DiamondRock Hospitality Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements unaudited. DiamondRock is a lodging REIT and hotel owner. At quarter-end it owned 28 hotels with 9,630 rooms.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $196.2 million | $213.0 million | (7.9%) |
| Operating profit | $19.3 million | $24.3 million | (20.6%) |
| Operating margin | 9.8% | 11.4% | Down 1.6 percentage points |
| Net income | $8.9 million | $16.8 million | (47.0%) |
| Diluted EPS | $0.04 | $0.08 | Down $0.04 |
| Adjusted EBITDA | $47.3 million | $50.3 million | (6.0%) |
| Adjusted FFO | $36.6 million | $42.8 million | (14.5%) |
| Operating cash flow | $21.9 million | $29.7 million | (26.2%) |
Comparable hotel performance, adjusted for acquisitions and dispositions, was stronger than reported revenue suggests: occupancy was 74.1% versus 73.3%, ADR was $217.62 versus $217.09, and RevPAR rose 1.4% to $161.30. Comparable room revenue benefited from business transient, contract, and group demand; leisure transient room revenue declined 2.5%.
Reported revenue fell partly because three hotels sold in 2016 were no longer included, partly offset by the February 2017 Sedona acquisitions. Excluding these non-comparable properties, revenue increased 0.4%. Hotel operating expenses declined 8.6% as reported, but rose 0.5% excluding portfolio changes.
Cash, debt, and liquidity
- Cash and cash equivalents were $112.4 million at March 31, down from $243.1 million at year-end; restricted cash was $48.8 million.
- Cash used in investing was $123.8 million, including $93.8 million for the Sedona acquisitions and $35.8 million in hotel capital expenditures. Cash used in financing was $28.7 million, including $25.3 million in dividends.
- Total debt was $918.0 million, with a 3.8% weighted-average interest rate and approximately 5.6-year weighted-average maturity. The company reported a 25.2% leverage ratio, no borrowings on its $300 million credit facility, and compliance with debt covenants.
- After quarter-end, on April 26, the company closed a new $200 million unsecured term loan and used part of the proceeds to repay the $170.4 million Lexington Hotel mortgage. Management said this removed near-term debt maturities; 20 of 28 hotels were unencumbered following the repayment.
- Variable-rate debt was $270.4 million at quarter-end. Management estimated a 25-basis-point rate change would affect annual interest expense by about $0.7 million.
Material changes, outlook, and risks
- DiamondRock acquired L’Auberge de Sedona and Orchards Inn Sedona on February 28 for a total contractual purchase price of $97 million, funded with corporate cash. The acquired hotels contributed $3.4 million revenue and $0.9 million net income during the quarter. Purchase accounting remained preliminary.
- Management expected 2017 hotel capital expenditures of $110 million to $120 million; $35.8 million had been spent in Q1. Major renovation work included projects at the Chicago Marriott Downtown, The Gwen, the Worthington Renaissance, the Charleston Renaissance, The Lodge at Sonoma, and JW Marriott Denver.
- The filing provided no specific full-year earnings or RevPAR guidance. Management expected available cash flows and financing sources to meet short-term liquidity needs, and anticipated hotel operating cash flow as a significant source of cash for the remainder of 2017.
- Net income and EPS were pressured by lower operating profit and a tax swing: Q1 2017 had $1.3 million of tax expense, compared with a $4.1 million tax benefit in Q1 2016. Lower interest expense, reflecting refinancing at lower rates, partly offset the decline.
- A franchisor had previously declared a hotel in default over guest satisfaction scores and retained the right to terminate the franchise agreement and seek a termination fee or liquidated damages. No termination action had been taken as of the filing; management said resolution was uncertain and a termination could materially harm results.
- Management cited hotel seasonality and exposure to economic conditions, local lodging demand, competition, and brand performance. Routine litigation was not expected to have a material adverse effect, though outcomes remain uncertain. The company reported no material changes to its previously disclosed risk factors.
Investor verification points
- Track comparable-property RevPAR and demand trends against the reported results, which were affected by hotel sales and acquisitions.
- Review the Sedona acquisitions’ final purchase-price allocation and subsequent operating contribution.
- Confirm completion and cost of the renovation program against the $110 million–$120 million 2017 capital expenditure estimate.
- Monitor the post-quarter refinancing, new term-loan terms, leverage, and available liquidity.
- Follow the unresolved franchise default and any potential termination, damages, or operating impact.