DiamondRock Hospitality Company — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019. DiamondRock is a lodging REIT and hotel owner, with 31 hotels and resorts totaling 10,102 rooms at quarter-end. Frenchman’s Reef in the U.S. Virgin Islands remained closed following Hurricanes Irma and Maria. The financial statements are unaudited; interim results may not indicate full-year performance.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $240.3 million | $220.8 million | $700.6 million | $640.3 million |
| Net income | $11.6 million | $31.4 million | $49.6 million | $63.8 million |
| Net income attributable to common stockholders | $11.5 million | $31.4 million | $49.4 million | $63.8 million |
| Diluted EPS | $0.06 | $0.15 | $0.24 | $0.31 |
| Net cash provided by operations | Not separately presented for the quarter | $135.7 million | $150.0 million |
- Q3 revenue increased 8.8%; excluding acquisition and reopening comparability effects identified by management, revenue rose 3.7%. Comparable hotel occupancy was 82.6% versus 82.2%, ADR was $238.35 versus $235.89, and RevPAR increased 1.6% to $196.95.
- For the first nine months, comparable occupancy was 79.6% versus 79.5%, ADR increased 0.7% to $235.75, and RevPAR increased 0.8% to $187.70. Management reported revenue growth of 3.2% excluding specified non-comparable amounts.
- Q3 operating expenses, net, rose to $211.0 million from $176.6 million. The prior-year quarter included $8.2 million of business-interruption insurance income and a $1.7 million property insurance settlement gain; neither was recorded in Q3 2019. Q3 2019 also included $6.4 million of uninsured natural-disaster-related costs.
- Interest expense was $14.2 million in Q3 and $38.3 million for the nine months, up from $10.2 million and $30.4 million, respectively. Nine-month Adjusted EBITDA was $197.8 million versus $189.5 million; Adjusted FFO was $162.3 million versus $156.2 million. These are non-GAAP measures defined by the company.
- At September 30, total debt was $1.094 billion, compared with $978.0 million at year-end 2018. Weighted-average interest rate was 3.87%; management reported an average debt maturity of approximately 4.6 years. Cash and cash equivalents were $26.7 million; restricted cash was $49.6 million. The company had $325 million of available capacity on its $400 million revolving facility.
- Nine-month investing cash outflow was $140.8 million, including $75.6 million for operating-hotel capital expenditures and $65.2 million for Frenchman’s Reef. Financing cash outflow was $10.2 million. Cash, cash equivalents and restricted cash declined $15.3 million to $76.3 million.
Material changes versus the prior comparable period
- Q3 and nine-month GAAP net income and EPS declined year over year, despite higher revenue. Lower prior-year insurance income and settlement gains, higher expenses and interest, and a $2.4 million debt-extinguishment loss affected comparisons.
- Revenue growth included Cavallo Point, acquired in December 2018, and other acquisition, reopening or renovation-related comparability effects. Comparable nine-month RevPAR growth was modest at 0.8%.
- In July 2019, DiamondRock refinanced its unsecured term loans: it repaid $300 million of existing loans, entered into a new $350 million term loan, increased revolving capacity from $300 million to $400 million, lowered pricing and extended the facility maturity to July 2023. The refinancing generated a $2.4 million loss from writing off unamortized debt costs.
- The company adopted ASC 842 lease accounting in January 2019, recording lease liabilities of $101.2 million and right-of-use assets of $99.6 million at adoption. Management said adoption did not materially affect results, cash flows or liquidity.
- DiamondRock repurchased 4.43 million shares for $42.8 million in the first nine months. It paid quarterly dividends of $0.125 per share; $175.2 million remained under the repurchase authorization as of November 8, 2019.
Outlook, commentary, risks and contingencies
- Management expected approximately $125 million of 2019 capital improvements at operating hotels. Planned projects included renovations and repositioning at several properties. No specific full-year revenue, earnings or RevPAR guidance was provided in the filing text.
- Management expected remaining-2019 cash sources principally from hotel operations, insurance proceeds and credit-facility draws, with uses including debt service, capital expenditures, distributions, corporate expenses and potential repurchases. It stated available sources were expected to meet short-term liquidity needs.
- Frenchman’s Reef remained closed; its insurance claim was ongoing. Subsequent to quarter-end, insurers committed an additional $40.1 million of proceeds; $35.5 million of that commitment had been received by November 8, 2019. If unresolved, the insurance litigation was scheduled for trial in the U.S. Virgin Islands in January 2020. The filing does not provide a confirmed reopening date.
- Interest-rate exposure is a key market risk. The company reported $250 million of variable-rate debt and estimated a 100-basis-point rate change would affect annual interest expense by approximately $2.5 million. Some debt and swaps reference LIBOR; the filing discusses uncertainty and potential costs associated with transition to a replacement benchmark.
- Other disclosed risks include lodging-sector and economic cyclicality, competition from alternative lodging, renovation cost or delay, natural disasters, financing availability and REIT qualification. Management reported no material change to the risk factors in its 2018 Form 10-K. Ordinary-course litigation was not expected by management to materially affect results, though outcomes remain uncertain.
Important facts for investors to verify
- Final amount, timing and collectability of Frenchman’s Reef insurance proceeds, litigation outcome, restoration spending and reopening plans.
- Whether modest comparable RevPAR growth and hotel-level cost trends support operating profit as acquisition-related growth normalizes.
- Debt maturity, floating-rate exposure, swap valuation and compliance with credit-facility covenants; the company reported covenant compliance at quarter-end.
- Execution and returns from the 2019 capital program, alongside liquidity needs from distributions and share repurchases.
- How much reported and adjusted performance depends on insurance, acquisition timing and other non-comparable or excluded items.