DiamondRock Hospitality Company — Q3 2023 Form 10-Q
Business context and period: DiamondRock is a lodging REIT that owns, but does not operate, premium hotels and resorts. At September 30, 2023, it owned 36 hotels with 9,745 rooms. This filing reports the three and nine months ended September 30, 2023, compared with the same periods in 2022; interim results may be affected by seasonality.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $276.5 million | $268.2 million | $811.3 million | $746.4 million |
| Net income | $27.3 million | $28.6 million | $75.7 million | $91.3 million |
| Net income attributable to common stockholders | $24.8 million | $26.0 million | $68.0 million | $83.6 million |
| Basic and diluted EPS | $0.12 | $0.12 | $0.32 | $0.39 |
| Adjusted EBITDA | $73.2 million | $76.3 million | $214.4 million | $213.2 million |
| Adjusted FFO available to common stock and unit holders | $54.6 million | $60.6 million | $159.9 million | $168.0 million |
| Cash provided by operating activities | Not presented separately | Not presented separately | $184.7 million | $158.0 million |
Q3 net income margin was approximately 9.9%, compared with 10.6% a year earlier; nine-month net income margin was approximately 9.3%, compared with 12.2%. These percentages are calculated from reported revenue and net income.
Q3 hotel statistics were 76.3% occupancy, $273.56 ADR and $208.78 RevPAR, versus 74.9%, $282.03 and $211.32, respectively. For the first nine months, occupancy was 73.3% versus 68.7%, ADR was $281.92 versus $289.03, and RevPAR was $206.76 versus $198.55.
Balance sheet, debt and liquidity
- Total assets were $3.26 billion and total equity was $1.65 billion at September 30, 2023.
- Total debt, net of issuance costs, was $1.179 billion, compared with $1.186 billion at year-end 2022. The weighted-average interest rate, including swaps, was 5.07%; weighted-average debt maturity was approximately 2.7 years.
- Debt included $379.9 million of mortgage debt and $799.3 million of unsecured term loans. The $400 million revolving credit facility had no borrowings outstanding. The company reported $425 million of variable-rate debt principal and estimated that a 100-basis-point rate change would affect annual interest expense by approximately $4.3 million.
- Unrestricted cash was $102.7 million and restricted cash was $42.5 million. Nine-month operating cash flow was $184.7 million; investing cash use was $101.2 million and financing cash use was $45.4 million.
- One $74.8 million mortgage matures in August 2024. Management stated that operating cash flow or available revolver capacity is sufficient to repay it. All mortgage cash traps had been released by September 30.
- Reported credit-facility covenant measures were within stated limits: maximum leverage ratio 28.3% against a 60% limit, fixed-charge coverage 3.08x against a 1.50x minimum, and unencumbered leverage 28.4% against a 60% limit.
Material changes versus prior periods
- Q3 revenue increased 3.1%, but net income attributable to common stockholders declined 4.6%. Revenue growth reflected acquired properties and higher food, beverage and other revenue; comparable-property rooms revenue fell $1.7 million, as resort leisure demand normalized.
- For the nine-month period, revenue rose 8.7%, led by stronger urban group and corporate travel and additional properties. Comparable-property room revenue increased, while resort occupancy and ADR declined amid normalizing leisure demand.
- Hotel operating expenses rose 7.1% in Q3 and 12.9% year to date, outpacing revenue growth year to date. Management cited higher occupancy-related labor costs, property tax assessments and insurance premiums.
- Interest expense rose to $16.0 million in Q3 from $9.1 million and to $48.7 million year to date from $22.9 million. The company cited higher rates on variable debt, term loans entered into in 2022, and interest-rate swap accounting/fair-value effects.
- Nine-month net income was lower despite revenue growth, in part reflecting the prior-year $9.7 million loss on early debt extinguishment and a more favorable prior-year swap fair-value adjustment. Nine-month 2023 also included a $0.9 million impairment of unrecoverable construction in progress; 2022 included a $2.8 million impairment related to Tranquility Bay.
- In August 2023, the company acquired Chico Hot Springs Resort and adjacent ranch for $31.9 million, funded with cash. It also acquired land under the Worthington Renaissance Fort Worth parking structure for $1.8 million.
Outlook, commentary and risks
- No full-year revenue, earnings or FFO guidance is provided in the filing. Management anticipated hotel operating cash flow as the principal source of cash for the remainder of 2023.
- Management expected approximately $100 million of 2023 hotel capital improvements; $67.4 million had been spent through September. The Dagny and Salt Lake City Marriott guestroom renovations were completed; the Hilton Burlington repositioning was expected to finish in summer 2024.
- Common dividends reported for 2023 were $0.03 per share quarterly after a $0.06 January payment. Series A preferred dividends were $0.515625 per share quarterly. The REIT generally must distribute at least 90% of REIT taxable income, subject to applicable requirements.
- Key risks include inflation, elevated interest rates, labor and operating-cost pressures, lodging demand and seasonality, financing availability, debt obligations, competition, renovation costs or delays, natural disasters and potential health emergencies. Management specifically cautioned that inflation and higher rates could pressure hotel performance, distributions and debt service capacity.
- The company recognized $0.5 million of Q3 business-interruption insurance income after a seven-day electrical-fire closure at a New York hotel. It reported routine litigation and stated that uninsured liabilities are not expected to have a material adverse effect, while noting outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether urban group and corporate travel gains can continue to offset normalizing resort leisure demand and lower ADR.
- Future interest expense and refinancing terms for the $74.8 million 2024 mortgage and $300 million term loan maturing in January 2025; verify the impact of variable rates and hedge coverage.
- Whether labor, property taxes, insurance and other operating costs continue to grow faster than hotel revenue, and whether the planned 2023 capital program is completed within budget.
- Cash-flow capacity to fund dividends, capital spending, debt maturities and potential buybacks; distinguish unrestricted cash from restricted property-improvement and lender reserves.
- Performance and integration of Chico Hot Springs, and the expected operating impact of the Hilton Burlington repositioning.
- Non-GAAP measures are company-defined and should be assessed alongside GAAP results; reported Adjusted EBITDA and Adjusted FFO declined in Q3 and year-to-date Adjusted FFO was below the prior-year period.