DiamondRock Hospitality Company — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. DiamondRock is a lodging REIT that owns, but does not operate, premium hotels and resorts. At quarter-end it owned 28 hotels with 9,630 rooms.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $243.3 million | $256.7 million | $439.5 million | $469.7 million |
| Operating profit | $50.7 million | $58.1 million | $69.9 million | $82.4 million |
| Net income | $36.6 million | $44.2 million | $45.5 million | $61.0 million |
| Diluted EPS | $0.18 | $0.22 | $0.23 | $0.30 |
| Adjusted EBITDA | $77.6 million | $84.1 million | $124.9 million | $134.5 million |
| Adjusted FFO | $63.6 million | $63.1 million | $100.2 million | $105.9 million |
- Q2 GAAP operating margin was approximately 20.8% versus 22.6% a year earlier; net margin was approximately 15.0% versus 17.2%. Six-month operating margin was approximately 15.9% versus 17.5%; net margin was approximately 10.3% versus 13.0%.
- Comparable hotel performance improved: Q2 comparable occupancy was 85.0% versus 85.4%, ADR rose 2.4% to $239.00, and RevPAR rose 2.0% to $203.21. For the six months, occupancy was 79.6%, ADR was $229.16, and RevPAR was $182.48, up 1.8% year over year.
- Six-month operating cash flow was $87.4 million, compared with $94.6 million. Capital expenditures were $60.4 million; hotel acquisitions used $93.8 million. Cash and cash equivalents ended at $149.6 million, down from $243.1 million at year-end 2016. Restricted cash was $41.5 million.
- At June 30, debt was $943.7 million net of issuance costs ($951.0 million face amount), versus $920.5 million net at year-end. The weighted-average interest rate was 3.69%, and weighted-average maturity was approximately 6.2 years. The company reported a 25.0% leverage ratio, no credit-facility borrowings, and compliance with debt covenants.
Material changes versus the prior period
- Reported revenue declined 5.2% in Q2 and 6.4% for the first half, primarily reflecting 2016 hotel dispositions. Excluding acquisition and disposition effects, revenue increased 0.6% in Q2 and 0.5% for the six months.
- Q2 net income fell 17.2%; six-month net income fell 25.4%. Adjusted EBITDA declined 7.8% in Q2 and 7.1% for the six months, while Q2 adjusted FFO was nearly flat and first-half adjusted FFO declined 5.4%.
- Hotel operating expenses fell in reported terms because of portfolio changes, but excluding non-comparable properties increased 2.4% in Q2 and 1.5% in the first half. Management cited higher property taxes, including assessments at Chicago and Colorado hotels.
- DiamondRock acquired L’Auberge de Sedona and Orchards Inn Sedona for a contractual $97 million on February 28, 2017. On April 26, it raised a $200 million unsecured five-year term loan and repaid the $170.4 million Lexington Hotel New York mortgage; the repayment generated a $0.3 million early-extinguishment loss.
Outlook, risks and unusual items
- Management expects 2017 hotel capital improvements of $110 million to $120 million; $60.4 million had been spent through June. It identified the final phase of the Chicago Marriott Downtown renovation as a major upcoming project, expected to begin in late 2017 and finish in early 2018.
- No earnings or RevPAR guidance is provided in the supplied filing text. Management said available cash flows, cash balances, financing capacity and other capital sources are expected to meet short-term liquidity needs; anticipated second-half cash uses include debt service, capital expenditures, dividends, corporate expenses, and potential acquisitions or share repurchases.
- The company paid common dividends of $0.125 per share in January, April and July 2017. Its REIT status generally requires distribution of at least 90% of taxable income.
- Hotel seasonality, economic and local lodging demand, competition, new supply, lodging alternatives, brand performance and interest-rate movements may affect results. A 25-basis-point change in rates on the $300 million of variable-rate debt would change annual interest expense by approximately $0.8 million.
- A prior franchise default tied to guest satisfaction scores had been cured, but a renewed decline could lead to termination and a potentially material termination-fee claim. Routine litigation is disclosed; management does not expect it to have a material adverse effect, though outcomes are uncertain. The filing reports no material change in previously disclosed risk factors.
- Q2 included a $0.3 million loss on early debt extinguishment. First-half hotel acquisition costs were $2.3 million. Prior-year comparisons included an $8.1 million gain on hotel sales, affecting reported earnings comparisons.
Investor verification priorities
- Confirm comparable-property operating trends and whether RevPAR gains translate into hotel-level profit given cost increases and higher property taxes.
- Review acquisition performance and the final purchase-price allocation for the Sedona properties, which remained preliminary.
- Assess the planned renovation spending, remaining project costs and expected operating disruption.
- Track debt, variable-rate exposure, covenant headroom, and the use of cash for dividends, acquisitions and repurchases.
- Monitor guest-satisfaction scores and the status of the hotel franchise agreement risk.