DiamondRock Hospitality Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. DiamondRock is a lodging REIT that owns and asset-manages premium hotels and resorts operated by third parties. At quarter-end it reported 29 hotels with 8,878 rooms; all owned hotels were open, though some had been closed for part of the period.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $124.8 million | $20.4 million | $197.7 million | $190.4 million |
| Net loss | $19.1 million | $73.4 million | $190.7 million | $108.1 million |
| Net loss attributable to common stockholders | $21.5 million | $72.8 million | $194.8 million | $107.3 million |
| Loss per common share, diluted | $0.10 | $0.36 | $0.92 | $0.53 |
| Interest expense | $10.7 million | $11.6 million | $19.2 million | $32.8 million |
| Adjusted EBITDA (non-GAAP) | $19.8 million | $(37.0) million | $10.2 million | $(25.2) million |
Q2 occupancy was 46.7%, ADR was $221.79 and RevPAR was $103.65, compared with 8.9%, $175.76 and $15.63, respectively, in Q2 2020. For the first half, occupancy was 36.7%, ADR was $219.95 and RevPAR was $80.65; RevPAR increased 10.5% year over year on the company’s comparable basis.
First-half hotel operating expenses fell 14.6% to $176.8 million, while revenue rose 3.8%. The first-half net loss included $126.7 million of impairment losses, principally related to two hotel sales. Cash interest paid was $21.6 million for the six months.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $192.9 million and restricted cash was $26.7 million. Management reported liquidity of $638.9 million, including unrestricted corporate cash, $400 million of undrawn revolving capacity and unrestricted cash held at hotels.
- Total debt, net of issuance costs, was $986.2 million, down from $1,048.7 million at year-end 2020. The weighted-average interest rate was 3.97% and weighted-average maturity was approximately 3.1 years. No revolving-credit borrowings were outstanding at quarter-end.
- First-half operating cash flow was negative $36.4 million. Investing activities provided $191.4 million, including $213.8 million of net hotel-sale proceeds; financing activities used $70.2 million. Cash, cash equivalents and restricted cash increased by $84.8 million.
- All mortgage loans with cash-trap provisions were below their required coverage thresholds. The company said it did not expect these cash traps to prevent it from meeting short-term liquidity needs.
Changes, transactions and notable items
- Q2 revenue rebounded sharply from the pandemic-affected prior-year quarter. First-half revenue increased only modestly, with room revenue up 9.9% but food-and-beverage revenue down 15.8%.
- DiamondRock sold Frenchman’s Reef on April 30 for $35.0 million cash plus a contingent participation right in future profits, and sold The Lexington Hotel on June 30 for $185.3 million. It recorded $11.5 million and $115.2 million of first-half impairment losses, respectively, for these properties.
- After quarter-end, the company acquired the 218-room Bourbon Orleans Hotel for $81.1 million and the 37-room Henderson Park Inn for $27.5 million, both funded with corporate cash.
- First-half capital spending was $16.9 million at operating hotels and $2.7 million on Frenchman’s Reef reconstruction. Management expected approximately $55 million of 2021 capital improvements, including selected renovation and repositioning projects.
Outlook, risks and contingencies
Management said leisure-hotel demand improved in late 2020 and the first half of 2021, while demand at other hotels remained historically low. It expected COVID-19 to continue materially affecting results, financial position and cash flow in the second half of 2021; new variants could slow or reverse the recovery. The filing gives no specific earnings or RevPAR guidance.
The common dividend remained suspended. Series A preferred dividends continued, at $0.515625 per share for each of the March and June 2021 payments. Credit-agreement covenant relief was extended through Q4 2021; amendments also set minimum liquidity at $125 million and allow preferred dividends up to $25 million annually. The filing also identifies interest-rate and LIBOR-transition risks; a 100-basis-point move in rates on variable-rate debt was estimated to change annual interest expense by $2.2 million. Routine litigation was not expected by management to have a material adverse effect, though outcomes remain uncertain.
Management concluded there was no substantial doubt about the company’s ability to continue as a going concern for the 12 months after issuance. The common dividend resumption, recovery pace, hotel cash needs, debt covenant compliance and contingent Frenchman’s Reef proceeds remain uncertain.
Investor verification priorities
- Track hotel demand recovery by market and segment, including occupancy, ADR, RevPAR and the performance of leisure versus urban properties.
- Verify liquidity available after hotel working-capital needs, covenant restrictions and cash trapped under mortgage agreements.
- Monitor debt maturities, covenant testing after the relief period, and the transition from LIBOR to replacement rates.
- Review acquisition funding and integration for the Bourbon Orleans Hotel and Henderson Park Inn, and progress on planned renovations and the $55 million capital-spending expectation.
- Assess the size and timing of any proceeds from the Frenchman’s Reef profit-participation right, which is contingent and not assured.