DiamondRock Hospitality Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company owned 27 premium hotels and resorts with 11,608 rooms, plus a mortgage loan secured by a Chicago hotel and a right to acquire a hotel under development. It operates as a lodging REIT and receives hotel operating results after manager fees.
Financial and operating results
- Q3 revenue: $210.6 million; GAAP operating profit was $22.0 million and net income was $8.6 million, or $0.04 per diluted share. Prior-year reported results included impairment and discontinued-operation losses, so they are not directly comparable.
- Comparable Q3 operating trends: Against management’s adjusted 2012 comparison, revenue declined 6.1% to $210.6 million, partly reflecting 20 fewer days for Marriott-managed hotels. Portfolio RevPAR rose 1.1% to $141.03, as ADR increased 2.8% while occupancy fell 1.3 percentage points to 79.5%.
- Year-to-date revenue and earnings: Revenue was $616.1 million, up 11.1% from the adjusted comparison of $554.3 million; management attributed much of the increase to five hotels acquired in 2012. Comparable-hotel revenue increased 1.2%. Net income was $19.5 million versus a reported prior-period net loss of $33.2 million. The reporting-calendar change limits comparability.
- Non-GAAP measures: Q3 Adjusted EBITDA was $51.0 million and Adjusted FFO was $35.9 million. Nine-month Adjusted EBITDA was $147.6 million and Adjusted FFO was $105.8 million. These company-defined measures are not substitutes for GAAP results and may not be comparable across companies.
- Cash flow: Nine-month operating cash flow was $100.2 million; investing cash outflow was $86.7 million, including $75.3 million of hotel capital expenditures; financing cash inflow was $20.3 million. Cash and equivalents ended at $43.4 million, up from $9.6 million at year-end 2012.
- Debt and liquidity: Total debt was $1.06 billion, all mortgage debt, with a 5.24% weighted-average rate and approximately 3.7-year weighted-average maturity. The $200 million unsecured facility had no borrowings; $200 million remained available. Restricted cash was $86.6 million. Credit-facility covenant metrics were within stated limits.
- Balance sheet: Total assets were $3.00 billion and stockholders’ equity was $1.67 billion at September 30, 2013. Mortgage debt increased from $968.7 million at December 31, 2012.
Material changes, outlook and risks
- The company shifted to calendar-quarter reporting in 2013. It did not restate 2012 quarterly results, and the filing cautions that reported periods are not directly comparable. Management provides adjusted comparisons, but these also involve period adjustments.
- Renovations at three New York hotels displaced approximately 84,000 room nights in the first nine months; the Lexington Hotel also closed for six days after an electrical incident. Lexington renovations were completed in October 2013. The company attributed reduced occupancy partly to these disruptions.
- The Lexington mortgage DSCR was 0.7x against a 1.1x minimum, and a cash trap was in effect. Failure to cure the covenant default could make the loan due. The company said it would deposit approximately $2.0 million to cure the shortfall in Q4 2013; the reserve is to be released after DSCR exceeds 1.1x for two consecutive quarters.
- Management expected available operating cash flow, existing cash and, if needed, credit-facility borrowings to meet near-term needs. Its 2013 and early-2014 capital program was approximately $140 million; $75.3 million had been spent through September. No specific earnings or RevPAR guidance was provided.
- After quarter-end, the company entered a $63 million, seven-year, 4.25% fixed-rate Salt Lake City mortgage and defeased the prior loan at an approximately $1.5 million cost. It also expected to sell the Torrance Marriott South Bay for $74 million, subject to closing conditions.
- The company paid quarterly dividends of $0.08 in January and $0.085 in April, July and October. A $100 million share-repurchase authorization was approved, but no program repurchases had been made as of the filing.
- Other disclosed risks include cyclical hotel demand, local economic conditions, new hotel supply, interest-rate exposure, seasonal operating patterns and uncertain litigation outcomes. Management said there were no material changes to the risk factors in its 2012 Form 10-K.
Most important facts for investors to verify
- How the calendar reporting change and management’s adjusted comparisons affect year-over-year conclusions.
- Whether Lexington’s DSCR default was cured as planned and when its cash-trap restrictions were released.
- Whether the Torrance sale closed and how sale proceeds and the Salt Lake City refinancing affected liquidity, debt and earnings.
- Renovation costs, completion schedules and the return to normal hotel operations, particularly at the New York properties.
- Actual capital spending against the approximately $140 million program, cash generation and the sustainability of dividends.
- Hotel demand, occupancy and RevPAR trends, along with compliance with debt covenants and upcoming mortgage maturities.