DiamondRock Hospitality Company — Q1 2023 Form 10-Q
Business context and period. DiamondRock is a lodging-focused REIT that owns premium hotels and resorts, operated by third-party managers and hotel brands. At March 31, 2023, it owned 35 properties with 9,607 rooms across 24 U.S. markets. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $243.6 million | $196.8 million | +23.8% |
| Net income | $9.2 million | $10.1 million | Down $0.9 million |
| Net income attributable to common stockholders | $6.7 million; $0.03/share | $7.6 million; $0.04/share | Lower |
| Adjusted EBITDA | $55.4 million | $44.9 million | +23.3% |
| Adjusted FFO available to common stock and unit holders | $38.0 million | $30.9 million | +23.0% |
| Net cash from operating activities | $58.1 million | $13.2 million | Up $44.9 million |
Hotel operating statistics improved overall: occupancy was 66.9% versus 56.1%, ADR was $277.86 versus $283.72, and RevPAR was $185.80 versus $159.13, a 16.8% increase. Adjusted EBITDA was approximately 22.7% of revenue, compared with approximately 22.8% in Q1 2022, calculated from reported figures.
Operating expenses rose 23.8% to $182.5 million, broadly in line with revenue growth; management cited higher occupancy and related labor costs. Interest expense increased to $17.2 million from $4.1 million. Total assets were $3.18 billion and total equity was $1.60 billion at quarter-end.
Cash, debt and liquidity
- Cash and cash equivalents were $76.5 million; restricted cash was $46.0 million. The company reported no borrowings on its $400 million revolving credit facility.
- Total debt, net of issuance costs, was $1.184 billion, versus $1.186 billion at year-end 2022. Debt included approximately $384 million of mortgage debt and $800 million of unsecured term loans. Weighted-average interest rate was 4.88%; weighted-average maturity was approximately 3.2 years.
- Four of 35 hotels secured mortgage debt; 31 were unencumbered. The $300 million term loan matures in January 2025, mortgage maturities include $75.7 million in August 2024, and the $500 million term loan matures in January 2028.
- Credit agreement covenants showed substantial reported headroom: maximum leverage ratio 60% versus actual 27.6%; minimum fixed-charge coverage 1.50x versus actual 3.36x.
- Operating cash flow was $58.1 million; capital expenditures were $21.6 million; financing cash outflow was $21.1 million. Cash, cash equivalents and restricted cash increased $15.4 million during the quarter.
Material changes versus Q1 2022
- Revenue growth reflected stronger travel demand and occupancy, as well as contributions from 2022 acquisitions. Rooms revenue increased 21.6%, food and beverage revenue 30.9%, and other revenue 22.2%.
- Higher interest expense more than offset improved hotel operating results at the GAAP net-income level. The increase reflected higher rates on variable-rate debt, unsecured term loans entered into in 2022, and interest-rate-swap fair-value changes. Swap mark-to-market and settlements contributed $2.0 million of interest expense in Q1 2023, compared with a $7.5 million benefit in Q1 2022.
- Q1 2022 included a $2.8 million impairment of a right-to-manage intangible asset and $0.5 million of business-interruption insurance income; neither item recurred in Q1 2023.
- Adjusted FFO increased partly because the swap fair-value adjustment changed from a $7.5 million loss in Q1 2022 to a $2.0 million gain in Q1 2023, as defined in the company’s reconciliation.
Outlook, risks and notable items
- No full-year earnings or revenue guidance is provided. The company expects 2023 hotel capital improvements of $100 million to $115 million; $21.6 million was spent in Q1. Planned projects include renovations or repositionings at Hilton Boston Downtown/Faneuil Hall, Hilton Burlington Lake Champlain, Salt Lake City Marriott and Bourbon Orleans Hotel.
- Management expects net cash flow from hotel operations to be a principal cash source for the remainder of 2023, with uses including debt service, capital expenditures, distributions, corporate costs, potential acquisitions and potential share repurchases.
- Management identifies inflation and rising interest rates as significant economic risks, potentially increasing operating, renovation and financing costs. Of $1.2 billion in debt, $425 million was variable-rate; a 100-basis-point rate movement was estimated to change annual interest expense by $4.5 million.
- Mortgage cash traps held $8.2 million at quarter-end; $6.8 million was released in April 2023. Management said it did not expect the traps to impair short-term liquidity. The company had $31.6 million set aside in restricted property-improvement funds.
- Ordinary-course claims and litigation remain possible; management does not expect uninsured liabilities, if any, to materially affect financial condition or results. The filing reports no material changes to the risk factors in the 2022 Form 10-K. Disclosure controls were deemed effective, with no material quarter-on-quarter change in internal control over financial reporting.
- The company repurchased 56,400 shares under its program for $0.4 million during Q1; $187.3 million of authorization remained as of May 5, 2023. The $200 million ATM offering program had no sales.
Key facts for investors to verify
- Whether occupancy and RevPAR gains persist, and how ADR and hotel-level labor costs evolve.
- Exposure to variable rates and the cost and timing of the January 2025 term-loan maturity and August 2024 mortgage maturity.
- Execution, timing and total costs of the $100 million to $115 million 2023 capital program, including any operating disruption.
- Cash availability after restricted balances, distributions, capital spending and any future acquisitions or repurchases.
- Comparability of non-GAAP measures, particularly Adjusted EBITDA and Adjusted FFO, given exclusions and derivative fair-value movements.