DiamondRock Hospitality Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. DiamondRock is a lodging REIT that owns, but does not directly operate, premium hotels. At year-end it owned 29 hotels with 10,928 rooms across 18 North American and U.S. Virgin Islands markets.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $931.0 million | $872.9 million |
| Operating income | $145.3 million | $137.5 million |
| Net income | $85.6 million | $163.4 million |
| Basic and diluted EPS | $0.43 | $0.83 |
| FFO | $197.2 million | $212.1 million |
| Adjusted FFO | $203.4 million | $171.5 million |
| EBITDA | $251.0 million | $326.9 million |
| Adjusted EBITDA | $265.9 million | $235.8 million |
| Cash from operations | $227.6 million | $179.8 million |
- Revenue rose 6.7%; excluding the effect of acquisitions, openings and dispositions, revenue increased 3.5%. Comparable portfolio occupancy was 79.9%, ADR was $213.74 and RevPAR was $170.87; RevPAR increased 4.7% year over year.
- Operating income margin was approximately 15.6%, versus 15.8% in 2014; net income margin was approximately 9.2%, versus 18.7%. These are calculated from reported figures.
- Reported net income and FFO declined largely against an unusually strong 2014 comparison, which included hotel sale and acquisition gains, a litigation settlement and note-repayment gains. Adjusted EBITDA rose about 12.8% and Adjusted FFO about 18.6%.
- Fourth-quarter revenue was $233.8 million and net income was $25.7 million, versus $223.6 million and $63.6 million, respectively, in fourth-quarter 2014. Quarterly EPS was $0.14 versus $0.32.
- Investing cash outflow was $203.6 million, including $150.4 million for acquisitions and $63.0 million of hotel capital expenditures. Financing cash inflow was $45.3 million; dividends paid were $96.1 million.
- Year-end cash and equivalents were $213.6 million, with another $59.3 million in restricted cash. Total debt was $1.178 billion, all mortgage debt; 17 of 29 hotels were unencumbered, and the $200 million unsecured credit facility had no year-end borrowings. Year-end weighted-average debt interest rate was 4.49%; $170.4 million of debt was variable-rate.
- Common dividends declared were $0.50 per share for 2015, up from $0.41 in 2014. The quarterly dividend increased from $0.1025 to $0.125 during 2015.
Material changes and significant items
- Acquired the 157-room Shorebreak Hotel for approximately $58.8 million and the 184-suite Sheraton Suites Key West for approximately $94.4 million.
- Refinanced or repaid several mortgages. New fixed-rate loans included $85 million at 3.66% for Renaissance Worthington, $65 million at 4.33% for JW Marriott Denver and $205 million at 4.36% for Westin Boston Waterfront. Frenchman’s Reef and Orlando Airport Marriott loans were repaid.
- Rebranded the former Conrad Chicago as The Gwen, a Luxury Collection Hotel, with a planned approximately $25 million renovation. A $9.6 million impairment followed the decision not to exercise an adjacent land lease option; a separate $0.8 million impairment related to a tenant lease at the Lexington Hotel.
- Property-tax expense increased 17.8%, primarily due to reassessments, particularly at Chicago hotels. Franchise fees increased 43.8%, in part due to acquisitions and brand-related costs.
- 2015 debt maturities included approximately $262.1 million scheduled in 2016 and $185.5 million in 2017. The Chicago Marriott mortgage was prepaid January 11, 2016; the Courtyard Manhattan/Fifth Avenue mortgage was a near-term maturity. After year-end, the company also reported borrowing $60 million under its credit facility to partially fund the Chicago loan prepayment.
Outlook, risks and contingencies
- Management expected RevPAR growth to decelerate in 2016 and cited weaker-than-expected business transient demand, uncertainty about the lodging cycle, new supply and alternative lodging. New York and Chicago supply growth was a particular concern.
- Management pointed to portfolio quality, continued asset-management initiatives, renovation benefits, refinancing savings and limited near-term debt maturities as offsets. No specific numeric 2016 revenue or earnings guidance is provided in the filing text.
- Approximately $150 million of hotel capital improvements were expected in 2016, including work at The Gwen and the Chicago Marriott Downtown. Funding depends on operating cash flow and access to debt or equity capital.
- Key risks include lodging cyclicality and fixed hotel costs; market oversupply; reliance on third-party managers and major brands; labor and operating-cost pressures; refinancing and covenant risk; and storm, earthquake, terrorism and other uninsured-loss exposure. Five Manhattan hotels and two downtown Chicago hotels represent significant room exposure in markets facing supply growth.
- The proposed Marriott-Starwood merger could increase brand concentration and reduce DiamondRock’s negotiating leverage; its eventual effect was uncertain. Frenchman’s Reef has a $6.5 million named-windstorm deductible. The company reported routine litigation and said any uninsured liabilities were not expected to materially affect its financial condition or results, while noting litigation outcomes remain uncertain.
- The company reported compliance with mortgage financial covenants at year-end, effective disclosure controls and effective internal control over financial reporting. Its auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the debt maturity schedule, including the post-year-end Chicago repayment, the Courtyard Manhattan/Fifth Avenue maturity, and subsequent credit-facility borrowings.
- Assess whether 2016 RevPAR deceleration, supply growth in New York and Chicago, and alternative lodging affect comparable hotel results and margins.
- Track the return and disruption risk from the planned $150 million capital program, particularly The Gwen and Chicago Marriott renovations.
- Reconcile GAAP earnings and FFO trends with Adjusted EBITDA and Adjusted FFO, including the material one-off gains and the 2015 impairments.
- Monitor the dividend against operating cash flow, capital needs, debt service, REIT distribution requirements and the board’s discretion; the $150 million repurchase program had no repurchases through year-end.
- Review the complete filing and notes for property-level debt terms, ground-lease obligations, insurance deductibles and hotel-manager agreements.