DiamondRock Hospitality Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. DiamondRock is a lodging REIT that owns, but does not operate, premium hotels and resorts; third-party managers run its properties. At year-end it owned 28 hotels with 9,630 rooms across 18 markets. Frenchman’s Reef in St. Thomas and the Inn at Key West were closed after 2017 hurricane damage.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $870.0 million | $896.6 million |
| Operating income | $139.8 million | $157.5 million |
| Net income | $91.9 million | $114.8 million |
| Diluted earnings per share | $0.46 | $0.57 |
| Adjusted EBITDA | $250.0 million | $258.9 million |
| FFO / Adjusted FFO | $194.6 million / $201.0 million | $203.1 million / $206.3 million |
| Cash provided by operations | $204.5 million | $215.6 million |
| Cash and cash equivalents at year-end | $183.6 million | $243.1 million |
| Total debt, net of financing costs | $937.8 million | $920.5 million |
Operating margin was approximately 16.1% versus 17.6% in 2016; net margin was approximately 10.6% versus 12.8%. These percentages are calculated from reported revenue and income. Annual dividends declared were $0.50 per common share, unchanged from 2016.
Revenue declined 3.0% year over year. Excluding acquisitions, dispositions, and the hurricane-related hotel closures, management reported revenue growth of 1.0%. On a comparable basis, occupancy rose 0.8 percentage points to 80.6%, ADR increased 1.4% to $230.61, and RevPAR increased 2.4% to $185.93. Room revenue growth was partly offset by weaker food and beverage revenue, particularly banquet business.
Cash, debt, and investment
- Operating cash flow was $204.5 million. Investing activities used $178.6 million, including $93.8 million for the Sedona acquisitions and $99.6 million of hotel capital expenditures. Financing activities used $85.4 million, including $100.5 million of dividends and repayment of the Lexington Hotel mortgage, partly offset by a $200 million term loan.
- Year-end unrestricted cash was $183.6 million, with another $40.2 million of restricted cash. The $300 million senior unsecured credit facility had no borrowings outstanding. Twenty of 28 hotels were unencumbered by mortgage debt.
- Debt had a 3.8% weighted-average interest rate and approximately 5.7-year weighted-average maturity. The company reported $944.4 million of face-value debt, including $300 million of variable-rate debt; a 25-basis-point rate change was estimated to affect annual interest expense by about $0.8 million.
- 2017 capital improvements totaled approximately $99.6 million. The company expected to spend approximately $135 million in 2018. Contractual obligations included $1.145 billion of debt payments including interest and $643.7 million of operating lease commitments, largely ground leases.
Material changes and unusual items
- Net income fell 19.9%, while Adjusted EBITDA declined 3.4%. Earnings were affected by lower reported revenue, hurricane disruptions, higher property taxes and other costs, and a $3.2 million impairment charge. Reported operating expenses also benefited from a $4.1 million gain on business-interruption insurance.
- Hurricanes Irma and Maria caused substantial damage at Frenchman’s Reef and the Inn at Key West. Frenchman’s Reef was expected to remain closed through the end of 2019; DiamondRock terminated Marriott’s management agreement effective February 20, 2018. The Inn at Key West was undergoing renovation and was expected to reopen as Havana Cabana Key West in the second quarter of 2018.
- The filing records $41.7 million of hurricane-related property impairment, offset by a $40.8 million insurance receivable deemed probable of collection; the resulting net impairment charge was $0.9 million. By year-end, $10.0 million of insurance proceeds had been received, with another $37.5 million received after year-end. Final amounts and timing of recovery remained uncertain. The reported $3.2 million impairment total also included other items.
- DiamondRock acquired L’Auberge de Sedona and Orchards Inn Sedona for a contractual $97 million. It also entered purchase agreements for two further hotel acquisitions in early 2018, including the Landing Resort & Spa, expected to be funded with cash on hand.
- The Tax Cuts and Jobs Act reduced the corporate tax rate and generated a $4.2 million deferred-tax benefit in 2017. It also created an $18.2 million transition-tax obligation associated with Frenchman’s Reef foreign earnings, elected to be paid over eight years.
Outlook, risks, and contingencies
Management characterized the 2018 economic outlook as favorable and expected lodging demand to outpace new supply, while noting that supply growth in top-25 urban markets was expected to exceed historical averages. The company projected 2018 supply increases of 6.8% in New York City, 4.8% in Boston, and 1.7% in Chicago. These are management’s market estimates, not company earnings guidance; the filing does not provide a clear numerical company-wide 2018 revenue or earnings forecast.
Key risks include hotel-industry cyclicality and seasonality, new room supply, competition from alternative lodging and online intermediaries, reliance on third-party managers and major brands, renovation costs and disruption, and exposure to hurricanes and other disasters. Insurance coverage is subject to deductibles and sublimits; Frenchman’s Reef has a $6.5 million named-windstorm deductible. Variable-rate debt, refinancing and covenant risks, long-term ground-lease obligations, REIT qualification, and changes in tax rules are also material considerations. Management said ordinary-course litigation was not expected to have a material adverse impact, while noting outcomes remain uncertain.
Important facts for investors to verify
- Progress, total cost, and timing of insurance recoveries and repairs at Frenchman’s Reef and the Inn at Key West, including the effect of the prolonged Frenchman’s Reef closure and change in manager.
- Whether the two announced 2018 acquisitions closed as planned, their purchase prices and funding, and expected returns.
- Actual 2018 capital spending against the approximately $135 million estimate, and any operating disruption from renovations.
- Comparable hotel operating trends versus supply growth in New York, Boston, and Chicago, and the return to operations of hurricane-affected hotels.
- Debt maturities, variable-rate exposure, covenant headroom, and the company’s ability to sustain its $0.50 annual dividend while meeting investment and repair needs.
- Final insurance claim outcomes and the implementation and cash-tax effects of the Tax Cuts and Jobs Act.