DiamondRock Hospitality Company — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. DiamondRock is a lodging REIT and hotel owner. At quarter-end it owned 27 hotels with 9,630 rooms.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $256.7 million | $249.8 million | $469.7 million | $458.7 million |
| Operating profit | $58.1 million | $44.2 million | $82.4 million | $65.6 million |
| Net income | $44.2 million | $24.8 million | $61.0 million | $35.5 million |
| Diluted EPS | $0.22 | $0.12 | $0.30 | $0.18 |
| Adjusted EBITDA | $84.1 million | $81.1 million | $134.5 million | $129.6 million |
| Adjusted FFO | $63.1 million | $61.5 million | $105.9 million | $99.2 million |
Reported operating margin was approximately 22.6% in Q2 2016 versus 17.7% a year earlier, and 17.5% for the first half versus 14.3%. Net margin was approximately 17.2% and 13.6%, respectively, for those periods. These comparisons include notable prior-year impairment charges and current-period hotel-sale gains.
Comparable hotel operating statistics showed Q2 occupancy of 84.9% versus 84.2%, ADR of $223.35 versus $223.45, and RevPAR up 0.9% to $189.71. For the first half, occupancy declined to 79.2% from 80.3%; ADR rose 0.9% to $214.82, while RevPAR fell 0.6% to $170.05. Management cited softer lodging conditions in Chicago and New York, including renovation and brand-conversion impacts.
Cash, debt and liquidity
- First-half operating cash flow was $94.6 million, compared with $99.9 million in 2015. Hotel capital expenditures were $54.1 million.
- Investing activities provided $67.7 million, including $118.3 million of net proceeds from two hotel sales. Financing activities used $209.4 million, primarily for mortgage repayments and dividends. Cash and cash equivalents declined by $47.0 million to $166.5 million.
- At June 30, total debt was $925.3 million, down from $1.170 billion at year-end 2015; weighted-average interest rate was 3.71%. Debt included $826.0 million of mortgage debt and a $100 million term loan. The $300 million unsecured credit facility had no borrowings outstanding.
- Management reported a 23.9% leverage ratio, 4.09x fixed-charge coverage against a 1.50x minimum, and $2.52 billion tangible net worth against a $1.91 billion minimum. Eighteen of 27 hotels were unencumbered by mortgage debt.
- $270.4 million of debt was variable rate. A 25-basis-point rate change would affect annual interest expense by approximately $0.7 million, according to the filing.
Material changes, outlook and risks
- Q2 revenue rose 2.8%; excluding acquisition and disposition effects, management reported growth of 1.6%. First-half revenue rose 2.4%, but was up only 0.2% excluding those portfolio changes.
- Net income included an $8.1 million pre-tax gain on hotel sales. Conversely, Q2 and first-half 2015 results included impairment charges of $9.7 million and $10.5 million, respectively. These items affect year-over-year comparisons.
- DiamondRock sold the Orlando Airport Marriott for a contractual $63 million and the Hilton Minneapolis for $140 million in June. The Hilton Garden Inn Chelsea/New York City, under a $65 million sale agreement, closed July 7, 2016.
- The company reduced expected 2016 hotel capital expenditures to approximately $135 million from $150 million, citing dispositions and fewer planned renovations. Management expected remaining-2016 cash sources to include hotel operations and Chelsea sale proceeds; anticipated uses included capital spending, dividends, debt service, corporate expenses and potential share repurchases.
- Quarterly common dividends were $0.125 per share. The company stated it expected available cash flows, cash, financing and disposition proceeds to meet short-term liquidity needs; this is management’s expectation, not a guarantee.
- The Lexington Hotel New York mortgage matures in October 2017. Its reported debt yield was approximately 6.4%, below the 13% condition for the first one-year extension option.
- A hotel franchisor notified the company of a franchise-agreement default due to low guest satisfaction scores. The franchisor reserved termination rights, and the mortgage lender reserved default rights, though neither had taken that action as of the filing. An adverse outcome could materially affect the company.
- The filing identifies potential adverse lodging-industry effects from Brexit-related economic or market uncertainty. Routine litigation was disclosed; management did not expect it to have a material adverse effect, while noting litigation outcomes are uncertain.
Key facts for investors to verify
- Whether comparable hotel RevPAR and demand recover, particularly in Chicago and New York, and how renovations affect results.
- Progress on the guest-satisfaction remediation plan and the franchisor’s and lender’s responses.
- Plans and financing for the Lexington mortgage maturity, including whether extension conditions can be met.
- Completion and proceeds of the Chelsea hotel sale, and execution of the revised $135 million capital-spending plan.
- Debt, liquidity and interest-rate exposure, as well as the sustainability of dividends amid hotel-cycle and seasonal volatility.
- How much reported earnings growth reflects recurring hotel performance versus dispositions, sale gains and prior-period impairments.