Diamondrock Hospitality Co quarterly report, Q1 FY2014

DiamondRock Hospitality Company — Q1 2014 Form 10-Q

Business context and period. The filing reports unaudited results for the three months ended March 31, 2014, compared with Q1 2013. DiamondRock is a lodging REIT and hotel owner, not operator. At quarter-end it owned 26 hotels with 11,121 rooms, held a senior mortgage loan secured by a Chicago hotel, and had a right to acquire a hotel under development in New York City.

Financial and operating performance

Metric	Q1 2014	Q1 2013 / prior date
Total revenue	$190.1 million	$175.9 million; up 8.1%
Operating profit	$10.1 million; 5.3% of revenue	$1.4 million; 0.8% of revenue
Net income (loss)	$4.0 million; $0.02 per diluted share	$(4.1) million; $(0.02) per diluted share
Adjusted EBITDA	$37.3 million	$34.3 million
Adjusted FFO	$29.5 million	$26.8 million
Operating cash flow	$10.8 million	$18.2 million
Hotel capital expenditures	$26.0 million	$13.9 million
Cash and cash equivalents	$111.5 million	$144.6 million at Dec. 31, 2013
Total debt	$1.088 billion	$1.092 billion at Dec. 31, 2013

Portfolio occupancy was 72.2%, versus 70.3%; average daily rate (ADR) was $179.95, up 4.9%; and revenue per available room (RevPAR) was $129.89, up 7.6%. Hotel operating expenses rose 7.1% to $150.4 million, slower than revenue growth. Interest expense increased to $14.5 million from $13.6 million. A $6.8 million income tax benefit contributed to the return to reported profitability.

Cash declined by $33.1 million during the quarter. Investing cash outflow was $21.7 million, primarily reflecting hotel capital expenditures, partly offset by $6.0 million of loan principal receipts. Financing cash outflow was $22.2 million, including $16.8 million of dividends and $3.5 million of scheduled mortgage principal payments. The company reported $97.9 million of restricted cash, which is not equivalent to unrestricted liquidity.

Material changes and transactions

• Revenue rose 8.1%; room revenue increased 7.8% and food and beverage revenue increased 10.4%, with management citing stronger group and banquet business.
• Corporate expenses fell $2.7 million, primarily because Q1 2013 included $3.1 million of severance costs related to the departure of the former President and Chief Operating Officer.
• Adjusted EBITDA improved to $37.3 million from $34.3 million; Q1 2013 included $3.1 million of severance costs. These are non-GAAP measures and should be considered alongside GAAP results.
• After quarter-end, on April 14, 2014, the company sold Oak Brook Hills Resort for $30.1 million, including $4.0 million of seller financing.
• The company received a $6.0 million principal payment on its Allerton mortgage loan during Q1. After quarter-end, the borrower notified the company of intent to prepay the remaining loan; expected Q2 repayment was subject to the borrower raising the required capital.

Outlook, liquidity, risks and contingencies

• Management expected 2014 results to benefit from its 2013 capital investments, the Lexington Hotel New York’s rebranding to Marriott’s Autograph Collection, group booking pace at selected properties, and the expected mid-2014 opening and acquisition of a 282-room Times Square hotel. The purchase price is approximately $128 million; $26.9 million had been deposited in escrow. Management said it did not assume construction cost-overrun risk, but deposits could be forfeited if the company does not close, subject to contractual conditions.
• Management expected approximately $95 million of hotel capital improvements in 2014, including about $45 million to complete 2013 projects and $50 million for new projects. Q1 capital spending was approximately $26.0 million.
• Management said available operating cash flow, cash balances and, if needed, its credit facility were expected to meet short-term liquidity needs. The $200 million unsecured credit facility had no borrowings at quarter-end. Total debt had a 5.17% weighted-average interest rate and approximately 3.4-year weighted-average maturity.
• Mortgage maturities begin in late 2014, with approximately $230 million due in 2015 and $305 million in 2016. Management cited refinancing, unencumbered-property borrowing capacity, dispositions, its credit facility and operating cash flow as potential funding sources.
• The Lexington Hotel New York loan was below its 1.1x minimum debt-service coverage ratio after the hotel’s 2013 renovation. The lender held a $4.2 million reserve for the shortfall; management expected the ratio to exceed the threshold in Q2 2014 and the reserve to be released. The loan also had a cash-trap provision triggered during 2013. The company reported compliance with other mortgage covenants.
• Of $1.1 billion of debt, $170.4 million was variable-rate. Management estimated a 25-basis-point rate change would change annual interest expense by about $0.4 million. Hotel demand, local economic conditions, new supply, brand performance, seasonal variation, and access to financing are among the disclosed business risks. Management reported no material change to the risk factors in its 2013 Form 10-K.
• Routine litigation was disclosed; management did not expect uncovered liabilities to materially adversely affect financial condition or results, while noting litigation outcomes are uncertain. Disclosure controls were assessed as effective, with no material internal-control change reported during the quarter.

Investor facts to verify

• Whether the Allerton loan was prepaid in Q2 and the actual proceeds received.
• Whether the Lexington loan’s coverage ratio recovered, the cash-trap condition ended, and the $4.2 million reserve was released.
• Completion, acquisition cost, opening date and funding for the Times Square hotel, alongside planned 2014 capital spending.
• Plans for the 2014–2016 mortgage maturities and covenant headroom, particularly secured recourse indebtedness, reported at 44.5% against a limit below 45%.
• Whether portfolio operating gains convert into stronger operating cash flow, given Q1 cash flow declined year over year despite higher revenue and adjusted earnings.