DRH

DiamondRock Hospitality Co. 10-Q Summary

Business Context and Reporting Period

DiamondRock Hospitality Company is a lodging-focused real estate investment trust (REIT) owning 20 premium hotels and resorts with approximately 9,600 guestrooms across key U.S. gateway cities and destination resorts. The properties are operated under brands owned by Marriott, Starwood, or Hilton. This report covers the fiscal quarter ended September 11, 2009, and the period from January 1, 2009, to September 11, 2009.

Key Financial Metrics

Debt Profile: As of September 11, 2009, total debt was $820.9 million, consisting entirely of mortgage debt. The senior unsecured credit facility balance was $0. The weighted-average interest rate on mortgage debt was 5.80%.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 14.6% in Q3 2009 and 15.8% YTD compared to 2008. This was driven by an 18.9% decline in Revenue Per Available Room (RevPAR) YTD, resulting from a 13.0% decrease in Average Daily Rate (ADR) and a 5.0 percentage point drop in occupancy.
• Profitability: Net income turned to a net loss of $2.1 million YTD 2009 compared to $39.1 million in 2008. Operating profit margins compressed significantly due to the revenue shortfall.
• Customer Mix: Business transient revenue, the most profitable segment, declined 31.6% YTD. Group revenue declined 16.1% YTD due to cancellations and reduced meeting sizes. Leisure revenue declined 6.9% YTD.
• Cost Management: Hotel operating expenses decreased 9.8% YTD, primarily due to reduced wages and benefits and lower incentive management fees. However, depreciation and amortization increased 8.1% YTD due to new assets in service.
• Liquidity: Cash and cash equivalents increased from $13.8 million at year-end 2008 to $119.3 million in Q3 2009, bolstered by equity offerings and the repayment of the credit facility.

Outlook, Guidance, and Risks

• Outlook: Management anticipates a challenging operating environment for the remainder of 2009 and into 2010. Lodging demand is expected to lag the general economic recovery. New hotel supply is expected to peak in 2009 and remain above historical averages in 2010, particularly in Fort Worth, Chicago, and Austin.
• Capital Strategy: The company completed a $75 million controlled equity offering program and a follow-on public offering, raising significant capital. They repaid the entire $52 million balance on their senior unsecured credit facility. Management intends to minimize capital spending in 2009, funding approximately $6 million from corporate cash.
• Dividends: The company intends to pay a 2009 dividend equal to 100% of taxable income, with up to 90% paid in shares of common stock.
• Risks: Primary risks include the severity and duration of the economic recession, declining lodging fundamentals, and the potential for new hotel supply to impact rates. The company noted that while they have low leverage, obtaining new debt or refinancing on reasonable terms remains uncertain in the current credit market.
• Unusual Items: The company recorded a $1.3 million impairment charge on a favorable lease asset related to the Westin Boston Waterfront Hotel during the YTD period.

Investor Verification Checklist

• Verify the sustainability of the 13% decline in ADR and whether rate stabilization has occurred in key gateway markets.
• Confirm the impact of the 31.6% drop in business transient revenue on future cash flows, as this segment is the primary profit driver.
• Review the specific debt maturity schedule for the $820.9 million in mortgage debt to assess refinancing risks in the current credit environment.
• Monitor the company's ability to maintain the minimum fixed charge coverage ratio (currently 2.2x vs. 1.6x covenant) if EBITDA continues to decline.
• Assess the effectiveness of the cost-containment measures (labor reductions, capital expenditure cuts) in preserving operating margins.