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Text: 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.
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 U.S. as government restrictions were imposed to curtail the spread of COVID-19 in order to protect the general public.
While some communities were able to reduce the spread of 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 million to 25 million people.
The overall environment experience in 2020 is the very definition of unprecedented.
Before going any further, I want to recognize the hard work of our hotel operating teams and their dedication to the health and safety of our guests.
I also want to recognize our corporate employees for their agility, creativity and perseverance to ensure that DiamondRock is secure and well positioned for a profitable future.
Let me recap those for you.
One, the second quarter is expected to be the worst period in the year.
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.
Supply is going to be constrained going forward as new construction starts to evaporate and obsolete hotels shut their doors for good.
According to F.W. Dodge, rolling three-month hotel construction starts were down 56% in June as compared to the prior year.
Moreover, last quarter, we suggested as much as 10% of the existing supply in Midtown East, New York, may not reopen.
There's reason to believe that our 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 return to pre-COVID-19 levels of demand.
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 open 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 of benefit accruals.
Impressively, compared to the prior year, second quarter man hours decreased 83% at open hotels and 99% at hotels with 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 reopened a total of 12 additional hotels in the second quarter.
The 22 hotels we had opened at the end of the quarter represent 58% of our hotel rooms.
But since the openings were staggered, the math works such that just 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 the 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 achieve breakeven profitability, and we expect that this trend continued in July.
In April, five hotels achieved breakeven profitability on a GOP 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 in May and six hotels in June.
The consistent theme is nearly is that nearly every one of these hotels is among our collection of drive to resorts.
Leisure was clearly the brightest segment during the quarter and certainly a source of strength in DiamondRock's portfolio.
As you might have guessed, weekends were 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 ADR for the majority of the weeks.
For the second quarter, leisure transient ADR 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 were encouraging.
The Shorebreak in Surf City Huntington Beach averaged nearly 50% occupancy in July.
Our L'Auberge de Sedona, Orchards Inn and Havana Cabana Key West, each ran occupancy over 60%.
L'Auberge actually had an average rate in July of $553, which was a 14% increase over the prior year.
But our little star of the month was 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 are not expecting a significant recovery after this summer.
In fact, we do not expect a true recovery in business transient demand until folks return to the office, which appears drifting toward early 2021 for many major employers.
Nevertheless, there are individuals traveling 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 of the quarter, we saw less than $400,000 of revenue from business transient channels, but this grew to $1 million in May and $2.5 million in June.
These are meager beginnings.
But longer term, we are optimistic that as a consequence of more office personnel working from home, there may be 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, C-Band had two billion RFPs passed through their system in the second quarter of 2020 as compared to six billion in the second quarter of 2019.
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 of value.
Since the start of the COVID 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 has since slowed to just $2 million to $3 million per week.
We expect cancellations will persist as we move throughout the year.
However, it was encouraging to see 250,000 to 350,000 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 toward 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-COVID levels.
While there have been short-term opportunistic groups booked in 2020, rate parameters for the 2021 and 2022 periods have been normal.
Instead, the main request is around terms for cancellations and rebookings, highlighting that groups do want to meet, but desire flexibility until there is greater visibility.
I want to touch on a few financial items in Q2, 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 with 10 hotels open, $5.7 million in May with 12 hotels open and $10.9 million in June with 22 hotels open.
Excluding the Sonoma Renaissance, which opened July 1, 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%.
It 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 $0.20.
For CapEx, we have canceled or delayed over 65% of our original capital expenditure plans.
In the second quarter, we restricted capex spending to only $20.7 million, including $8.5 million for Frenchman's Reef to put the project in a position where we could pause work.
Our primary focus remains conserving capital, so we are prioritizing only those expenditures where we have high confidence that they can produce a near-term earnings benefit and high return on investment at minimal cost and complexity.
In this regard, we spent $4.5 million to complete the F&B repositioning initiatives at our Renaissance hotels in Sonoma, Worthington and Charleston as well as the JW Marriott Cherry Creek.
We expect these investments will be earnings contributors in 2021, and the average IRR is forecast to be over 30%.
We remain in a strong liquidity position.
At the end of the quarter, we have $364 million of 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 meet our initial expectations for our overall cash burn rate.
At the hotel operating level, we averaged a $10.1 million monthly loss in the quarter, surpassing our initial forecast by 16%.
Including corporate G&A, 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 in second quarter 2020, we expect our burn rate will improve 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 estimate 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 pace seen in the second quarter.
Including cash, G&A and debt service, this works out to an overall burn rate of $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.
The erosion in EBITDA obscures the strong balance sheet DiamondRock wielded before going into the pandemic.
For example, net debt to undepreciated book value as of second quarter 2020 was just 26%.
We ended the second quarter with net debt of only $106,000 per key on a portfolio with a replacement cost in the range of $450,000 per key.
This implies a net debt to replacement cost of less than 24%.
Importantly, DiamondRock's debt is well structured.
It is 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 in 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 a waiver through the end of the first quarter of 2021 and relaxed covenants through year-end 2021.
Covenant tests restart in the 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-COVID EBITDA.
Third, flexibility for acquisition.
We have no limitation on our ability to pursue equity funded unencumbered acquisitions, and our $300 million limitation on encumbered acquisitions is proportionately 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 is 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, a diversified source of debt capital and one of the best maturity schedule in the sector is a measurable competitive advantage for DiamondRock.
In closing, I want to point out, we've expanded our disclosure to provide monthly detail on hotels open the entire quarter, hotels partially open during the quarter and hotels that remain closed.
It 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.
And on that note, I'll hand the call back to Mark for final comments.
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 distancing and wearing mask or some combination of the above.
Encouragingly, there are already 30 vaccines in human trial.
Because of the wide array in 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, with drive to resorts doing best, only very modest increases in BT business and large group business not meaningfully returning until 2021.
We did want to provide you with some of the ways in which we are positioning DiamondRock for the future.
Let me highlight a few.
One, we have a great portfolio that is increasingly weighted toward drive to resorts.
We have 13 of 31 hotels that are leisure oriented.
This has been a multiyear strategic initiative as seven or last eight hotel acquisitions fit into this category.
We were early to recognize the trend here and remain committed believers.
Two, small hotels have been outperforming.
According to STR, hotels under 300 rooms have shown the best relative performance.
Due to our focus on boutiques and drive to resorts, the median hotel in DiamondRock's portfolio is just 265 rooms.
Three, the portfolio has numerous ROI projects, many with 30% plus IRRs.
These include the just completed rebranding of the Sheraton Key West to the Barbary Beach House resort as well as the upcoming luxury upbranding of our Vail Resort.
Four, while we pause the reconstruction of Frenchman's Reef, we remain excited about its long-term prospects.
Essentially, this is a nugget of future value for our shareholders.
And finally, we have a solid balance sheet to allow us to withstand a substantial downturn and then position us to be offensive at the right time.
We are already seeing some interesting opportunities in the market.
We have great assets, a solid balance sheet, strong industry relationships and an experienced management team that has weathered numerous prior downturns over the last 30 years.

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q2 adjusted ffo loss per share $0.20.
not providing updated guidance at this time.

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