DiamondRock Hospitality Company — Q3 2010 Form 10-Q
Reporting period: Fiscal quarter ended September 10, 2010, and year-to-date (YTD) January 1–September 10, 2010; comparisons are to the fiscal quarter ended September 11, 2009 and YTD September 11, 2009. The company notes that hotel managers use differing reporting calendars, so reported hotel periods may not align exactly with calendar quarters.
Business context
DiamondRock is a lodging-focused REIT and hotel owner, not operator. As of September 10, it owned 23 branded hotels and resorts with 10,743 rooms and held a senior mortgage loan secured by another hotel. During 2010 it acquired the Hilton Minneapolis, Renaissance Charleston and Hilton Garden Inn Chelsea.
Financial results and key metrics
| Metric | Q3 2010 | Q3 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Revenue | $151.1 million | $137.8 million | $415.1 million | $400.0 million |
| Operating profit | $6.8 million | $7.2 million | $19.6 million | $17.5 million |
| Net income (loss) | $(3.5) million | $0.8 million | $(11.0) million | $(2.1) million |
| Basic and diluted EPS | $(0.02) | $0.01 | $(0.08) | $(0.02) |
| EBITDA (non-GAAP) | $28.3 million | $26.2 million | $79.5 million | $75.1 million |
| FFO (non-GAAP) | $17.8 million | $19.6 million | $48.2 million | $55.2 million |
| Cash from operations | — | $42.5 million | $49.9 million |
Q3 operating margin was approximately 4.5%, versus 5.2% in the prior-year quarter; YTD operating margin was approximately 4.7%, versus 4.4%. Q3 revenue rose 9.7%, while operating expenses rose 10.5%. The Q3 net result also reflected a substantially smaller income-tax benefit than in 2009. YTD net loss was affected by the prior-year $13.9 million tax benefit; 2010 recorded $0.8 million of tax expense.
On a pro forma hotel basis including comparable periods for 2010 acquisitions, Q3 occupancy was 75.0% versus 73.5%, ADR was $149.35 versus $145.93, and RevPAR increased 4.4% to $111.94. YTD occupancy was 71.3% versus 69.0%; ADR declined 0.7% to $151.94, while RevPAR rose 2.7% to $108.34.
YTD investing cash outflow was $352.8 million, primarily for hotel acquisitions and the Allerton loan, plus $16.2 million of hotel capital expenditures. Financing provided $194.2 million, including $209.8 million of net common-stock proceeds. Cash and cash equivalents fell to $61.3 million from $177.4 million at year-end 2009; restricted cash was $48.2 million. The company reported $782.7 million of mortgage debt, no borrowings under its revolving facility, and stockholders’ equity of $1.411 billion.
Material changes and transactions
- The three hotel acquisitions involved approximately $266 million in total cash consideration. Acquisition-related expenses were $1.2 million YTD.
- A May follow-on offering sold 23 million shares at $8.40 per share and generated approximately $184.7 million net. The completed controlled equity program generated $25.1 million net. Common shares outstanding increased to 154.6 million from 124.3 million at December 31, 2009.
- The $200 million unsecured revolving credit facility was amended and restated in August, with maturity extended to August 2013 and a possible one-year extension. No amounts were drawn at quarter-end; the company may seek lender approval to increase it to $275 million.
- YTD interest expense declined $3.2 million, primarily because the Frenchman’s Reef mortgage lender waived $3.1 million of previously accrued penalty interest. The loan modification also extended certain project deadlines and required escrow funding.
- Hurricane Earl caused damage at Frenchman’s Reef; $1.4 million of remediation expense was recorded, below the named-windstorm insurance deductible.
Outlook, risks and contingencies
- Management said lodging demand and ADR improved during Q3 and expected rates to improve during the remainder of 2010. No specific financial guidance was provided.
- The company planned an approximately $45 million Frenchman’s Reef renovation and repositioning program, with expected company cash spending of approximately $35 million over two years. Most work was expected in summer 2011, including partial closure of about 300 rooms; management anticipated EBITDA would be lower by several million dollars versus the comparable 2010 period. Marriott’s proposed contribution was based on a non-binding term sheet.
- The Allerton senior loan, acquired for approximately $60.6 million, was in default and had matured in January 2010. Its $69.0 million principal was on non-accrual; approximately $2.1 million of accrued interest was unrecorded. Foreclosure proceedings were ongoing, with no assurance of success or timing.
- The Courtyard Manhattan/Midtown East mortgage cash-trap provision had been triggered; $1.3 million was held by the lender. The company said it was in compliance with mortgage covenants. Credit-facility actuals included a 39.1% leverage ratio against a 60% maximum, 1.9x fixed-charge coverage against a 1.3x minimum then applicable, and $1.779 billion tangible net worth against a $1.457 billion minimum.
- The Frenchman’s Reef subsidiary’s USVI tax agreement had expired, raising its tax rate from approximately 4% to 37.4%. The USVI Economic Development Authority recommended a five-year extension retroactive to February 2010, but final approval and execution remained outstanding.
- A service-charge ordinance claim involving employees at the Los Angeles Airport Marriott and other area hotels was in early stages; the company could not estimate the likelihood or amount of loss, but did not expect a material impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Final USVI approval and the earnings impact of the Frenchman’s Reef tax agreement extension.
- Allerton loan recovery, foreclosure outcome, and whether recorded value and unrecorded interest remain recoverable.
- Frenchman’s Reef renovation costs, funding commitments, schedule, hotel closures and resulting operating disruption.
- Hotel-level operating trends, including whether RevPAR growth continues and expense increases remain controlled.
- Liquidity, cash-trap restrictions, debt covenant headroom, and the effect of additional equity issuance on per-share results.