DRH

Diamondrock Hospitality Co. 10-Q Summary

Business Context and Reporting Period

Diamondrock Hospitality Company is a self-advised real estate investment trust (REIT) owning and acquiring upper upscale and upscale hotels primarily in North America. This report covers the fiscal quarter ended September 9, 2005, and the year-to-date period from January 1, 2005, to September 9, 2005. As of the period end, the company owned 14 hotels comprising 5,633 rooms. The company completed its initial public offering (IPO) on June 1, 2005.

Key Financial Metrics

Operating Statistics (Pro Forma Q3 2005): Occupancy was 76.4%, Average Daily Rate (ADR) was $133.84, and Revenue Per Available Room (RevPAR) was $102.31.

Material Changes vs. Prior Period

• Portfolio Expansion: The company acquired eight hotels during the YTD 2005 period, including a portfolio of four hotels from Capital Hotel Investments (CHI) in June 2005, the Vail Marriott, SpringHill Suites Buckhead, and Oak Brook Hills Resort. This makes direct comparison to the prior year difficult.
• Revenue Growth: Total revenues for the quarter were $65.4 million compared to no comparable revenue in the prior year quarter (as the company had just begun operations in late 2004). Pro forma revenues for the quarter increased to $72.5 million when adjusted for acquisitions.
• Profitability: The company reported a net income of $2.2 million for the quarter, compared to a net loss of $0.7 million for the period from incorporation to September 10, 2004. The YTD net loss of $8.9 million was driven by significant corporate expenses, including $5.6 million in stock-based compensation and transaction costs.
• Debt Structure: Total debt increased from $180.8 million at year-end 2004 to $366.0 million at September 9, 2005, due to new mortgage financings on acquired properties and a new $75 million senior secured credit facility.

Guidance, Outlook, and Risks

• Industry Outlook: Management expects the hotel industry to continue recovering, driven by demand growth outpacing supply growth. Projections indicate occupancy, ADR, and RevPAR will continue to increase in 2005.
• Capital Expenditures: Significant renovations are planned or underway, including a $13 million renovation of the Torrance Marriott and a $5 million renovation of the Bethesda Marriott Suites. Total capital projects set aside in property improvement funds and restricted cash totaled $33 million.
• Liquidity: The company maintains a $75 million senior secured revolving credit facility (expandable to $250 million). As of September 9, 2005, $5 million was drawn. The company intends to meet liquidity needs through operations, existing cash, and borrowings.
• Risks: Primary market risk is interest rate exposure on variable-rate debt (approximately 7.7% of total debt). A 100 basis point increase in rates would increase interest expense by approximately $280,000 annually. Other risks include economic slowdowns, terrorism, and the ability to maintain REIT status.
• Dividends: The Board declared a dividend of $0.1725 per share for the third quarter, paid September 27, 2005. The company intends to pay a similar quarterly distribution in the fourth quarter.

Investor Verification Checklist

• Acquisition Accounting: Verify the final purchase price allocations for the six hotels acquired in 2005, as preliminary allocations may be adjusted.
• Renovation Costs: Monitor the execution and cost overruns of the planned $13 million Torrance Marriott renovation and other capital projects.
• Debt Covenants: Review compliance with debt service coverage ratios and leverage limits on the new mortgage financings and the senior secured credit facility.
• Stock-Based Compensation: Assess the impact of the $5.6 million stock-based compensation expense on future earnings and dilution.
• Pro Forma Adjustments: Distinguish between actual reported results and pro forma results which include properties under previous ownership to understand true organic growth.