
Particularly in Boston and Chicago I was wondering if you could provide.
E tail on that group pace and then how the convention calendar is shaping up in those markets.
So groups tremendous for us in Boston and Chicago, we're going to outperform those Mart, we expect outperformed those markets while the the Citywides are good in both markets for next year.
As you May recall, we underperformed what merger issues in 2018 in Boston, So we have more room to run.
So our our comp there is easy.
Fortunately or unfortunately, but it'll it should allow us to outperform on the group side in Boston.
Compared to the rest of the market in 2020, Chicago's got a good convention calendar going into next year. We also.
Recently completed our $110 million renovation. The last piece was lobby, which came online just couple of months ago, We redid. The all the meeting space within the last year. So we.
We have a really nice set up that we're gaining market share as I mentioned earlier, we are gaining market share with that hotel and we would expect to continue to gain market share, particularly on the group side as we move into next year.
Thank you.
Our next question.
Thomas.
From Morgan Stanley Your line is open.
Hi, Good morning. So first question on transactions are and what's your appetite to buy much more hotels here. Thank you.
Good morning, Thomas So I can say, we were always as a public company, we're always monitoring the markets and looking at things.
I think given where the stock price is today the relative value of an acquisition versus our stock it's tough to justify.
There may be an opportunity to do a small small hotel that synergistic that may be located next to one of ours, where we can knock out most of the DNA and make it accretive.
But it's it's tough to do deals now really have to be a special special opportunity. So.
I think theres, a relatively high hurdle to new acquisitions would be the right way to look at it.
Helpful and then second question.
Just around the demand environment.
You know you highlighted the business transient demand is soft but your group bookings are really strong seems to me like and they are a strong going out.
Like for a long period of time, which seems very counterintuitive.
Now why would corporates be booking out further when the nervous about the.
Environment can you like what do you think's going on basically.
Well, there's a lot of puts and takes to it part of it is.
A lot of our markets were off citywide convention calendars this year and they flip next year. So some of it's just the strength of the Citywides. So if you think about Boston, Chicago and DC Citywides are softer this year and New York City Convention calendars in 2020, those are three very important markets for us and they're just much stronger the way. They line up as you know a lot of these groups rotate kind of on three or four year cycles, and maybe in Orlando, one year Chicago one year.
San Diego at one year.
And it just happens they're sinking up in a more favorable Pat pattern for us so thats, helping the overall numbers and the pace.
Do you think doing as anything else going on beyond just the citywide calendars.
Tom do you have anything to add.
I think that.
The group decisions are made further out so you're layer learning more and more groupon and the mix of business is pretty consistent.
On the weekends have been have been strong and so Im Association drive some of that incorporates been short term, but pretty consistent.
I think on the corporate volume side, we're seeing.
We're seeing room nights.
Increase which is obviously the indicator of demand as Mark said.
With less citywide group in the city you Theres more room to take that transient demand and I think thats part of the.
The dynamic the other part of it is there is more production going into our into our hotels. The challenge on the on the corporate side is just the increasing in the pricing in the rates and how do you maximize that year over year and that's all.
You are committing this year probably sometime in September October for rates for 2020, So what decisions you make in September October set pricing for your corporate.
Volume the following year and so that's that's something we're heavily focused on paying paying a lot of attention to for 2020, because we have what such good group layered on the on the books, we really want to make sure we're maximizing pricing on all the other channels as well.
That's really helpful color. Thank you.
Thanks Thomas.
Your next question comes from Deutsche Bank. Your line is open.
Hey, good morning, guys.
Mark Thanks for all the helpful data points on the on the group wanted to drill down into the outer on spend and maybe expand it to.
Across the portfolio not just in the groups how much do you think you know resort resort fees and some of the other fees or.
Maybe helping that out still this year and then.
Not always a fun topic to talk about but what do you think happens to those fees when we.
Some point, when we get a little bit softer.
So let me take parses out so one of the things its going on here is that pricing power is more difficult, particularly with the the business transient. So Tom's group the asset management group and I really do think where the best asset management team. The business has really gone on a.
Kind of a philosophical.
Pat to make sure we're getting every nickel and dime in everywhere. We can so not only are the are we trying to find more profitable groups. We have done things in the bars and lobbies to increase lot lobby sale in may we redid the lobby bar in Chicago, we're selling a $1000 more in SMB every night there.
And we've done something similar at the Lexington, which its relaunch. So we're trying to maximize any profit. We can end the asset management team has gone through every contract every concession agreement.
To try to find opportunities and that could be re auditing leased restaurant, we had which we did in Denver and found over $100000 in and the way they were calculating their participating rent.
It can be it can be in auditing the food cost how much waters in the chicken and making sure that we're not getting a watery chicken with 5% water versus 3%, it's really a lot of the nickels and dimes its re letting a parking lease. So we have a parking valet contract and going back out to RFP and trying to re note renegotiated, even though it's not up and do there's a lot of those rents and concessions theres a lot of those other categories, where we're really pushing to try to find opportunities.
When when it is a more difficult pricing environment, that's asset management strategy, So you're seeing that play out.
As to your question about amenity fees and resort fees.
There is a real value proposition there.
The the big chains require four to one or five to one value. So if you had a 10 dollar fee you need to be able to prove that you're delivering $50 to value.
And where we have well trained.
Front desk and teams.
We think our customers actually that it's a it's a win kind of a win win for both sides.
There have been a number of attorney general lawsuits and there was one in DC recently got a lot of headline value.
We think it's around disclosure or not whether their legal or not but we think the disclosures. Good we will.
Of course, the big brands, who are in charge of that most of this.
Of course, they've had.
The best lawyers looking at this from day, one and of course, they're committed to good disclosure so.
We feel good about disclosure, we feel good about the value proposition and.
I think with the right training, we're feeling good about customer experience.
Okay.
Helpful and then.
On the transient side.
Your degree a lot of this is just kind of corporate uncertainty in travel decisions things like that but much of it for you guys. Do you think there is any of it relates and maybe this is on the leisure side to the Marriott.
Some.
Displeasure among some of their loyalists with some of the recent bond voice changes do you think that factors in at all or is it just kind of kind of noise.
No I mean, I would say, we're big believers and and Marriott Hilton.
Yes brand families that were associated with we think they do a great job. We think they have the best loyalty programs. There are there are changes and clearly it wasn't perfect, but it's still when you think about the size of the system the ability to redeem into the number of properties. It's still there the best the best in the World.
From that perspective.
We don't see our customers seem happy our contribution coming in from the brands has been consistent so we haven't seen any fall off on the contribution from the brands.
I will say on a related point, we have had some.
Some growing pains as theyve adjusted the rewards redemption rates.
And amount of points that you need to redeem into hotels and I think that we're getting it right, but there there was some growing pains in that process and that impacted us.
Kind of in particular spots across the portfolio.
Okay very good thanks, Mark sure.
Our next question.
Great.
Your line is open.
Thanks, Good morning.
Winter Park is setting its internal plans for the next few years I'm just curious how the company thinks about the remaining length of cycle severity of a potential downturn.
Those sorts of things.
Yes, I would say.
We run a lot of sensitivities with the board and we do a lot of strategy planning so.
It's hard to know I think we planned the balance sheet for a downturn at all times. So we're always thinking about the balance sheet capacity, how much dry powder we have.
On downside scenarios.
But we manage our business kind of on a.
Or typical slow growth environment for the next couple of years.
Great. Thank you.
Our next question comes from Austin, Wurschmidt from Keybanc capital markets. Your line is open.
Hi, Good morning, everybody Mark I guess with respect to your comments around having a 175 of availability under your share repurchase plan.
And kind of keeping your powder dry late in the cycle, how much dry powder do you have available today to pursue share buybacks or acquisitions for that matter.
Before you would consider needing to sell additional hotels.
Yes, so by our calculation is as I just mentioned last Q on a we run kind of scenarios to stress test the balance sheet. If we think we have about $300 million of investment capacity and still remaining in a strong balance sheet position.
Now, obviously, we're going to consider different kalpoe allocation decisions to make sure we're maximizing value for shareholders. We feel like we have a fair amount of capacity, where we are now.
So what does that 300 million if you were to deploy imply in terms of I guess the upper.
Thresholds of your leverage target.
It depends a little bit on how we resolve the Frenchmans reef litigation, but assuming we're successful there.
Austin. This is Jay has assuming you know excluding frenchmans reef thats sort of in the four and a half to five.
Andres way, we like to think about it through the cycle is remaining below five times at sort of the bottom of the cycle. So in that scenario, we're kind of around four and a half.
Okay understood. Thanks, Thank you for the detail there and then.
Any specific markets that you'd highlight that drove the reduction in revpar growth or was it more I guess broad based.
Well in the second quarter, we had terrific growth in Boston.
Phoenix San Francisco area.
And resorts overall were over 3%. So those were our star our star markets and then we are really happy with our relative performance, both in New York City, and Chicago, why a little tougher markets.
We did outperform and both of those markets.
Salt Lake City, and Washington, DC, where were our most difficult markets.
So is it fair to assume that that those to the latter two markets are what's driving the biggest percentage of the revpar reduction.
In terms of your guidance.
Well for the balance of the year is really it's really more about the business transient trend for the back half of the year.
That particular market, so I'd say throughout our portfolio.
We had at the beginning of the year had kind of a more robust expectation of how the business transient traveler would perform and now we're seeing it grew 1% in the second quarter, we've kind of extrapolated that out for the balance of the year and that's really the main driver too to the adjusted guidance.
Great I appreciate the thoughts thank you.
Sure.
I'm showing no further questions at this time.
Call it back to Mark for closing remarks.
Good. Thank you very much to everyone on the call. We really appreciate your interest in Diamondrock and we look forward to updating you on our next call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.
May disconnect and have a wonderful day.