Diamondrock Hospitality Co quarterly report, Q1 FY2018

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DiamondRock Hospitality Company — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; unaudited. DiamondRock is a lodging REIT and hotel owner. At quarter-end it owned 30 hotels with 9,949 rooms. Two properties affected by 2017 hurricanes were closed during the quarter; Havana Cabana Key West reopened in April 2018.

Financial and operating performance

  • Revenue: $181.5 million, down 7.5% from $196.2 million. The decline primarily reflects the closed Frenchman’s Reef and Havana Cabana properties. Excluding disclosed non-comparable items, revenue increased 1.1%.
  • Comparable hotel indicators: Occupancy was 73.9% versus 73.2%; ADR was $212.51, up 1.0%; and RevPAR was $156.98, up 1.9%. These comparisons exclude the hurricane-closed hotels and adjust for acquisition timing.
  • Profit: Operating profit was $13.5 million versus $19.3 million; net income was $4.3 million versus $8.9 million. Diluted EPS was $0.02 versus $0.04. Operating margin was approximately 7.4%, compared with 9.8%.
  • Adjusted measures: Adjusted EBITDA was $43.4 million versus $47.3 million; Adjusted FFO was $33.7 million versus $36.6 million. These are non-GAAP measures as defined by the company.
  • Cash flow: Operating cash flow was $33.6 million versus $24.8 million. Investing used $123.7 million, including $119.0 million for acquisitions and $25.8 million of capital expenditures, partly offset by $21.2 million of property-insurance proceeds. Financing used $26.2 million, including $25.4 million of dividend payments.
  • Liquidity and debt: Cash and cash equivalents were $69.1 million and restricted cash was $38.4 million at March 31. Debt, net of issuance costs, totaled $937.6 million, with a 3.89% weighted-average interest rate and approximately 5.4-year weighted-average maturity. The company reported 28.2% leverage under its credit agreement and no facility borrowings at quarter-end; it subsequently borrowed $20 million for general corporate purposes.
  • Dividends and equity: Common dividends were $0.125 per share for each of the January and April payments. The company sold 230,719 shares through its ATM program for net proceeds of $2.7 million during the quarter.

Material changes and unusual items

  • Q1 revenue included a $21.9 million decrease at Frenchman’s Reef and a $2.2 million decrease at Havana Cabana due to hurricane-related closures. Frenchman’s Reef was expected to remain closed through the end of 2019.
  • DiamondRock acquired the 77-room Landing Resort & Spa for a contractual price of $42 million and the 242-room Hotel Palomar Phoenix for $80 million, both on March 1.
  • The company recognized a $6.0 million business-interruption insurance gain and $1.9 million of insurance expense reimbursements. It received $40.0 million in hurricane-related insurance proceeds during the quarter, including $18.8 million for business interruption and $21.2 million for property losses; additional claims remained under negotiation.
  • Expenses included $3.0 million of severance related to the former CFO’s departure and $2.8 million for a voluntary employee buyout program at the Lexington Hotel New York. Adjusted EBITDA and Adjusted FFO exclude these severance costs.
  • Interest expense rose to $9.9 million from $9.5 million, primarily reflecting term-loan interest. A 25-basis-point change in rates on variable-rate debt was estimated to change annual interest expense by $0.8 million.

Outlook, risks, and contingencies

  • No specific earnings or RevPAR guidance was provided. Management said available cash flows, cash balances, financing sources, insurance proceeds and, if needed, credit-facility borrowings were expected to meet short-term liquidity needs.
  • The company expected approximately $135 million of hotel capital improvements in 2018. Planned work included renovations at Vail, Westin Fort Lauderdale, Hotel Rex and JW Marriott Denver.
  • Key risks include lodging demand and competition, interest rates and financing availability, renovation execution and costs, natural disasters and uncertain insurance recoveries, and REIT qualification. The filing reported no material change to previously disclosed risk factors.
  • Routine litigation was not expected by management to have a material adverse effect, though outcomes remain uncertain. A hotel franchise agreement previously subject to a guest-satisfaction default was no longer in default; renewed deficiencies could expose the company to termination and related claims.

Investor verification priorities

  1. Track insurance claim collections, repair costs and the restoration timeline for Frenchman’s Reef; confirm the post-quarter reopening and operating performance of Havana Cabana.
  2. Assess whether comparable RevPAR and revenue trends persist and how the closed properties affect reported results.
  3. Verify acquisition returns and the effect of the new properties’ management, lease and financing terms.
  4. Monitor planned 2018 capital spending, renovation disruption, and the impact of severance and other unusual items on underlying performance.
  5. Review liquidity after the subsequent $20 million facility draw, variable-rate exposure, debt covenants and dividend coverage.