DiamondRock Hospitality Co. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 16, 2006, and the year-to-date period from January 1, 2006, to June 16, 2006. DiamondRock Hospitality Company is a self-advised lodging real estate investment trust (REIT) focused on premium full-service hotels. As of the reporting date, the company owned 17 hotels comprising 7,678 rooms across major U.S. markets, with concentrations in New York City, Los Angeles, Atlanta, and Chicago.
Key Financial Metrics
| Metric | Q2 2006 (Quarter) | Q2 2005 (Quarter) | YTD 2006 (Jan-Jun) | YTD 2005 (Jan-Jun) |
|---|---|---|---|---|
| Total Revenues | $124.97 million | $33.52 million | $208.09 million | $59.86 million |
| Net Income (Loss) | $13.90 million | ($5.82 million) | $18.26 million | ($11.09 million) |
| Operating Profit | $23.84 million | ($1.99 million) | $33.80 million | ($4.60 million) |
| EBITDA | $37.13 million | $2.63 million | $56.32 million | $4.66 million |
| Funds From Operations (FFO) | $25.97 million | ($1.48 million) | $39.39 million | ($2.38 million) |
| Cash from Operations | N/A | N/A | $37.51 million | $4.27 million |
| Total Debt | $665.50 million | N/A | $665.50 million | N/A |
| Cash & Equivalents | $108.88 million | N/A | $108.88 million | N/A |
| Weighted Avg. Interest Rate | 5.7% | N/A | 5.7% | N/A |
Note: Year-over-year comparisons are significantly impacted by the acquisition of 10 hotels after the second quarter of 2005.
Material Changes and Acquisitions
- Portfolio Expansion: The company acquired two major properties in 2006:
- Chicago Marriott Downtown Magnificent Mile: Acquired March 24, 2006, for approximately $295 million plus assumed liabilities. The company assumed $220 million of floating-rate debt, which was immediately refinanced into a 10-year fixed-rate loan at 5.98%.
- Westin Atlanta North at Perimeter: Acquired May 2, 2006, for $61.5 million.
- Capital Structure: Total debt increased from $431.2 million (Dec 31, 2005) to $665.5 million (June 16, 2006). As of June 16, 2006, 100% of the debt carried fixed interest rates with a weighted-average maturity of 9 years.
- Equity Raise: On April 4, 2006, the company completed a secondary offering of 19.32 million shares at $13.00 per share, yielding net proceeds of $238.2 million.
- Refinancing: On May 9, 2006, the company refinanced the Courtyard Manhattan/Fifth Avenue debt, replacing a $23 million variable-rate loan with a $51 million fixed-rate loan at 6.48%.
Outlook, Risks, and Management Commentary
- Operating Performance: Pro forma RevPAR for the quarter increased 11.6% year-over-year, driven by a 10.2% increase in Average Daily Rate (ADR) and a 1.0 percentage point increase in occupancy. Management attributes this to strong lodging fundamentals and effective asset management.
- Capital Expenditures: The company plans to spend approximately $89 million in 2006 on value-added capital projects, including room renovations and repositioning at properties such as the Los Angeles Airport Marriott, Oak Brook Hills Marriott Resort, and Orlando Airport Marriott.
- Dividends: The board declared a quarterly dividend of $0.18 per share for both Q1 and Q2 2006. The Q2 dividend was paid on June 22, 2006.
- Risks: Primary market risk is interest rate risk, though the company has mitigated this by converting all debt to fixed rates. Other risks include general economic conditions affecting travel demand and the ability to execute renovations on time and budget.
- Yield Support: Marriott International provides operating cash flow guarantees ("Yield Support") for certain hotels. The company recorded $1.4 million in yield support for Q2 2006, offsetting management fees.
Investor Verification Checklist
- Verify the pro forma impact of the Chicago Marriott and Westin Atlanta acquisitions on future earnings per share.
- Confirm the status and budget adherence of the $89 million planned capital expenditure program for 2006.
- Monitor the company's leverage ratio (currently 47.3% against a 75% covenant limit) as new acquisitions are pursued.
- Review the terms of the "unfavorable contract liability" of $83.8 million recorded for the Chicago Marriott management agreement.
- Assess the sustainability of the 10.9% year-over-year RevPAR growth in the context of broader economic trends.