DiamondRock Hospitality Company — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. DiamondRock is a lodging REIT and hotel owner. At quarter-end it owned 31 hotels with 10,097 rooms; Frenchman's Reef remained closed following 2017 hurricane damage. Interim results may not indicate full-year performance.
Financial and operating performance
- Q2 revenue: $257.9 million, up 8.4% year over year. Excluding the non-comparable contribution from Cavallo Point, acquired in December 2018, revenue rose 3.9%. Comparable Q2 occupancy was 83.1%, ADR $250.23 and RevPAR $208.02, up 0.4%, 0.6% and 1.1%, respectively.
- Q2 earnings: Net income was $29.1 million versus $28.0 million; diluted EPS was $0.14 in both periods. Adjusted EBITDA was $81.1 million versus $75.8 million; Adjusted FFO was $65.1 million versus $65.6 million.
- First-half results: Revenue was $460.3 million, up 9.7%; excluding acquisitions and other non-comparable hotel periods, it increased 2.9%. Comparable RevPAR rose 0.3% to $182.98, with occupancy down 0.1 percentage point and ADR up 0.5%. Net income was $38.1 million versus $32.3 million; diluted EPS was $0.19 versus $0.16. Adjusted EBITDA was $130.2 million versus $119.3 million and Adjusted FFO was $107.1 million versus $99.3 million.
- Cash flow and investment: First-half operating cash flow was $80.9 million, compared with $68.1 million. Investing cash outflow was $89.3 million, including $47.0 million of operating-hotel capital expenditures and $42.2 million at Frenchman's Reef. Cash, cash equivalents and restricted cash totaled $89.5 million at June 30; unrestricted cash was $41.9 million.
- Debt and liquidity: Debt, net of issuance costs, was $1.077 billion, up from $978.0 million at year-end 2018. The weighted-average interest rate was 4.11%, with an approximately 3.8-year weighted-average maturity. The company reported $195 million of undrawn capacity on its $300 million credit facility at quarter-end and was in compliance with stated debt covenants. Twenty-three of 31 hotels were unencumbered by mortgage debt.
- Balance sheet and distributions: Total assets were $3.295 billion and total equity was $1.826 billion. The quarterly dividend was $0.125 per share. The company repurchased 4.15 million shares for $40.0 million during the first half.
Material changes and unusual items
- First-half revenue and expenses were affected by acquisitions of Cavallo Point, Hotel Palomar Phoenix and The Landing Resort & Spa, and by Havana Cabana Key West's 2018 reopening. Management reported comparable revenue growth excluding these effects.
- Q2 hotel operating expenses increased 4.2%; excluding non-comparable items and prior-year severance costs, they increased 3.4%. First-half hotel operating expenses rose 8.6%, or 3.7% excluding non-comparable items and prior-year severance costs.
- Interest expense increased to $12.4 million in Q2 from $10.3 million, and to $24.1 million for the first half from $20.2 million. Drivers included increased credit-facility borrowings, higher term-loan rates and a derivative fair-value adjustment.
- First-half business-interruption insurance income was $8.8 million, compared with $8.0 million. No such income was recognized in Q2 2019, versus $2.0 million in Q2 2018. The Frenchman's Reef insurance claim remains unresolved.
- DiamondRock adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $101.2 million of lease liabilities and $99.6 million of right-of-use assets at adoption. It recorded a $15.3 million cumulative adjustment to accumulated deficit; management said adoption did not materially affect operations, cash flows or liquidity.
Outlook, risks and contingencies
- Management expected 2019 capital expenditures of approximately $125 million for operating hotels, including carryover projects; $47.0 million had been spent by June 30. Management described expected remaining-year cash sources as hotel operating cash flow, insurance proceeds and credit-facility borrowings, with uses including debt service, capital spending, distributions and potential repurchases. No specific full-year revenue or earnings guidance is provided in the filing text.
- On July 25, 2019, after quarter-end, the company amended and refinanced its credit arrangements: revolving capacity increased to $400 million and maturity extended to July 2023; it also entered into a new $350 million five-year term loan, used to repay the existing $100 million and $200 million term loans. A swap fixed LIBOR at 1.70% through July 2024 on $175 million of the new term loan.
- Frenchman's Reef remained closed, with restoration costs and insurance recoveries subject to uncertainty. The company and insurers are litigating over the amount of hurricane coverage owed while continuing discussions.
- A hotel franchisor had maintained a default notice related to guest-satisfaction scores. No termination action had been taken and no accrual was recorded; termination and a potential fee could materially adversely affect the company.
- Key disclosed business risks include lodging demand and economic conditions, competition and alternative lodging, renovations and construction costs, financing and interest rates, natural disasters and insurance recoveries, regulatory and REIT qualification requirements, and cybersecurity. The company reported no material change to its previously disclosed risk factors.
Most important facts for investors to verify
- Whether Frenchman's Reef restoration, insurance litigation, eventual reopening and recoveries proceed on expected terms and timing.
- Whether comparable hotel revenue and RevPAR growth can offset expense increases, and how reported results compare with adjusted non-GAAP measures.
- The effects of the July 2019 refinancing on total debt, interest costs, maturities, covenant headroom and liquidity.
- Actual 2019 capital spending versus the approximately $125 million estimate, including project timing and disruption at renovated hotels.
- Whether the unresolved franchise default is cured or leads to termination or a claim for fees.
- The impact of variable-rate debt: management estimated that a 100-basis-point rate change would alter annual interest expense by approximately $4.1 million, based on quarter-end exposure.