Diamondrock Hospitality Co. - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the fiscal quarter ended March 26, 2010. Diamondrock Hospitality Company is a lodging-focused REIT owning a portfolio of 20 premium hotels and resorts (9,586 rooms) in key gateway cities and destination resorts. The company operates as an owner, not an operator, utilizing management agreements with major brands including Marriott, Starwood, and Hilton.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $112.8 million | $118.5 million |
| Net Loss | $(8.3) million | $(5.3) million |
| Loss Per Share (Basic/Diluted) | $(0.07) | $(0.06) |
| EBITDA | $17.1 million | $18.9 million |
| Funds From Operations (FFO) | $10.6 million | $13.4 million |
| Net Cash from Operating Activities | $0.6 million | $13.8 million |
| Total Debt | $785.3 million | $786.8 million |
| Cash and Cash Equivalents | $181.4 million | $14.3 million |
| Weighted Average Interest Rate | 5.86% | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 4.8% year-over-year, driven by a 6.2% decrease in Average Daily Rate (ADR) which offset a 1.8 percentage point increase in occupancy. RevPAR declined 3.7%.
- Widened Net Loss: Net loss increased from $5.3 million to $8.3 million. This was partially mitigated by a $3.1 million reversal of previously accrued penalty interest related to a mortgage loan modification at Frenchman's Reef.
- Interest Expense Reduction: Interest expense dropped significantly from $11.5 million to $8.1 million, primarily due to the $3.1 million penalty interest reversal.
- Liquidity Improvement: Cash and cash equivalents surged from $14.3 million to $181.4 million, bolstered by $22.8 million in net proceeds from a controlled equity offering program.
- Operating Expenses: Hotel operating expenses decreased 3.5% due to cost-containment measures, specifically reductions in wages and benefits.
Outlook, Risks, and Management Commentary
- Capital Markets Activity: The company completed a $75 million controlled equity offering, selling 2.8 million shares at an average price of $9.13. They are also negotiating a new $200 million unsecured credit facility to replace the current one expiring in February 2011.
- Dividend Policy: A dividend of $0.33 per share was paid in January 2010, with 90% paid in stock and 10% in cash. The company intends to distribute taxable income to maintain REIT status.
- Debt Covenants: While the company was in compliance with all covenants as of March 26, 2010, a "cash trap" provision was triggered on the Courtyard Manhattan/Midtown East mortgage subsequent to the quarter-end.
- Tax Risk: A tax agreement with the U.S. Virgin Islands regarding the Frenchman's Reef property expired in February 2010. If not extended, the tax rate on this property could rise from ~4% to 37.4%.
- Capital Expenditures: The 2010 capital improvement budget is $36 million, with only $7 million expected to be funded from corporate cash; the remainder will be funded from hotel escrow reserves.
Investor Verification Checklist
- Verify the status of the U.S. Virgin Islands tax agreement extension for the Frenchman's Reef property.
- Monitor the impact of the triggered "cash trap" provision on the Courtyard Manhattan/Midtown East property on future cash flows.
- Confirm the finalization of the new $200 million unsecured credit facility.
- Review the trajectory of ADR recovery as occupancy stabilizes in the second half of 2010.
- Assess the sufficiency of the $181.4 million cash balance against upcoming debt maturities and dividend obligations.