DiamondRock Hospitality Company — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. DiamondRock is a lodging REIT and hotel owner, with 29 hotels and 10,928 guest rooms at quarter-end.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $238.5 million | $229.2 million | $697.2 million | $649.2 million |
| Operating profit | $41.4 million | $38.2 million | $107.0 million | $103.3 million |
| Net income | $24.5 million | $43.8 million | $59.9 million | $99.8 million |
| Diluted EPS | $0.12 | $0.22 | $0.30 | $0.51 |
| Adjusted EBITDA | $69.3 million | $66.8 million | $198.9 million | $175.0 million |
| Adjusted FFO | $52.3 million | $48.3 million | $151.5 million | $129.7 million |
Q3 operating margin was approximately 17.4%, compared with 16.7%; nine-month operating margin was approximately 15.3%, versus 15.9%. These percentages are calculated from reported revenue and operating profit.
For comparable hotels, Q3 RevPAR increased 2.2% to $176.92, with ADR up 3.2% and occupancy down 0.8 percentage points. For the nine-month period, comparable RevPAR rose 5.2% to $171.75, with ADR up 4.3% and occupancy up 0.7 percentage points. Management attributed room-revenue growth chiefly to transient demand; group revenue declined 7.7% in Q3 but grew 1.5% for the nine-month period.
Nine-month net cash from operations was $157.8 million, versus $115.6 million. Investing used $190.8 million, including $150.4 million for acquisitions and $46.1 million for hotel capital expenditures. Financing used $49.4 million, including $71.0 million of dividends. Cash and cash equivalents fell to $62.0 million from $144.4 million at year-end 2014; restricted cash was $55.7 million.
At September 30, total debt was $1.056 billion, including $1.031 billion of mortgage debt and $25.0 million drawn on the $200 million unsecured credit facility. Weighted-average interest rate was 4.50%; weighted-average maturity was approximately 4.5 years. The company reported compliance with debt covenants. Unrestricted cash and restricted cash totaled $117.6 million; credit-facility capacity was also available, subject to its terms and covenants.
Material changes versus comparable periods
- Revenue increased 4.1% in Q3 and 7.4% for nine months. Excluding acquisitions, openings and dispositions identified by management, revenue increased 2.9% and 5.5%, respectively.
- Net income declined materially because 2014 included significant gains not repeated in 2015. Q3 2014 included a $23.9 million gain on acquiring the Hilton Garden Inn Times Square Central. The 2014 nine-month period also included a $13.6 million gain on prepayment of a note receivable, an $11.0 million litigation-settlement gain, and other gains.
- Adjusted EBITDA and Adjusted FFO increased in both comparison periods, despite lower GAAP net income.
- Hotel operating expenses rose 4.3% in both the quarter and nine-month period. Management cited, among other items, higher property taxes and franchise fees; the comparable nine-month expense increase was 4.7%.
- The company acquired the 157-room Shorebreak Hotel for a contractual $58.5 million and the 184-suite Sheraton Suites Key West for $94.0 million. It also rebranded the former Conrad Chicago as The Gwen, a Luxury Collection Hotel, effective September 1.
Outlook, risks and unusual items
- The filing provides no explicit full-year earnings or revenue guidance. Management expected available operating cash flow, cash balances, financing and credit-facility borrowings to meet near-term needs; long-term funding may also depend on debt or equity issuance and property dispositions.
- Management identified approximately $250 million of 2016 mortgage maturities, excluding scheduled principal payments. After quarter-end, it repaid the $55.3 million Orlando Airport Marriott mortgage and obtained a $205 million, 10-year fixed-rate mortgage on the Westin Boston Waterfront; proceeds were expected to fund prepayment of the Chicago Marriott mortgage in January 2016. The company also reported subsequent credit-facility borrowings and repayment as these transactions proceeded.
- 2015 nine-month results included $10.5 million of impairment losses: $9.7 million related to the decision not to exercise a Westin Boston-area development lease option and $0.8 million related to a Lexington Hotel New York tenant lease.
- The Frenchman’s Reef tax agreement expired in February 2015, initially increasing the applicable tax rate. After quarter-end, a 15-year extension was granted retroactive to February 15, 2015; management expected a fourth-quarter tax adjustment to reflect the lower rate.
- Interest-rate risk is a key market risk: $195.4 million of debt was variable-rate at quarter-end; a 25-basis-point rate change would affect annual interest expense by approximately $0.5 million. The filing notes hotel seasonality, lodging-market cyclicality and competitive limits on rate increases. Management said there were no material changes to previously disclosed risk factors.
- Management said routine litigation was not expected to materially affect financial condition or results, while noting that outcomes remain uncertain. The board authorized a new $150 million share-repurchase program on November 4, 2015; repurchases may be suspended or terminated.
Important facts for investors to verify
- How comparable-property RevPAR, occupancy and ADR perform after Q3, particularly given the quarterly decline in group revenue.
- Execution and funding of the 2016 debt-maturity plan, including the intended use of the Westin Boston Waterfront financing proceeds and refinancing of the Chicago Marriott loan.
- Actual fourth-quarter tax benefit from the retroactive Frenchman’s Reef agreement extension.
- Cash available after acquisitions, capital projects, dividends and any share repurchases; the filing reports $46.1 million of capital expenditures through September and planned renovations, including an estimated $25 million project at The Gwen.
- GAAP results alongside Adjusted EBITDA and Adjusted FFO, which are non-GAAP measures and exclude certain items; the 2014 comparison includes material gains that affect reported net income.