DiamondRock Hospitality Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. DiamondRock owns and asset-manages premium hotels and resorts as a REIT. It owned 30 hotels with 9,949 rooms at quarter-end; Frenchman’s Reef remained closed following 2017 hurricane damage.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $220.8 million | $223.5 million | $640.3 million | $663.0 million |
| Operating profit | $44.2 million | $34.3 million | $95.7 million | $104.3 million |
| Net income | $31.4 million | $21.6 million | $63.8 million | $67.1 million |
| Diluted EPS | $0.15 | $0.11 | $0.31 | $0.33 |
| Adjusted EBITDA (non-GAAP) | $70.3 million | $63.1 million | $189.5 million | $188.1 million |
| Adjusted FFO (non-GAAP) | $56.9 million | $50.1 million | $156.2 million | $150.2 million |
Margins: Operating margin was approximately 20.0% in Q3 versus 15.4% a year earlier, and 14.9% for the nine months versus 15.7%. Net margin was approximately 14.2% versus 9.7% in Q3 and 10.0% versus 10.1% for the nine-month periods.
Hotel performance: Comparable Q3 occupancy was 82.4% versus 84.9%; ADR was $233.14, up 2.3%; RevPAR was $192.07, down 0.7%. For the nine months, occupancy was 79.8% versus 81.0%, ADR was $231.67, up 2.5%, and RevPAR was $184.94, up 1.0%. The filing’s comparisons adjust for acquisition, closure and renovation timing.
Cash flow and liquidity: Nine-month operating cash flow was $150.0 million versus $147.4 million. Investing used $167.5 million, including $119.5 million for acquisitions and $76.8 million for hotel capital expenditures, partly offset by $30.7 million of property insurance proceeds. Financing provided $6.1 million, including $92.7 million of equity proceeds and offset by $76.5 million of dividends. At September 30, cash and cash equivalents were $169.7 million and restricted cash was $42.6 million. The $300 million credit facility was undrawn.
Debt: Debt, net of issuance costs, totaled $931.6 million, down from $937.8 million at year-end 2017; weighted-average interest rate was 4.03% and weighted-average maturity approximately 4.9 years. The company reported a 23.8% leverage ratio and compliance with debt covenants. Face debt was $937.4 million, of which $300 million was variable-rate debt; a 25-basis-point rate change would affect annual interest expense by approximately $0.8 million.
Material changes versus prior period
- Q3 revenue declined 1.2%, but excluding specified non-comparable hotel closures, acquisitions and renovation effects, management reported growth of 0.4%. Nine-month revenue fell 3.4%; on the company’s adjusted comparison basis it increased 1.3%.
- Q3 net income rose by $9.8 million. Results included $8.2 million of business-interruption insurance income, a $1.7 million property-insurance settlement gain, and a reversal of previously recorded CFO-related compensation expense. Nine-month net income declined by $3.3 million; results included $16.3 million of business-interruption insurance income and $10.9 million of Lexington Hotel union buyout severance costs.
- Q3 interest expense increased to $10.2 million from $9.7 million, primarily reflecting higher variable interest rates on term loans. Nine-month interest expense rose to $30.4 million from $28.8 million, primarily due to the $200 million term loan entered into in 2017.
- In March, DiamondRock acquired the 77-room Landing Resort & Spa for $42 million and the 242-room Hotel Palomar Phoenix for $80 million. The company issued 7.47 million shares through its prior ATM program during the nine months for net proceeds of $92.9 million.
Outlook, commentary and risks
- No quantified earnings or RevPAR guidance was provided. Management expected approximately $135 million of hotel capital improvements in 2018; $76.8 million had been spent through September. Hotel Rex was undergoing a comprehensive renovation and was expected to reopen as Hotel Emblem; renovation work at JW Marriott Denver was planned to begin in Q4 2018, with most work in 2019.
- Management expected Frenchman’s Reef to remain closed into 2020. The company continued to pursue its hurricane insurance claim and was litigating with insurers over coverage; negotiations were also ongoing. The ultimate recovery and restoration costs remain uncertain.
- A California resort acquisition was pending for approximately $150 million, with closing expected in Q4 2018 subject to conditions. Consideration was to include cash and up to approximately 1.2 million OP units. A new $50 million unsecured term loan entered into October 18 was to be funded upon closing.
- Management said available operating cash flow, cash, equity and debt financing, insurance proceeds and other potential sources were expected to meet short-term liquidity needs. Risks include lodging demand and competition, rising operating costs and interest rates, financing and acquisition execution, natural disasters and uncertain insurance recoveries, and hotel renovation disruption. The company also disclosed franchise-default risk if guest satisfaction at a hotel deteriorates again.
- Other notable items: Havana Cabana Key West reopened in April after hurricane-related renovation; its insurance claim was settled for $8.3 million net of deductibles. The Lodge at Sonoma’s smoke-damage claim was settled for $1.3 million net of deductibles. The board increased the share-repurchase authorization from $150 million to $250 million on November 2; no shares had been repurchased in 2018.
Important facts for investors to verify
- Progress, total costs, reopening timing and final insurance recovery for Frenchman’s Reef, including the outcome of insurer litigation.
- Whether the pending California resort acquisition closes, its final purchase consideration, and the related funding and dilution from OP units.
- Underlying hotel trends excluding acquisitions, closures, renovations and insurance income; particularly occupancy declines and the gap between reported and comparable-period results.
- Delivery of the 2018 capital-spending plan and renovation schedules, including any impact on hotel operating results.
- Debt costs and covenant headroom as interest rates change, alongside dividend coverage and the use of ATM equity or repurchase capacity.