DiamondRock Hospitality Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. DiamondRock is a lodging-focused REIT and hotel owner. At quarter-end it owned 33 hotels with 9,454 rooms. All hotels were open during the quarter; three had been closed for all or part of Q1 2021.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $196.8 million | $72.9 million | Up 170.0% |
| Occupancy | 55.8% | 29.6% | Up 26.2 percentage points |
| ADR | $278.57 | $236.10 | Up 18.0% |
| RevPAR | $155.43 | $69.88 | Up 122.4% |
| Net income (loss) | $10.1 million | $(171.6) million | Q1 2021 included $122.6 million of impairment losses |
| Net income (loss) attributable to common stockholders | $7.6 million | $(173.3) million | EPS: $0.04 vs. $(0.82) |
| Adjusted EBITDA | $44.9 million | $(9.6) million | Non-GAAP measure |
| Adjusted FFO available to common stock and unit holders | $30.9 million | $(24.9) million | Non-GAAP measure |
| Cash and cash equivalents | $41.6 million | — | Restricted cash was an additional $38.9 million |
| Total debt | $1.174 billion | $1.067 billion at Dec. 31, 2021 | Increase primarily reflected $110 million of revolver draws |
Revenue growth reflected higher occupancy and ADR during the recovery, as well as acquisitions. Hotel operating expenses rose 89.2% to $147.4 million, below the revenue growth rate. The company reported $4.1 million of GAAP interest expense, which included a $7.5 million favorable noncash interest-rate-swap fair-value adjustment; cash interest paid was $10.5 million. Net income as a percentage of revenue was approximately 5.1%.
Cash-flow statement: operating cash flow was positive $13.2 million; investing cash outflow was $110.9 million; financing cash inflow was $102.7 million. However, MD&A describes operating cash flow as a $13.2 million use, conflicting with the cash-flow statement. This discrepancy should be verified.
Balance sheet, debt and liquidity
At March 31, 2022, total assets were $3.089 billion and total liabilities were $1.560 billion. Debt comprised $574.9 million of mortgage and other debt, $398.7 million of unsecured term loans and $200.0 million outstanding under the $400 million revolving credit facility. The weighted-average debt interest rate was 3.78%, and management reported an approximate 2.2-year weighted-average maturity. Four mortgage loans mature within 12 months of May 6, 2022. Twenty-five of 33 hotels were unencumbered by mortgage debt.
Mortgage cash-trap provisions were triggered for all mortgage loans except the Salt Lake City Marriott loan; $3.1 million was held in cash traps. The company said it did not expect the traps to impede short-term liquidity. Credit agreements imposed a minimum-liquidity requirement of $125 million during the covenant-relief period. The company reported compliance with original financial covenants at quarter-end and expected to exit covenant-waiver restrictions in Q2 2022. Covenant modifications continue through Q2 2023.
Material changes, outlook and risks
- Acquisitions: DiamondRock acquired the 103-room Tranquility Bay Beachfront Resort for $63.0 million in January and bought two third-party-owned units for $1.7 million in March. It recorded a $2.8 million impairment of the resort’s right-to-manage intangible asset in connection with unit purchase agreements. On April 1, 2022, it acquired the 96-room Kimpton Fort Lauderdale Beach Resort for $35.3 million; $36.2 million in purchase deposits had been paid by quarter-end.
- Recovery and outlook: Management said leisure demand had improved, while demand at other hotels remained historically low. It expected COVID-19 to continue adversely affecting results, financial position and cash flows for the remainder of 2022; recovery could vary by market and new variants could reverse progress. No numerical earnings or revenue guidance was provided.
- Capital spending and dividends: Management expected approximately $100 million of 2022 capital improvements, including renovations and repositioning projects. The common dividend had been suspended since 2020; management expected to recommence quarterly common dividends beginning in Q3 2022, subject to board approval and relevant financial considerations. Preferred dividends continued, at $0.515625 per share for the March 2022 payment.
- Interest-rate exposure: The filing reported $418.1 million of variable-rate debt and estimated that a 100-basis-point rate change would affect annual interest expense and cash flows by about $4.2 million. LIBOR-based contracts require transition to replacement rates, with potential cost and contract-transition uncertainty.
- Other risks and items: COVID-19, travel demand, operating-cost inflation, financing availability and cost, debt maturities, hotel operations and renovations, competition, natural disasters, and REIT qualification are among the disclosed risks. A $0.5 million business-interruption insurance recovery related to the Caldor wildfire was recognized in Q1. Management said routine litigation was not expected to have a material adverse impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- Resolve the conflicting Q1 operating-cash-flow descriptions: positive $13.2 million in the cash-flow statement versus a $13.2 million use in MD&A.
- Track refinancing or repayment plans for the four near-term mortgage maturities and the July 2023 revolver maturity, including covenant-relief terms and available liquidity.
- Assess whether the expected Q3 2022 common-dividend restart and approximately $100 million capital-spending plan remain achievable alongside debt service and acquisitions.
- Monitor hotel demand recovery by market and customer type, particularly business and group travel, and the sensitivity of operating costs and results to inflation and COVID-19 developments.
- Review the effect of rising interest rates and LIBOR replacement on borrowing costs, swap positions and cash flows.