DiamondRock Hospitality Company — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. DiamondRock is a lodging-focused REIT and hotel owner. At quarter-end it owned 31 hotels with 10,093 rooms; Frenchman’s Reef remained closed following hurricane damage.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $202.4 million | $181.5 million | +11.5% |
| Income from operations | $16.5 million | $13.5 million | +22.1% |
| Net income | $9.0 million | $4.3 million | More than doubled |
| Net income attributable to common stockholders | $8.9 million | $4.3 million | — |
| Diluted EPS | $0.04 | $0.02 | — |
| Net cash from operating activities | $21.9 million | $33.6 million | Down $11.7 million |
| Adjusted EBITDA (non-GAAP) | $49.2 million | $43.4 million | +13.2% |
| Adjusted FFO (non-GAAP) | $41.9 million | $33.7 million | +24.2% |
GAAP operating margin was approximately 8.1%, compared with 7.4%; net margin was approximately 4.4%, compared with 2.4%. These calculations use reported revenue and operating or net income.
Operating performance and period-over-period changes
- Reported revenue growth included acquisitions and the return of Havana Cabana Key West, which reopened in April 2018. Acquisitions and reopening contributed $17.9 million of revenue growth; excluding these non-comparable items, revenue increased $3.0 million, or 1.6%.
- For comparable hotels, occupancy was 72.9% versus 73.6%, ADR was $215.83 versus $215.62, and RevPAR was $157.38 versus $158.72, a 0.8% decline.
- Operating expenses rose 10.6% overall, while expenses excluding identified non-comparable items and prior-year severance rose 1.9%. Depreciation and amortization increased 16.4%, mainly reflecting acquisitions and hotel renovations.
- Net income benefited from $8.8 million of Frenchman’s Reef business-interruption insurance income and a $3.8 million income-tax benefit. The prior-year quarter included $6.0 million of business-interruption insurance income and $5.8 million of severance costs.
Cash flow, debt and liquidity
- Operating cash flow was $21.9 million. Investing used $30.3 million, including $21.1 million for operating-hotel capital expenditures and $9.2 million for Frenchman’s Reef. Financing provided $0.2 million; cash, cash equivalents and restricted cash declined $8.2 million to $83.4 million.
- At March 31, unrestricted cash was $36.5 million, restricted cash was $46.9 million, and $60.0 million was drawn under the $300 million unsecured credit facility, leaving $240 million of capacity. The company borrowed a further $30.0 million after quarter-end.
- Total debt was $1.035 billion, with a weighted-average interest rate of 4.13% and approximately 4.2 years’ weighted-average maturity. The filing reports $300 million of variable-rate debt; a 100-basis-point rate movement would change annual interest expense by approximately $3.0 million. The company reported a 29.1% leverage ratio and compliance with its credit-facility covenants.
- Shareholders’ equity declined to $1.83 billion from $1.89 billion at year-end. The company repurchased 3.14 million shares for $30.0 million during the quarter at an average $9.52 per share.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management expected 2019 hotel capital improvements of approximately $125 million and described operating cash flow, insurance proceeds and credit-facility borrowings as expected sources of cash for the remainder of the year.
- Frenchman’s Reef remained closed; its insurance claim was unresolved and was subject to litigation in the U.S. Virgin Islands and New York. The company received $5.0 million of insurance proceeds in Q1 2019. The timing and amount of further recovery are uncertain.
- A hotel remained in default under its franchise agreement because of guest-satisfaction scores. Although scores had improved, the franchisor retained termination rights and could seek a termination fee or liquidated damages.
- ASC 842 adoption on January 1, 2019 resulted in recognition of $101.2 million of lease liabilities and $99.6 million of right-of-use assets, with a $15.3 million cumulative-effect reduction to accumulated deficit. The company said adoption did not materially affect results, cash flows or liquidity.
- Management cited economic and lodging-demand changes, competition including alternative lodging, renovation execution and cost risks, financing and interest-rate exposure, natural disasters and insurance recoveries, and REIT qualification among key risks. It reported no material change to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Progress, cost and reopening expectations for Frenchman’s Reef, and the outcome and collectability of the related insurance claim.
- Whether comparable hotel demand and RevPAR stabilize, given the quarter’s 0.8% comparable RevPAR decline.
- Execution and funding of the approximately $125 million 2019 capital program alongside distributions and potential further repurchases.
- Franchise-default status and any potential termination or damages exposure.
- Variable-rate debt exposure, upcoming credit-facility maturity in May 2020, and subsequent borrowing after quarter-end.
- Underlying performance alongside insurance income, tax benefits and non-GAAP adjustments; interim results may not indicate full-year performance.