DiamondRock Hospitality Company — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. DiamondRock is a lodging REIT that owned 31 hotels with 9,133 rooms at quarter-end. All owned hotels were open during Q3. Comparisons with 2020 are heavily affected by the COVID-19 downturn and hotel closures.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $179.5 million | $50.1 million | $377.2 million | $240.4 million |
| Net loss | $1.8 million | $79.6 million | $192.5 million | $187.7 million |
| Net loss attributable to common stockholders | $4.2 million | $80.4 million | $199.0 million | $187.8 million |
| Loss per common share, diluted | $0.02 | $0.40 | $0.94 | $0.93 |
| Adjusted EBITDA (non-GAAP) | $38.9 million | $(24.4) million | $49.1 million | $(49.6) million |
- Q3 comparable hotel occupancy was 65.1%, ADR was $237.41 and RevPAR was $154.54, up 45.2, 14.8 and 275.0%, respectively, from 2020. Nine-month occupancy was 46.0%, ADR $228.06 and RevPAR $104.93; RevPAR increased 67.7%.
- Q3 operating improvement reflected increased travel and the reopening of hotels; leisure-focused properties recovered more strongly than other markets. The comparison also includes differing hotel ownership and operating periods.
- Nine-month operating cash flow was negative $22.3 million, versus negative $54.7 million in 2020. Investing activities provided $61.8 million, mainly reflecting $213.8 million in net hotel-sale proceeds, offset in part by $116.5 million of acquisitions and capital spending. Financing activities used $76.5 million. Cash, cash equivalents and restricted cash ended at $97.8 million, including $66.5 million unrestricted cash.
- Total debt, net of issuance costs, was $982.8 million, down from $1.049 billion at December 2020. The weighted-average interest rate was 3.97%; the revolving credit facility had no borrowings and $400 million of stated capacity. Debt maturities include a $45.9 million mortgage due January 2022, with a potential one-year extension subject to conditions. Twenty-three of 31 hotels were unencumbered by mortgage debt.
- All mortgage loans with cash-trap provisions were below their required operating thresholds at quarter-end. Management said it did not expect the traps to prevent meeting short-term liquidity needs. The credit agreements required minimum liquidity of $125 million during the applicable covenant period; management concluded there was no substantial doubt about the company’s ability to continue as a going concern for the following 12 months.
Material changes and unusual items
- DiamondRock sold Frenchman’s Reef for $35.0 million in cash, plus a contingent participation in future profits, and sold The Lexington Hotel for $185.3 million. It recorded $11.5 million and $115.2 million of related impairment losses, respectively, in the first half of 2021.
- In July, it acquired the 218-room Bourbon Orleans Hotel for $90.1 million and the 37-room Henderson Park Inn for $26.4 million, funded with corporate cash.
- Q3 interest expense was $10.1 million, compared with $10.8 million a year earlier. Nine-month interest expense fell to $29.2 million from $43.7 million, principally due to interest-rate-swap fair-value changes; the prior-year comparison also included capitalized interest.
- At September 30, common stockholders’ equity was $1.519 billion and accumulated deficit was $775.5 million. The company had 210.6 million common shares outstanding at November 5, 2021.
Outlook, risks and capital allocation
- Management expected COVID-19 to continue materially adversely affecting Q4 2021 results, financial position and cash flow. It cited pandemic duration and variants as uncertain, while noting that leisure demand had improved and demand at other hotels remained historically low.
- Management expected existing cash and available revolver capacity to meet short-term liquidity needs. It anticipated Q4 cash uses for debt service, capital expenditures, hotel working capital, preferred dividends, corporate expenses and possible acquisitions.
- DiamondRock expected to spend approximately $55 million on 2021 capital improvements; about $30.1 million had been spent at operating hotels through September. Supply-chain disruption and construction-cost inflation could delay projects or increase costs. Construction commitments were approximately $26.3 million, subject to contract cancellation provisions.
- The quarterly common dividend remained suspended. The company paid three 2021 Series A preferred dividends of $0.515625 per share each. Preferred dividends are subject to financing restrictions and board decisions.
- The company had authorization for a new at-the-market common-stock program of up to $200 million but had made no sales under it by quarter-end. Variable-rate debt exposure was estimated at $220.9 million; a 100-basis-point rate change would affect annual interest expense and cash flow by approximately $2.2 million. LIBOR transition was an additional financing risk.
- Other disclosed risks include lodging demand and operating-cost volatility, leverage and refinancing, hotel renovation and management risks, natural disasters, and litigation. Management did not expect ordinary-course litigation, net of insurance, to materially affect results, but noted outcomes are uncertain.
Key facts for investors to verify
- Whether hotel occupancy, ADR and RevPAR recovery continues, particularly in urban and business-travel markets, and how COVID-19 developments affect demand.
- Liquidity and covenant compliance, including the $125 million minimum-liquidity requirement, cash traps, and refinancing or extension of the January 2022 mortgage maturity.
- Actual capital spending versus the approximately $55 million 2021 plan, and potential construction delays or cost increases.
- Whether the Frenchman’s Reef contingent profit participation produces proceeds; the reported sale consideration does not guarantee a future payment.
- Future common-dividend policy, preferred-dividend capacity, and any issuance under the $200 million ATM program.
Adjusted EBITDA is a company-defined non-GAAP measure; the filing cautions that it should be considered alongside, not as a substitute for, GAAP results and cash flows.