DiamondRock Hospitality Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. DiamondRock owns premium hotels and resorts and reported a portfolio of 28 properties with 9,630 rooms.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $223.5 million | $220.2 million | $663.0 million | $689.9 million |
| Operating profit | $34.3 million | $41.3 million | $104.3 million | $123.7 million |
| Net income | $21.6 million | $29.9 million | $67.1 million | $90.9 million |
| Diluted EPS | $0.11 | $0.15 | $0.33 | $0.45 |
| Adjusted EBITDA | $63.1 million | $65.6 million | $188.1 million | $200.1 million |
| Adjusted FFO | $50.1 million | $52.1 million | $150.2 million | $158.0 million |
Q3 revenue increased 1.5%, but operating profit fell about 17% and net income fell about 28%. For the nine months, revenue declined 3.9%, operating profit about 16%, and net income about 26%. Reported operating margin was approximately 15.4% in Q3 versus 18.8% a year earlier, and 15.7% for the nine months versus 17.9%. Nine-month results include hotel dispositions in 2016 and the Sedona acquisitions in 2017; excluding acquisition and disposition effects, management said revenue decreased 0.3% for the nine months.
Comparable operating indicators improved: Q3 occupancy was 85.4% versus 84.0%, ADR was $227.75 versus $224.91, and RevPAR rose 2.9% to $194.42. For the nine months, occupancy was 81.5%, ADR $228.67, and RevPAR $186.46, up 2.2% on a comparable basis. Food-and-beverage revenue was weaker, with comparable declines attributed primarily to lower banquet and catering revenue.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $149.4 million, compared with $152.5 million. Investing cash use was $168.9 million, including $93.8 million for Sedona acquisitions and $77.5 million of capital expenditures. Financing cash use was $57.0 million; cash and equivalents declined $76.5 million to $166.6 million.
- At September 30, 2017, debt was $940.8 million net of issuance costs ($947.8 million face amount), with a 3.75% weighted-average interest rate and approximately 5.9 years’ weighted-average maturity. Debt increased from $920.5 million at year-end 2016. The company had $166.6 million unrestricted cash, $42.3 million restricted cash, and no credit-facility borrowings.
- The $300 million unsecured credit facility matures in May 2020; the $100 million and $200 million unsecured term loans mature in May 2021 and April 2022. The company reported covenant compliance, a 24.4% leverage ratio, and 20 of 28 hotels unencumbered by mortgage debt.
- Management said available cash flows, cash balances, financing and other potential sources were expected to meet short-term liquidity needs. Variable-rate debt was $300 million; a 25-basis-point rate change would affect annual interest expense by approximately $0.8 million.
Material developments, outlook and risks
- Hurricanes Irma and Maria damaged Frenchman’s Reef in St. Thomas; the resort was closed and expected to remain closed through the end of 2018. The Inn at Key West was also closed, with reopening expected by the end of Q1 2018. Two other Florida hotels reopened shortly after the storm. California wildfire smoke temporarily closed The Lodge at Sonoma in October; it reopened October 20.
- The company recorded a $40.5 million property-damage impairment and a $39.9 million estimated insurance receivable, leaving $0.6 million of damage loss below the applicable deductible. These were preliminary estimates; the filing says insurance payment amount and timing were not determined and estimates would be finalized in Q4 2017. It also recorded $1.8 million impairment for unrecoverable construction in progress.
- Management expected 2017 hotel capital improvements of $110 million to $120 million; $77.5 million had been spent in the first nine months. The final phase of the Chicago Marriott Downtown renovation was expected to begin in late 2017 and finish in early 2018.
- Management provided no explicit earnings or RevPAR forecast. It cautioned that lodging results are seasonal and sensitive to economic conditions, competition, travel demand, hotel supply and brand performance. Natural-disaster damage to surrounding communities could prolong tourism weakness, delay infrastructure recovery, constrain labor or raise costs and could affect results and distributions.
- Management agreements changed at Courtyard Manhattan/Midtown East and, after quarter-end, Hotel Rex. The Frenchman’s Reef agreement may be terminable following catastrophic damage; DiamondRock was evaluating its options.
- Routine litigation was not expected by management to have a material adverse effect, though outcomes are uncertain. A previously reported franchise guest-satisfaction default had been cured, but renewed default could expose the company to termination and damages.
Most important facts for investors to verify
- Actual insurance recovery, timing, final repair costs, and reopening schedules for hurricane-affected properties.
- Comparable-property operating trends, particularly weaker food-and-beverage, contract and leisure-transient demand, against improved occupancy, ADR and RevPAR.
- Execution and cost of the 2017 capital program and remaining Chicago Marriott Downtown renovation.
- Debt and interest-rate exposure, covenant headroom, and cash needs for dividends, repairs and acquisitions.
- Whether Sedona acquisitions and management changes deliver the expected operating contribution, and whether the unresolved franchise risk recurs.