DiamondRock Hospitality Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. DiamondRock is a lodging REIT that owns, but does not operate, premium hotels and resorts. At quarter-end it owned 34 hotels with 9,567 rooms. All hotels were open during the 2022 periods.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $268.2 million | $179.5 million | $746.4 million | $377.2 million |
| Net income (loss) | $28.6 million | $(1.8) million | $91.3 million | $(192.5) million |
| Net income (loss) attributable to common stockholders | $26.0 million | $(4.2) million | $83.6 million | $(199.0) million |
| Diluted EPS | $0.12 | $(0.02) | $0.39 | $(0.94) |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $158.0 million | $(22.3) million |
Q3 revenue increased 49.4%; nine-month revenue increased 97.9%. For the nine-month period, occupancy was 68.6% versus 48.2%, ADR was $285.89 versus $243.88, and RevPAR was $196.23 versus $117.57. Q3 occupancy was 75.0% versus 65.2%, ADR $280.40 versus $249.34, and RevPAR $210.18 versus $162.66. These comparisons reflect recovering travel demand; acquisition contributions also boosted revenue.
Total operating expenses were $220.4 million in Q3 and $620.6 million for nine months. Revenue less operating expenses was $47.8 million in Q3 (17.8% of revenue), versus $10.7 million (5.9%) a year earlier; for nine months it was $125.9 million (16.9%), versus an operating loss of $162.2 million (43.0%) in 2021. These are simple calculations from reported revenue and total operating expenses, not company-reported margin measures. Nine-month 2021 results included $126.7 million of impairment losses.
Q3 interest expense was $9.1 million, and nine-month interest expense was $22.9 million. Q3 and nine-month results each included a $9.7 million loss on early extinguishment of debt from the September refinancing. Adjusted EBITDA was $76.3 million in Q3 and $213.2 million for nine months; adjusted FFO available to common stock and unit holders was $60.6 million and $168.0 million, respectively. These are non-GAAP measures and should be considered with the filing’s reconciliations.
Liquidity, debt and capital allocation
- At September 30, unrestricted cash was $313.9 million and restricted cash was $46.0 million. Debt was $1.366 billion, compared with $1.067 billion at year-end 2021; the reported weighted-average interest rate was 4.26%.
- Cash from operations of $158.0 million was offset by $149.8 million used in investing, including $44.6 million of capital expenditures and $106.2 million for acquisitions. Financing activities provided $276.1 million; cash, cash equivalents and restricted cash increased $284.4 million.
- The September 27 refinancing established an undrawn $400 million revolving facility maturing in 2026 and $800 million of term loans: $500 million due in 2028 and $300 million due in 2025. The company used term-loan proceeds to repay prior term loans and revolving borrowings, and planned to repay remaining 2023 mortgage maturities. Three of four near-term mortgage loans were repaid after quarter-end; the company intended to repay the Westin San Diego Bayview loan in December 2022.
- At quarter-end, leverage ratio was 29.6%; the company reported compliance with its amended credit agreement covenants. It had $4.2 million in mortgage cash traps and said these were not expected to impair short-term liquidity.
- The board authorized up to $200 million of common-stock repurchases through February 28, 2025. After quarter-end, the company repurchased 1.6 million shares for $12.3 million; $187.7 million of authorization remained as of November 4. The common dividend resumed with a $0.03-per-share payment in October 2022. Preferred dividends continued.
Material changes, outlook and risks
- Revenue and hotel operating performance improved substantially year over year as travel demand recovered. Resort occupancy was at or above pre-pandemic levels; urban hotels continued to recover. Comparisons are affected by hotels temporarily closed in 2021, acquisitions in 2021–2022, and prior-year dispositions.
- The company acquired Tranquility Bay Beachfront Resort for $63.0 million and Kimpton Fort Lauderdale Beach Resort for $35.3 million. It recorded a $2.8 million impairment related to Tranquility Bay rental-management agreements and a $45.2 million related intangible asset.
- Management expected approximately $100 million of 2022 capital improvements; $44.6 million had been invested through September. Projects included hotel repositionings and renovations. The filing provides no specific full-year revenue, earnings or RevPAR guidance.
- Management cited ongoing uncertainty from COVID-19, especially the pace of business-travel and group-meeting recovery, as well as inflation, higher interest rates, operating-cost pressures, seasonality, and potential financing constraints. Of $1.4 billion in debt, $842.2 million was variable-rate; a 100-basis-point rate change was estimated to affect annual interest expense and cash flows by $8.4 million.
- LIBOR-based contracts required transition as relevant LIBOR settings were expected to cease or become unrepresentative after June 30, 2023; replacement-rate terms could affect borrowing costs. Routine litigation was disclosed, with management not expecting uninsured exposures to have a material adverse effect, while acknowledging outcome uncertainty.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether hotel demand, particularly urban business travel and group meetings, continued recovering after quarter-end, and how performance compares excluding acquisitions and temporary 2021 closures.
- Completion and funding of the remaining mortgage repayment, the post-quarter debt and interest-rate profile, and ongoing compliance with credit covenants.
- Whether inflation, labor and other operating costs are eroding hotel profitability despite higher room rates and RevPAR.
- Progress, cost and expected returns from the planned capital projects, and the effect of share repurchases and resumed common dividends on liquidity.
- The reconciliation and period presentation of non-GAAP measures, especially adjusted FFO, alongside GAAP earnings and cash flow.