DRH

Diamondrock Hospitality Co. - Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 23, 2007. Diamondrock Hospitality Company is a lodging-focused real estate investment trust (REIT) owning 21 hotels with 9,798 rooms across major U.S. markets. The company operates under an umbrella partnership REIT (UPREIT) structure. As of the reporting date, the company had 94,534,132 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 61% year-over-year, driven primarily by the acquisition of six new hotels since Q1 2006 and organic growth in existing properties.
• Acquisition Activity: The company acquired the Westin Boston Waterfront Hotel (793 rooms) for approximately $330.3 million in February 2007. This acquisition significantly expanded the portfolio and contributed to the increase in total assets from $1.8 billion to $2.1 billion.
• Capital Structure: The company completed a follow-on equity offering, selling 18.3 million shares for net proceeds of $317.6 million, which funded the Boston acquisition. Additionally, the company amended its credit facility, expanding it from $75 million to $200 million.
• Operating Expenses: Hotel operating expenses rose to $98.5 million from $61.5 million, consistent with the larger portfolio size. Depreciation and amortization increased to $16.1 million from $9.0 million.
• Dividends: The board declared a quarterly dividend of $0.24 per share, an increase from the $0.18 per share declared in the prior year's fourth quarter.

Outlook, Risks, and Management Commentary

• Capital Expenditures: Management plans to invest approximately $70 million to $80 million in capital improvements in 2007. Major projects include a $35 million renovation of the Chicago Marriott Downtown and $15 million in tenant improvements for the Westin Boston Waterfront.
• Liquidity: The company maintains a conservative capital structure with 97.5% of debt at fixed rates. It holds $17.4 million in cash and has $178.5 million available under its new $200 million unsecured credit facility.
• Market Risk: The primary market risk is interest rate fluctuation. Only 2.5% of debt is variable rate. A 100 basis point increase in rates would decrease future earnings by approximately $0.2 million annually.
• Seasonality: The company notes that historically, approximately two-thirds of annual income is generated in the second and fourth quarters.
• Legal: No material litigation is pending or threatened.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the newly acquired Westin Boston Waterfront Hotel against pro forma projections, noting it was only partially operational during the quarter.
• Capital Expenditure Execution: Monitor the timeline and budget adherence for the planned $35 million Chicago Marriott renovation and other major capital projects.
• Debt Covenants: Confirm continued compliance with the new credit facility covenants, specifically the maximum leverage ratio of 65% and minimum fixed charge coverage ratio of 1.6x.
• Dividend Sustainability: Assess whether the increased dividend rate of $0.24 per share is sustainable given the increased interest expense from the expanded portfolio and debt levels.
• Pro Forma Comparability: Note that year-over-year comparisons are limited due to the significant portfolio expansion; review pro forma statistics for a clearer view of organic performance.