DiamondRock Hospitality Company — Q2 2015 Form 10-Q
Business context and reporting period. DiamondRock is a lodging-focused REIT that owns, but does not operate, premium hotels and resorts. At June 30, 2015, it owned 29 hotels with 10,936 rooms. This filing covers the quarter and six months ended June 30, 2015; interim results are seasonal and are not necessarily indicative of full-year performance.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $249.8 million | $229.9 million | $458.7 million | $420.0 million |
| Operating profit | $44.2 million | $55.0 million | $65.6 million | $65.1 million |
| Net income | $24.8 million | $51.9 million | $35.5 million | $56.0 million |
| Diluted EPS | $0.12 | $0.26 | $0.18 | $0.29 |
| Adjusted EBITDA | $81.1 million | $70.9 million | $129.6 million | $108.2 million |
| Adjusted FFO | $61.5 million | $51.9 million | $99.2 million | $81.4 million |
| Cash from operations | Not provided for quarter | Not provided for quarter | $99.9 million | $65.8 million |
Revenue rose 8.7% in Q2 and 9.2% in the first half. Excluding property ownership/opening changes, revenue increased 6.3% and 6.9%, respectively. Comparable hotel RevPAR increased 6.0% in Q2 and 6.8% in the first half, supported by higher rates and occupancy. For the first half, weighted-average occupancy was 79.8% versus 78.4%, ADR was $212.01 versus $201.92, and RevPAR was $169.09 versus $158.26.
Operating profit margin was approximately 17.7% in Q2 versus 23.9% in the prior-year quarter, and 14.3% for the first half versus 15.5%. The quarter’s lower GAAP profit reflects, in part, a $9.7 million impairment and the absence of significant prior-year gains. Adjusted EBITDA and Adjusted FFO increased in both comparison periods; these are non-GAAP measures and should be considered alongside GAAP results.
At June 30, total assets were $3.23 billion, total debt was $1.10 billion, and stockholders’ equity was $1.82 billion. Debt carried a 4.43% weighted-average interest rate and approximately four-year weighted-average maturity. Cash and cash equivalents were $84.1 million, with restricted cash of $60.2 million. First-half capital expenditures were $32.2 million. Cash declined $60.2 million in the first half, principally reflecting hotel acquisitions, capital spending and dividends.
Material changes and notable items
- Acquired the 157-room Shorebreak Hotel for $58.5 million in February and the 184-suite Sheraton Suites Key West for $94.0 million on June 30. Acquisitions contributed to reported revenue growth but make comparisons less directly comparable.
- Recorded $10.5 million of first-half impairment losses: $9.7 million related mainly to abandoning a leasehold acquisition option near the Westin Boston Waterfront, and $0.8 million related to a tenant lease asset at the Lexington Hotel.
- Refinanced the Renaissance Worthington with an $85 million, 10-year fixed-rate loan at 3.66%; repaid the Frenchman’s Reef mortgage. On July 1, after quarter-end, refinanced the JW Marriott Denver with a $65 million, 10-year fixed-rate loan at 4.33%.
- 2014 comparative earnings included an $11.0 million net litigation settlement gain, a $13.6 million gain on prepayment of the Allerton note, and a $1.3 million gain on hotel sale. These items, as well as the 2015 impairment, materially affect GAAP comparisons.
- At June 30, $305 million of mortgage debt maturities were expected in 2016, excluding scheduled principal payments. Management cited refinancing, unencumbered hotel borrowing capacity, the credit facility, dispositions and operating cash flow as potential funding sources.
Outlook, risks and contingencies
Management expected approximately $85 million of capital improvements in 2015. Planned work included hotel room renovations and repositioning projects; the cost of the Conrad Chicago/Luxury Collection repositioning was still being finalized. The company did not provide specific earnings or RevPAR guidance in the supplied filing text.
Management said available cash flow, existing cash, financing and, if needed, credit-facility borrowings were expected to meet near-term liquidity needs. It described its strategy as maintaining conservative leverage and balance-sheet flexibility. The $200 million unsecured facility had $90 million outstanding at quarter-end; the company reported compliance with covenants and substantial headroom against stated leverage and fixed-charge tests. It repaid $50 million of facility borrowings after quarter-end.
Interest-rate risk is a key market exposure: $260.4 million of debt was variable-rate, and a 25-basis-point rate change was estimated to affect annual interest expense by $0.7 million. The company also noted hotel seasonality, lodging-market and brand-performance dependence, and uncertainty around access to capital and refinancing. The USVI tax agreement for Frenchman’s Reef expired February 14, 2015; absent an extension, the subsidiary’s stated tax rate is 37.4% rather than approximately 7%. Management was seeking an extension, but success was not assured. Routine litigation remained subject to uncertainty; management did not expect an aggregate material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the USVI tax agreement was extended and whether related tax expense was subsequently adjusted.
- Progress and final cost of planned 2015 capital projects, particularly the Chicago renovations and Luxury Collection repositioning.
- How the company refinances or otherwise addresses the approximately $305 million of 2016 mortgage maturities.
- Whether comparable RevPAR and operating-cost trends persist, given that reported growth also reflects acquisitions and other portfolio changes.
- Subsequent debt balances and liquidity after the July refinancing and $50 million credit-facility repayment.
- The effect of the lease-option impairment and other unusual or non-GAAP adjustments when assessing recurring earnings and cash generation.