DiamondRock Hospitality Company — Q2 2011 Form 10-Q
Business context and reporting period. DiamondRock is a lodging-focused REIT that owns premium hotels and resorts and a senior mortgage loan secured by a hotel. This filing covers the fiscal quarter ended June 17, 2011 and the year-to-date period January 1–June 17, 2011. Hotel-manager reporting calendars differ, so some properties’ quarterly results include operations only through May 31. Comparisons are also affected by acquisitions.
Key financial metrics
| Metric | Quarter ended June 17, 2011 | Comparable 2010 quarter | YTD 2011 | Comparable YTD 2010 |
|---|---|---|---|---|
| Revenue | $169.5 million | $151.1 million | $291.8 million | $264.0 million |
| Operating profit | $14.6 million | $14.7 million | $10.3 million | $12.8 million |
| Net income (loss) | $(0.6) million | $0.8 million | $(11.6) million | $(7.5) million |
| EBITDA (non-GAAP) | $36.6 million | $34.1 million | $53.9 million | $51.2 million |
| FFO (non-GAAP) | $21.1 million | $19.9 million | $31.4 million | $30.5 million |
| Net cash from operations | — | $18.3 million | $13.8 million |
Quarterly operating margin was approximately 8.6%, versus 9.8% in the comparable quarter; year-to-date operating margin was approximately 3.5%, versus 4.9%. Quarterly diluted EPS was approximately break-even (reported as $0.00), versus $0.01; YTD diluted loss per share was $0.07, versus $0.06.
- Hotel operating indicators: Pro forma quarterly occupancy was 74.7% (+1.4 percentage points), ADR was $162.87 (+2.4%), and RevPAR was $121.61 (+4.3%). YTD occupancy was 70.3% (+0.6 points), ADR $156.36 (+2.8%), and RevPAR $110.00 (+3.9%).
- Cash and liquidity: Cash and cash equivalents were $20.9 million at June 17, down from $84.2 million at year-end; restricted cash was $75.8 million. Investing used $423.8 million and financing provided $342.2 million in the YTD period.
- Debt: Total debt was $1.036 billion, compared with $780.9 million at year-end; weighted-average interest rate was 5.47% and weighted-average maturity approximately 4.9 years. The company had $115 million drawn on its $200 million unsecured facility, with $85 million undrawn before subsequent borrowing. Mortgage debt was principally fixed-rate; $115 million was variable-rate.
Material changes versus prior period
- Revenue increased 12.2% for the quarter and 10.5% YTD, substantially reflecting acquisitions, including Hilton Minneapolis, Renaissance Charleston, Hilton Garden Inn Chelsea, JW Marriott Denver at Cherry Creek, and Radisson Lexington. Reported growth should not be read as same-property growth.
- On a pro forma basis, RevPAR rose 4.3% for the quarter and 3.9% YTD. Management attributed gains mainly to stronger pricing and increased higher-rated business-transient demand; group revenue was flat.
- Operating profit was slightly lower quarterly and lower YTD despite increased revenue. Hotel operating costs, depreciation, acquisition costs, corporate expenses, and interest expense increased. YTD interest expense also compares against a 2010 period that included reversal of $3.1 million of Frenchman’s Reef penalty interest.
- The company issued 12.4 million common shares in a follow-on offering, netting approximately $149.7 million. It acquired the 196-room JW Marriott Denver for about $74.2 million and the 712-room Radisson Lexington for about $336.8 million.
Outlook, commentary, risks and unusual items
- Management stated that operating cash flow, cash balances and, if needed, credit-facility borrowings were expected to meet short-term liquidity requirements. No formal earnings guidance was provided.
- Management planned approximately $65 million of 2011 capital improvements, including about $37 million for the Frenchman’s Reef renovation and repositioning. Two of that resort’s four buildings closed in May; material operating disruption was expected during the project. The filing reported approximately $21.3 million of hotel capital expenditures YTD.
- A Times Square hotel purchase agreement provides for a fixed-price acquisition upon completion, expected in 2013: approximately $128 million for 285 rooms, potentially rising to approximately $178 million if approvals allow up to 400 rooms. The company had deposited $20 million; deposits may be forfeited if the company fails to close, subject to contractual exceptions.
- Subsequent to quarter-end, the company acquired the 177-room Courtyard Denver Downtown for approximately $46 million, funded with cash, a $15 million credit-facility draw and assumed $27.2 million mortgage debt. That mortgage matures August 5, 2012.
- The Allerton Hotel mortgage loan was matured and in default; the borrower filed for Chapter 11 bankruptcy, staying foreclosure. The loan’s carrying value was $57.3 million, versus estimated fair value of $40.5 million; management recorded no impairment, citing collateral value. Interest recognition remained on non-accrual status.
- The Conrad Chicago failed management-agreement performance criteria; Hilton declined to cure. DiamondRock may terminate by December 31, 2011, with a $1.0 million termination fee, which was accrued. Orlando Airport Marriott and Oak Brook Hills Marriott were also forecast likely to fail termination criteria, subject to managers’ cure rights.
- Other contingencies include an employee claim alleging service-charge ordinance violations at Los Angeles-area hotels; the company could not estimate the outcome or potential loss. Management said routine litigation was not expected to be material. The company reported compliance with debt covenants; credit-facility leverage was 45.3% against a 60% maximum and fixed-charge coverage was 2.1x against a 1.5x minimum.
Most important facts for investors to verify
- How much of revenue and RevPAR growth came from comparable hotels versus acquisitions, and whether hotel operating costs continue to rise faster than comparable revenue.
- Progress, disruption, funding and expected returns from the Frenchman’s Reef renovation; actual 2011 capital spending versus the stated plan.
- Allerton loan recovery prospects and bankruptcy outcome, including the gap between carrying value and disclosed fair value.
- Debt and liquidity after the post-quarter Courtyard Denver acquisition, including the 2012 mortgage maturity, facility availability and covenant headroom.
- Times Square permits, deposit exposure, development schedule and final room count and purchase price.
- Resolution and potential cost of the Los Angeles employee litigation and management-contract performance issues.